How China Can Reach Its Climate Goals

As we all know, climate change is the greatest threat to our world today, and action on climate will require concerted efforts from government, corporates, and financial institutions. China has stepped up and pledged to be carbon neutral by 2060, but this will require a 75% to 85% carbon emission reduction by 2050.

To achieve this, the Chinese government will need to accelerate sector transformation by continuing to drive investments in green energy and green finance. Businesses that operate in China have the opportunity to make real change by promoting an energy mix transformation and decarbonizing their supply chains.

Flipping China’s Energy Mix

Emissions in China still mainly come from energy and industry, but those levels have stabilized since 2013. The continued investment in renewable photovoltaic and wind power, along with the expansion of nuclear power and carbon capture and storage by energy businesses, will play a significant positive impact in helping China achieve its target of keeping temperature increases to 1.5 degrees. Based on our analysis, these combined efforts could flip China’s energy generation mix from 70% fossil energy today to just 20% by 2050.

Companies that are directly engaged in power generation and distribution should implement the most crucial green levers by adopting renewable energy, while all companies should work diligently to develop a comprehensive strategy to guide green transformation. At BCG, we’ve developed a “Climate Plan for China” with more than 50 initiatives for businesses—from promoting non-motor transportation to utilizing hydrogen fuel in airplanes—in order to support China’s carbon-neutral vision by 2060.

The partnership among business, government, and financial institutions will be critical to ensure sustainable development.

Creating Sustainable Supply Chains

The second major driver of progress will be improving the sustainability of supply chains. To do this, companies need to pursue five levers:

1. Engage suppliers over the long term. This allows businesses to set standards and track supplier performance and can be one of the most powerful direct levers to reduce upstream emissions. DSM, the Dutch materials company, for example, has started to ask suppliers to use 100% renewable power and uses webinars to help them understand the business case for the switch from conventional power sources.

2. Change procurement strategy. Companies can make this shift by using data provided by their most important suppliers and layering it into models to establish a clear view of supply chain emissions. Businesses can then partner with suppliers to develop joint decarbonization efforts. As the hub of global manufacturing, China’s leadership on green energy can have a positive ripple effect around the world.

3. Redesign products and services. Optimize for sustainability by increasing the amount of recycled materials you use and redesigning your products to save energy—or, as Tesla has done, to save weight. In Tesla’s case, this resulted in longer battery reach and therefore a stronger consumer proposition.

4. Change operational policies. All business leaders need to think about how to embed supply chain decarbonization into their organization. Leaders can introduce low-carbon governance to align internal incentives and empower the organization

5. Engage customers and the broader ecosystem. Focus on peers, governments, investors, and customers in China and around the world. When downstream companies commit to procure greener input materials in an offtake agreement, for example, this provides certainty for producers and enables investment.

The good news is that end-to-end decarbonization has a much smaller impact on end-consumer prices overall than you might think. We recently conducted a study with the World Economic Forum on this topic and found that across eight major sectors prices would not need to increase for end-consumers by more than 1% to 4%. This is because high-emissions raw input materials often make up only a small share of the price that end consumers pay.

To highlight one example: decarbonizing the supply chain for a car would only increase costs to the end consumer by 2%, because major input materials—steel, aluminum, and plastics—are just a fraction of the cost that consumers pay, even though the high-emitting input materials themselves could be quite expensive to decarbonize.

These cost increases will still feel significant in many sectors and in some regions. It can be hard to get consumers to pay more, and many companies are worried about accepting any less margin on their products.

However, the fact that we are talking about only 2% here—instead of 10% or 20%-—gives us real hope that collaboration along the value chain could make it possible.

Again, business has an instrumental role to play in making real change on climate. But business cannot do it alone. We need to forge strong partnerships with governments and investors to move forward together—something that BCG and I are deeply committed to.