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China Country Climate and Development Report

EAST ASIA

PACIFIC

October, 2022

CHINA

World Bank Group

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iChinaCountryClimateandDevelopmentReportEASTASIAPACIFICOctober,2022CHINAWorldBankGroup©2022TheWorldBankGroup1818HStreetNW,Washington,DC20433Telephone:202-473-1000;Internet:www.worldbank.orgThisworkisaproductofthestaffofTheWorldBankGroupwithexternalcontributions.“TheWorldBankGroup”referstothelegallyseparateorganizationsoftheInternationalBankforReconstructionandDevelopment(IBRD),theInternationalDevelopmentAssociation(IDA),theInternationalFinanceCorporation(IFC),andtheMultilateralInvestmentGuaranteeAgency(MIGA).TheWorldBankGroupdoesnotguaranteetheaccuracy,reliabilityorcompletenessofthecontentincludedinthiswork,ortheconclusionsorjudgmentsdescribedherein,andacceptsnoresponsibilityorliabilityforanyomissionsorerrors(including,withoutlimitation,typographicalerrorsandtechnicalerrors)inthecontentwhatsoeverorforreliancethereon.Theboundaries,colors,denominations,andotherinformationshownonanymapinthisworkdonotimplyanyjudgmentonthepartoftheWorldBankGroupconcerningthelegalstatusofanyterritoryortheendorsementoracceptanceofsuchboundaries.Thefindings,interpretations,andconclusionsexpressedinthisvolumedonotnecessarilyreflecttheviewsoftheorganizationsoftheWorldBankGroup,theirrespectiveBoardsofExecutiveDirectors,andthegovernmentstheyrepresent.Thecontentsofthisworkareintendedforgeneralinformationalpurposesonlyandarenotintendedtoconstitutelegal,securities,orinvestmentadvice,anopinionregardingtheappropriatenessofanyinvestment,orasolicitationofanytype.SomeoftheorganizationsoftheWorldBankGrouportheiraffiliatesmayhaveaninvestmentin,provideotheradviceorservicesto,orotherwisehaveafinancialinterestin,certainofthecompaniesandpartiesnamedherein.NothinghereinshallconstituteorbeconstruedorconsideredtobealimitationuponorwaiveroftheprivilegesandimmunitiesofanyoftheorganizationsofTheWorldBankGroup,allofwhicharespecificallyreserved.RightsandPermissionsThematerialinthisworkissubjecttocopyright.BecauseTheWorldBankGroupencouragesdisseminationofitsknowledge,thisworkmaybereproduced,inwholeorinpart,fornoncommercialpurposesaslongasfullattributiontothisworkisgivenandallfurtherpermissionsthatmayberequiredforsuchuse(asnotedherein)areacquired.TheWorldBankGroupdoesnotwarrantthatthecontentcontainedinthisworkwillnotinfringeontherightsofthirdparties,andacceptsnoresponsibilityorliabilityinthisregard.AllqueriesonrightsandlicensesshouldbeaddressedtoWorldBankPublications,TheWorldBankGroup,1818HStreetNW,Washington,DC20433,USA;e-mail:pubrights@worldbank.org.COUNTRYCLIMATEANDDEVELOPMENTREPORTCHINAivChinaCountryClimateandDevelopmentReportAcknowledgementsThisreportwaswrittenbyacoreteamcomprisedofSebastianEckardt(TTL),GianniRuta(co-TTL),KatherineStapleton,JenJungEunOh,AshleyWan,HasanDudu,YoonheeKim,MariaAnaLugo,YiYan,andJoonkyungSeong,withinputsfromLydiaKim,MinZhao,DavidKaczan,JunGe,YushaLi,YanqinSong,XimingPeng,ChristophedeGouvello,MenglingShen,MingyangHao,XiangXu,YuanXiao,JiaLi,MarcinPiatkowski,MinHou,DanielMira-Salama,RadhikaGoyal,SainiYang,LadisyKombaChengula,TianQi,MarcusWishart,YiYan,AbayomiAlawode,JorgePuig,DewenWang,YolandaYunZhu,VickyChemutai,MarylaMaliszewska,PaulBrenton,YongmeiZhou,EugeniuCroitor,HectorPollitt,TianshuChen,MaximilianHirn,YuShang,KhanhLinhThiLe,andHaThanhDoan.ThereporthasbenefitedgreatlyfromcommentsandsuggestionsbyStephaneHallegatte,SomikV.Lall,RichardDamania,VivienFoster,VivekPathak,AadityaMattoo,AnnJeannetteGlauber,JohnNasir,andWenjieChen(IMF).TheeconomicandsectoralmodelingworkwasdoneinpartnershipwithCambridgeEconometrics,TsinghuaUniversity,ChinaAcademyofTransportationScience,andChinaAcademyofSocialScience.ThereportwaspreparedundertheguidanceofManuelaFerro,AlfonsoGarcía,RuthHorowitz,EthiopisTafara,MartinRaiser,MaraWarwick,HassanZaman,BenoitBosquet,RanjitLamech,Kim-SeeLim,andMerliBaroudi.vChinaCountryClimateandDevelopmentReportCONTENTSAcknowledgements........................................................................................ivOverview...........................................................................................................1China’sclimateambitionanddevelopmentopportunity..................................................................................03Chartingpathwaystoresilient,carbon-neutralgrowth......................................................................................05Whatwerecommend...........................................................................................................................................07PolicyPackage1:Acceleratethepowersectortransitionwithmarketreformsandinvestmentsinrenewables.......................................................................................................................................................08PolicyPackage2:Decarbonizekeyenergydemandsectors—industryandtransport..............................09PolicyPackage3:Enhanceclimateresilienceandlow-carbondevelopmentinrurallandscapesandurbanareas......................................................................................................................................................10PolicyPackage4:Harnessmarketstodrivecost-effectiveeconomy-wideabatementandinnovation...13PolicyPackage5:Managetransitionriskstoensureajusttransition........................................................14PolicyPackage6:Fosterglobalclimateaction.............................................................................................15FromAnalysistoAction........................................................................................................................................161.Introductionandstructureofthereport....................................................202.FramingtheclimatechallengeinChina’sdevelopmentcontext................222.1.Prosperityinachangingclimate.................................................................................................................222.2.Unprecedentedeconomicdevelopmentbutrisingenvironmentalstrains..............................................242.3.Rebalancingfromhigh-speedtohigh-qualitygrowth.................................................................................273.Policypathwaysforagrowth-friendlyandinclusivedecarbonization.......333.1.China’sexistingclimatepolicymix..............................................................................................................333.2.Augmentingthepolicymix—fivefundamentalshifts..................................................................................353.3.Gaugingtheeconomicanddistributionalimpactsofdecarbonization....................................................363.4.Sectorpoliciesforcarbonneutrality...........................................................................................................45viChinaCountryClimateandDevelopmentReport3.4.1.Electricityandheat(45percentofemissions,growingat4percentannually)..............................463.4.2.Industry(33percentofemissions,nolongergrowing).....................................................................513.4.3.Transport(8percentofemissions,growingby6percentannually)................................................533.4.4.Low-carboncitiesandbuildings..........................................................................................................583.4.5.Agriculture,landuse,landusechange,andforestry(6percentofemissions,shrinkingby5percentannually).............................................................................................................................................613.5.Economy-wideandenablingpoliciesforcarbonneutrality.......................................................................663.5.1.Macroeconomicandstructuralpolicies:carbonpricing,competition,innovation,andtrade.......663.5.2.Greenfinance.......................................................................................................................................733.4.3.Ensuringajusttransition.....................................................................................................................773.6.Externalpoliciesforacarbonneutralglobaleconomy..............................................................................804.PolicyPathwaysforresiliencetoachangingclimate................................864.1.Climaterisksandvulnerabilities.................................................................................................................864.2.China’sexistingadaptationpolicycontext.................................................................................................874.3.Adaptationandresiliencepolicypathways.................................................................................................884.3.1.Facilitatetheadaptationcapacityofpeople,firms,andlocalgovernments....................................884.3.2.Integrateadaptationinlanduseandwateruseplans......................................................................904.3.3.Protectcriticalpublicassetsandservices,particularlyinurbanareas...........................................924.3.4.Helpthemostvulnerablemanageresidualrisksandnaturaldisasters.........................................935.Fromanalysistoaction...............................................................................97Listofabbreviations.....................................................................................101Appendix:DetailedResultsofMacroeconomicSimulations(MANAGECGE)..............................................................................................103References...................................................................................................108viiChinaCountryClimateandDevelopmentReportBoxesBox1.AcceleratedDecarbonizationScenario(ADS).......................................................................................43Box2.AnalternativemodelingapproachusingE3ME..................................................................................44Box3.China’spowermarketandwhyreformswillbecriticalforthetransitiontocarbonneutrality.........47Box4.HowChinacanmeetenergydemandwithoutbuildingnewcoal-firedpowerplants........................48Box5.MotorfueltaxesinChina.......................................................................................................................55Box6.Synergiesbetweencarbonsequestration,foodproduction,andotherecosystemservices............64Box7.ThepotentialimpactsofglobalclimatepolicyactiononChina’seconomy........................................83TablesTableO.1.DifferentMeasuresofChina’sCarbonFootprint...........................................................................02TableO.2InvestmentneedstoachieveChina’sNDCandcarbonneutrality...............................................06TableO.3.Short-term(next5years)priorities.................................................................................................16Table1.DifferentMeasuresofChina’sCarbonFootprint...............................................................................25Table2.InvestmentneedstoachieveChina’sNDCs.....................................................................................38Table3.MacroeconomicModelingResultsforReferenceandNDCScenarios............................................42Table4.Transportmodelingscenarios,keypolicyparameters,andresults.................................................56Table5.EstimatesofannualsequestrationpotentialfromdifferentNbS....................................................62Table6.Revenuerecyclingusingexistinggovernmenttransfersandpensionsystems..............................68Table7.Short-term(thenext5years)policypriorities....................................................................................97viiiChinaCountryClimateandDevelopmentReportFiguresFigureO.1.ClimatechangeposesamajorthreattoChina’seconomyandlivelihoods...............................03FigureO.2.China’sGrowthChallenge..............................................................................................................04FigureO.3.China’sClimateChallenge.............................................................................................................04FigureO.4.PathwaytoCarbonNeutrality........................................................................................................05FigureO.5.DistributionalImpactsofDecarbonization...................................................................................07FigureO.6.DenserChineseCitiesHaveLowerPerCapitaEmissions,butDensityHasBeenDecliningOverTime............................................................................................................................................................12FigureO.7.JobLossesWillDisproportionatelyAffectLower-SkilledMen,WorkingInland,WhereasJobGainsAreMoreLikelytoBeUrban,SkilledJobsinCoastalRegions.............................................................15Figure1.TheCCDRataglance........................................................................................................................20Figure2.UnabatedclimatechangeposesamajorthreattoChina’seconomy,withestimatedGDPlossesbetween0.5percentand2.3percentperannumasearlyas2030.............................................................22Figure3.Airpollutioniscausingasignificanteconomicandhumantoll......................................................23Figure4.GrowthandGHGemissionshavehistoricallybeencloselylinked..................................................24Figure5.China’semissionsprofileisdominatedbythecoal-dependentpowersectorandheavyindustry...............................................................................................................................................................25Figure6.Export-ledgrowthhasresultedinawidegapbetweenChina’sproductionandconsumptionemissions............................................................................................................................................................26Figure7.China’sincreasinglyfactor-drivengrowthmodelisfacingconstraints...........................................27Figure8.China’stransitionfrompeakcarbontocarbon-neutralitywillbefasterthanadvancedeconomies..........................................................................................................................................................28Figure9.AnIntegratedClimateandDevelopmentFrameworkforChina.....................................................28Figure10.Transitionrisksvarysignificantlyacrossprovinces.......................................................................29Figure11.China’slow-carbonopportunity:rapidgrowthinpatentingandrenewableenergyjobs,anddecliningrenewablesprices..............................................................................................................................31Figure12.China’spolicymixhasreliedmoreheavilyoncommand-and-controlpoliciesthanmarketinstruments........................................................................................................................................................34Figure13.ModelarchitectureandScenariosfortheCCDR...........................................................................37Figure14.ExitingCoal.......................................................................................................................................38Figure15.AggregateImpactsofDecarbonization..........................................................................................39Figure16.DistributionalImpactsofDecarbonization.....................................................................................41Figure17.ImpactandCostofADS...................................................................................................................43Figure18.E3MEmodelingofthetransitiontocarbonneutralityshowspositiveGDPimpacts,withsimilarsectoralemploymentshifts...............................................................................................................................45ixChinaCountryClimateandDevelopmentReportFigure19.Fivesectorsaccountfor96percentofChina’sGHGemissions..................................................45Figure20.TheNDCBaselineScenariocouldpushenergy-relatedemissionstocarbonneutralitybefore2060.......................................................................................................................................................48Figure21.By2050,renewableenergywillneedtoaccountforabout85percentoftotalinstalledcapacityintheNDC............................................................................................................................................49Figure22.Industrialemissionsgrowthhasstartedtodecouplefromoutput...............................................52Figure23.Ifunmitigated,transportemissionsareestimatedtocontinuerisinguntiltheypeakaround2040,andstillemitover1GtofCO2annuallyin2060..................................................................................54Figure24.EPSandADSpolicyscenarioscouldbringforwardthetransportemissionspeakfrom2040to2035and2030,respectively...........................................................................................................................57Figure25.DenserChinesecitieshavelowerpercapitaemissions(panelA),butdensityhasbeendecliningovertime(panelB).............................................................................................................................59Figure26.China’slanduseefficiencyhasimprovedsince2000..................................................................64Figure27.Chinastillsubsidizesfossilfuelstotheorderof0.2percentofGDP...........................................66Figure28.Acarbonchargerisingto$75/tCO2by2030couldreduceemissionsby15to20percent(panelA),whileraisingadditionalrevenuesof2.7percentofGDP(panelB)...............................................68Figure29.ImporttariffsandNTBsarehigheronlower-carbonproducts.....................................................71Figure30.Green-labeledloansnearlytripledbetween2016and2021......................................................74Figure31.Currentlyworkersingreenjobshavehighereducationalattainmentthaninnongreenjobs...78Figure32.Joblosseswilldisproportionatelyaffectlower-skilledmen,workinginland,whereasjobgainsaremorelikelytobeinurban,skilledjobsincoastalregions..............................................................79Figure33.Chinahasuniquepotentialtoinfluencetheclimatepolicychoicesofothercountriesandshiftglobalprices...............................................................................................................................................81Figure34.Chinacanalsoshiftglobalabatementcostsandclimateoutcomesthroughitsinfrastructurefinancingandexports........................................................................................................................................82Figure35.Settlementareaexposedto10percentannualchanceofflooding,givenmedianprojectedsea-levelrise(sqkm).........................................................................................................................................87Figure36.AdaptationprinciplesinBRICS(Brazil,Russia,India,China,andSouthAfrica)countries(quantitativeanalysis)........................................................................................................................................89Figure37.AdaptationprinciplesratingsinChina(qualitativeandquantitativeanalysis)............................89Figure38.Growthofsettlementareasexposedtofloodhazards(1985–2015).........................................92Figure39.Householdsinthelowestincomedecileshighlydependongovernmenttransfersandlaborincomeparticularlyfromagriculture................................................................................................................94Figure40.Thewelfareofpoorerhouseholdsisparticularlysensitivetotheimpactoffoodprices............94Figure41.Prioritizationapproachforrecommendations................................................................................99Figure42.Prioritizingpolicyactionstomaximizeclimateanddevelopmentoutcomes............................1001ChinaCountryClimateandDevelopmentReportOverview©AlexBrylov/Shutterstock02ChinaCountryClimateandDevelopmentReportTheChinaCountryClimateandDevelopmentReport(CCDR)providesanalysisandrecommendationsonintegratingthecountry’seffortstoachievehigh-qualitydevelopmentwiththepursuitofemissionreductionandclimateresilience.Withoutadequatemitigationandadaptationefforts,climateriskswillbecomeagrowingconstrainttoChina’slong-termgrowthandprosperity,threateningtoreversedevelopmentgains.Conversely,ifeffortstotackleclimaterisksleadtoasignificantdeclineingrowthandrisinginequality,theywoulddeprivemillionsofpeopleofdevelopmentandlikelyerodesupportforthereformsnecessarytoachievealastingeconomictransformation.Hence,Chinawillneedtogrowandgreenitseconomyatthesametime.Thisreportofferspolicyoptionstoachievethesedualobjectivesbyeasinginevitabletrade-offsandmaximizingpotentialsynergiesbetweenChina’sdevelopmentandclimateobjectives.TableO.1.DifferentMeasuresofChina’sCarbonFootprintCO2EmissionsperCapitaEmissionIntensityTotalGHGEmissions(Unit)(Tonsperperson)(kgperPPP$ofGDP)(MtofCO2e)Brazil5.00.131057.3China9.00.4612705.1India2.50.263394.9Indonesia3.70.191002.4Philippines2.20.14234.3Russia17.20.392476.8UnitedStates18.30.236001.2Vietnam4.70.33450.1EuropeanUnion7.60.133383.4OECD10.70.1814551.2Source:WorldBankWorldDevelopmentIndicators(WDI).DatareferstototalGHGemissionsandtheyear2019.China’sdevelopmentandclimatechangearedeeplyandincreasinglyintertwined.Thecountryisbothacontributortorisingglobalgreenhousegas(GHG)emissionscausingclimatechangeandseverelyaffectedbyitsadverseimpacts.AlthoughChinaisnotthemainsourceofhistoricalcumulativeemissions,ittodayaccountsfor27percentofannualglobalcarbondioxideandathirdoftheworld’sgreenhousegasesemissions(TableO.1).Alongsideotherlargeremitters,China’scontributiontoreducingglobalclimaterisksisthereforecrucial.Reducinggreenhousegasemissionsinitsrelativelycarbon-intensiveindustrialeconomywillnotbeeasy,posingtransitionrisksbutalsoopeningnewopportunitiesfordevelopment.Atthesametime,largepartsofChina’spopulationandeconomicinfrastructureareheavilyexposedtoclimaterisks.China,likeothercountries,willhavetoadaptandbuildresiliencetoprotecthumanlifeandavoideconomiclossesfromtheeffects.TheCCDRisfirmlyanchoredinChina’sowndevelopmentandclimateaspirations.Chinaaimstosustainsufficienteconomicgrowthtodoublepercapitaincomeandbecomeahigh-incomecountryby2035.Simultaneously,recognizingthelong-termthreatclimatechangeposestoitsownandtoglobaldevelopment,Chinahasalsomadeambitiouscommitmentstopeakcarbonemissionsbefore2030andachievecarbonneutralitybefore2060.Thisreportis,therefore,notaboutwhetherChinashouldacttoaddressclimatechangebuthowitcandosowhilesafeguardingdevelopmentgainsandambitions.03ChinaCountryClimateandDevelopmentReportChina’sclimateambitionanddevelopmentopportunityClimatechangeposesasignificantthreattoChina’slong-termgrowthandprosperity.Risingsealevelsandrisksrelatedtocoastalflooding,stormsurges,andcoastalerosionthreatenChina’sdenselypopulatedlow-elevationcoastalcities,whichaccountforafifthofChina’spopulationandathirdofitsgrossdomesticproduct(GDP).Meanwhile,interiorprovincesinnorthernandwesternChinaareexposedtomorefrequentandextremeheatwavesanddroughtswhichintensifywatersecurityrisksandimpactagriculture—amajorsourceofincome,especiallyamongChina’sruralpoor.Nolongerthreatsinadistantfuture,theserisksarealreadystartingtomaterializetoday,asevidencedbyrecentfloodsanddroughtsthathavedevastatedlargepartsofthecountry.DirectannuallossesfromnaturalhazardsareestimatedtohaveaveragedUS$76billionoverthepastfiveyears.Studiesindicatethattheseeffectswillonlyintensify,withestimatessuggestingthatclimatechangecouldresultinGDPlossesofbetween0.5and2.3percent,asearlyas2030.Worryingly,theseimpactswilldisproportionatelyhitthebottom40percentoftheincomedistribution,whocouldincurlossesofupto4.7percentoftheirincomeby2030,inthemostsevereclimatescenario(FigureO.1.aandb).FigureO.1.ClimatechangeposesamajorthreattoChina’seconomyandlivelihoodsa)ChangeinGDP(percent)b)Changeinincomeofthebottom40%(percent)-4-3.5-3-2.5-2-1.5-1-0.50AgricultureDisastersHealthTemperatureAllimpacts-4-3.5-3-2.5-2-1.5-1-0.50AgricultureDisastersHealthTemperatureAllimpactsSource:Hallegatteetal.(2017),ShockwavesmodelingforChina.Note:Thebarsineachgraphrepresentrangesthatcorrespondtoalternativesocio-economicandclimatechangescenarios.Meanwhile,China’seconomyisalsoconfrontinggrowingeconomicimbalancesthatconstrainfuturegrowth.Afterdecadesofhigh-speedgrowth,China’sgrowthhasgraduallyslowedoverthepastdecade,reflectingloomingdemographicheadwindsandasharpdeclineinproductivitygrowth(FigureO.2.a).Theeconomyhasbecomeoverlyreliantoninvestment,especiallyincarbon-intensiveinfrastructureandrealestate,withrapidlydiminishingeconomicreturns(FigureO.2.b).China’seconomyalsoremainsmoredependentonindustrythandocountriesatsimilarlevelsofpercapitaincomes,partlyduetothelargepresenceofstatedominatedheavyindustries—inthesteel,cement,andotherconstructionmaterialssectors—andpartlybecauseofitsdominantroleinmanyglobalvaluechains.Aimingtoshiftfromhighspeedtohighqualitygrowth,Chinaneedstorebalanceitsgrowthmodel—fromtraditionalinfrastructureinvestmenttoinnovation,fromexportstodomesticconsumption,fromindustrytohigh-valueservices,fromhightolowcarbonintensity,andfromstate-ledtomoremarket-drivenallocationofresources.04ChinaCountryClimateandDevelopmentReportFigureO.2.China’sGrowthChallengeChina’sincreasinglyfactor-drivengrowthmodelisfacingconstraintsa)GrowthSlowdownb)ContributionstoGrowth9.67.97.87.47.06.86.96.76.02.28.12.84.54.802468101220112012201320142015201620172018201920202021202220232024y/ypercentRealGDPgrowthTrend-202468102.92.80.80.1-0.50.70.80.40.40.42.32.85.56.44.64.13.63.31.31.21978-19871988-19971998-20072008-20172018-2021TFPPhysicalcapitalperworkerHumancapitalperworkerEmploymentSource:WorldBankstaff,basedonPennWorldTables(PWT)andChinaNationalBureauofStatistics(NBS)data.Thetransitiontocarbonneutralandresilientdevelopmentwillcreatetransitionrisks.Whileaddressingclimaterisksisimperativetosecuringlongtermdevelopment,achievingChina’sclimateanddevelopmentgoalswillbeuniquelychallenging:itwillrequiredecouplingeconomicgrowthandemissionsatafasterpaceandatalowerincomelevelthaninadvancedeconomies(FigureO.3.a).Thiswillentailfundamentalstructuralchangesoftheeconomy:China’senergy,industrialandtransportsystems,itscities,andlandusepatternswillhavetoundergodramatictransformations.Energypriceswilllikelyincrease—atleastintheshortrun—withdetrimentalimpactsonconsumersandfirms.AlargepartofChina’sexistingcarbon-intensivecapitalstockwillbecomeobsolete,andjoblosseswilloccurinpollutingindustries,manyofwhichareconcentratedinsomeofChina’spoorerinteriorprovinces.Theresultingdisruptionsanddislocations–andtheirimpactongrowthandinclusion—areseriousconcernsthatneedtobeaddressedtomoveforwardonaneconomically,socially,andpoliticallyviabledecarbonizationpath.Thegoodnewsisthataggregateadjustmentcostsanddistributionalimpactsdependatleastpartlyonthepolicymixadopted.FigureO.3.China’sClimateChallengeChina’stransitiontocarbonneutralitywillrequiredecarbonizationatalowerincomelevelandatafasterpacethanothermajoreconomiesa)Emissionsandincomelevelsb)CO2emissionsandtargetsAdvancedeconomiesEmergingeconomies02468101214GtCO2eGtCO2e19902000201020202030204020502060NDCTargetsChinaIndiaIndonesiaRussia024681012141990200020102020203020402050NDCTargetsJapanUSAEU270510152025300200004000060000CO2emissionspercapita(tons)GDPpercapita,PPP(constant2017international$)China:1952-2019Japan:1950-2019UnitedKingdom:1950-2019UnitedStates:1950-2019Germany:1950-2019Source:WorldBankstaff,basedonCIATWorldDevelopmentReport(WDR),ClimateTracker.05ChinaCountryClimateandDevelopmentReportYet,Chinaisalsowellpositionedtoturnclimateactionintoaneconomicopportunity.Likeprevioustransformationsonthescaleenvisaged,thetransitiontoreducedcarbonintensityandclimateadaptationinChinaandtherestoftheworldwillunlocknewsourcesofeconomicgrowth,innovation,andjobcreation,withtheaddedbenefitofloweringChina’srelianceonimportedfuelsandenhancingitsenergysecurity.Asaglobalmanufacturinghub,China—andespeciallyitsprivatesector—isuniquelypositionedtotakeadvantageoftheseshifts.Chinaisattheforefrontofadvancinglow-carbonenergysupplyandmobility.Ithasone-thirdoftheworld’sinstalledwindpowerandaquarterofitssolarcapacity.Alreadytodayover4millionjobs—morethanhalfoftheglobaltotalinrenewableenergy—areinChina.Fueledbyitslargedomesticsavings,Chinaisalsobecomingaleaderingreenfinance,beinghometotheworld’slargestgreenbondandcreditmarkets.Theseopportunitiesarealsoreal.But,asinthecaseoftransitioncosts,whethertheywillberealizedcruciallydependsonpolicies.Chartingpathwaystoresilient,carbon-neutralgrowthModel-basedsimulations,consistentwithChina’s“30-60goals”andNationallyDeterminedContribution(NDC),showthatthepaceofemissionsreductionwillvaryacrosssectors,withimportantimplicationsforsequencing(FigureO.4).Thelow-carbontransitionofthepowersector—thelargestsourceofemissions—wouldneedtocomefirsttoachievearapiddeclineinemissionsoverthenexttwodecades.Frontloadingthedecarbonizationofthepowersectorisalsoimportanttomeetgrowingelectricitydemand,includingfromelectrificationofdemandsectors,suchastransport,buildings,andindustrywithoutincreasingemissions.Investmentsinavailableleast-costoptionsindomesticsolarandwind,supportedbyexpandedenergystoragewouldsteadilyreducecoaluseinthepowersector.Intheindustrialsector,reductionofexcessproductioncapacity,energyefficiencyimprovements,andelectrificationwouldloweremissionsintheshortterm,butinnovationssuchasgreenhydrogenandcarboncapture,usage,andstorage(CCUS)wouldberequiredtoachievedeepdecarbonizationinthelongterm.Inthetransportsector,carbonintensitywouldbereducedthroughcontinuedinvestmentsinpublicmasstransportsystems,electrificationaswellasinnovationsinlow-carbonfuelsforhard-to-electrifymodes.DirectCO2emissionsfrombuildingswouldbemitigatedthroughelectrification,cleandistrictheating,andenergyefficiency.Finally,carbonsequestration—negativeemissions—fromnature-basedsolutions(NbS),includingexpandedforestcoverage,willenablecarbonneutralitybyoffsettingsignificantresidualemissionsinhard-to-abatesectorswhilesimultaneouslyfavoringresiliencetofloods,droughts,andsea-levelrise.FigureO.4.PathwaytoCarbonNeutrality-202468101214161990199219941996199820002002200420062008201020122014201620182023202520272029203120332035203720392041204320452047204920512053205520572059GtCO2eElectricity/HeatIndustryTransportationBuildingsAgriculture,LULUCFOthersSimulationSource:WorldBankstaffestimatesusingintegratedmodelingframeworkwithMANAGECGE,TIMESChina,andLEAP.Note:ThepathwayisconsistentwithChina’s30/60goalanditsrevisedNDC.Decarbonizationwillrequiresignificantinvestmentsinamassivegreeninfrastructureandtechnologyscale-up.Specifically,oursectoralmodelssuggestthatChinawouldneedatotalofaboutUS$14trillioninadditionalinvestmentsfromnowuntil2060forthepowerandtransportsectorsalone,equivalentto0.97percentofGDP06ChinaCountryClimateandDevelopmentReportduringthatperiod(seeTableO.2).1Toavoidlocking-incarbonintensiveassetsandmeetChina’sNDCtargets,alargepartoftheseinvestmentswouldneedtobefrontloaded,requiringaboutUS$2.1trillion(equivalenttoroughly1.1percentofGDP)inthenextdecade.Underanaccelerateddecarbonizationscenariothatwouldallowemissionstopeakearlierthan2030,reducingcumulativecarbonemissionsuntil2060byalmost55billiontonsandsmoothingtheimpactsonGDPovertime,investmentneedswouldincreasebyUS$3trilliontoatotalofUS$17trillion.Whileoverallinvestmentneedsarelargestinthetransportsector,manyoftheinvestmentsinthesectorareexpectedtobringaboutsignificantenergyefficiencygainsandoperatingcostsavingsthatwouldmaketheseinvestmentsnotonlyeconomicallyviablebutfinanciallyattractive.Inaddition,technologicalprogressmaylowersomeofthesecosts,andindividualinvestmentsandthepoliciestoencouragethemmaybeprioritized(orde-prioritized)takingalsointoaccountspecificcost-benefitconsiderations.Publicinvestmentswillbenecessarybutnotsufficienttomeettheoverallinvestmentneeds.Theywillneedtobecomplementedbygoodsectorpolicies,broad-basedregulatoryreform,andnewstandardstofullytapthepotentialandincentivizeprivatesectorinvestmentandinnovationinthesesectors.Theaggregatemacroeconomicimpactsofdecarbonizationaremanageableandcruciallydependonpolicychoices.Themodel-basedsimulationssuggestcumulativeGDPlosses/gainsofbetween-2.0and0.3percent,dependingonthespecificpolicychoicesandmodelspecificationstoachievecarbonneutralitybefore2060.Beyondtheseestimatesthataresubjecttohighuncertainty,threepolicyrelevantfindingsemergefromthemodeling:First,aggregateeconomicimpactsofdecarbonizationarelikelytobemanageable.Importantly,theresultssuggestthatgrowthimpactsofachievingChina’sNDCinthenextdecadecouldbemarginallypositive,reflectingtheavailabilityoflow-costabatementoptionsinthepowersectorandindustrialenergyefficiency.Second,thesimulationsalsosuggeststhatadjustmentcostscouldbereducedsignificantlyiflabormarketfrictionsareaddressed,reinforcingtheimportanceofcomplementarystructuralreforms.Finally,theupperboundoftheestimatesillustratesthatdecarbonizationpoliciescouldevenboostgrowthiflaborproductivitygainsfromimprovedairqualityandpublichealthareaccountedfor.TableO.2InvestmentneedstoachieveChina’sNDCandcarbonneutralityIncrementalinvestmentoverreferencecase(inUS$billion)2021-252026-302031-402041-502051-60TotalNPV(6%)NPV(Risk-free)Electricity(GenerationandGrid)3363681,3861,9922004,2821,7572,588TransportLow-carbonmodeInfrastructure94977331818790124Fuelandoperatingefficiency-2244131,471370-1021,9288431,263Electrificationandfuelswitch2828973,0291,9511,2427,4032,9794,419Total4031,7275,9644,3471,35913,8005,6688,394Source:Bankinternalanalysis.GDPprojectionsarethesameasinthebaselineCGEscenario.Note:NPV(Risk-Free)iscalculatedbasedontheyieldcurveofChina’streasurybonds,rangingfrom2.0percentforthe1-yearbondto3.4percentforthe50-yearbond.1Otherestimateswhichincludeothersectors(building,agriculture,industry)estimatetotalinvestmentneedsatUS$22trillion.CICCResearch,CICCGlobalInstitute.(2022).GuidebooktoCarbonNeutralityinChina:MacroandIndustryTrendsunderNewConstraints(1sted.2022ed.).Springer.07ChinaCountryClimateandDevelopmentReportTherelativelybenignaggregateimpactsarenocauseforcomplacencyabouttransitionrisks.Themodelsimulationsshowthatcostsofthelow-carbontransitionaffectthepoordisproportionatelyandareregionallyandsectorallyconcentrated.Higherenergypricesleadtoasubstantiallossinhouseholds’purchasingpoweracrossthedistributionwithpoorerhouseholdsfacinglargerimpacts(FigureO.5).Loweremploymentandearningsamongagriculturalworkerswillaffectlow-incomehouseholds,whereasjoblosses,andlowerearningsinindustrywillimpacthouseholdsinthericherquintiles.SomeofChina’spoorestregions,whicharemoredependentoncarbon-intensiveeconomies,willbehardesthit.ThenorthandnorthwesternprovincesofXinjiang,InnerMongolia,Shanxi,Shaanxi,Ningxia,andLiaoningwouldexperiencethegreatestemissionsdeclines,negativeemployment,andoutputeffects.Bycontrast,thelow-emissionsprovincesofTianjin,Guangdong,Jiangsu,andZhejiangfacethebestoutcomes,closelyfollowedbyBeijingandShanghai.Recyclingpartofthecarbontaxrevenuesintosocialsupporttohouseholds,workers,andcommunitiesnegativelyaffectedbythetransitioncouldhelpstemrisinginequality.FigureO.5.DistributionalImpactsofDecarbonizationRegressiveimpactsofclimateactioncanbeaddressedWelfareimpactsbyincomegroups,2060(%relativetobaseline).Decompositionbyincomesource.-10-50510PercentrelativetobaselineScenario1Scenario2Scenario3Scenario4Q1Q2Q3Q4Q5Q1Q2Q3Q4Q5Q1Q2Q3Q4Q5Q1Q2Q3Q4Q5NominallaborNominalnon-laborPricesSource:WorldBankstaffestimatesbasedonMANAGE.WhatwerecommendBalancingChina’sdevelopmentandclimateobjectiveswillrequirebroaderstructuralandmarketreformstocomplementclimateaction.Climatepolicyactionisnecessarytoadjustrelativeprices–eitherthroughexplicitcarbonpricingorregulationandfosterlow-carboninnovationandtechnologyadoption.Governmentpolicieswillalsohavetofosterinvestments–bothprivateandpublic–inclimate-provinginfrastructureandsocialsafetynets.Buttheeffectivenessofthesepoliciesdependsoncompetitivemarketstocreatetherightincentivesformarketparticipantstoundertakeinvestmentsandstimulateinnovationingreenproductsandtechnologies.AlthoughChina’seconomyhasbecomemoremarket-driven,thereareremainingdistortionsinbothfactormarketsandkeyproductmarkets(forexample,energy).Thesedistortionshavecontributedtomisallocationofresourcesandstifledcompetition,weighingonproductivitygrowthbutalsocontributingtorelativelyhighcarbonintensity.Unlessaddressed,theycouldbecomeimpedimentsforanefficienttransitionprocess.Structuralreformstopromoteamarket-basedallocationofcapital,labor,andlandandtofacilitatethesmoothentryandexitofcompanieswouldenabletheeconomytoadaptmoreefficientlytochangingpricesignalsandregulations,therebyloweringadjustmentcosts.Theywouldalsohelpenhancetheeconomy’sshockabsorptioncapacitytophysicalrisks.Adoptingclimateactionswithinsuchcomprehensivepolicyframeworkwouldhelpeasetheinevitabletrade-offsandmaximizethepotentialsynergiesbetweenChina’sclimateanddevelopmentobjectives.Thespecificpolicyoptionspresentedinthisreportcanbestructuredaroundsixinterconnectedpolicypackages.08ChinaCountryClimateandDevelopmentReportPolicyPackage1:AcceleratethepowersectortransitionwithmarketreformsandinvestmentsinrenewablesThelowcarbontransitioninpowerandheatgenerationbetweennowand2030ispivotalindrivingdecarbonization.Thistransitionisbothfeasibleandnecessary.Itisfeasiblebecauseoftheavailabilityofincreasinglycost-competitiverenewableenergytechnologies.Anditisnecessarybecauseelectrificationinend-usesectors–transport,housing,andindustry–willrequireagrowingsupplyofcleanelectricitytoachieveindentedemissionreductions.Whileinvestmentsintherapidscale-upofrenewablecapacityareessential,structuralreformstocreatemoreintegratedandefficientelectricitymarketswouldhelpensureefficientutilizationandintegrationofrenewablegenerationassets.Itwouldalsohelpattractmoreprivatesectorinvestmentandinnovation.yyImplementscaleupofsolarandwindpowergenerationcapacityto1,200GWby2030,inlinewithChina’sNationallyDeterminedContribution(NDC).Whilethisenvisagedscaleupisambitious,analysisundertakenfortheCCDRshowsthataddingmorerenewableenergycapacity,upto1,700gigawatts(GW),couldadvanceemissionspeakingtoearlierthan2030andresultinasignificantreductionincumulativeemissions.Todoso,Chinawouldneedtoaddupto120GWofsolarandwindcapacityeveryyearby2030,1.5timestheannualaverageduring2016–20and20percentmorethanthecapacityadditionin2021.ThiswouldenableChinatomeetincrementalelectricitydemandwithrenewableenergyandreducecoal-basedgenerationfrom2025onwards.Thisisanambitioustarget.Achievingitwouldrequireastrongglobalsupplyresponseandincreasedproductioncapacityforbatteryandsolar/windcomponentstoreducepressureonpricesforthesetechnologies.yyAdoptinternationalbestpracticesinsystemplanning,reliabilityregulations,andvariablerenewableenergy(VRE)generationforecastanddispatchtoreducetheneedforadditionalcoal-firedgenerationcapacity.IncreasingthecapacityvalueforVREinlinewithstandardsusedinternationallywouldresultinlessneedforadditionalnewcoalcapacity.Moreover,VREdispatchcanbefurtheroptimizedbyadoptingadvancedshort-termweatherforecastinganddigitalizationattheprovincialgridlevel.yyAcceleratetheintegrationofprovincialandregionalpowermarketstooptimizeoverallcapacityusage.Integratingprovincialgridswouldallowoneprovincetotakeadvantageofreservecapacityinotherprovincesandreducetheneedforadditionalcoalpowercapacity.Thiswouldrequirebothphysicalinvestmentsininterprovincialtransmissionlinesandreformstomovedispatchoperationandresponsibilityfromtheprovincialtotheregionalornationallevel.Theauthoritiesareaimingforaunifiednationalpowermarketby2030.Acceleratingmarketintegrationcouldhelpreducethecostsoftheenergytransition.yyExpediteelectricitymarketreforms.Chinahasgraduallymovedtowardagreaterroleformarket-basedtransactionsinthepowersector.Acompletephasingoutofquotasforcoal-firedpowerplants,alongwiththeintroductionofamarketforancillaryservices,wouldencouragegreaterprivateinvestmentinrenewablesandstoragecapacityandfacilitatetheshiftofcoalpowerplantstopeakload.TogetherwitheffectivecarbonpricingthroughatighteningoftheemissionsstandardsunderChina’semissionstradingsystem(ETS),electricitymarketreformswouldoptimizesystemcost,enhanceflexibility,leveltheplayingfieldforrenewableenergy,andshifttheroleofChina’slargeexistingcoalfleets.yyPromotedemandmanagementmeasuresforelectricityuseandheating.Regulatorymeasuresandtime-of-useretailtariffscouldhelpdrivefurtherimprovementsinenergyefficiency.Chinacouldalsopromotedistributedrenewableenergyandstoragetotakesomeloadoutofthegrid,establishdemandresponseprogramswhereconsumersarepaidforvoluntaryloadcontrol,anddevelopsmartgridandelectricvehicle-to-gridapplicationsthatfurtherdecreasepeakdemandandincreasegridflexibility.Intheheatingsector,pricesremainwellbelowcostrecoveryandthelimiteduseofconsumption-basedbillingreducesincentivesforenergysavings,withtheresultingsubsidiesbenefitingricherhouseholdswithlargerdwellingsdisproportionately.Targetedsupporttothepoormaybeneeded,however,toaddressaffordabilityconcernsiftariffsareadjustedtoreflectcosts.09ChinaCountryClimateandDevelopmentReportPolicyPackage2:Decarbonizekeyenergydemandsectors—industryandtransportDecarbonizingtransportTransportsectorGHGemissionsaregrowingfastestamongallsectors.Ifunmitigated,transportemissionswouldpeakin2040atabout150percentofthecurrentlevel,muchlaterthanChina’stargetoverallpeakingyearof2030,beforedecreasingtothecurrentlevelby2060.Decarbonizingthetransportsectorrequiresconcertedeffortsencompassingpolicies,pricing,regulatorymeasures,infrastructureinvestments,andtechnologicalinnovation,throughwhichmotorizedtripscanbeavoidedorshiftedtolowerenergy-intensitymodes,ortheirenergyefficiencyimproved.yyAdvanceelectrificationbeyondpublictransportvehiclestoincludetheprivateandcommercialfleet.ElectricvehiclesinChinatakeuplessthan2percentofthetotalfleetandareconcentratedmostlyinthelargesturbanareas.Givenrapidmotorizationtrendsdrivenbyrapidlyrisingincomes,earlyactioncouldmitigaterisksofcostlyandemission-intensivelock-ininfossilfueltechnologies.Duringtheinitialmarketdevelopment,publicpoliciesmaybeneededtoensurepriceparity(throughtaxesandincentives),buttheseinterventionsshouldbetemporaryandneedtobecarefullydesigned.Scalingupcharginginfrastructurebyenablingprivateinvestmentisequallyimportant.Earlyactionstoadvanceelectrificationwouldbecriticalforadvancingemissionspeakingintransport,from2040orlaterunderthebusiness-as-usualscenarioto2030–35,bringingaboutanemissionsreductionofabout14.0–18.4Gtfromnowuntil2060.WhileelectrificationcanachievesomeemissionreductionevenwithChina’sexistingpowermix,aspointedoutabove,frontloadeddecarbonizationofelectricitysupplyiscrucialtorealizethefullabatementpotentialofelectrificationinthesector.yyCombineregulatorymeasureswithpricinginstrumentstoencouragefuelandenergyefficiencyimprovementbytheprivatesector.Chinahaseffectivelyimplementedadministrativemeasurestowardstricterfueleconomyandenergyefficiencystandardsofvehiclesovertime.Theseregulatorytools,combinedwithhigherfueltaxesorcarbonpricing,wouldprovidestrongincentivestoprivateandcommercialfleetoperatorstoreducefuelconsumption,whichisestimatedtobringaboutanemissionsreductionbetween4.3-7.0Gtfromnowuntil2060.yyPromotemodalshiftsfromprivateroadtransporttopublicmasstransit(forpassengertransport)andtorailwayandwaterway(forfreighttransport),throughdeeperintegrationacrossmodesandpricingincentives.Despitethesuccessinrapidlybuildinganextensivenetworkofhigh-speedrailwaysandurbanmetros,theintegrationbetweenmodeshasbeenweakduetothelackofinstitutionalcoordination.Thecurrentpricingstructureresultsinlowerrelativepricesforcarbon-intensivemodes(roadandairtransport)comparedtolower-carbonmodes(railandwaterway).Meaningfulshiftstolow-carbonmodes,whichrequirebothphysicalandoperationalintegrationacrossmodesandrelativepricingthatreflectsexternalities,canbringaboutanemissionsreductionbetween2.4-3.3Gtfromnowuntil2060.yyPromotetechnologydevelopmentforalternativelow-carbonfuelsforharder-to-decarbonizesectors.Waterborneandairtransportsystems,whichaccountforabout15percentoftransportemissionsandaregrowingfast,aredifficulttoelectrifywithcurrenttechnologies.Alternativeoptions,includinggreenhydrogen,ammonia,andpotentiallynewgenerationsofbatteries,arenotyetcommerciallyviable.Continuedinnovationwillberequiredtoachievefulldecarbonizationofthetransportsectorby2060inlinewithgovernmenttargets.DecarbonizingindustryIndustrialenergyefficiencyinChinahasimprovedsteadilyovertheyears,butgreaterprogressispossible.Althoughthegrowthrateofindustrialprocessemissionshasbeendecliningsince2005thankstorapidimprovementsinenergyefficiency,decarbonizingChina’slargeheavyindustrieswillbechallengingbecauselow-carbonproductiontechnologiesremaincostly(forinstance,useofhydrogenandcarboncaptureinsteelproduction)ordonotyetexist(asincement-production).Astructuralshiftawayfromheavyindustries,a10ChinaCountryClimateandDevelopmentReportmovetowardacirculareconomy,andthedevelopmentofnewtechnologies,includingcarboncaptureandstorage(CCS),willberequiredtobringindustrialemissionsdown.yyAshiftfromtraditionalinvestment-ledtowardsmoreconsumptiondrivengrowthwouldreducetrade-offsbetweentheauthorities’short-termgrowthandlong-termclimateobjectives.Chinahastraditionallyreliedheavilyoninvestmenttodrivegrowth.Thisinvestment-drivengrowthmodelhasstimulateddemandforsteel,cement,andothercarbon-intensiveoutputsofheavyindustriesandtherebyincreasedemissions.Theeconomicreturnstoinvestmentsespeciallyininfrastructureandrealestatehavebeendeclining.Insteadofstimulatingfurtheraccumulationofphysicalcapital,usinggovernmentpoliciestosupportconsumptionwouldbeconsistentwithChina’sobjectiveofeconomicrebalancingtowardservicesandconsumptionwhilesimultaneouslymitigatingthetrade-offbetweenshort-termgrowthandambitiousemissionstargets.yyGreaterattentiontocirculareconomyopportunitieswouldreduceemissionsintensityandhelpovercomematerialsupplybottlenecks.Promotionofthecirculareconomycansupportemissionsreductions.ElectricArcFurnace(EAF)productioniscurrentlyconstrainedbydomesticscrapsteelsupply.Astandardizedscrapsteelrecyclingsystemwouldfacilitateincreaseduseofscrap,importantinthecontextofChina’send-of-lifesteelavailabilityquantities,whichareexpectedtodoubleoverthecomingdecadeasexistinginfrastructurereachesend-of-life.Atthesametime,tighterdesignstandardsfornewbuildingscanbeusedtomandatemorerecycledcontent.yyInthelongerterm,thereisaneedtosupportdirectandindirectdriversoftechnologicaladvancement.Arangeoftechnologiesisavailabletoreduceemissionsbutrequirespriceincentivestosupportuptake.Technologiesavailablerangefromwell-establishedtoexperimentalandcandramaticallyreduceemissions(Linetal.2021).Backgroundanalysisoffirm-leveldatainChina’smajorindustries,undertakenforthisreport,demonstratesthecorrelationbetweenresearchinvestment,technologicalinnovation,andindustrialefficiencyacrosssectors.2Italsohighlightstheroleofforeigninvestmentindrivingefficienciesbydiffusingadvancedmanagementexperienceandcleanertechnologies.TheplannedexpansionoftheETSwillmotivateefficiencymeasureswhenitisexpandedtocoverareasoftheeconomybeyondpowergenerators.yyDecarbonizingtheindustrialsectormayalsoinducerelocationofindustriestowardprovinceswithhigherrenewableenergypotential.China’sindustrialcapacity,especiallyitscarbon-intensiveheavyindustries,isspatiallyconcentratedinthenorthwesternprovinces,reflectinghistoricalindustrializationpatternsthatwereinpartdrivenbytheendowmentswithcarbon-intensiveenergysources(suchascoal).Thelow-carbontransitionmayshiftcomparativeadvantagestoareaswithhighrenewableenergypotential(solar,wind,hydro)andfuelsderivedfromtheseinputs(hydrogen,ammonia).Thiswilllikelyreshapetheeconomicgeography.Enablingflexiblefactormarketscouldeasethisrelocationwhereitcontributestomostcost-effectivelow-carbonproduction.PolicyPackage3:Enhanceclimateresilienceandlow-carbondevelopmentinrurallandscapesandurbanareasDespiteprogressinsettinganationalpolicyframework,thereareopportunitiestoimproveadaptationeffortsatboththenationalandsectorlevels.Fortunately,mitigationandadaptationactionsaresynergeticinseveralareas,suchascityplanning;agricultural,water,andlandmanagementpractices;thedevelopmentofgreenfinance;nature-basedsolutions(NbS);andthecreationofanoffsetmarket,togetherwithbuildingmoreresilientsocialprotectionsystems.Low-carbonandresilientrurallandscapesPhysicalrisksfromclimatechangewillaffectthecountry’sagriculturalproductionpotentialandtheavailabilityofecosystemsservicessuchaswateryield,erosioncontrol,andcarbonsequestration.Changes2Backgroundnoteondeterminantsofindustrialeco-efficiency,preparedbyYutaoWangetal.(FudanUniversity).11ChinaCountryClimateandDevelopmentReportincropyieldsandtheavailabilityofarablelandwillaffectagriculturaloutputandcouldincreaserisks,unlessproductionpracticesareadaptedtoclimatechange.Waterresourcesarealreadybeingimpactedbyclimatevariability,andclimatechangewillseverelyaffectChina’swatersystems.Meanwhile,agriculture,togetherwithlanduse,land-usechange,andforestry(LULUCF),accountsfor6percentofemissions,althoughthishasdeclinedoverthepastdecade.Nature-basedsolutions,suchasafforestation,forestmanagement,nutrientmanagement,improvedgrazinglandmanagement,andwetlandsrestoration,offeropportunitiestocontributetoclimatechangemitigationandresilience.Preliminaryestimatessuggestthepotentialtoremoveatleast768MtofCO2equivalentannually(CO2yr-1)by2030throughNbSinChina.Thiscouldoffsetdifficult-to-mitigateemissions,reducingtotalcostsofachievingcarbonneutrality.NbScanalsodeliverpotentiallylargeco-benefits,intermsofecosystems,watershedmanagement,andpollutionreduction.ResearchpreparedfortheCCDRsuggeststhatland-basedcarbonsequestrationcouldbeimprovedby33.9percentwithnonetdecreaseinfoodproduction,althoughsomeswitchingoflanduseisrequired.yyElevateNbSwithinthenationalclimatechangeplanningprocessandusecarboncreditstoleveragenewsourcesoffinancing.ThereisaneedtoreflectthepotentialofNbSinhigh-levelplanning,andexplicittargetsshouldbesettowardthe30-60goals.UnlockingNbSpotentialwillalsorequirenewsourcesoffinancing;carboncreditsinconjunctionwiththeETScouldbeharnessedforthispurpose.Publicfundingwillcontinuetobenecessarybutspendingeffectivenesscouldbeimproved.Publiceco-compensationprograms(overUS$30billionannually),forexample,couldbeconditionedonecosystemoutcomeproxies(forexample,plantationdiversity)ratherthanoutputs(plantationarea)withtighterspatialtargeting(thatis,prioritizingareaswiththehighestbiodiversityandcarbonsequestrationpotential)anduseofreverseauctionmechanisms.Inaddition,theintroductionofChina’semissionstradingscheme(ETS)providesanopportunitytofinanceNbSthroughthesaleofcarbonoffsets.yyReduceChina’sfoodsystem-relatedgreenhousegas(GHG)emissionsbyrepurposingagriculturalpublicsupport,reducingfoodlossandwaste,andrecycling.ThiswouldentaildecreasingexpenditurescoupledwithproductionandusingthefiscalsavingstosupportthedevelopmentofgreentechnologyinR&Dexpenditures.R&DexpendituresincludetechnologiesthatmitigateGHGemissions;alleviatesoilandwaterpollutionfromfertilizer,pesticide,plasticfilm,andlivestockandpoultrywaste;reinforceclimateadaptationanddisasterresistance;andincreasetheefficiencyofnaturalresourceuse(landandwater).Greensubsidiesshouldbedesignedwithclearandconditionalenvironmentalrequirementsforpotentialrecipients.Onlyproducerswhomeettheenvironmentalrequirementsorsetstandardsshouldreceivesubsidies.Low-carbonandresilientcitiesCitiesinChinaplayanimportantroleinrealizingclimateanddevelopmentgoals.Theurbanizationrate,currentlyat60percent,isprojectedtoreach80percentin2035,withanexpectedurbanpopulationofover1billion.Citiesareexpandingmorerapidlyinareasexposedtoclimaterisks.Moreover,sea-levelriseandstormsurgeconstituteaseriousandimminentthreattoChinesecoastalcitiesandinfrastructure.Atthesametime,urbanbuilt-upareascurrentlyrepresentupto90percentoftotalCO2emissionsinChina.Whilepopulationdensityhasfallensteadilyinrecentyears,ouranalysisshowsthatlowerurbanpopulationdensityisassociatedwithhigherpercapitaemissions(FigureO.6).Reversingthistrendandcreatingconditionsfordenser,well-connected,andpeople-orientedcitieswouldbegoodfortheclimatewhileseizingthefullproductivitybenefitsofurbanagglomeration.Moreover,urbanNbS,suchasharnessingwindcoolingtodealwithurbanheattraps,usingnaturalwaterbodiesforfloodcontrol,andcreatingintegratedgreenurbanspacestopreservebiodiversity,canenhanceclimateresiliencewhilemakingcitiesmorelivable.12ChinaCountryClimateandDevelopmentReportFigureO.6.DenserChineseCitiesHaveLowerPerCapitaEmissions,butDensityHasBeenDecliningOverTimea)Emissionspercapitaandurbanpopulationdensity2001–2018b)UrbanpopulationdensitybycitygroupsEmissionspercapitaandUrbanPopulationDensity2001-2018UrbanPopulationDensitybyCityGroups2001-2018smallmediumlargemegacities6420TotalEmissionsPC,arsinh(ton)UrbanDensity,arsinh(pop/area)YearUrbanDensity,arsinh(pop/area)1year20152010200521.501.251.000.75200520102015Source:WorldBankcalculations.Note:Urbandensityiscalculatedbyurbanpopulation(population/builtarea)andtheunitistheinversehyperbolicsineof10thousandpeoplepersquarekilometer.Emissionsaretotalemissionspercapita,andtheunitislogoftons.Citygroupsaredefinedasfollows:smallcities—lessthan1million(50citiesin2018),mediumcities—between3and5million(52citiesin2018),largecities—between5and10million(62citiesin2018),andmegacities—morethan10million(11citiesin2018).yyPromotingdenser,well-connected,andpeople-orientedurbangrowth.Urbanplannershaveanumberoftoolsattheirdisposaltoachievealow-carbonurbangrowthpath,including:(i)regulatorymeasuressuchasfloorarearatiostoinfluencethedensityofdevelopment,(ii)landuseregulationstodiscourageurbansprawlandpromotecompactness,(iii)coordinatedurbanexpansionandpublictransportinvestmentstrategiestoencouragetransit-orienteddevelopment,(iv)areamasterplanstopromotewalkableneighborhoodsandsmall-blockdevelopment,and(v)scalingupofurbanre-densificationandregenerationprograms.ThedependenceofChina’scitiesonlandsalesforrevenueshasencouragedsprawl,andtheintroductionofpropertytaxesandalternativesourcesoflocalrevenuescouldthusgreatlyencouragedensificationofurbanareaswithloweremissionsandenhancedproductivity.yyCombinegreyandgreensolutionsandengagelocalplanningauthoritiestoprotectcriticalpublicassetsagainstfloods,stormsurge,andsea-levelrise.Policymeasurescouldincludetheenhancementofearlywarningsystems,planningandinvestingintherestorationofcoastalmangroves,andinvestinginimproveddrainage.Moreover,tomaximizethebenefitsforcommunities,citygovernmentsshouldinvolvelocalresidentsintheimplementationprocesstonotsimplyraiseawareness,butalsotoleveragecommunityresourcesfordisasterpreventionandresponse.yyStrengtheningcity-levelGHGinventoriesandrelatedanalyticswouldbecrucialtohelpcitiesidentifykeyemissionsreductionpotentialandmonitorprogresstowardtheachievementofcarbongoals.MethodologiesforGHGaccountingalsoneedfurtherstandardizationacrosscities,tofacilitateemissionstradingandguideprivateinvestment.yyStrengthenfiscalincentivesandfinancialandbuildingregulationstoencourageprivateinvestmentinmoreenergy-efficientbuildings.Aligningdomesticbuildingstandardswithinternationalnormscouldattractmoreinvestment,includingfromthegrowinggreenfinancepool.Morereliablemonitoringanddisclosureofbuildingenergyefficiencycouldinforminvestors,regulators,andhomeowners/occupiers.Itwouldalsoallowashiftofexistingfiscalincentivesforthebuildingsectortoincorporateex-postperformancemeasuresforenergyconservationandemissionsreduction.Finally,buildingcarbonemissionscouldbeincludedinthecarbontradingmarketsystem.13ChinaCountryClimateandDevelopmentReportCross-cuttinginstitutionalreformsforadaptationChina’sadaptationpolicylandscaperemainsfragmented.Thecurrentregulatorysystemprovideslimitedinformationandincentivesforprivateactorstoprepareforandinsureagainsttheeffectsofawarmingclimate.Nationalpolicieslackacoherenteffectivenessevaluationframework,whiletheuseofquantitativetargetsandmonitoringsystemsonclimateadaptionatthelocallevelislimited.yyIdentify,monitor,andfillgapsintheadaptationcapacityofpeople,firms,andlocalgovernments.Afirststepwouldbetomakeexistingdatabasesonclimatevulnerabilitymorebroadlyaccessibletogovernmentandnongovernmentactors.Localgovernmentslackthecapacityandknowledgetoimplementmoreresilientpoliciesandengageresidentsontheground.Governmentsatthesubcitydistrictlevelcouldbenefitfrompeerlearningandcollaborationbetweenurbanandruraldistrictstojointlyaddressclimatechange-relatedrisks.Thiscouldbeaccompaniedbythedevelopmentofanadaptationeffectivenessevaluationframework.Withimproveddataavailabilityondisasterriskandadaptationcapacity,privateinsurancemarketscansetappropriateincentivesandhelpmobilizefundingforriskmitigation.yyImprovethetargetingofsocialtransferstoaddressclimatevulnerabilities.Foodpriceshocksandclimatechange-inducedagriculturalproductionshockswillbekeychallengesfacedbythevulnerablepopulationsinChinaoverthenextfewdecades.Riskmitigationmeasuresincludestrengtheningfarmercooperatives,fosteringtheadoptionofclimate-smartagriculturalpractices,improvingaccesstoclimateinsuranceandsmallagriculturalloans,enhancingoff-farmincomeandemploymentopportunities,andinvestinginqualityeducationandtrainingservices.Inaddition,targetedtransferswillbeneededtopreventvulnerableruralhouseholdsfromfallingbackintopoverty.PolicyPackage4:Harnessmarketstodrivecost-effectiveeconomy-wideabatementandinnovationThetransitiontocarbonneutralitywillrequiretheuseofwell-designedeconomy-widepolicies.Economy-widepoliciesareimportanttodealwithmarketfailuresandensurerelativepricesreflectboththesocialcostofcarbonandthepublicbenefitsoflow-carboninnovationandtechnologydiffusion.Butachievingcarbonneutralitywillrequiremorethanadjustmentsinrelativeprices.Broaderstructuralreformstopromoteamoredecisiveroleofmarketforcesinguidingtheallocationofcapital,land,labor,andR&Dinvestmentarehencecriticaltoenablingtheeconomytoadaptmoreefficientlytochangingpricesignalsandregulations.yyExpandtheroleofcarbonpricingwithforwardguidance.SimulationsshowthatamorebroadlyappliedandhighercarbonpricerisingtoUS$50–75pertonofcarbonbytheendofthisdecadecouldhelpreduceChina’semissionsbyabout15to20percent.Tomoveinthisdirection,ChinacouldstrengthentheETSdesignwithatotalemissionscapwithpre-announcedannualemissionscapreductions,alignedwithChina’sdesiredemissionsreductionpath.Thiswouldallowinvestorstofactorfuturecarbonpriceincreasesintotheirinvestmentdecisionstoday.Overtime,theETSshouldalsobeexpandedtootheremittingsectors,asplanned,andcouldbecomplementedbycarbontaxationinsectorsinwhichETSimplementationisnotfeasible.TheefficacyoftheETSoranyotherformofcarbonpricingwillalsohingeuponthesuccessfulimplementationofmarketreformsinthepowersector(discussedabove).yyDeepenstate-ownedenterprise(SOE)reformstoenhancecompetition,productivitygrowth,andemissionsreduction.SOEsareestimatedtogenerateabouthalfofChina’stotalgreenhousegasemissions,giventheirdominantpresenceincarbon-intensivevaluechains.3Stateownershiphasgiventhegovernmentsignificantcapacitytoimplementlow-carbonpolicies,includingforinstancetherapidscale-upofrenewableenergyinrecentyears.SOEswillremainprotagonistsinChina’stransitiontocarbonneutrality.Adoptingcarbonaccountingandmonitoringsystemstogetherwithenhanceddisclosure,includingpublicationofSOE-specificclimateobjectivesandperformanceaspartoftheSOE3ClarkandBenoit(2022),“GreenhouseGasEmissionsFromState-OwnedEnterprises:APreliminaryInventory,”ColumbiaCenteronGlobalEnergyPolicy.(link)14ChinaCountryClimateandDevelopmentReportsectorannualreporting,wouldhelpinformSOEcorporatemanagementandfacilitatemonitoringandoversight.Atthesametime,deepeningreformstoexposeSOEstomarketdisciplineandcompetition—inlinewithChina’sownstatedreformobjectives—wouldhelpensureemissionreductionisachievedinanefficientmanner.Competitiveandopenmarketswouldcreatepowerfulincentivestoenhanceproductivity,includingintheuseofenergyandothercarbon-intensiveinputswhilestimulatinginnovationandadaptionofnewtechnologies.Strengthenedcorporaterestructuringandinsolvencyframeworkswouldalsobeimportanttofacilitatemarket-basedexitofnonviablefirmsandreduceexcesscapacity,includinginhigh-emittingsectors.yyFostermarket-drivengreenfinance.WhileChina’sgreenfinancemarketsaregrowingrapidly,greenassetsstillaccountforonlyafractionofChina’sfinancialmarket,withgreenloansandbondsmakingupabout8percentand1percent,respectively,ofthetotal.Greenequitymarkets,especiallyforearly-stageriskcapitalnecessarytospurinnovation,remainshallow.Atthesametime,climaterisksarenotproperlypricedinandplayalimitedroleinassetallocation.Arobustgreenfinancialmarketinfrastructure,includingstandardsandcarbonaccountinganddisclosurerequirements,wouldhelpcatalyzethedevelopmentofgreenfinance,complementedbystepstointegrateclimateconsiderationsintofinancialregulationandsupervision.Broaderfinancialsectorreforms,particularlyphasingoutimplicitstateguaranteesinfinancingthatcontinuetofavorthestatesector,couldacceleratecapitalreallocationtoproductivelow-carboninvestmentsandsupporttheshifttoamoreinnovation-driven,privatesector-ledgrowth.yyCreateaneffectiveinnovationecosystembycorrectingmarketandgovernancefailuresininnovationandearly-stagetechnologydiffusion.PublicR&Dsupportisnecessarytohelpresolvemultiplemarketfailures.Butimplementationofthesepoliciesisdelicate,andpublicresourcesmustbespentwelltohavethedesiredimpacts.Interventionsshouldbebasedonaclearunderstandingoftheirefficacyandrelativecost-effectiveness.ChinahasanextensivesystemofR&Dsupport,includingpublicguidancefunds—stateinvestmentvehiclestoprovideequityanddebtfinancingtoenterprises—aswellasotherformsofdemand-sidesubsidiestoencourageshiftsinconsumerbehavior.EnhancingtheefficiencyandefficacyofpublicR&Dsupportwillrequirecomplementaryreformstoopentheinnovationsystemandencouragemarketentryandcompetitiononalevelplayingfieldbetweenprivate—domesticandforeign—firmsandSOEs.yyReformingtradeandinvestmentpoliciestoencouragelowcarbonproductionandconsumption.AnalysisforthisreportdemonstratesthatChina’sNon-TariffBarriers(NTBs)andimporttariffsareonaveragehigheronlower-carbonproducts,particularlyinthecaseofNTBs.Thisisestimatedtoresultinanimplicitsubsidyonimportsofhigh-carbonproductsequivalenttoaround$US68pertonofCO2.Thegovernmenthasalreadyannouncedplannedtariffreformstoreducetheincentivetoimporthigh-carbongoods.NTBscouldalsobereviewedtoidentifyandrationalizepolicydistortionsthatbenefithigh-carbonproductgroupsornegativelyaffectlow-carbonsupplychains.PolicyPackage5:ManagetransitionriskstoensureajusttransitionEnsuringajusttransitionneedstobeacentralpriorityinthedecarbonizationstrategy,withpoliciestofacilitatethelabormarkettransitionandtargetedsupporttoareaswithconcentratedlosses.Impactsimulationscarriedoutforthisreportsuggestthatjobgainsaregenerallypredictedtooutweighjoblossesbutarelikelytooccurindifferentsectors,occupations,andregions.Theresultssuggestanemploymentdeclineofaround1to2millionworkersby2030inthecoalindustry,whichisthemostaffected.Joblossesareinlargelymale-dominated,lower-skilledoccupationsandinChina’scentralorwesternprovinces(FigureO.7).Ontheotherhand,jobgainsarepredictedtobeinhigher-skilledindustriesthataremorelikelytobeinChina’scoastalcities.44DellaVignaetal.(2021).15ChinaCountryClimateandDevelopmentReportyyEnhancelabormarketflexibilityandsocialsafetynetstoenableamoreseamlesslabormarketadjustment.Reducingbarrierstolabormobility,reformstothehukou(householdregistration)system,andtheportabilityofsocialbenefitscouldhelplowertheadjustmentcostsofthetransition.Tailoredsocialsafetynets,includingtemporaryincomesupport,couldalsohelpcushionnegativeemploymentshocksandencourageworkerstoremaininthelabormarket.Effectiveactivelabormarketpolicies—re-skilling,jobmatching,andtransitionsupport—willalsobeneededtobufferlabormarketimpacts.yyProvidemoretargetedassistancethatgoesbeyondsocialsafetynets,togroupsthatwillexperienceconcentratedlossesfromthelow-carbontransition.Eventhoughdirectcoal-relatedjobsaccountforaverysmallshareofChina’stotal,theyareheavilyconcentrated.Threeprovincesaloneaccountfortwo-thirdsofdirectcoaljobs.5Theeconomiesoftheseprovincesarealsoundiversifiedandhighlydependentoncoalforfiscalrevenues.Itwillbeimportanttoassistworkerstomovetonewopportunitiesandtoprovideotherformsofgrowth,employment,andrevenuesinaffectedcommunities,usingtargetedplace-basedsupportandinvestmentfocusingoneconomicgrowth,diversification,andregenerationincoalregions.FigureO.7.JobLossesWillDisproportionatelyAffectLower-SkilledMen,WorkingInland,WhereasJobGainsAreMoreLikelytoBeUrban,SkilledJobsinCoastalRegionsDistributionofjobslostandgained,holdingjobcharacteristicsfixed.a)Workers’characteristicsincontractingsectors.(%relativeto2018)b)Workers’characteristicsinexpandingsectors.(%relativeto2018)41.724.456.942.258.375.643.122.835.0020406080100GenderUrban/RuralRegionSkill36.148.258.477.263.9MaleFemaleMaleFemaleUrbanRuralUrbanRuralCoastalInlandCoastalInlandUnskilledUnskilledSemi-skilledSkilled51.841.615.37.5020406080100GenderUrban/RuralRegionSkillSourceandNotes:WorldBankcalculationsbaseduponCGEmodelingresultsin2030relativeto2018,combinedwithaveragesectorcharacteristicsbasedon2018ChinaFamilyPanelSurveyhouseholdsurveydata.Sectorcharacteristicsareheldfixedattheir2018levels.PolicyPackage6:FosterglobalclimateactionBeyondChina’sdirectcontributiontomeetingglobalemissionsreductiontargets,itslargedomesticmarketsize,industrialprowess,andgrowingtradeandfinanciallinkages,especiallywithdevelopingcountries,createadditionalopportunitiestofosterclimateaction.Tomaximizeitsimpactsonglobalclimategoals,domesticpolicyshiftswillneedtobecomplementedbyconsistentexternalpoliciestoensureclimate-friendlytradeandinvestmentlinkswiththerestoftheworld.Therecentannouncementtonotbuildnewcoalfiredpowerplantsisanimportantstepinthisdirection.yyCreatestricterrulesforoutwardforeignfinance:EncourageChineselenders,includingpolicybanks(ChinaDevelopmentBankandChinaExim)toadoptcleanfinancingprinciples(the“EquatorPrinciples”)andtophaseoutthefinancingofcoalandothercarbon-intensiveinfrastructure.Climate-relatedinformationdisclosureandguidanceonstandardswouldalsobeimportant.5Heetal.(2020).16ChinaCountryClimateandDevelopmentReportyyAssistemergingeconomieswithlow-carbonprojects:Chinacouldtakestepstoencouragetheemergingeconomiesinwhichitfinancesinfrastructuretooptforlower-carbonprojects.TechnicalassistanceusingChina’sownexperienceinrampinguprenewableenergycouldhelpothercountriesforgeaviablelower-carbonpathanddeepenmarketsforlow-carbontechnologies.FromAnalysistoActionTokick-startthetransitiontomoreresilient,carbon-neutraldevelopment,weconcludewiththefollowingprioritiesforactionduringthenextfiveyears:Theproposedpolicymeasurescombineeconomy-wideandsector-specificreformsinthekeyemittingsectors.Severalofthemaregoodfortheclimateandfordevelopment.Forexample,reformstoensurethedevelopmentofmorecompactandlivablecitieswouldmakeChina’scitiesmoreresilientandreducetheircarbonfootprintwhileboostingproductivitygainsfromagglomeration.Similarly,structuralreformstoenhancecompetition,provideamoredecisiveroletomarketforcesinresourceallocationandrebalancetheeconomyfromindustrytoserviceswouldcontributetoachievingbothclimateandgrowthobjectives.Reformsshouldbesequencedtotakeadvantagefirstofno-regretstepsandlower-hangingfruit—forexample,theavailabilityoflow-costrenewabletechnologiesinthepowersector.Someofthemeasures,liketheacceleratedrolloutofrenewableenergygenerationcapacity,contributetospeedyreductionsinemissions.Others—forexample,refiningChina’sETSorinvestinginlow-carbonresearchanddevelopment—maynotcauselargeimmediategainsbutcouldestablishimportantfoundationsfordeepdecarbonizationinthelongrun.Together,thesemeasuresconstitutecriticalfirststepsthatChinacouldtakeoverthenextfiveyears.Giventheuncertaintiesinvolved,policiesandtheirimpactswillhavetobemonitoredandadaptedovertime.TableO.3.Short-term(next5years)prioritiesRationalePolicyOptions1.DefinethetrajectorytocarbonpeakinganddeliverclearsignalstofirmsChinahasmadelong-termcommitments,butshort-termemissiontargetsremainambiguous.•Provideclearforwardguidancebysettingannualmass-basedemissionscapsoverthenextdecade,supportedbyaconsistentcarbonaccountingframeworkforfirms,provinces,andcities.2.AcceleratethepowersectortransitionwithmarketreformsandinvestmentsinrenewablesThesectorishighlyreliantoncoal,anditoccupiesthelargestshareoftotalemissions.Greenenergytechnologiesareincreasinglyavailableandaffordable.Thedemandforelectrificationindownstreamsectors(transport,industry)isrising.•Increase,by2030,solarandwindpowergenerationcapacityto1200GWto1,700GW,supportedbyadditionalenergystorageof200GWandmoreflexibleelectricitygrid.•Adoptinternationalbestpracticeinsystemplanning,reliabilityregulations,andvariablerenewableenergy(VRE)generationforecastanddispatchtoenablephasingdownofcoaluse.•Expediteelectricitymarketreforms,includingpricingreforms,developmentofancillaryserviceandcapacitymarkets,andinterprovincialpowertrade.•Promotedemandmanagementmeasures,includingenergyefficiency,distributedrenewableenergy,anddemandresponseprograms.3.Decarbonizekeyenergydemandsectors—industryandtransportEmissionsfromtransportandindustryareincreasing.Thereispotentialtoswitchtocleanenergysources,includingelectrification,efficiencyimprovement,anddemandmanagement.•Adoptmacroeconomicpoliciestosupportrebalancingfromindustryandinvestment-ledtoservicesandconsumptiondrivengrowth.•Setclearandambitiousemissionsreductiontargetsandtechnologystandardsinthecementandironandsteelindustries.17ChinaCountryClimateandDevelopmentReportRationalePolicyOptions•Accelerateelectrificationoftheprivateandcommercialfleets,movingawayfromfocusonpublicbuses,providingtaxincentivestowardpriceparity,nonmonetaryincentives,andadequatecharginginfrastructure(inconjunctionwiththelowcarbonenergytransitiontodecarbonizepowersupply).•Incentivizetransportuserstoimprovefuelandoperatingefficiencythroughpricingandregulationsonvehicleandfuelstandards.•Promotemodalshiftstopublicmasstransitandlow-carbonfreightmodes(railwaysandwaterways)throughmodalintegrationandpricingincentives.4.EnhanceclimateresilienceandadaptationinrurallandscapesandurbanareasTheland-usesectorcanbeharnessedtoincreaseresilience,anditcanbecomeanetcarbonsinkprovidingopportunitiestooffsethard-to-abateemissionsinothersectors.•Developanadaptationpolicyframeworkforagriculture,increasetheuseofnature-basedsolutions,andusescientificandmeteorologicalinformationtoinformwateruseandwaterresourcesplanning.•IncreasetheprofitabilityofinvestmentsinNbSbyacceleratingforestrysectorreform,reorientingeco-compensation,andleveragingcarbonoffsetmarkets.•Repurposepublicsectorsupporttoagriculturetosupportlow-carbonlanduseandpromotethereuseofagriculturalwaste.•Strengthenpolicyframeworkonurbanland-useandspatialplanning,todiscouragesprawl.•Strengthenstandardsandprovidefiscalincentivesforenergyconservationandemissionsreductioninthebuildingsector.•Strengtheninterinstitutionalcollaborationandvulnerabilitydataaccesstohouseholds,firms,andlocalgovernments,anddevelopanadaptationeffectivenessevaluationframework.5.Harnessmarketstodrivecost-effectiveeconomy-wideabatementandinnovationEconomy-wideclimatepoliciesarenecessarytointernalizeboththenegativeexternalityofcarbonemissionsandthepositiveexternalitiesfrominnovation.•Expandtheuseofcarbonpricingmechanisms,includingtheETS,withafocuson(i)buildingmarketinfrastructure,(ii)unifyingperformancebenchmarks,and(iii)introducingpermitauctioningasthefoundationforagradualtransitiontowardaneffectivecapandtradesystemwithanabsoluteemissionscap.•EnhancecompetitionbetweenSOEsandnon-SOEstoallowmarketforcestodriveallocationofcapitalandR&Dresources.•Revisenontarifftradebarrierstoeliminateincentivestotradeinhigh-carbonproducts.•ReformR&Dsupportforlow-carbontechnologies,movingfromquantitytoqualityofresearchandpatenting.•Harnessthefinancialsectorbyestablishingcorporateemissionsaccountingsystems,mandatingclimate-relatedfinancialdisclosures,andusingblendedfinancetofavorinnovation.6.Mitigatethesocialcostsofthetransitionandpreparethelaborforceforthelow-carboneconomyThelow-carbontransitionwillhavedistributionalimplications.Householdswillalsobeaffectedbyrisingenergypricesandbychangesinthelabormarket.•Improvelabormobilitythroughhukoureformandactivelabormarketprograms.•Providetargetedassistancetocommunitiesthatwillexperienceconcentratedjoblosses.•Revisitgovernmentskillsdevelopmentstrategiesandsystemsandworkwithschools,traininginstitutions,employers,andworkerstoincorporategreenskillsintotherelevantprograms.18ChinaCountryClimateandDevelopmentReportRationalePolicyOptions7.FosterglobalclimateactionWithChinabeingthelargestsourceofinfrastructurefinancinginlow-incomeeconomies,adoptingclimate-friendlyinvestmentpracticeswouldamplifyglobalimpact.•EncourageChineselenders,includingpolicybanks—ChinaDevelopmentBankandChinaExim—toadoptcleanfinancingprinciples(“theEquatorprinciples”),andphaseoutfinancingofcoalandothercarbon-intensiveinfrastructure.19ChinaCountryClimateandDevelopmentReport1.Introductionandstructureofthereport©tampatra/istockphoto20ChinaCountryClimateandDevelopmentReport1.IntroductionandstructureofthereportTheChinaCountryClimateandDevelopmentReport(CCDR)providesanalysisandrecommendationsonintegratingthecountry’seffortstoachievehigh-qualitydevelopmentwiththepursuitofcarbonemissionreductionandclimateresilience.Withoutadequatemitigationandadaptationefforts,climateriskswillbecomeagrowingconstrainttoChina’slong-termgrowthandprosperity,threateningtoreversedevelopmentgains.Conversely,ifeffortstotackleclimaterisksleadtoasignificantdeclineingrowthandrisinginequality,theywoulddeprivemillionsofpeopleofdevelopmentandlikelyerodesupportforthereformsnecessarytoachievealastingeconomictransformation.Hence,Chinawillneedtogrowandgreenitseconomyatthesametime.Thisreportofferspolicyoptionstoachievethesedualobjectivesbyeasinginevitabletrade-offsandmaximizingpotentialsynergiesbetweenChina’sdevelopmentandclimateobjectives.China’sdevelopmentandclimatechangearedeeplyintertwined.Thecountryisbothacontributortorisingglobalgreenhousegas(GHG)emissionscausingclimatechangeandseverelyaffectedbyitsadverseimpacts.Althoughnotthemainsourceofhistoricalcumulativeemissions,Chinatodayaccountsfor27percentofannualglobalcarbondioxideandathirdoftheworld’sgreenhousegasesemissions.Alongsideotherlargeremitters,China’scontributiontoreducingglobalclimaterisksisthereforecrucial.Chinahasmadeambitiouscommitmentstopeakemissionsofcarbondioxidebefore2030andachievecarbonneutralitybefore2060(thesetargetsarealsoknownasthe“30-60goals”).ReducinggreenhousegasemissioninChina’srelativelycoal-dependentandcarbon-intensiveindustrialeconomywillinvolvefundamentalstructuralchangesinenergy,industrialandtransportsystems,cities,andlanduse.ThiswillhaveinevitableimpactsonChina’sfuturedevelopmenttrajectory—posingrisksbutalsoopeningnewopportunities.Atthesametime,largepartsofChina’spopulationandeconomicinfrastructureareheavilyexposedtoclimaterisks,withpoorerhouseholdsparticularlyvulnerableandlessabletoprotectthemselvesadequately.Investinginadaptationandgreaterresilienceisthusimperative,atthesametimeasthecountryaimstocontrolandreduceitsownemissions.Synergiesbetweeninvestmentsinmitigationandadaptationexistanddeserveparticularattention.China’sclimateanddevelopmentchallengesandopportunitiesareinmanyrespectsunique.First,asChinahassetitsownclimateobjectivestopeakcarbondioxideemissionsbefore2030andachievecarbonneutralitybefore2060,thereportisnotaboutwhetherChinashouldacttoachievethesegoalsbuthowitcandosowhilesafeguardingdevelopmentgainsandambitions.Second,thesizeandstructureofChina’seconomycreateuniquerisksbutalsoopportunitiestoseizesomeofthetechnologicalandeconomicbenefitsofearlyclimateaction.Third,astheworld’ssecondlargesteconomy,China’schoiceswillmatternotonlyforeconomicactorsinChinabutalsoforeconomicactorsthroughouttheworld.China’sclimateactionsoffertheopportunitytoexertgloballeadershipanddemonstrateviableanddevelopment-compatiblepathwaysandcouldinduceotherdevelopingcountriestofollow.Thesepriorshaveshapedtheoverallframework,relativefocus,andscopeofthisreport.Figure1.TheCCDRataglance25Development&climatechangeHowclimatechangecouldaffecttheeconomy3PolicypathwaysfordecarbonizationHowtoachievenet-zeroemissionswiththebestdevelopmentoutcomes4PolicypathwaysforresilienceHowtobuildresiliencetoachangingclimateFromanalyistoaction:HowtoprioritizeandsequenceactionTheremainderofthereportisstructuredasfollows.Chapter2focusesonChina’sdevelopment,pastandpresent,andhowawarmingglobalclimateandChina’sowndecarbonizationeffortscouldaffecttheeconomy.Chapter3explorespolicypathwaystoachievecarbonneutralitywiththebestdevelopmentoutcomes,Chapter4exploreshowclimatechangeisaffectingChinaandhowtobuildresilience,andChapter5concludeswithkeypolicyrecommendations(Figure1).21ChinaCountryClimateandDevelopmentReport2.FramingtheclimatechallengeinChina’sdevelopmentcontext©Colemanphotographer/Shutterstock22ChinaCountryClimateandDevelopmentReport2.FramingtheclimatechallengeinChina’sdevelopmentcontext2.1.ProsperityinachangingclimateUnmitigatedclimatechangeposesasignificantthreattoChina’slong-termgrowthandprosperity.Incomparativeterms,Chinaisranked61stoutof181countriesforclimatevulnerabilityinthe2020ND-GAIN(NotreDameGlobalAdaptationInitiative)Index.Alreadytoday,climatechangeisaffectingChinaandimpactsareexpectedtointensifyinyearstocome.Asaveragetemperaturesrise,naturaldisastersandextremeweathereventssuchasheatwavesandfloodsareprojectedtogrowinfrequencyandseverity.GivenChina’slargeterritory,specificexposureanddriversofclimateriskvaryacrossitsdifferentgeographies.TheimpactsofclimatechangethreatenChina’sdenselypopulatedandeconomicallycriticallow-elevationcoastalcities,whichareestimatedtoaccountforafifthofChina’spopulationandathirdofitsgrossdomesticproduct(GDP).Chinaalreadyexperiencesfrequentcoastalflooding,stormsurges,coastalerosion,andsaltwaterintrusion.Flooddamagesarelikelytogrowduetoclimatechange-inducedsea-levelrise,unlessfurtheradaptationmeasuresaretaken.TheGDPatrisk(in2019purchasingpowerparity)intheShanghaiandGuangzhoumetropolitanareas,forexample,couldsurpass,respectively,US$1.6trillionandUS$291billionayearbytheendofthecentury(BernardandShepherd2021).Whereasthecoastisatriskofflooding,aridandsemi-aridregionsininteriorprovincesinnorthernandwesternChinaareexposedtomorefrequentandextremeheatwavesanddroughts.Thiswilladdstresstoalreadyoverexploitedwaterresourcesandintensifywatersecurityrisks,imposingsignificantandlong-lastingimpactsonagriculture—amajorsourceofincome,especiallyamongChina’slow-incomeruralresidents.Chinahasmadehugeinvestmentsintransferringwaterfromthewater-richsouthernprovincestothewater-scarcenorthernones,butawarmingclimateislikelytoreducetheavailabilityofmeltingicewaterfromtheheadwatersofallofChina’smajorrivers,highlightingtheneedtoshiftattentiontowardimprovedwaterresourcemanagement.Asidefromriskstohumanlivelihoods,theimpactofexcessivewaterextractiononecosystemsandbiodiversityalsoneedstobefactoredin.Figure2.UnabatedclimatechangeposesamajorthreattoChina’seconomy,withestimatedGDPlossesbetween0.5percentand2.3percentperannumasearlyas2030a)ChangeinGDP(percent)b)Changeinincomeofthebottom40%(percent)-4-3.5-3-2.5-2-1.5-1-0.50AgricultureDisastersHealthTemperatureAllimpacts-4-3.5-3-2.5-2-1.5-1-0.50AgricultureDisastersHealthTemperatureAllimpactsSource:Hallegatteetal.(2017),ShockwavesmodelingforChina.Note:thebarsineachgraphrepresentrangesthatcorrespondtoalternativesocio-economicandclimatechangescenarios.23ChinaCountryClimateandDevelopmentReportClimateimpactsexertgrowingeconomiccosts,oftendisproportionatelyaffectingChina’slower-incomehouseholds.AnnuallossesduetonaturalhazardsaveragedUS$76billionannuallyoverthepastfiveyears,witharoundone-thirdofChina’sagriculturallandnegativelyaffected.Studiessuggestthattheseeffectswillintensifyinthefuture.Forexample,WorldBankmodelingbyHallegatteetal.(2017)estimatesthatclimatechangecouldresultinGDPlossesofbetween0.5and2.3percentasearlyas2030,dependingontheclimatescenario(Figure2a).Incomelosseswilldisproportionatelyhitthebottom40percentoftheincomedistribution,abracketthatcouldincurincomelossesofupto4.7percentby2030inthemostsevereclimatescenario.Otherresearchhasarrivedatsimilarestimates,suggestingGDPlossesamountingtoaround0.5percentofGDPinthenextdecade,0.5to3.5percentofGDPbymidcentury,and1to6percentofGDPby2100,dependingontheclimatescenarios(CMCC2021;SwissReInstitute2021).6Figure3.Airpollutioniscausingasignificanteconomicandhumantolla)Airpollutiondamagepercapita(CurrentUS$)b)AirPollutionRelatedMortalityRate(NumberofPrematureDeathsPer1MillionPopulation)China,1990China,2019UAEAustraliaBrazilCanadaSwitzerlandChileGermanyFranceUKIndonesiaIndiaJapanKoreaMexicoMongoliaRussiaSingaporeUSAVietnam0204060801001201401601802002.533.544.555.5China,1990-2019LogGDPpercapita(Constant2017USD,PPP)Deathratefromoutdoorairpollution(numberofprematuredeathper1millionpersons)China,1990China,2019AustraliaBrazilCanadaSwitzerlandChileGermanyFranceUKIndonesiaIndiaJapanKoreaMexicoMongoliaRussiaSingaporeUSAVietnam0204060801001202.533.544.555.5China,1990-2019Airpollutiondamagepercapita(CurrentUSD)LogGDPpercapita(Constant2017USD,PPP)Source:AdjustedNetSavingsDatabase,WorldDevelopmentIndicators,WorldBank.Inaddition,despitesignificantimprovementsinrecentyears,airpollution—closelyassociatedwithChina’scarbonemissions—posesaseriousthreattothewell-beingofmillionsofChinese.Despitesubstantialimprovementsinairqualityinrecentyears,42percentofChina’spopulationstilllivesinareasthatdonotmeettheWorldHealthOrganization(WHO)airqualityguidelines,andalmostallChinesecitieshaveparticulatematter2.5(PM2.5)concentrationsabovetheWHOrecommendedthresholds.Chronicobstructiverespiratorydiseaseandotherhealthimpactsinducedbyairpollutionareestimatedtoaccountforabout1.5milliondeathsannuallyinChina(Figure3a).Directeconomiclossesareestimatedtoamounttoabout0.5percentofGDPannually(Figure3b).Moreover,airpollutionhasbeenshowntonegativelyaffectlaborproductivity(Changetal.2019).AccountingfortheseeffectssignificantlyincreasestheeconomicreturnstoclimateactionasshowninthisCCDR.MitigatingthecausesofclimatechangeandenhancingresiliencetoitsconsequencesarethereforecentraldevelopmentchallengesforChina.China’spolicyresponsetoclimateriskswillbeshapedbyitsuniquepositionintheglobaleconomyandenvironment.Thisincludesthebalancebetweenmitigationandadaptationmeasures.ChinaplaysapivotalroleinglobaleffortstocontainGHG-inducedtemperaturerises.WithouteffectivemitigationeffortsinChinaandotherlargeemitters,includinghigh-incomeeconomiesthataccountforadisproportionateshareofhistoricalcumulativeemissions,itwillbeimpossibletoachievethegoalsoftheParisAgreement.ThisreportthusputsasignificantemphasisonpathwaystoachievingChina’s6DetailsonthesetrendsandpotentialsensitivitiestoclimateshocksarefurtherdiscussedinChapter4.24ChinaCountryClimateandDevelopmentReportcarbonpeakingandneutralitygoals,therebylimitingitsownandtheworld’sexposuretophysicalclimaterisks,describedabove.AndalthoughChina’seffortstomitigateclimatechangeareimportant,likeothercountries,itwillhavetosimultaneouslyadaptandbuildresiliencetoprotecthumanlifeandavoideconomiclossesfromtheeffectsofresidualclimatechange.Adaptationandmitigationwillthushavetobeintegratedaspartofacomprehensiveclimateanddevelopmentstrategy.Thisreportplacesparticularemphasisonmeasuresthatcouldsimultaneouslycontributetobothobjectives.2.2.UnprecedentedeconomicdevelopmentbutrisingenvironmentalstrainsOverthepast40years,Chinahasachievedunprecedentedeconomicgrowthanddevelopmentgainsbutalsoexperiencedrisingcarbonemissions.Likeotherindustrialcountries,China’sdevelopmentprocesshashistoricallyexhibitedastronglinkbetweengrowthofpercapitaincomesandrisingpercapitaemissions(Figure4).China’srapideconomicascendancesincethe1970shasledtoanearly30-foldincreaseinpercapitaincomebuthasalsoresultedincarbondioxide(CO2)emissionsgrowingmorethantenfoldoverthesameperiod(WorldBankWorldDevelopmentIndicators[WDI],ClimateAnalysisIndicatorsTool[CAIT]).Thiscorrelationbetweengrowthandemissionsreflectsdeepinterconnections:TheverysamedriversthatpropelledChina’srapideconomicgrowthandunprecedenteddevelopmentgains—capitaldeepening,export-ledindustrialization,andurbanization—havealsoresultedinrisingcarbonemissions.Thestrongrelianceonenergy-intensiveactivitiesindrivingeconomicdevelopmentledChinatobecomenotonlytheworld’ssecondlargesteconomybutalsothelargestenergyconsumer,whileitsrelianceoncoalasaprimaryenergysourcehasmadeittheworld’sbiggestcurrentemitterofenergy-relatedCO2.Figure4.GrowthandGHGemissionshavehistoricallybeencloselylinkeda)PercapitaincomeandCO2emissionsb)China’sshareinglobaloutputandCO2emissions0510152025303519781982198619901994199820022006201020142018ChinaCO2shareChinaGDPshare0510152025300200004000060000GDPpercapita,PPP(constant2017international$)China:1952-2019Germany:1950-2019Japan:1950-2019UnitedKingdom:1950-2019UnitedStates:1950-2019CO2emissionspercapita(tons)Source:WorldBankWorldDevelopmentIndicators(WDI),ClimateAnalysisIndicatorsTool(CAIT).25ChinaCountryClimateandDevelopmentReportTable1.DifferentMeasuresofChina’sCarbonFootprint(Unit)GHGEmissionsperCapita(TonsCO2eperperson)EmissionIntensity(kgCO2eperPPP$ofGDP)TotalGHGEmissions(MtCO2e)Brazil5.00.131057.3China9.00.4612705.1India2.50.263394.9Indonesia3.70.191002.4Philippines2.20.14234.3Russia17.20.392476.8UnitedStates18.30.236001.2Vietnam4.70.33450.1EuropeanUnion7.60.133383.4OECD10.70.1814551.2Source:WorldBankWorldDevelopmentIndicators(WDI).DatareferstototalGHGemissions(CO2equivalent)andtheyear2019.Althoughcontributingalargeshareofcurrentemissions,China’shistoricalcumulativeemissionsarelowerthanthoseofothermajoreconomies.HistoricalcumulativenetanthropogeniccarbonemissionsinNorthAmerica,Europe,andEasternAsia(includingChina)are23percent,16percent,and12percent,respectively.7Onapercapitabasis,China’semissionsin2019(9tonnesCO2-equivalent[tCO2e]peryear)surpassthoseoftheEuropeanUnion(7.6tCO2e)butremainslightlybelowtheOrganisationforEconomicCo-operationandDevelopment(OECD)average(10.7tCO2e)andwellbelowtheUnitedStatesaverage(17.6tCO2e).However,thecarbonintensityofChina’sGDP—theamountofcarbonusedtogenerateaunitofoutput—remainsrelativelyhigh(Table1).Improvedindustrialenergyefficiencyandashiftoftheenergymixtowardrenewableshasmoderatedemissionsgrowthsince2016,althoughChina’sabsoluteemissionshavecontinuedtoriseat2percentannuallyduringthepastdecade.AndalthoughChina’seffortstomitigateclimatechangeareessential,likeotherdevelopingcountries,itwillhavetosimultaneouslyadaptandbuildresiliencetoprotecthumanlifeandavoideconomiclossesfromtheeffectsofresidualclimatechange.Figure5.China’semissionsprofileisdominatedbythecoal-dependentpowersectorandheavyindustryGHGemissions(MtCO2e)02000400060008000100001200014000Electricity/HeatIndustryTransportationBuildingsAgriculture,LULUCFOthers199019921994199619982000200220042006200820102012201420162018Source:WorldBankcalculationsusingdatafromCAIT,theNationalBureauofStatisticsofChina(NBS),andtheInternationalEnergyAgency(IEA).72021IPPCReport.26ChinaCountryClimateandDevelopmentReportChina’srapidemissionsgrowthhasbeendrivenprimarilybythecoal-dependentpowersectorandheavyindustry.China’scoal-dependentpowersectoraccountsforthelargestshareofemissions,withelectricityandheatgenerationaccountingfor45percentofallGHGemissions,butthankstoagradualshiftintheenergymix,emissionsfromthepowersectorhavestartedtomoderateinrecentyears(seeFigure5).China’sindustrialemissionsalsoremainexceptionallylarge,at33percentofCO2emissionsin2018,whichcomparestosharesof9percentintheUSand12percentintheEU.ThisreflectsChina’spositionasaglobalmanufacturinghub,and,moreimportantly,itsoutsizedandcarbon-intensiveconstructionandheavyindustries—steel,cement,andotherconstructionmaterials.Heavyindustryaccountsfor96percentofindustryCO2emissions,with85percentofthosefromthecement,steel,andironsectorsalone.Thetransportsector’semissionsaccountforabout8percentoftotalGHGemissionsandcontinuetoriseunabatedlyashigherincomesdrivemotorizationandmobilitydemand.Finally,buildingsaccountforabout5percentoftotalGHGemissions,drivenbybothlowenergy-efficiencybuildingstockandexpansionoffloorspace,asincomesandurbanizationrateshaverisen.Figure6.Export-ledgrowthhasresultedinawidegapbetweenChina’sproductionandconsumptionemissionsa)Productionvsconsumption-basedemissionsb)Embeddedemissionsinnetexports0246810199019921994199619982000200220042006200820102012201420162018BillionmetrictonsProductionSideCO2EmissionsConsumptionSideCO2EmissionsWTOAccession-1.5-1-0.500.511.519901992199419961998200020022004200620082010201220142016CO2emissions(billionmetrictons)embeddedinnetexportsChinaUS&EUWTOAccessionSource:WorldBankstaffestimatesbasedondatafromOurWorldinData.China’slargeexportsectoralsocontributestoemissions.Chinaisanetexporterofembeddedemissions,withanestimated13percentofChina’sdomestic,or“productionside”emissionsembeddedinexportstoothercountriesin2018(Figure6).8InthewakeofChina’saccessiontotheWorldTradeOrganization(WTO)in2001,emissionsinitiallyrosefast,propelledbyrapidexportandforeigndirectinvestment(FDI)growth.Duringthefirstdecadeofthe2000s,productionemissionsgrowthoutstrippedconsumptionemissions,whereasproductionemissionsintheUSandtheEU,China’smaintradingpartners,declined.Morerecently,China’scarbonemissionsembodiedingrossexportsstartedtotaper,inlinewithexternalrebalancingoftheeconomyaftertheglobalfinancialcrisisandadecliningexportshareinGDP.ReflectingChina’scomparativeadvantageinmanufacturing,88percentofembeddedcarbonemissionscomefromthemanufacturingsector,withchemicalproducts(17percent)andmetalproducts(17percent)thetwolargestcontributors.98Embeddedemissionsrefertothecarboncontentexportedgoods.Inotherwords,emissionsthataregeneratedinChinabyproducinggoodsthatexportedtoothermarkets.Thecalculationisbasedondomesticvalueadded,usingOECDdata.9WorldBankstaffdata,basedondatafromtheOECDandCOMTRADE(commonformatfortransientdataexchangeforpowersystems).27ChinaCountryClimateandDevelopmentReportState-ownedenterprises(SOEs)continuetoplayadominantroleinChina’seconomy,especiallyincarbon-intensivesectors.SOEsareestimatedtoaccountforaround25to40percentofGDPandaround40percentofemployment.10SOEscontrolvaluechainsforsectorsresponsible,directlyorindirectly,forthemajorityofChina’semissions:coal,electricity,oil,gas,steel,andcement.ItisestimatedthatSOEsgenerateabouthalfofthecountry’stotalGHGemissions(ClarkandBenoit2022).AddressingemissionsgeneratedbySOEswillthereforeformakeycomponentofreachingChina’sgoalofcarbonneutralitybefore2060.China’sclimategoalsarenottheonlyreasonitseconomyneedstoadjust.Reflectingloomingdemographicheadwindsandasharpdeclineinproductivitygrowth,China’spotentialgrowthhasgraduallyslowedoverthepastdecade(Figure7).Theoverrelianceonstate-ledinvestment,especiallyincarbon-intensiveinfrastructureandrealestate,hasledtorapidlydiminishingeconomicreturns.China’smedium-andlong-termgrowthprospectsareincreasinglydependentonitsabilitytoreinvigorateproductivitygrowthandrebalancetheeconomy:fromtraditionalinfrastructureinvestmenttoinnovation,fromexportstodomesticconsumption,fromindustrytohigh-valueservices,andfromstate-ledtomoremarket-drivenallocationofresources.WeshowinthisreportthatthereformsChinaneedstosustaingrowthwouldalsosignificantlylowerthecostofclimateaction.Figure7.China’sincreasinglyfactor-drivengrowthmodelisfacingconstraintsa)RealGDPgrowthb)ContributionstoGDPgrowth9.67.97.87.47.06.86.96.76.02.28.12.84.54.802468101220112012201320142015201620172018201920202021202220232024y/ypercentRealGDPgrowthTrend-202468102.92.80.80.1-0.50.70.80.40.40.42.32.85.56.44.64.13.63.31.31.21978-19871988-19971998-20072008-20172018-2021TFPPhysicalcapitalperworkerHumancapitalperworkerEmploymentSource:WorldBankanalysisbasedonPennWorldTables(PWT)andNationalBureauofStatistics(NBS)data.2.3.Rebalancingfromhigh-speedtohigh-qualitygrowthChinahashighambitions,bothfordevelopmentandclimateaction.Chinaaimstoachievesufficienteconomicgrowthtodoubleannualpercapitaincomebetween2020and2035toaroundUS$21,000.Atthesametime,China’spolicyobjectivefunctionhasincreasinglyshiftedtowiderpolicyobjectivessuchastacklingincomeinequalityandreducingenvironmentaldegradation.Thevisionofcreatingan“ecologicalcivilization”thatintegratessustainabilityintodevelopmenthasbeenenshrinedinChina’sconstitutionandisseenasacentralelementofChina’slong-termgrowthanddevelopmentpath.China’sownpolicyanddevelopmentplanningdocuments,includingthe14thFiveYearPlan,havehighlightedthis,emphasizinggrowthalongsidearangeofenvironmentalandsocialtargets.ItiswithinthisbroadercontextthatChinamadeitsambitiouslong-termclimatecommitment,pledgingtopeakemissionsbefore2030andachievecarbonneutralitybefore2060.Thescaleofthiscarbonneutralitychallengeshouldnotbeunderestimated:achievingthisgoalwillrequireatransitionfrompeakemissionstocarbonneutralityinafastertimeframeandanemissionspeakatalowerincomelevelthantheoneexperiencedbyadvancedeconomies(Figure8).10EstimatingtheshareofSOEsischallengingbecausestatisticsarenotreleasedbyownershipstatus.SeeZhang(2019)(link)orLinetal.(2020)(link)forestimatesanddiscussion.28ChinaCountryClimateandDevelopmentReportFigure8.China’stransitionfrompeakcarbontocarbon-neutralitywillbefasterthanadvancedeconomiesCO2emissionsandtargets(GtCO2e)a)Advancedeconomiesb)Emergingeconomies024681012141990200020102020203020402050NDCTargetsUSAEU27Japan0246810121419902000201020202030204020502060NDCTargetsChinaIndiaRussiaIndonesiaSource:ClimateActionTracker.TherearebothcomplementaritiesandtensionsbetweenChina’sclimateanddevelopmentgoals.Whileaddressingclimaterisksisimperativetosecuringlongtermdevelopment,decarbonizingChina’scoal-dependentandcarbon-intensiveindustrialeconomywillnotbeeasy.Itwillinvolvefundamentalstructuralchangeoftheeconomy,energyandtransportsystems,cities,andlanduse.Thisrequiresacombinationofacceleratedstructuraltransformationwithresources—labor,capital,andland—movingfromhigh-carbontolow-carbonactivities,aswellasinnovationanddiffusionofnewtechnologiestoenhanceenergyefficiencyandresourceproductivitywithinallemittingsectors.Theimplieddeepandacceleratedstructuralchangecarriesimportanteconomicandsocialrisks.However,becauseofChina’stechnologicalcapabilities,thepathwaytocarbonneutralityalsoopensnewopportunitiesfordevelopment,andbecauseofChina’ssize,substantiallyincreasestheprobabilitythattheworldasawholeavoidscatastrophicclimatechange.Greateradaptationeffortswillbeneededunderanycircumstancestomitigateeconomicdamagesandprotectthemostvulnerable,buttheseefforts,too,opennewopportunitiesforgreenerandmoreresilientgrowth;forexample,inagricultureorinthedevelopmentofChina’scitiesandinfrastructure(Figure9).Figure9.AnIntegratedClimateandDevelopmentFrameworkforChinaDevelopmentGoalsResourceproductivityInnovation,RebalancingSupplyshock,JobLosses,StrandedAssetsLimitedfiscalspaceforadaptationinpoorerprovincesReducedvulnerabilityofthepoorReducedvulnerabilitytoshocksEconomicandjoblossesinailingsectorsandregionsAirqualityco-benefits,Eco-compensationpaymentsOpportunitycostsofresilienceinvestmentsClimateGoalsDecarbonizationAdaptationStructuralTransformationandInnovationGrowthInclusionSynergiesTradeoffsSource:Reportauthors.29ChinaCountryClimateandDevelopmentReportThedisruptionsanddislocationsstemmingfromtheacceleratedstructuraltransformationandcreativedestructionnecessaryforachievingcarbonneutralityneedcarefulattention.Energypriceswilllikelyhavetoincrease—atleastintheshortrun—withdetrimentalimpactsonconsumersandfirms.AlargepartofChina’sexistingcarbon-intensivecapitalstock,includingarelativelyyoungfleetofcoal-firedpowerplants,maybecomeobsolete,andjoblosseswilloccurinhigh-carbonindustries,withimpactsonpotentialgrowthandinclusion.Ourestimatesbasedoncensusdatasuggestthataround10to15percentofChina’sjobsareinrelativelyhigh-carbonindustriesthatmaybeaffectedbythelow-carbontransition.Thisofcoursedoesnotmeanallthesejobswillbelost,butskillcontentandrequirementsmaychange.Onthecapitalside,strandedassetscouldalsobesignificant.ReflectingChina’srapidandrelativelyrecentcapitalaccumulation,itsexistingfleetofcoalplants,steelmills,andcementfactoriesisnotonlycarbonintensivebutalsorelativelyyoung.Forexample,40percentofChina’scoalplantshavebeenbuiltinthelast10years,meaningthatearlyretirementofasignificantamountofexistingcapacityincoal-firedpowergenerationwillberequiredtomeetthedecarbonizationgoals(Figure10b).Becauseindustrialstructures,andhencecarbonintensity,varystarklyacrossChina’sprovinces,theseimpactswillbefeltunevenlyacrossChina’sregionsandcouldwidenspatialimbalancesinincomeandwelfare.Someofthepoorernorthernandwesternprovincesthataremoreheavilyreliantoncoalandheavyindustriesthantherichercoastalcitiesinthesoutheastareparticularlyexposedtothesetransitionrisksand,withoutcountervailingsupportmeasures,China’salreadylargespatialincomeandwelfaregapscouldwidenbecauseofthelow-carbontransition.In2019,thecarbonintensityofGDPwasover20timeshigherinthemostcarbon-intensiveprovince(Ningxia)comparedtotheleastcarbon-intensiveprovince(Beijing).Beijinghasalreadypassedpeakemissionsandmanyothercoastalprovincesarealsoapproachingpeakemissions,reflectingtherelocationofcarbon-intensiveindustriestootherprovincesandtheemergenceofmodernserviceeconomies(Figure10a)(Duetal.2017).Bycontrast,emissionscontinuetogrowinmanypoorerandmoreresource-dependentprovinceslikeNingxia,Xinjiang,Shanxi,andInnerMongolia.Relianceoftheseprovincialeconomiesoncoalandcoal-relatedheavyindustriesimplysignificanttransitioncosts.Figure10.Transitionrisksvarysignificantlyacrossprovincesa)PerCapitaOutputandemissionsbyprovinceb)Strandedassets—Agedistributionofexistingcoal-firedpowerplantsinChinabyregion0100200300400500600<1011-2021-3031-40>40GWYearsNorthNortheastNorthwestCentralEastSouth-503000600012000240004800096000BeijingHunanShaanxiShanxiInnerMongoliaShanghaiPerCapitaGDP(RMB)PerCapitaCO2Emissions(ton)Source:WorldBankcalculationsusingdatafromCarbonEmissionAccountsandDatasets(CEADs)andNBS.Yet,arguablyChinaisalsowellpositionedtoturntheclimatechallengeintoanopportunity.Likeprevioustransformationsofsimilarscale,theacceleratedtransitiontoreducedcarbonintensityinChinaandtherestoftheworldwillunlocknewsourcesofeconomicgrowth,innovation,andjobcreation.Therearefivekeyreasonswhythelow-carbontransitionofferseconomicopportunitiesforChinaandwhythecountrymaybeuniquelypositionedtotakeadvantageoftheseshifts:30ChinaCountryClimateandDevelopmentReport1.Increasingreturnstoscale,largedomesticmarket,andmanufacturingcapabilities:Manylow-carbontechnologies,includingwindandbatterystorage,havebeenshowntohaveincreasingreturnstoscaleininnovation,manufacturing,andoperation.ThisopensopportunitiesparticularlyforlargecountrieslikeChina.Itimpliesthatprogressivedeploymentoflow-carbontechnologiesinChinacanpushdownprices,reducingabatementcosts.China’sscale-upofrenewableenergy—windandsolar—withacceleratinguptakedrivingdowncostsisaninstructiveexample(Figure11c).Atthesametime,China’smanufacturingcapabilitiesenabletheeconomytorespondtorisingdemandandbuildcomparativeadvantagesinemerginglow-carbontechnologies.Finally,italsomeansthatearly-stageinvestmentsinresearchcanbecatalyticwithreturnsaccumulatingovertime,resultinginamplifiedeffects.Indeed,Chinaisrapidlyaccumulatinginnovationcapacity,asevidencedbylow-carbonpatentingactivitythathasacceleratedoverthepastdecade(seeFigure11a)(Crubbetal.2021).2.Expandingexportmarkets:BeyondChina’sdomesticmarket,thereisasizableglobalmarketopportunity.With85percentoftheworld’spopulationand90percentofglobalGDPnowincountriesthathavenet-zeropledges,therewillbegrowingdemandforlow-carbonproductsandexportmarketsthatexpanddynamicallyovertimeaspricesfall.Indeed,thecountryisalreadydisplayingacomparativeadvantageinseveralrenewableexports.3.Highdomesticsavingsrates:At47percentofGDP,Chinahasoneofhighestdomesticsavingsratesintheworld,providingampleliquiditythatcanbemobilizedtofundtheexpansioningreeninvestments.Chinaisalreadybecomingaleaderingreenfinance,withthebiggestgreenbondandcreditmarketsintheworld.Lowdomesticinterestratesmeanthatrelativelymorecapital-intensivegreentechnologiescanstillbecompetitive.Givenfallingreturnsintraditionalinfrastructureandrealestatesectors,andincontrasttomanyotherdevelopingcountries,thechallengeforChinaisnottoscaleupinvestmentbutrathertoshiftitsallocationinthedirectionoflow-carbonactivitiesandtechnologies.4.High-skilledjobcreation:Chinaalreadyhasanestimated54million“greenjobs”andover4millionjobsinrenewableenergy(seeFigure11b).VariousprojectionsallsuggestthatthetransitiontocarbonneutralityinChinawillresultinmorejobgainsthanlosses,andthejobgainswillbeinhigherskilled,higher-productivityindustriesthanjoblosses,forminganimportantavenueforeconomictransformation,asresourcesmovetohigherproductivitysectors.5.Reduceddependenceonimportedfossilfuels:AcceleratingtheenergytransitionwouldstrengthenChina’sresiliencetothevolatilityofglobalfossilfuelpricesbyreducingitsdependenceonoilandgasimports.Chinaisanetimporteroffossilfuels–oil,gas,andcoal–withimportsaveragingabouttwopercentofthecountry’sgrossdomesticproduct(GDP).Thisdependenceonfuelimportsisexposingtheeconomytoglobalcommoditypricefluctuations,asevidencedbytherecentpriceshockduetothewarinUkraine.Incontrast,renewableenergyisessentiallyadomesticresource,especiallyforChina,whichisamajorproducerofkeyrenewableenergytechnologiesfromwindturbinestobatterystorage6.“Co-benefits,”suchasimprovedhealthoutcomesfromlowerpollution.ManypoliciestargetingCO2emissionscanhelptosimultaneouslyreduceemissionsofairpollutantsandmitigateassociatedhealthimpactsandeconomiclosses.Inthesamevein,policiestoreduceemissionsinagriculturefromexcessiveuseoffertilizercouldhavesignificantco-benefitsonfoodandwaterquality.Improvedurbanplanningcouldreducepercapitaemissionsbycreatingdensercities,whilealsoenhancingproductivity.Measurestomakecitiesmoreresilientthroughnature-basedsolutionscouldhelpmakeChina’scitiesmorelivable.Intheconcludingsection,thisreporthighlightsthesepotentialsynergiesinderivingprioritiesforpolicyaction.31ChinaCountryClimateandDevelopmentReportFigure11.China’slow-carbonopportunity:rapidgrowthinpatentingandrenewableenergyjobs,anddecliningrenewablespricesa)Climatechangepatenting(000s)b)Renewableenergyjobsin2020(millions)c)AveragecostofelectricityfromnewplantsinChina($/MwH)05010015020025030035020102012201420162018202020222024202620282030SolarWindonshoreCoal01234ChinaBrazilUnitedStatesIndiaEU-28SolarPVBiofuelHydropowerWindSolarheatingandcoolingBiogasGeothermalMunicipal&industrialwasteCSPTide,wave,&oceanenergyMillions756555453525155ChinaJapanUSAKoreaEPOandGermany20182008Source:A.Engineeringandtechnology(E&T)analysisusingIFICLAIMSdata(link),B.WorldBankanalysisusingIEAandInternationalRenewableEnergyAgency(IRENA)data,C.IRENA,CarbonTrackerInitiative,WoodMcKenzie.Note:“Solar”referstoutility-scalephotovoltaicpowerand“wind”totheonshoretype(notoffshore).Dataarecapacity-weightedaveragelevelizedcostofelectricityfromnewpowerplantsinChinainconstant2019yuananddollarspermegawatt-hour.Levelizedcostofelectricityiscalculatedasthesumofconstructionandoperatingcostsoverexpectedpowergeneration.RebalancingChina’seconomyanddevelopingnewdriversofgrowthcouldmakefuturegrowthlesscarbonintensive.China’sstructuraldevelopmentanditsclimateagendasaremutuallyreinforcing.Reformsthatsupportrebalancing—forexample,liberalizationofservicesectorsorstepstoboostprivateconsumptionandlowerexcessivepublicinvestment—couldcontributetoreducingemissionsintensity.Atthesametime,theopportunitiesindevelopinggreentechnologiescouldalsounleashanewroundofinnovationanddiffusionofnewtechnologiesthatcouldcontributetofutureproductivitygrowth.GiventhescaleandcomplexityoftransformingChina’seconomy,thepublicandprivatesectorsmustworktogether.Arobustprivatesectorcanplayacentralroleindeliveringmarketsolutions,improvingproductivity,reducingcosts,stimulatingtechnologicalinnovation,fillingthefinancialgap,andeventuallytransformingtheeconomytobecomemoreresilientandachievecarbonneutrality.Forthistohappen,privatesectorfirmswillneedapredictableregulatoryenvironmentandalevelplayingfieldwithaccesstomarketsandfinance,especiallylong-termfundsrequiredforclimatechangemitigationinvestmentandinnovation.Complementarypublicsectorinvestmentsandfiscalincentivescanincreasetheattractivenessofgreenprivatesectorinvestmentsandcovercriticalgaps,whereprivatemarketsfail.ForChinatoachieveagrowth-friendlyandinclusivepathtoalow-carbonandresilienteconomy,thecountrywillneedapackageofstructuralandmarketreformstocomplementclimatepolicyinstruments.AlthoughChina’seconomyhassomemarket-drivenfeatures,therearekeydistortionsinbothfactormarketsandkeyproductmarkets(forexample,energy).Thesedistortionshavecontributedtomisallocationofresourcesandstifledcompetition,weighingonproductivitygrowthbutalsocontributingtorelativelyhighcarbonintensity.Unlessaddressed,theycouldbecomeimpedimentsforanefficientdecarbonizationprocess.Structuralreformstopromoteamarket-basedallocationofcapital,labor,andlandandtofacilitatethesmoothentryandexitofcompanieswouldenabletheeconomytoadaptmoreefficientlytochangingpricesignalsandregulations,therebyloweringadjustmentcosts.32ChinaCountryClimateandDevelopmentReport3.Policypathwaysforagrowth-friendlyandinclusivedecarbonization©maple90/Shutterstock33ChinaCountryClimateandDevelopmentReport3.Policypathwaysforagrowth-friendlyandinclusivedecarbonization3.1.China’sexistingclimatepolicymixChina’s30-60targets,alongwithitsupdatedNationallyDeterminedContribution(NDC),setthegoalpostsforChina’slong-termclimateambition.Inadditiontothe30-60targets,inOctober2021,justbeforeCOP-26(the26thUnitedNationsClimateChangeConferencein2021),ChinasubmitteditsupdatedNDCtotheUnitedNationsFrameworkConventiononClimateChange(UNFCCC).TheNDCconfirmedthebroadtargetsannouncedin2020,committingfor2030tocutCO2intensitybyover65percentfromthe2005level,increasetheshareofnonfossilfuelsinprimaryenergyconsumptionto25percent,increasetheforeststockvolumeby6billioncubicmeters(m3)fromthe2005level,andreach1200gigawatts(GW)ofsolarandwindpowergeneratingcapacity.FollowingtheNDC,Chinarampedupeffortstointegrateclimateactionineconomy-widedevelopmentefforts,whilemanyofthedetailsonhowclimategoalswillbeachieved,includingkeyemissionstargets,arestillbeingformulated.Thecountryrecentlyissuedthe1+Nclimatepolicyframework,providingfurtherdetailsonChina’s30-60goals.The“1”inthepolicyframework’stitlestandsfortheoverarching“WorkingGuidance,”11whichidentifiescorestrategicpriorities.The“N”inthepolicyframeworkindicatesboththepublishedandupcomingactionplansinkeysectorsandindustriesforachievingcarbonpeakingandneutrality.TheactionplanpublishedbytheStateCouncilinOctober2021specifieswhatisrequiredtoensuretheachievementsofthe2025and2030targetsaslaidoutintheoverarchingWorkingGuidance.In2022,thecountryissuedtheNationalClimateChangeAdaptationStrategy2035.Takentogether,thesedocumentsandtargetsemphasizethatendeavorstopeakcarbondioxideemissionsandachievecarbonneutralitymustbeincorporatedintotheoveralleconomicandsocialdevelopmentframework,underthecountry’sguidelinesforexercisingnationwideplanning,prioritizingconservation,andleveragingthestrengthofthegovernmentandmarketsbothonthedomesticandinternationalfronts,whileguardingagainstrisks.Theseeffortssuggestsignificantbutrelativelygradualprogressinthenextdecade,followedbyanaccelerationafterwards.Theshort-termfocusremainsonreducingthecarbonemissionsintensityofdomesticproductionratherthancappingandreducingabsoluteemissions.China’sclimatepolicymixhassofarreliedmoreonregulatoryandcommand-and-controlmeasuresthanonmarket-basedinstruments,withacentralrolefortargetsandquotas.AclassificationbyZhangetal.(2022)ofnearly2000environmentalpoliciesfromtheNationalPeople’sCongressortheStateCouncilfrom1978to2019hasshownthatnearlythree-quarterswerecommand-and-controlpolicies,referringtopoliciesthataremandatoryandachievedthroughadministrativeinstruments(Figure12).Market-basedinstruments,suchasfiscalpoliciesrelatedtoenvironmentalgovernance,emissionsfees,oremissionstradingneedtobefurtherstrengthened.Administrativetargetsforenergyconsumption,energyintensity,andairpollutionhavebeenkeyinstrumentssincethe11thFive-YearPlan(FYP).Thesetargetstrickledownfromthetoptothelowestadministrativelevels,includingtownshipsandindividualenterprises,andtheirfulfillmentisanimportantcriterioninevaluatingtheperformanceofbothlocalgovernmentofficialsandstate-ownedenterprisemanagers.Thesetargetsareinturnmostlyachievedthroughadministrativemeasures,rangingfrommandatedtechnologyupgradingtoforcedplantclosures.Duringthe12thFYP(2011–2015),forinstance,thousandsofinefficientpowerplantswereforciblyclosed,resultinginacumulativereductionrepresentingnearly5percentoftotalglobalemissions(Liuetal.2021).11ThefullnameisWorkingGuidanceforCarbonDioxidePeakingandCarbonNeutralityinFullandFaithfulImplementationoftheNewDevelopmentPhilosophy.34ChinaCountryClimateandDevelopmentReportAdministrativemeasureshavebeencomplementedbysignificantpublicinvestmentandsupportprogramstoencouragedevelopmentandadoptionoflow-carbontechnologies.Directsubsidies,feed-in-tariffsforrenewableenergy,andfiscalincentivessuchasvalue-addedtax(VAT)exemptionshaveplayedaparticularlyimportantroleinthedevelopmentofrenewablesandlow-carbontechnologies.Inthe13thFYPperiod(2016–2020),researchandinnovationonenergytechnologywereprioritiesinChina’s“NationalInnovation-DrivenDevelopmentStrategy,”accompaniedbythedevelopmentofanetworkofnationallaboratoriesandenergyR&Dcenters.Chinahasbeenthebiggestinvestorinrenewableenergyoverthelastdecade,spendingnearlyUS$760billionbetween2010and2019,withasignificantamountcomingfromtheprivatesector(UNEP2019).Chinahasalsoinvestedheavilyinlow-carbonpublicinfrastructure,includingtheexpansivehigh-speedrailnetwork,intracitypublictransportnetworks,publictransportelectricvehicles(EVs)andEVinfrastructure.Figure12.China’spolicymixhasreliedmoreheavilyoncommand-and-controlpoliciesthanmarketinstrumentsEnvironmentallawsandregulationsbytype050100150200Command-controlMarketPublicparticipation197819801982198419861988199019921994199619982000200220042006200820102012201420162018Source:WorldBankstaff,basedonZhangetal.(2022).EventhoughChinahasrecentlyestablishedanationalemissionstradingscheme(ETS),marketinstrumentshavesofarplayedalimitedroleinreducingemissions.Chinafirstembarkedoneffortstotestemissionstradingwithpilotprogramslaunchedinsevenprovincesandcitiesstartingin2013.Justunderadecadelater,tradingonthenationalETSbeganinJuly2021.However,atpresentthereremainvariouslimitationstotheETS,bothinrelationtoitsdesign,coverage,andthewiderroleofpricesignalsininfluencingresourceallocationinChina’spowersector,whichwillbediscussedinmoredetailinChapters3.2and3.3.China’srelianceontarget-drivencommand-and-controlmeasureshasachievedasignificantreductioninemissions,butsometimeswithunnecessarilyhigheconomiccosts.Thereisevidencethatanoverrelianceoncommandandcontrolcouldleadtoinefficientoutcomes.Forexample,Fanetal.(2022)haveshownthatmandatedtechnologyinvestmentstoachievedual-energytargetsduringthe11thFYPwerechosenadministrativelyanddidnotactuallyhaveadiscernibleimpactonemissions.Forairpollutioncontroltargets,Stoerck(2020)findsthatadministrativemeasureswereassociatedwithawidevariationinthemarginalabatementcosts,suggestingemissionsreductionwasoftenachievedinunnecessarilycostlyways.Sietal.(2020),focusingontheperiodfrom2002to2013,foundthatenvironmentalpoliciesinvolvingfinancialincentivesormonetaryawardshadmorefavorableimpactsonoutputandfirmprofitsthancommandandcontrolpolicies.Timilsina,Pang,andChang(forthcoming)findthattheGDPcostofachievingChina’sNDCemissionstargetsby2030throughquantitativeemissionsquotascouldamountto0.95percentofGDP,whereastheuseofacarbontaxwithrevenuerecyclingtolowercorporatetaxescouldlowersuchcoststo0.11percentofGDPinthebestcase.35ChinaCountryClimateandDevelopmentReport3.2.Augmentingthepolicymix—fivefundamentalshiftsToachieveagrowth-friendlyandinclusivedecarbonizationpathway,China’spolicyframeworkwillneedtoevolve,takingadvantageofdifferent,complementarypolicylevers.Thereisnosilverbullettoachievedecarbonization.Thepolicymixshoulddeploydifferentinstrumentsinacomplementaryandmutuallyreinforcingway.Thisisimportantbecausepolicyinstrumentsdiffernotonlyintheirabatementefficacyandcosteffectivenessbutalsointheirimpactsongrowthandinclusion.Thefollowingfiveshiftscouldanchoroverallpolicypriorities:1.Translatinglong-termclimategoalsintoclearforwardguidancetoanchorexpectationandallowasmootheradjustment.China’slong-termtargetsstilllackclearmilestonesforemissionsreductions,causingpolicyuncertaintyandreducingtheincentiveforlow-carboninvestments.Itiswellestablishedthatpolicyuncertaintyisbadforbothgrowthanddecarbonization,beingamajorimpedimenttoprivatesectorinvestment,greenorotherwise.Establishingabsolutemass-basedemissionscapsaspartofthe“1”decarbonizationguidanceorChina’sfive-yearplanscouldanchorexpectationsofcitizens,publicinstitutions,andthemarketabouttheintendedemissionsreductionpathway.Itwouldalsoallowthegovernmenttoensureconsistencybetweenpolicymeasuresandambitionandassessprogressovertime.2.Avoidingbackloadedpolicyactiontoensureasmoothtransition.Theemissionstrajectorybetweennowand2060willdeterminebothwhetheremissionsarereducedgraduallyorabruptly,andChina’sstageofeconomicdevelopmentwhenemissionsarecut.Therearereasonsinfavorofbackloadingtheemissionstrajectory,includingallowingabatementcoststofallovertimewiththediscoveryofnewtechnologies.Additionally,theimpactofthewarinUkraineonglobalenergypriceshasledtoareconsiderationofshort-termdecarbonizationplansinmanycountries,includingChina,aspolicymakersemphasizeenergysecurityaboveallelse.Atacticalpauseintheshortrunmaybeadvisabletomaintainpoliticalsupportforthelong-termgoal.Butbackloadingclimateactionriskscreatinghigheradjustmentcostsfrommoreabruptactioninlateryears,andincreasedstrandedassets,alongwithmissedeconomicopportunitiestodevelopfirst-moveradvantagesinlow-carbontechnologiesandindustries.123.Complementingcommand-and-controlwithmoremarket-basedincentivestoenhanceefficiencyandloweradjustmentcosts.Asdiscussedabove,administrativetargets,regulations,andquotascanhavehighefficacyatloweringemissions,especiallyinthecontextofChina’sstrongadministrativecapacity,butcanalsocreateinconsistenciesandresultinloweconomicefficiency.Togetherwithforwardguidance,pricesignalsandmarketincentivescouldguideamoreefficientanddynamicresourcereallocationprocess,spurinnovation,andinducebehavioralchanges.Forthesepricesignalstowork,however,factorandproductmarketsneedtooperateefficientlywithoutdistortions,underscoringtheimportanceofcomplementarystructuralreforms.Detailedpolicyoptionsarediscussedinsection3.5.1.4.Rebalancingfromstate-ledtomoreprivatesector-driveninvestmentandinnovationtofosterfasterdiffusionanddiscoveryoflow-carbontechnologies.Low-carbonsupply-sidepolicies,includinginvestmentinlow-carboninfrastructureandtechnologies,havegenerallybeenfoundtobeanimportantcomplementtopricingandregulatoryinstruments.Byaddressingmarketfailuresinthedevelopmentanddiffusionoflow-carbontechnologies,theycanhelplowertransitioncostwithpositiveoutcomesforgrowthandinclusion(IMF2020).Butimplementationofthesepoliciesisdelicate,andpublicresourcesmustbespentwelltohavethedesiredimpacts.ChinahasanextensivesystemofR&Dsupport.Enhancingitsefficiencyandefficacywillrequirecomplementaryreformstoopentheinnovationsystem12TheInternationalMonetaryFund(IMF)(2022)showsthattheoutputcostsofachievingChina’scarbonneutralitytargetwiththesamecumulativeemissionswouldbefarhigherifclimateaction(representedintheirstudybyacarbontax)isdelayed,becauseofthehighercostofabruptadjustment.36ChinaCountryClimateandDevelopmentReportandencouragemarketentryandcompetition,includingbytheprivatesector.Specificpoliciesinthisregardarediscussedinsection3.5.1.5.Explicitlyincorporatingpolicymeasurestosoftenthedistributionalimplicationsofthelow-carbontransition.Low-carbonpoliciesareexpectedtohavewide-rangingdistributionalimplicationsthroughbothconsumptionandincomechannels.Chinahasdevelopedsomepoliciestomitigatesocialimpacts—forexample,fromthereductionofcoalcapacity.Thepolicyapproachnowneedstoevolvetomatchtheraisedambition,scale,andpaceoftheenvisagedfuturetransition.Complementarypoliciestomitigateimpactsonthemostaffectedprovinces,communities,andpeoplewillbecrucialtomakingthetransitioninclusiveandensuringsustainedsupport.Specificpoliciesarediscussedinsection3.5.3.Thesefiveshiftsunderpinthespecificpolicyoptionsandrecommendationsdiscussedinthenextsections,whichfocusonthemainemittingsectors,andthesectoralandeconomy-widereformsthatwouldachievedecarbonizationwhileminimizingthecostsandmaximizingdevelopmentimpacts.3.3.GaugingtheeconomicanddistributionalimpactsofdecarbonizationThissectionwillprovideamodel-basedassessmentofdecarbonizationpathways,seekingtoquantifymacroeconomicanddistributionalimpactsofdifferentdecarbonizationpolicies.Attheoutsetitisimportanttorecognizethesignificantuncertaintyinvolvedinpredictingthecomplexanddynamiclong-termchangeprocessunderpinningdecarbonization.Keyaspectsofthetransition—forexample,thespeedoftechnologicalprogressinlow-carbontechnologies—are“knownunknowns.”Moreover,policyoptionstodrivedecarbonizationinvolveanarrayofpricinginstruments,regulations,structuralmeasures,governmentexpenditures,andtaxes.Notalloftheselendthemselvesreadilytoquantificationineconomy-widemodels.Nevertheless,economicmodelscanprovideimportantinformationregardingthebroadmagnitudeofpotentialimpactsassociatedwithcertainpolicyoptionsandthusinformchoicesthatleadtobetteroutcomes.Ratherthanattemptingtoprovidespecificpointestimates,theapproachchoseninthisstudyaimstogaugerangesofpossibleoutcomes,drawingontheresultsfrommultiplemodels.Existingmodel-basedestimatesoftheimpactofthecarbonneutralitytransitiononChina’sGDPtendtolieintherangeof-4percentto+7.5percent.Theestimatesvarysowidelynotonlybecausetheysimulatedifferentpolicysets,butalsobecauseofdifferencesinunderlyingparametersdrivingmodelbehaviorandhenceresults.EvenGDPimpactestimatesofthesamecarbonpolicyscenariocanrangefrom-1.9to+0.4percentrelativetothebaselineby2030.Theseinsightspointdirectlytotheuncertaintythatexistsinquantifyingtheeconomicimpactsofdecarbonizationpathways,buttakentogethertheyestablishabroadrangeofpossibleoutcomes.Usinganintegratedmodelingframeworkwithbottom-upsectormodelsandaneconomy-wideCGEmodel,wesimulatetheimpactsofdifferentpolicysetstoachieveChina’scarbonneutralitycommitments.Theprincipalmodelarchitecture,keyscenarios,anddataflowsaredepictedinFigure13.ThesimulationsusetheWorldBank’sMitigationAdaptationandNewTechnologiesAppliedGeneralEquilibrium(MANAGE)model,withintegratedbottom-upsectormodelsintransportandenergyaswellasmicrosimulations,toassessimpactsonhouseholds.TheresultsofthesemicrosimulationsthenrecursivelyinformthedesignofastylizedhouseholdtransferpolicyinMANAGE.Becausedecarbonizationrepresentsanasymmetricshockthatwillaffectdifferentregionsdifferently,theMANAGEmodelhasbeenregionalizedtosimulateimpactsatthesubnationallevel.Inaddition,theassessmentalsopresentstheresultsofanalternativemacroeconomicmodel—E3ME—thatallowsforstimuluseffectsandinducedtechnologicalchange(Box2).37ChinaCountryClimateandDevelopmentReportFigure13.ModelarchitectureandScenariosfortheCCDRBaselineassumptions•GDPgrowth•PopulationgrowthEnergySystemsModel(China-TIMES)TransportEmissionAccoutingModel(LEAP)Microsimulations(2018ChinaFamilyPanelSurvey)MacroeconomicModel(MANAGEDYNAMICCGE)KeyPolicies•REgenerationcapacityandintegration•Powerandheatingsectormarketreform•Energyefficiencyimprovement•ElectrificationofdemandsectorsKeyPolicies•Carbonpriceto$75pertonby2030andtoreachzeroemissionsby2060•Revenuerecycling(Investment,Transfers)•LabormarketFrictions•Co-Benefits•LandUseandNature-BasedSolutionsKeyPolicies•Acceleratedelectrificationandfuelchange•Modalshiftthroughpricingandinvestments•OperatingandenergyefficiencyimprovementKeyPolicies•TargetedHouseholdTransfersImpacts•HouseholdFactorIncomes(Wagesandcapital)•HouseholdConsumption•Byquintile,gender,locationandskilllevelReferenceScenarioReferenceScenarioRegionalizedCGE(toassessspatialimpacts)AcceleratedDecarbonizationScenario(ADS)NationallyDeterminedContribution(NDC)NDCWithTransfersNDCW/OLMFrictionsNDCWithCo-BenefitsEnergymixInvestmentcosts(Energy)Investmentcosts(Transport)NDCScenarioAcceleratedDecarbonizationScenarioEnergydemandfortransportElectrificationrateGDP,HouseholdincomeEmploymentTargetedHouseholdSupportReferenceScenarioAcceleratedDecarbonizationScenarioEnhancedPoliciesScenarioSource:Reportauthors.Fourdifferentpolicyscenariosareestimated.Wemodelfourstylizedscenarioswithacombinationofcoreeconomy-widecarbonpricing,low-carbonsupplypolicies,andinnovationsubsidies.ThesescenariosarealignedwithChina’s30/60goalsanditsupdatedNDC.Scenario1combinesbroad-basedcarbonpricingwithrevenuerecyclingintoprivateinvestmentalongsidethepoliciescapturedinthesectoralenergyandtransportmodels.Thescenarioalsoreflectslabormarketfrictionsandincorporatesincreasedcarbonsequestrationfromlandusechange.Scenario2combinesreformsofscenario1butinsteadofrevenuerecyclingintoinvestment,carbonrevenuesareusedtoprovidetargetedcompensationtohouseholds.Scenario3issimilartoscenario2butincorporatesamoreflexiblelabormarket,allowingforafasterreallocationoflabor.Scenario4issimilartoscenario2butconsiderstheco-benefitsfromairqualityimprovementsonlaborproductivity.Acrossallscenarios,wemodeltherequiredeffortstoachievepeakcarbondioxideemissionsbefore2030andcarbonneutralitybefore2060.Theresultsarecomparedtoabaselinecaseofcurrentclimatepoliciesalreadyunderimplementation.TheresultsaresummarizedinTable3anddiscussedinmoredetailbelow.Decarbonizationwillrequiresignificantinvestmentsforamassivegreeninfrastructureandtechnologyscale-up.Specifically,oursectoralmodelssuggestthatChinawouldneedatotalofaboutUS$14trillioninadditionalinvestmentsinthepowerandtransportsectorsalone—inadditiontothebaselineinvestmentstokeepupwithdemandgrowthandmaintainexistingassets—fromnowuntil2060(seeTable2),equivalentto0.97percentofGDPduringthatperiod.13Muchoftheseinvestmentswouldneedtobefrontloadedtomeetthetargetofpeakingcarbondioxideemissionsbefore2030,requiringaboutUS$2.1trillion(equivalenttoroughly1.1percentofGDP)inthenextdecadealone.Someoftheseinvestments—suchas13Otherestimateswhichincludeothersectors(building,agriculture,industry)estimatetotalinvestmentneedsatUS$22trillion.CICCResearch,CICCGlobalInstitute.(2022).GuidebooktoCarbonNeutralityinChina:MacroandIndustryTrendsunderNewConstraints(1sted.2022ed.).Springer.38ChinaCountryClimateandDevelopmentReportelectrificationandfuelswitch—areexpectedtobemadebyprivatesectorfirmsandindividualsandbringaboutsignificantenergyefficiencygainthatwouldmaketheseinvestmentsnotonlyeconomicallyviablebutfinanciallyattractive.Forotherareas,publicinvestmentswillbenecessarybutnotsufficienttomeettheseneeds.Theywillneedtobecomplementedbygoodsectorpolicies,broad-basedregulatoryreform,andnewstandardstofullytapthepotentialandincentivizeprivatesectorinvestmentandinnovationinthesesectors.Overtime,technologicalprogressmaylowersomeofthecosts,andindividualinvestmentsandthepoliciestoencouragethemmaybeprioritized(orde-prioritized)takingalsointoaccountspecificcost-benefitconsiderations.Table2.InvestmentneedstoachieveChina’sNDCsIncrementalinvestmentoverreferencecase(inUS$billion)2021-252026-302031-402041-502051-60TotalNPV(6%)NPV(Risk-free)Electricity(GenerationandGrid)3363681,3861,9922004,2821,7572,588TransportLow-carbonmodeInfrastructure94977331818790124Fuelandoperatingefficiency-2244131,471370-1021,9288431,263Electrificationandfuelswitch2828973,0291,9511,2427,4032,9794,419Total4031,7275,9644,3471,35913,8005,6688,394PercentofGDP0.55%1.52%1.95%1.04%0.27%0.97%n.a.n.a.Source:Bankinternalanalysis.GDPprojectionsarethesameasinthebaselineCGEscenario.Note:NPV(Risk-Free)iscalculatedbasedontheyieldcurveofChina’streasurybonds,rangingfrom2.0percentforthe1-yearbondto3.4percentforthe50-yearbond.Transportinvestmentincludesinfrastructureinvestment(e.g.,masstransportationsystems,EVchargingstations),aswellasreplacementofrollingstock(private,public,andcommercialvehiclefleets).Figure14.ExitingCoal0500100015002000250030003500400045002020202520302035204020452050ThousandMetricTonsCoalConsumptionandProductionProductionNDCProductionADSConsumptionNDCConsumptionADSSource:WorldBankstaffestimatebasedonMANAGE39ChinaCountryClimateandDevelopmentReportyyEmissions:Theemissionsreductionpathreflectsthedifferentpaceofdecarbonizationacrosssectors(Figure15a).Thelow-carbontransitionofthepowersector—thelargestsourceofemissions—isacceleratedtoachievearapiddeclineinemissionsoverthenexttwodecades.Coalusewouldbesteadilyreducedthroughinvestmentsinavailableleast-costoptionsindomesticsolarandwind,supportedbyexpandedbatteryandpumpedstorageaswellasreformstoachievemorecompetitive,nationallyintegratedpowermarketsthatwouldfacilitatetheefficientintegrationofahighshareofvariablerenewableenergy.14ThiswouldenableChinatomeetitsgrowingelectricitydemand,whichisexpectedtodoubleby2060,inpartbecauseofincreasedelectrificationinend-usesectors,suchasbuildings,industry,andtransport.Althoughindustrialemissionscouldinitiallybereducedthroughfurtherefficiencyimprovements,capacityreductions,andelectrification,deepdecarbonizationoftheindustrialsectorwillrequiretechnologiessuchasgreenhydrogenandcarboncapture,usage,andstorage(CCUS).15Thesetechnologiesarenotpresentlycommerciallyviable,anditshouldbenotedthattheachievementofChina’sdualcarbongoals,butmorebroadlytheachievementoftheParisclimatetargets,requirestechnologicalprogressthatreducesthecostsofthesetechnologiestoapointwheretheybecomecompetitive.Inthisreport,thisisassumedtooccurbyaround2040.Bythesametoken,inadditiontocontinuedinvestmentsinpublicmasstransportsystemsincities,andtheexpansionofpassengerandfreightrailnetworksbetweencities,innovationsinlow-carbonfuelsforhard-to-electrifymodesarerequiredtosharplyreducetransportsectoremissions.DirectCO2emissionsfrombuildingswouldbemitigatedthroughelectrification,cleandistrictheating,andenergyefficiency.Finally,carbonsequestration—negativeemissions—fromnature-basedsolutions,includingexpandedforestcoverage,alsoplayakeyrole,enablingcarbonneutralitywithsignificantresidualemissionsinhard-to-abatesectors.Figure15.AggregateImpactsofDecarbonizationa)EmissionsbysectorinNDCscenariob)GDPimpacts(%deviationfrombaseline)-2024681012141620222024202620282030203220342036203820402042204420462048205020522054205620582060GtCO2eElectricity/HeatIndustryTransportationBuildingsAgriculture,LULUCFOthers-8-6-4-20220222024202620282030203220342036203820402042204420462048205020522054205620582060CarbonneutralitywithrevenuerecyclingtoinvestmentsCarbonneutralitywithairpollutionco-benefitsCarbonneutralitywithflexiblelabormarketsCarbonneutralitywithcompensationSource:WorldBankstaffestimatesbasedonCGEMANAGE14Therapidexpansionofrenewableenergyandstoragecapacitywillrequireastrongglobalsupplyresponsetoavoidincreaseddemandpressuretopushuppricesforkeytechnologies.15ThisisinlinewithpreviousfindingsbyIEA2021andERF2021.40ChinaCountryClimateandDevelopmentReportyyOutput:Overall,theresultsoftheCGEmodelingimplymarginallossesormodestgainsinoutputby2030dependingonscenarios,butsteadilyincreasinglossesasclimateambitionissteppedupovertime.By2060,outputlossesrangefrom1.1to6.6percent(Table3andFigure15b).Cumulativeoutputdeviationsovertheentireperiodrangefrom-2.0to0.3percentfromthebaseline.Theseestimatesarewellwithintherangeofexistingmodels.Itisnoteworthythatintheshortrun—overthenextdecade—impactsonoutputcouldbemarginallypositive,reflectingtheavailabilityofrelativelylowhangingfruit,includingcost-effectivemeanstoincreaseenergyefficiencyandshifttheenergymixtowardrenewableenergysources.Long-termoutputlossesmainlyresultfromthesupplyshockdrivenbyrisingenergypricesassociatedwithcarbonpricingandtheacceleratedrenewalofequipment,whichcanbepartiallyoffsetbythegrowth-positiveimpactsofanincreaseininvestmentthankstorecyclingofcarbonpricingrevenuestoprivateinvestment(Scenario1).Incontrast,ifcarbonrevenuesarechanneledintocompensatinghouseholds,thismitigatesadversewelfareimpactsbuttendstoexacerbatenegativeimpactsongrowth,asincrementalmitigationinvestmentscrowdoutotherinvestment(Scenario2).ResultsalsoindicatethattheGDPimpactofsimilaremissionsreductionscouldbereducediflabormarketfrictionsareaddressed;forexample,throughreformstolowerbarrierstolabormobility(Hukoureforms)andactivelabormarketpolicyandre-skillingsupport,reinforcingtheimportanceofcomplementarystructuralreforms(Scenario3).Accountingforthepotentialpositiveimpactsofairqualityimprovementsonlaborproductivityalsoimprovesoutcomes,partiallyoffsettingnegativeimpactsofenergypriceshocks(Scenario4).yyJobs:AggregateemploymenteffectsintheCGEmirroraggregateoutputeffectswithbroad-basedreductionsinemploymentsimilarinmagnitudetotheoutputlosses.Disaggregatedemploymentimpactsacrossallscenariossuggestreallocationwiththegreatestjoblossesinemissions-intensivesectorsandlargestjobgainsintheshortruninhigh-skilledservices.Majornegativeemploymenteffectsarefeltbythecoalsector(coalminingexperiencesa700thousandto1.3milliondeclineinemployedindividualsrelativetothebaselinein2030,anda2.6to2.9milliondeclinein2060).FurtherdetailsoftheexpectedemploymentimpactsarediscussedinChapter3.5.3.yyWelfare:Withoutcompensation,householdwelfarecouldbenegativelyaffectedbybothpriceincreasesandlossesinlaborearnings(seeFigure16).16Atthemacroeconomiclevel,thisisreflectedinacompositionalshiftofGDPfromconsumptiontowardinvestmentexpenditures(Scenario1).Moreover,climateactionwithoutcompensatingmeasuresalsotendstoberegressive:higherpricesareexpectedtoleadtoasubstantial(andregressive)lossinhouseholds’purchasingpoweracrossthedistribution,exceptfortherich,whospentarelativelylowershareoftheirbudgetonenergy-intensivegoods.17Eventhoughwelfarelossesarehigheramongthepoorestincomegroupsrelativetotheirincome,thebruntoftheburdenisbornebyricherhouseholds(60percentunderScenario1),becausethedeclineintheirlaborandnonlaborincomesissignificantlylargerinabsoluteterms.Meanwhile,loweremploymentandearningsamongagriculturalworkerswillaffectlow-incomehouseholds,whilejobtransitionsoutofmining,andlowerearningsacrossmostsectorsforskilledworkers,willimpacthouseholdsinthericherquintiles.Theliftingoflabormarketfrictionscansupportthetransitiontoalow-carboneconomy,asitwillspeedthereallocationofworkerstobetter-paidemploymentopportunitiesinservicesandutilities.Finally,incorporatinglaborincomegainsfromimprovedlaborproductivityinducedbyairqualityco-benefitsdampensthenegativeshocktohouseholdsacrossthedistribution,withthelowestquintilesgainingmost(Scenario4).16Alvarez2019,Garcia-Murosetal.2022.17InlinewithWangetal.(2019),utilitiescontributemosttothelossinhouseholds’purchasingpower.InChina,electricityandfuelrepresentonaverage2.0and1.6percentofhouseholdexpenditure,respectively.Thebottomdecilespends3.1percentonelectricity,andthesamebudgetshareisallocatedtofuel.Instead,thesebudgetsharesare1.3and0.6percent,respectively,forhouseholdsintherichestdecile.41ChinaCountryClimateandDevelopmentReportFigure16.DistributionalImpactsofDecarbonizationWelfareimpactsbyincomegroups,2060(%relativetobaseline).Decompositionbyincomesource.-10-50510PercentrelativetobaselineScenario1Scenario2Scenario3Scenario4Q1Q2Q3Q4Q5Q1Q2Q3Q4Q5Q1Q2Q3Q4Q5Q1Q2Q3Q4Q5NominallaborNominalnon-laborPricesSource:WorldBankstaffestimatesbasedonCGEMANAGE.yySpatialimpacts.Thegapbetweenruralandurbanhouseholdsunderthecarbonneutralityscenarioisexpectedtoincrease,aspoorerhouseholds,ofteninruralareas,wouldlosemoreinrelativetermscomparedtotheirricher,typicallyurbancounterparts.18Yet,theurban-ruralgapcouldnarrow,iflabormarketfrictionsarereduced.Inaddition,initialresultsfromtheregionalizedmodelsuggestthatimpactswillvarysignificantlyacrossprovinces.SomeofthenorthandnorthwesternprovincesofXinjiang,InnerMongolia,Shanxi,Shaanxi,Ningxia,andLiaoningwouldexperiencethegreatestemissionsdeclines,negativeemployment,andoutputeffectsin2030.Theseprovinceswouldexperienceoutputdeclinesofcloseto4percentrelativetothebaselineintheNDCscenario.Bycontrast,thelow-emissionsprovincesofTianjin,Guangdong,Jiangsu,andZhejiangfacethebestoutcomes,withonlya0.9percentdecline,closelyfollowedbyBeijingandShanghai,whichwouldexperiencedeclinesof1.2percentonaverage.Aspoorerprovincesaremorelikelytoexperiencesharperdeclines,decarbonizationmayworsenalreadyhighlevelsofspatialinequality,unlesstheseeffectsaremitigatedthroughinterregionalfiscaltransfers.18ThisresultisconsistentwithpreviousanalysisfromLiangetal.(2013).42ChinaCountryClimateandDevelopmentReportTable3.MacroeconomicModelingResultsforReferenceandNDCScenariosSCENARIOANDPOLICYSETUPEmissions2030Output2030Emissions2060Output2060Cumu-lativeEmissions2022–2060CumulativeOutput2022–2060Referencescenario(currentcli-matepolicies;mtCO2eorbillionUSD)13,13724,8497,23954,161405,1801,421,448Scenario1:Carbonneutralitywithrevenuerecyclingtoinvestment(%changefrombaseline)•Carbonpriceto$75pertonby2030andtoreachzeroemis-sionsbefore2060•Revenuerecyclingintoprivateinvestment•Labormarketfrictions•Noco-benefits-3.0-0.02-95.4-3.37-28.13-0.66Scenario2:CarbonNeutralitywithcompensation(%changefrombaseline)•Scenario1+•Revenuerecyclingintofullcompensationtohousehold-3.0-0.02-95.4-6.59-28.13-2.00Scenario3:CarbonNeutralitywithflexiblelabormarkets(%changefrombaseline)•Scenario2+•Structuralreforms—Flexiblelabormarkets-3.00.40-95.4-1.87-28.130.31Scenario4:CarbonNeutralitywithairpollutionco-benefits(%changefrombaseline)•Scenario2+•Co-benefits-3.00.04-95.4-1.08-28.13-0.11Source:WorldBankstaffestimatebasedonMANAGE.Note:Moredetailedsimulationresultsarepresentedinappendix1.43ChinaCountryClimateandDevelopmentReportTheresultssuggestthatChina’stransitiontocarbonneutralitywouldbechallenging,butitslong-runeconomiccostsunderreasonableassumptionswouldremainmanageable.Thelowerboundoftherangerepresentsanestimateofadjustmentcostswithoutco-benefitsunderrelativelyconservativeassumptionsregardingthedevelopmentoftechnology.Beyond2040,theresultsofthemodelingshouldbeinterpretedwithadditionalcaution,givenuncertaintyaroundkeyassumptions,includingtheemergenceofcost-effectivetechnologiesinkeyemittingsectors,suchassteelandcement.Yet,pastexperiencewithsharpcostreductionsinrenewableshasdemonstratedthatbreakthroughsarepossibleandwouldindeedbecomemorelikelyasaresultofclearmarketandpolicysignals.Theresultsalsopointtotheimportanceofcomplementarypoliciestoreducelabormarketfrictions,whichwouldloweradjustmentcostsunderthestandardCGEmodelbyaroundhalf.Accountingforthepotentialco-benefitsfromreducedairpollutionalsoreducesadjustmentcosts.Finally,analternativemacroeconomicmodelsuggeststhat,inabest-casescenarioassumingstimuluseffectsandinducedtechnologicalchange,thezero-carbontransitioncouldevenresultinsmalloutputgains.Overall,theseresultssuggestthatwiththerightpolicymix,Chinacouldachieveitsclimategoalsataneconomicandsocialcostthatissmallrelativetothepotentiallycatastrophicdamagesandeconomicandsocialconsequencesthatcouldresultfromunmitigatedclimatechange(asdiscussedattheoutsetofthisreportandinmoredetailinChapter4,climate-inducedeconomiclossescouldrisetoupto6percentofGDP,annually,bytheendofthecentury).Box1.AcceleratedDecarbonizationScenario(ADS)WhileChina’sNDCenvisagesarapidscaleupofrenewableenergycapacityandlowcarbontechnologies,themodellingframeworkwasusedtoillustratethepotentialbenefitsandcostsofanacceleratedemissionreductionpathway.Underthisscenariorenewablecapacityisexpandedto1700GWby2030,insteadof1200GWundertheNDC.Similarly,inthetransportsectormodalshiftsandEVmarketpenetrationaresteppedup,comparedtotheNDC/2030peakscenario.Suchapathwaywouldallowemissionstopeakearlierthan2030,leadingtoasignificantreductionincumulativeemissionsofalmost55billiontons.However,investmentneedsinthetransportandenergysectorswouldincreasesignificantlybyaboutUS$3trillion(toatotalofaboutUS$17trillion)requiredovertheentireperiodwithmostoftheadditionalinvestmentbeingfrontloaded.Meanwhile,changesinGDPwouldalsobesmootherasfrontloadingavoidsasharperandhencemorepainfuladjustmentlateron.Figure17.ImpactandCostofADSa)LowerEmissionsb)HigherInvestmentsc)VaryingGDPPath051015201820212024202720302033203620392042204520482051205420572060GHGEmission,CO2e,GtonsPowerManufacturingBuildingIPPUTransportAgricultureOtherNDC01020NDCADSIncrementalinvestmentneedsunderdifferentdecarbonizationscenarios(trillionUS$)%deviationfrombaseline,GDPimpactsElectrificationandfuelswitchFuelandoperatingefficiencyLow-carbonmodeInfrastructureElectricity(GenerationandGrid)ADSNDC-4.0-3.5-3.0-2.5-2.0-1.5-1.0-0.50.00.52022202520282031203420372040204320462049205220552058ADSNDCSource:WorldBankstaffestimatesbasedonMANAGE44ChinaCountryClimateandDevelopmentReportTherelativelybenignlong-runaggregateeffects,however,donotimplythatthetransitiontocarbonneutralitywouldbeeasy.Thesimulationresultsacrossmodelsandscenariosillustratesignificantadverseimpactswithjobandincomelossesthataresectorallyandspatiallyconcentrated.Thedisruptionsanddislocationsstemmingfromtheacceleratedstructuraltransformationandcreativedestructionnecessarytoachievecarbonneutralityneedcarefulpolicyattention.StructuralreformstoenhancethefunctioningofChina’sfactor(labor,land,andcapital)andkeyproduct(energy)marketscouldenableamoreefficientreallocationofresourcesandstimulatecompetitionandtechnologydiffusion,therebydampeningadjustmentcostsandharmfulimpactsongrowthandwelfare(Zhang2022).Socialsupporttoworkersandcommunitiesnegativelyaffectedbythetransitionisequallyimportantinstemmingrisinginequality.Thesepolicyoptionswillbespelledoutinmoredetailinthenextsectionofthisreport.Box2.AnalternativemodelingapproachusingE3METhisboxpresentssimulationresults,employinganalternativemacroeconomicmodel.ThesimulationsarebasedontheCambridgeEconometrics’E3MEmacro-econometricmodel,adynamicmodelwidelyusedforclimatepolicyassessments.Similarpolicyscenariosaremodeledtoreachcarbonneutrality,inbotha“moderate”and“rapid”transitionscenario.ThismodelhasseveralfeaturesthatdifferfromCGEmodels,liketheMANAGEmodelusedabove,including:yyKeynesianstimuluseffects:UnlikeCGEmodels,theE3MEisanonequilibriummodel.Itismoredemand-drivenanddoesnotassumethatpricesalwaysadjusttomarketclearinglevels,allowingforoutputgapsandendogenousexpansioninmoneysupply.Undertheseconditions,regulationsandotherpoliciesmayleadtoincreasesinoutputandemploymentiftheytriggeradjustmentsthatusespareeconomiccapacity.yyInducedtechnologicalchange:Inaddition,themodelalsoincorporatesendogenoustechnologicalchangerelyingonadynamic(micro-agent)moduletosimulatetechnologyadoption.Thebottom-uptechnologydiffusionmodulesresultin‘S-shaped’pathsoftechnologydiffusion,consistentwiththeinnovationliterature,andpoliciestoadjustpricesandinduceinitialtake-upmaythuschangetherateoftechnologydiffusion.E3MEresultsillustratethepotentialupsideofclimateactionwithdecarbonizationboostinggrowthandjobcreation.Relativetothereferencescenariowithcurrentpolicies,outputinthemoderatescenarioincreasesbyabout2percentby2030or0.9percentby2060inthesesimulations(whichcontrastswiththemorepessimisticresultsoftheMANAGEmodel).Trackingoutputgains,netemploymentalsoimproves,althoughthescaleofaggregateemploymentimpactsissmallerthanthescaleoftheGDPimpactsbecausesomeadditionalproductionisenabledthroughhigherproductivity.Thesecontrastingoutcomesreflectcoredifferencesintheeconomicassumptionsunderpinningthetwomodels:whereastheCGEassumesthattheeconomyoperatesinequilibriumwithoutanysparecapacity,E3MEassumesthattheeconomyhasunderusedresources(laborandcapital)andthatdebtcanfundadditionalexpenditurewithoutcrowdingoutotherinvestment.WithinE3ME,climateactionalsoinducesacceleratedendogenoustechnologydiffusion,asinvestorslearnaboutnewtechnologies.Thisendogenouslylowersthecostsasdeploymentoflow-carbontechnologyexpandsandthereforelowerstransitioncosts.Despitemorefavorableaggregateoutputandemploymenteffects,disaggregatedsectoralimpactsmirrorthosefoundintheCGEresults.Majorjoblossesareseenintheminingsector,whichexperiencesa1.1milliondeclineinemployedindividualsrelativetothebaselineinthemoderatescenarioby2030.Theagriculturesectoralsoexperiencesaslightdecline.Buttheseemploymentlossesaremorethanoffsetbyemploymentgainsinindustrieslikemechanicalengineering,whichexperiencesanemploymentriseof1.5million,andprofessionalservices,witha0.9millionemploymentrise.45ChinaCountryClimateandDevelopmentReportFigure18.E3MEmodelingofthetransitiontocarbonneutralityshowspositiveGDPimpacts,withsimilarsectoralemploymentshiftsa)GDPImpacts(%frombaseline)b)Employmentchangein2030inmoderatescenario(millions)0.0%0.5%1.0%1.5%2.0%2.5%3.0%202020252030203520402045205020552060ModerateRapid-1.1-0.40.20.20.20.30.30.30.30.30.91.21.54.35.3AgricultureCoalBasicMetalsComputingServicesOtherBus.ServicesElectricityConstructionMisc.ServicesMetalGoodsHotels&CateringProf.ServicesOthersMech.EngineeringRapidtotalTotal-2.0-1.00.01.02.03.04.05.06.0SourceandNotes:WorldBankcalculationsusingCambridgeEconometricsmodelingwork.3.4.SectorpoliciesforcarbonneutralityAchievingChina’sclimatecommitmentwouldrequiremajorpolicyreformsandsignificantinvestmentsinthekeyemittingsectors.InChina,energy-relatedemissions,includingfromelectricityandheatgeneration,industry,transport,andbuildings,accountfor90percent,oftotalGHGemitted,whereasagricultureandland-use-relatedemissions,includingfromforestryandecosystemservices,accountfor6percent(Figure20).Thissectionprovidessector-specificpolicyrecommendationsandcriticalinvestmentneedsineachofthesesectors.Figure19.Fivesectorsaccountfor96percentofChina’sGHGemissionsGHGemissionsbreakdownin2018(%)45338564GHGElectricity&heatgenerationIndustryTransportAgriculture,LULUCFBuildingsOthersSourceandNotes:WorldBankcalculationsusingCAITemissionsdata.Note:Industryisthesumofmanufacturing,construction,andindustrialprocessemissions.46ChinaCountryClimateandDevelopmentReport3.4.1.Electricityandheat(45percentofemissions,growingat4percentannually19)China’srapideconomicgrowthandassociatedsharpincreaseinenergyconsumptionhasbeenfueledprimarilybycoal.Overthepast20years,China’stotalprimaryenergyconsumptionhasmorethantripledandtotalinstalledelectricitygenerationcapacityhasincreasedsevenfoldto2,370GWin2021.Althoughsignificantimprovementsinenergyefficiencyoverthesameperiodhaveledtoweakdecoupling,withenergyintensityofGDPdecliningbytwo-thirds,energydemandcontinuedtorise.Inthelastdecadealone,China’selectricityconsumptionroseto7,520terrawatt-hours(TWh)in2020.PeakpowerdemandgrewfasterthanGDPorelectricityconsumptionoverthelastfiveyearsandreached1,183GWin2020.Theenergytransitionawayfromcoalwillbeimportant,forbothChinaandtheworldtomeettheglobalmidcenturyclimategoals.ThisisalsoakeydeterminantforChinatoachieveitsownclimategoals.Astheworld’slargestcoalproducerandconsumer,Chinareliedoncoalfor57percentoftotalenergyconsumptionin2020,mostofwhichwasmetbydomesticproduction(4.07billiontonsin2020).Three-fifthsofcoalconsumptionisforpowerandheat,and60percentoftotalelectricityisgeneratedfromcoal.Althoughtheshareofcoal-basedelectricityhasbeendeclining,coalpowercapacityandgenerationhavecontinuouslygrownoverthepasttwodecades.Coal-basedgenerationcapacityreached1,109GWin2021,whichislargerthanthetotalcoalpowercapacityofallothercountriesintheworld.Mostcoalpowerplantsarerelativelyyoung:45percentoftheexistingcoalpowerplantsarelessthan10yearsold,82percentlessthan20years,andtheaveragecapacity-weightedageis12.7years.AsChinaseekstoachievecarbonneutralitybefore2060,manyoftheseassetsriskbeingstranded.TheaverageuseofcoalpowerplantsinChinadroppedfrom61percentin2011toabout50percentin2021.Acceleratingtheenergytransitionrequireseconomicpricingandoperationalreformsintheelectricityandheatsupplymarkets.DespiteChina’seffortstoadvancepowermarketreforms,incentivesremaininadequateforinterprovincialcooperationandefficientuseandphase-downofcoal(Box3).Limitationsoncostpassthroughandmarketcontractmodalitymakeitdifficultforrenewableenergytointegrateandbeusedefficientlyinthepowermarket.Insufficientcostrecoveryintheheatingsectorhampersinvestmentingreaterefficiencyandrenewableenergysolutions.Significantinvestmentsandtechnologyadvancementsareneededtocomplementpolicyreformsandachievedecarbonizationgoals.Toevaluatepoliciesandunderstandtheirinfluenceonpowermarketdecarbonization,threescenarioswereconsidered:(a)ReferenceScenario(REF),whichisbasedoncurrentsectoralpoliciesbutdoesnotconsiderclimatecommitments;(b)NDCBaselineScenario(NDC),whichassumescarbonemissionspeakingin2030,2.5gigatonnesofequivalentcarbondioxide(GtCO2e)ofresidualemissionsin2050,andcarbonneutralityin2060;and(c)AcceleratedDecarbonizationScenario(ADS),whichshowsapathwayofpeakingemissionsearlierthan2030,reaching1GtCO2eofemissionsin2050andcarbonneutralityin2060.20ThesummaryresultsaredepictedinFigure20.19DatafromCAIT,withcurrentGHGemissionsbreakdownfor2018andcompoundannualgrowthrate(CAGR)from2010–18.20TIMESisusedtobuildanoptimizationmodelbasedonbottom-upenergysystemlinearprogrammingforChina’senergysystem,inpartnershipwithTsinghuaUniversity.47ChinaCountryClimateandDevelopmentReportBox3.China’spowermarketandwhyreformswillbecriticalforthetransitiontocarbonneutralityInChina,electricitypricesanduse/dispatchofpowerplantsarelargelydeterminedbyprovincialgovernmentsbasedoncentralgovernmentguidelinesandcontinuetofavorcoal-basedpowergeneration.Provincialgovernmentsresponsibleforannualgenerationplansandallocationofoperationalquotasforcoalpowerplantshaveanincentivetoprovidearoughlyequitablenumberofoperatinghourstoeachpowerplant.Thisprocessresultsinsystemplanningtobalancesupplyanddemandlargelyattheprovinciallevel,uneconomicdispatchofthepowerplants,andlimitedincentivestoabsorbrenewableenergygenerationandtocooperateacrossprovincialgrids.Thesystemhasbeenreformedsince2015,withgenerationquotasforcoalpowerplantsgraduallyreduced.Thepowercrunchin2021ledtoseveralimportantchangesinpowersectorregulations.China’senergypriceswereregulatedwithinanarrowpricebanduntilOctober2021.Asaconsequence,whenglobalcoalpricesincreasedin2021,coalgeneratorshadnoincentivetoproducemoreelectricity,astheycouldnotpassthroughcoalpriceincreases.Thisledtolargepowershortagesacrossseveralprovinces.InOctober2021,thepricebandwasexpandedfrom10to20percent,andthepricesforhighenergy-consumingenterprisesandspotmarkettrading(electricitytradinginshorttimeperiodslikedaily,hourly,orrealtime)werefullyliberalized,althoughtradingremainslargelyinterprovincial.Moreover,industrialandcommercialconsumerswererequiredtopurchaseadditionalelectricityfromthemarket,withgenerationquotastobegraduallyphasedoutforthesesectors.Thesechangeshelpedcoalgeneratorsrecoverincreasingcosttosomeextent,althoughbecausecoalpricesweresimultaneouslysubjecttodomesticcontrols,itdidlittletoencouragegreaterrenewableenergyintegration.Theintegrationofnationalpowermarketswillbecriticaltomovetoasystemofeconomicdispatchandfacilitategreateruseofrenewableenergy.ThecurrentpowermarkethasnotcreatedadequateincentivesforChina’sgridcompaniestoconstructnewgridnetworkstoconnectlargerenewableenergy-producingregionstothepopulouscoastalregions.Interprovincialpowertradingisstilllimitedinscaleasprovincestendtoprotecttheirownproducers.Expandingspotmarketandinterprovincialtradinghasthepotentialtoimproverenewableenergyintegrationandwouldallowthepowersystemtooperatewithalowerreservecapacity,thuslimitingtheneedforcapacityexpansion.ReformswereproposedinNovember2021foracross-provincialspotmarket,whichwillbeginwithafewpilotprovinces.Thiswasfurtherprioritizedwithasetofdirectiveson“fast-trackingtheconstructionofaunifiednationalpowermarket”inJanuary2022.Achievingcarbondioxideemissionspeakingbefore2030andcarbonneutralitybefore2060,inlinewiththeNationallyDeterminedContribution(NDC)commitments,wouldresultinasignificantreductionincarbonemissions,notjustforChinabutonaglobalscale.UndertheNDCScenario,energy-relatedcarbonemissionswouldbe120GtCO2elowerthanundertheREFScenario,significantamountsconsideringtheremainingglobalcarbonbudgetof900GtCO2thatwouldkeepglobalwarmingto2.0°C(IPCC2021).Suchreductionsarederivedfromsubstantialdeclinesintotalprimaryenergyconsumption,rapidscale-upofrenewableenergy,andextensiveelectrificationofenergydemand.China’stotalprimaryenergyconsumptionin2050undertheNDCisprojectedtobelowerby25percentthanundertheREF,mainlyduetodemandsidemeasuresandenhancedenergyefficiency.TheinstalledcapacityofsolarPVandwindwouldreachover5,000GWin2050undertheNDC,whereasitwouldbeonly2,000GWundertheREF.By2050,renewableenergywouldneedtobethemajorsourceofpowergeneration,accountingforabout85percentoftotalinstalledcapacityand80percentoftotalelectricitygenerationundertheNDC.Theshareofelectricityintotalfinalenergyconsumptionin2050wouldincreasefrom32percentundertheREFto46percentundertheNDC,primarilyduetofuelswitchingforheatgenerationforindustryandbuildingsandelectrificationintransport.48ChinaCountryClimateandDevelopmentReportBox4.HowChinacanmeetenergydemandwithoutbuildingnewcoal-firedpowerplantsChina’senergyplanforeseesacontinuinggrowthofpowerdemand.Givenrecentpowershortagesandtheintermittencyofrenewableenergysources,theauthoritieshavearguedthatmeetinggrowingdemandrequirestheinstallmentofsome120GWofadditionalcoal-firedcapacity.China’senergyplansconsiderusingthiscapacitypredominantlytomeetpeakdemand,whileallowingaverageloadfactorstodeclinefurther.Suchastrategycouldbecostly,aspowergeneratorswouldneedtobecompensatedforprovidingsuchancillaryservicesforsystemstability.However,acarefulexaminationoftheparametersdrivingpowersystemplanningshowsthatanalternativescenariowithoutnewcoalcapacityisfeasibleandmaybemorecost-effective.Specifically,byallowinggreaterinterprovincialtrade,Chinacouldexploitthecomplementarityofpeakloadsacrossprovincesandthuslowerreservecapacityneeds.Ifprovincialgridsareintegrated,withsupplyanddemandbalancedattheregionallevel,thenationalpeakloadwouldbelowerthanthetotalofprovincialpeakloadsby5to6percent.Furtherloweringreservecapacityrequirementstointernationalstandardsforbothcoal-firedandrenewablepowercouldalsokeepcapacitygrowthincheck.Inaddition,thereremainsconsiderablepotentialtoimproveeconomicdispatchandusageofhydropowerandenergystoragetomeetpeakdemandfollowinginternationalbestpractices.Inparallel,thepotentialofdemand-sidemanagement,includingdemandresponse,canbefurtherharnessedtoslowdownpeakloadgrowthandsupportintegrationofvariablerenewableenergy.Followingapeakin2030,coalpowergenerationcapacityanditsusewouldneedtodeclinesubstantiallyovertimeundertheNDCscenario.Thechallengesinphasingdownthecurrentlevelofcoalgenerationtoachievecarbonneutralityaresubstantial.TheanalysisshowsthatChinawouldneedtoreducecoalpowercapacitytoabout380GWby2050(about65percentreductionfrom2021).Intheprocess,theaveragecoalcapacityuseratewouldfallfrom48percentin2020toabout10percentby2050,shiftingtheroleofcoal-firedpowerplantsfrombaseloadtoservingpeakdemand.GiventherelativelyyoungageofChina’scoal,thistransitionimpliessignificantstranded-assetrisks,althoughneithertheADSnortheNDCscenarioinvolveearlyretirementofcoalplants,insteadfactoringinsubstantialpricingreformstocompensategeneratorsforlowloadfactors.About10percentoftheremainingcoalfleetisexpectedtobeabatedwithcarboncapture,usage,andstorage(CCUS)by2050—atechnologythatisnotyetcommerciallyviableoravailableatscale.Suchtechnologicalinnovationswillplayacriticalroleinaddressingresidualabatementneeds,notonlyinthepowersectorbutalsointheindustrialsectors.Figure20.TheNDCBaselineScenariocouldpushenergy-relatedemissionstocarbonneutralitybefore2060Projectedcarbonemissionsfromenergyuse024681012201020202030204020502060REFNDCADSGtCO2eSource:WorldBankandTsinghuaUniversityanalysis.49ChinaCountryClimateandDevelopmentReportScalingupinvestmentinenergystoragetoimprovegridflexibilityisessentialforacceleratingrenewableenergydevelopmentandintegration,whileensuringthereliabilityofpowersupply.Theshareofvariablerenewableenergy,namelysolarandwind,isexpectedtoreachabout17percentoftotalelectricitygenerationand37percentoftotalinstalledcapacityin2030undertheNDC.Acceleratingrenewableenergydevelopmentmayposechallengesinintegratingvariablerenewableenergyintothegridandreliabilityofpowersupply.Recognizingthis,thegovernmentannouncedplanstoincreasepumpedhydrostorageto120GWby2030andbatterystorageto30GWby2025.UndertheNDC,therequiredstoragecapacityisestimatedat200GWby2030and1,300GWby2050.Achievingthismassivescaleupwillneedtoinduceastrongglobalsupplyresponseandexpansionofproductioncapacityforkeytechnologies(currenttotalglobalinstalledbatterystoragecapacityis17GWin2020).AchievingtheNDCcommitmentsrequiresaboutUS$4trillionofincrementalinvestmentinthepowersectorcumulativelybetween2020and2060.Inthepowersectoralone,theinvestmentneedsingeneration,transmission,distribution,andenergystorageby2060areestimatedtobeaboutUS$8trillionundertheREFandUS$12trillionundertheNDC.Figure21.By2050,renewableenergywillneedtoaccountforabout85percentoftotalinstalledcapacityintheNDCProjectedInstalledCapacityforElectricityGeneration10791214114797425441666586528241054189182433821512482998342998024502550020004000600080002020203020502030205020302050OthersWindSolarGeothermalHydroNuclearBiomassOilNaturalgasCoalREFNDCADSNote:Renewableenergycapacityassumptionsrefertonotionalcapacityanddonotpointatanyspecificproject,whichwillrequirelookingatthetechnical,environmental,andsocialconsiderationsassociatedwithprojectduediligence.Detailedcapacityprojectionendin2050duetotechnicaldatalimitsoftheexistingTIMESmodel.Source:WorldBankandTsinghuaUniversityanalysis.Privatesectorparticipationcanhelpmeettheseinvestmentneedsandacceleratetheenergytransition,butthisrequiresfurtherreforms.Chinaadded101GWofrenewableenergycapacityandmadeUS$266billionofinvestmentintheenergytransitionin2021,thelargestintheworld.However,theprivatesector’smarketsharehasbeenshrinking,largelyduetothelackofsupportingpoliciesandchallengesinaccessingcapital.Forinstance,theshareofsolarpowerplantsinvestedinandheldbytheprivatesectorplummetedfromover70percentoftotalcapacityin2018tolessthan40percentbytheendof2019,asaresultoftheso-called531Policy,whichwasannouncedonMay31,2018,toacceleratephasingoutsubsidiesforsolarPVandeasethefinancialburdenofthegovernment.Thechangesingovernmentsubsidypoliciesledtoreluctancebythebankingsectortolendtoprivatecompanies,whichtendtohavefewerandlessdiverserevenuesourcesthantheirSOEcounterparts.Thisiscompoundedbyadditionalconditionsimposedbylocalgovernmentsinrenewableenergyauctions,suchasthecreationofassociatedlocalindustries—conditionsthatspecializedrenewableenergyinvestorsfindhardtomeet.Delaysinsubsidypayments,withtheoutstandingamountestimatedtoexceedUS$60billion,haveaddedtothechallengesforprivateinvestors.50ChinaCountryClimateandDevelopmentReportChinacouldincreaseitscontributiontotheglobalclimatechangemitigationbyacceleratingenergytransitionbeyondtheNDC,asillustratedundertheADS.Theanalysisdemonstratesthatachievingpeakemissionsearlierthan2030canfurtherlowerChina’scumulativeenergy-relatedcarbonemissionsuntil2060by50GtCO2e.Inthepowersector,thisaccelerationentailsincreasingcleanenergytargetsby2030comparedtowhatwouldhavebeenachievedundertheNDCScenario,including(i)increasingsolarPVandwindgenerationcapacityfrom1,200GWto1,700GWby2030,(ii)increasingtheshareofvariablerenewableenergyinelectricitygenerationfrom17percentto25percentby2030,and(iii)increasingenergystoragecapacityfrom200GWto300GWby2030.CombiningtheexpansionofrenewablecapacityundertheADSScenario,withbettersystemplanningandpowermarketreforms,allowsprojectedenergydemandtobemetwithouttheneedforadditionalcoal-firedpowerplants(Box4).Consequently,followingtheADSwillincreasetheinvestmentneedsinthepowersector.TheADSisestimatedtorequireaboutUS$14trillionbetween2020and2060cumulatively,aboutUS$2trillionmorethanundertheNDC.WhatwerecommendyyEnhancegridoperationanddispatchpracticesandmovefromprovincialleveltowardregionalandnationallevelplanning.Loadprofilesofprovincialgridsarecomplementarytoeachother,andintegratingprovincialgridswouldthusallowoneprovincetotakeadvantageofreservecapacityinotherprovinces.Totakeadvantageofthesecomplementaritiesrequirestherapidexpansionofinterprovincialtransmissioncapacityandreformstooptimizedispatch.Toacceleratetheconstructionofanationalpowermarket—currentlyenvisagedby2030—Chinashouldaccelerateregionalspotmarketpilotsamongneighboringprovinces,whichwouldrequirelessupfrontinvestmentintransmissioncapacity.yyAdoptinternationalbestpracticesinsystemplanning,reliabilityregulations,andvariablerenewableenergy(VRE)generationforecastanddispatchtoreducetheneedforadditionalcoal-firedgenerationcapacity.IncreasingthecapacityvalueforVREinlinewithstandardsusedinternationallywouldresultinlessneedforadditionalnewcoalcapacity.Moreover,VREdispatchcanbefurtheroptimizedbyadoptingadvancedshort-termweatherforecastinganddigitalizationattheprovincialgridlevel.CurrentlygridoperatorstakeaconservativeapproachinestimatingVREgenerationonday-to-dayoperation,whichmaycausealargercoalpowercapacitythanisrequiredtomeetsystemreliabilitystandards.yyImplementscaleupofsolarandwindpowergenerationcapacityto1,200GWby2030,inlinewithChina’sNationallyDeterminedContribution(NDC).Whilethisenvisagedscaleupisambitious,analysisundertakenfortheCCDRshowsthataddingmorerenewableenergycapacity,upto1,700gigawatts(GW),couldadvanceemissionspeakingtoearlierthan2030andresultinsignificantreductionincumulativeemissions.Todoso,Chinawouldneedtoaddupto120GWofsolarandwindcapacityeveryyearby2030,1.5timestheannualaverageduring2016–20and20percentmorethanthecapacityadditionin2021.Thisisanambitioustarget.Achievingitwouldrequireastrongglobalsupplyresponseandincreasedproductioncapacityforbatteryandsolar/windcomponentstoreducepressurepricesforthesetechnologies.yyEnhancerenewableenergyintegrationcapacitybyinvestinginadditionalstorage.Scalingupenergystorageisinstrumentalforavoidingrenewablepowercurtailmentandforpeakshaving,andthuseliminatingtheneedforadditionalcoalpowercapacity.Therequiredstoragecapacityisestimatedat200GWby2030,roughlyatenfoldincreasefromcurrentlevels,and1,300GWby2050undertheNDC.Toadvancepeakemissionstoearlierthan2030,upto300GWofenergystoragecapacityisneededby2030and1,700GWby2050.Competitiveauctionsforstoragecapacitycouldincentivizeinvestmentsandreducecoststhroughon-gridbatteryapplicationsorrenewableenergycombinedwithbatterystorage,alongsidetheintroductionofamarketforancillaryservices.Achievingthismassivescaleupinstoragecapacitywillrequireexpansionofglobalproductioncapacityforkeytechnologies(currenttotalglobalinstalledbatterystoragecapacityis17GWin2020).51ChinaCountryClimateandDevelopmentReportyyExpediteelectricitymarketreforms.First,electricitypricingneedstobemorecost-reflective,convergentacrosstheprovinces,andreflectiveofmarketconditions.Chinashouldconsiderfullyliberalizingmarkettransactionsbetweenpowergeneratorsandindustrialandcommercialconsumersandeliminatingremainingcoalpowerquotas.Second,anancillaryservicesmarketandpotentiallyacapacitymarketshouldbedevelopedtoenableprivatesectorinvestmentinenergystorageandcompensatepowerplantstoshiftfrombasetopeakloadserving.Togetherwitheffectivecarbonpricing,suchasthroughatighteningofpoweremissionsquotasundertheETS,thesemeasureswouldincentivizeinnovationandsignificantlyreducethecostsoftheenergytransition.Theresultingincreaseinend-userpricesofenergywouldraiseaffordabilityconcerns,butthesearebetteraddressedthroughlifelinetariffsortargetedsubsidiesthanthroughpriceregulationsthatdiscouragemarketefficiency.yyPromotedemandmanagementmeasuresforelectricityuse.Demandmanagementwoulddecreasepeakdemandandincreasesystemflexibility,loweringadditionalcapacityneeds.Measurescouldincludeallowinggreatervariabilityoftime-of-use(TOU)retailtariffs,thepromotionofdistributedrenewableenergyandstorage,demandresponseprogramswhereconsumersarepaidforvoluntaryloadcontrol,andthedevelopmentofsmartgridandelectricvehicle-to-gridapplications.yyStrengthenincentivemechanismsforfuelswitching,electrification,anddemandmanagementforheating.Themajority,about85percent,ofheatingdemandinChinaispresentlysuppliedbycoal,followedbyotherfuelsincludinggasandelectricity,throughdistrict-level,state-ownedcombineddistrictheatingplants(CHPs)orbuilding-levelboilers.Switchingfromcoaltogascansignificantlyreduceemissionsduringthetransitionbutwouldsignificantlyincreasecosts.Nonfossilfuelsolutionsexistforheatsupply,includingheatrecovery,geothermal,biomass,andsolar.However,highlysubsidizedheatingtariffsimplylowprofitabilityanddiscouragefreshinvestmentsinthesector.Furthermore,thelackofmeteredconsumption-basedbillingmeansthereislittleincentiveforhouseholdstoconserveheat.Reformstopricingandmeteringpoliciesarepoliticallyenormouslychallenging,andpreviouspilotshaveremainedlargelylocalized.Nonetheless,suchreforms—complementedwithtargetedsubsidiesorlifelinetariffstopoorerhouseholds—wouldbevitaliftheenergytransitionistoincludetheheatingsector.Promotinglow-carbongreenbuildings,asdiscussedinthesubsequentbuildingsection,willfurtherenhancedemand-sideefficiency.yyBuildaconduciveinvestmentclimatetoencourageprivatesectorparticipation.Tomeetthescaleoftheinvestmentneedsforpowersectordecarbonization,crowdinginprivatesectorinvestmentiscritical,especiallyforrenewableenergyandenergystorage.Enhancingthepredictabilityofthepolicyframeworkcouldhelpencouragestrongerprivateinvestment.Avoidingnonsectorspecificinvestmentconditionalitieswouldalsoenhancetheconditionsforprivatesectorparticipationandattractthetechnologicallymostadvancedplayers,reducingcostsofthetransition.Expandingthegreenelectricitycertificate(GEC)market,allowinglargerparticipationfromrenewableenergygeneratorsandvoluntarypurchasers,andexpandingthenationalETStocoverrenewableenergygenerationfacilitiesmayalsoenhancecashflowtoprivatesectorinvestors.3.4.2.Industry(33percentofemissions,nolongergrowing)AmajordriverofChina’seconomicgrowth,theindustrialsectorproduceslargeemissions,bothinabsoluteandrelativeterms.IndustrialprocessemissionsaccountforonethirdofChina’stotalemissions(Figure22).China’sindustryisrelativelyemissionsintensive,at1.49tCO2eperUS$2015grossvalueadded,morethandoubletheG20average.ThisismainlyduetothehighshareofheavyindustriesinChina’seconomyandtotherelativelyhighemissionintensityofthekeyindustriescomparedtogloballeaders.Heavyindustries—ironandsteel,cement,andotherconstructionmaterials—accountfor39percentoftotalGDP(relativeto18.5percentintheUSand22.3percentintheEU.52ChinaCountryClimateandDevelopmentReportFigure22.Industrialemissionsgrowthhasstartedtodecouplefromoutput100%90%80%70%60%50%40%30%20%10%0%ofChina’semissionsareinIndustry,with...intheUSintheEUinIndiaoftheseinheavyIndustry,with...USEU-28Indiafromcement,steelandironWithChina’s33%industrysharecomparingwithindustrysharesof...Steel,iron&titaniumCement33%9%12%23%9%12%23%33%96%50%35%96%85%Source:WorldBankstaff,basedonNBSdata.Chinahasachievedsubstantialincreasesinenergyefficiencyoverthepasttwodecadesandanabsolutedeclineinemissionsfrommanufacturingandconstructionsince2013.Thisreflectstheeconomy’sshiftingcompositiontowardservices,thegradualdiversificationawayfromsteelandcementproductiontowardhigh-valueactivitiesinmachineryandchemicals,andenergyefficiencyimprovementboththroughtechnologiesandregulatorymeasures(IEA2020a).21SteelmakingandcementproductionnowhaveenergyintensitiesthatareslightlybelowtheG20average.Efficiencyimprovements22between1998–2013amountto408percentforsteel,201percentfortextiles,134percentforcement,296percentforpetrochemicals,and157percentforpapermaking.Theseimprovementsarecalculatedtohaveconservedatotalof1.99billiontceofenergyoverthisperiod,withsubstantialfurthergainsinsubsequentyears.Improvementsinefficiencyaremostprominentintheeasternprovinces,withcentralandwesternregionsimprovingbutataslowerrate.Althoughthecarbonintensityoftheironandsteelsectorhasbeendeclining,substantialopportunitiesforfurthergainsremain.Thissectoralonecontributes14percentofChina’stotalenergy-relatedCO2emissions(Renetal.2021).EnergyintensityinChina’sironandsteelsectordecreasedfrom3.2tCO2/tcein2000to1.6tCO2/tcein2019butcontinuestosubstantiallylagworldleaders(forexample,0.47tCO2/tceintheUS).Chinacontinuestorelyonblastfurnace-basicoxygenfurnace(BF-BOF)technologyfor90percentofitsproduction,comparedto72percentfortheglobalaverage(and30percentintheUS,76percentinJapan,and44percentinIndia).Electricarcfurnace(EAF)alternativeshaveemissionsofaroundonequarterperunitofproduction(Linetal.2021).Thismayalsoproduceco-benefitsintermsofdioxinspollutionreduction.WhatwerecommendEventhoughthegrowthrateofindustrialprocessemissionshasbeendecliningsince2005thankstorapidimprovementsinenergyefficiency,decarbonizingChina’slargeheavyindustrieswillrequireimportantchanges.Thetransitionwillbechallengingbecauselow-carbonproductiontechnologiesremaincostly(forinstance,useofhydrogenandcarboncaptureinsteelproduction)ordonotyetexist(asinthecementindustry).Fundamentalchangesarenecessarytotheindustrialstructure,material,andenergyefficiency,withnewproductionprocesses,greatermaterialrecirculation,andcarboncapturetechnologies.Benefits,however,wouldbebothglobalandlocal.Inadditiontotheeconomy-widereformsdiscussedfurtherbelow,whichwilllikelyhaveimportantimpactsonthedecarbonizationoftheindustrialsector,specificopportunitiestomakefurtherprogressexist.21SuchastheTop1,000andTop10,000programs.22Calculatedassinglefactoreco-efficiencyimprovements.WorldBankAnalysis,usingthedatafromChinaStatisticalYearbooks,ChinaEnvironmentalStatisticalYearbooks,ChinaEnergyStatisticalYearbook.Daterangeisconstrainedbytheavailabilityofmicrodata.53ChinaCountryClimateandDevelopmentReportyyAshiftfromtraditionalinvestment-ledstimulustowardmeasuresthatsupportconsumptionwouldreducetrade-offsbetweentheauthorities’short-termgrowthandlong-termclimateobjectives.Chinahasreliedheavilyontraditionalinvestmentstimulustosupporttheeconomyduringdownturns,mostrecentlyinthecontextoftheCOVID-19-inducedslowdown.Suchtraditionalinfrastructureinvestmentstimulatesdemandforsteel,cement,andothercarbon-intensiveoutputsofheavyindustriesandtherebyincreasesemissions.Atthesametime,theeconomicreturnstosuchinvestmentshavealsobeendeclining.Insteadofstimulatingfurtheraccumulationofphysicalcapital,usinggovernmentstimulustosupportconsumptionwouldbeconsistentwithChina’sobjectiveofeconomicrebalancingtowardservicesandconsumptionwhilesimultaneouslymitigatingthetrade-offbetweenshort-termgrowthandambitiousemissionstargets.yyGreaterattentiontocirculareconomyopportunitieswouldreduceemissionsintensityandhelpovercomematerialsupplybottlenecks.Promotionofthecirculareconomycansupportemissionsreductions.ElectricArcFurnace(EAF)productioniscurrentlyconstrainedbydomesticscrapsteelsupplyandcost.Astandardizedscrapsteelrecyclingsystemwouldfacilitateincreaseduseofscrap,importantinthecontextofChina’send-of-lifesteelavailabilityquantities,whichareexpectedtoincreaserapidlyoverthecomingdecadeasexistinginfrastructurereachesend-of-life.Atthesametime,tighterdesignstandardsfornewbuildingscanbeusedtomandatemorerecycledcontent.yyInthelongerterm,thereisaneedtosupportdirectandindirectdriversoftechnologicaladvancement.Arangeoftechnologiesisavailabletoreduceemissionsbutrequirespriceincentivestosupportuptake.Technologiesavailablerangefromwell-establishedtoexperimentalandcandramaticallyreduceemissions(Linetal.2021).Backgroundanalysisoffirm-leveldatainChina’smajorindustries,undertakenforthisreport,demonstratesthecorrelationbetweenresearchinvestment,technologicalinnovation,andindustrialefficiencyacrosssectors.23Italsohighlightstheroleofforeigninvestmentindrivingefficienciesbydiffusingadvancedmanagementexperienceandcleanertechnologies.TheplannedexpansionoftheETSwillmotivateefficiencymeasureswhenitisexpandedtocoverareasoftheeconomybeyondpowergenerators.yyDecarbonizingtheindustrialsectormayalsoinducerelocationofindustriestowardprovinceswithhigherrenewableenergypotential.China’sindustrialcapacity,especiallyitscarbon-intensiveheavyindustries,isspatiallyconcentratedinthenorthwesternprovinces,reflectinghistoricalindustrializationpatternsthatwereinpartdrivenbytheendowmentswithcarbon-intensiveenergysources(suchascoal).Thelow-carbontransitionmayshiftcomparativeadvantagestoareaswithhighrenewableenergypotential.Accesstoenergywillincreasinglybedeterminedbyrenewablesourcesofelectricity(solar,wind,hydro)andfuelsderivedfromtheseinputs(hydrogen,ammonia)andthiswilllikelyreshapetheeconomicgeography.Enablingflexiblefactormarketscouldeasethisrelocationwhereitcontributestomostcost-effectivelow-carbonproduction.3.4.3.Transport(8percentofemissions,growingby6percentannually)Amajordriverofeconomicgrowth,China’sinfrastructureinvestmentsoaredatacompoundannualgrowthrateofalmost20percentfrom2007to2016,afterwhichthegrowthslowedtoaround4percent.24Theresultsincludethelongestexpresswaysandhigh-speedrailnetworkintheworld,alongwithsignificantexpansionsinruralroadsandurbanrailsystems.25Suchrapidgrowthhassupportedcorrespondinggrowthindemand:thenumberofvehiclesdoubledinjust10years,from192millionin2010to372millionin2020;freighttransportgrewfrom14to20trillionton-kmoverthelast10years,alongwiththegrowingtradeandseven-foldincreaseine-commercetransactionsoverthesameperiod(CSY2021;CER2019,2020).23Backgroundnoteondeterminantsofindustrialeco-efficiency,preparedbyYutaoWangetal.(FudanUniversity).24NationalBureauofStatistics;TheEconomistIntelligenceUnit.25By2019,China’sroadnetworkreached5millionkm,includingabout150,000kmofexpressways,andrailwaysabout140,000km,including35,000kmofhigh-speedrail.ChinaTransportSectorDevelopmentStatisticalBulletin(2020).54ChinaCountryClimateandDevelopmentReportWithrapidgrowthofbothsupplyanddemand,thetransportsectorhasbecomeamajorcontributortoenergyconsumptionandGHGemissionsinChina.Itssharecontinuestoincreasewiththehighestgrowthrateamongallsectors,reachingover11percentin2019beforetemporarilydecreasingduring2020duetoCOVID-19-inducedtravelrestrictions(seeFigure23).Ifunmitigated,transportemissionsareestimatedtocontinuerisinguntiltheypeakatabout150percentofthecurrentlevelaround2040,muchlaterthanChina’stargetpeakingyearof2030,beforedecreasingtothecurrentlevelby2060.Figure23.Ifunmitigated,transportemissionsareestimatedtocontinuerisinguntiltheypeakaround2040,andstillemitover1GtofCO2annuallyin2060TransportSectorCO2EmissionsinChina–TrendsandBusinessasusual(BAU)Projection010020030040050002004006008001000120014001600180020102015202020252030203520402045205020552060WaterwayRailwayAviationRoadMotorizedvehicle(RHS)TransportCO2emissionsbymodeCO2emission(Mt)Vehicleownership(million)Source:WorldBankanalysis.Decarbonizingthetransportsectorrequiresconcertedeffortsencompassingpolicies,pricing,regulatorymeasures,infrastructureinvestments,andtechnologicalinnovation.Throughthese,motorizedtripscanbeavoidedorshiftedtolowerenergy-intensitymodes,ortheirenergyefficiencyimproved.Chinahasexcelledatdevelopmentofsingle-modeinfrastructure(e.g.,urbanrailsystems,high-speedrailnetwork,airports,andseaports)aswellastheearlymarketpenetrationofelectricvehiclesandsupportinginfrastructure,atleastinpublicbusesandtaxis.Ontheotherhand,keygapsremain:(i)market-basedpolicyandpricingmechanismstomanagetransportdemandandmotivateindividualtravelersandbusinessestoshifttogreenermodesandfuels(seeBox5);(ii)scalingelectricvehicleandothercleanfueltechnologiesbeyondpublictransportservices,especiallyinfreighttransport;(iii)integratedtransportsystems,especiallyinlargemetropolitanregions,formodalshifttolow-carbonandlow-energyintensivemodes;and(iv)shiftfromanemphasisonconstructiontoagreaterfocusonassetmanagementandmaintenancebyinvolvingtheprivatesector.55ChinaCountryClimateandDevelopmentReportBox5.MotorfueltaxesinChinaChina’smotorfueltaxes,leviedatauniformrateof¥1.52perliter(equivalenttoUS23₵),havenotchangedsince2015.Firstimplementedin1994undertheProvisionalRegulationsofthePeople’sRepublicofChinaonExciseTax,therefinedoilexcisetaxsystemisleviedupstream—thatis,atthestageofproduction,commissionedprocessing,andimports,ratherthandownstreamusage.Globally,averagefuelefficienciesofmotorvehiclesareinverselycorrelatedwithfuelprices:forinstance,theaveragefuelefficiencyinGermanyisabout45percentgreaterthanthatoftheUS,wherethefuelpriceshaveremainedatmuchlowerlevel—about50percentofGermany—overthepastdecade.26AlthoughChina’svehicleownershipisstilllow,theaveragefuelefficiencyofpassengercarsinChinaislowerthanthatofitsEuropeancounterparts.AsChinafurthermotorizes,itwillbecriticaltophaseoutinefficientfuelsubsidies(seesection3.5.1)toprovidepriceincentivestosetthetransportsectoronthepathofhigherenergyefficiency,whileconsideringtheaffordabilityoftransport,especiallyforlower-incomepopulation,includingthroughprovisionofpublictransportandotherlow-carbonoptions.Evenwithhigherfossilfuelprices,substantialsubsidieswouldstillbeneededtosupportthepriceparitybetweeninternalcombustionenginevehicles(ICEVs)andelectricvehicles.TobringthelifecyclecostofanEVtoparitywiththatofanICEV(withoutsubsidiesonEVmanufacturingorpurchasingorcarbonpricing),thepriceofmotorfuelwouldneedtoincreasefromthecurrent¥7.5/literto¥13.9/liter(US$2.19/liter).Thistranslatestoafivefoldincreaseinthefueltaxfromthecurrent¥1.52perliterto¥7.9perliter(equivalenttoUS$1.24),whichisunrealistic.Inotherwords,evenwithphasingoutofinefficientfuelsubsidies,substantialamountsofsubsidieswouldstillberequiredtoequalizelife-cyclecostsofICEVsandEVsinthenearfuture.Policyreforms,significantinvestments,andtechnologyadvancementsareneededtoachievedecarbonizationgoalsinthetransportsector.Toevaluatepoliciesandunderstandtheirinfluenceontransportdemandandtheiremissions,threescenarioswereconsidered:(i)ReferenceScenario(REF),basedonpoliciesthatarecurrentlybeingimplementedandalreadyannouncedandscheduledforimplementationintheshortterm;(ii)EnhancedPolicyScenario(EPS),whichincludesmeasuresthatareannouncedbutwithoutclearlydefinedtimelineorresourcesforimplementation,resultingincarbonemissionspeakingin2035,and0.23GtCO2eofresidualemissionsin2060;and(iii)AcceleratedDecarbonizationScenario(ADS),whichincludesmeasuresthataremoreambitiousbutattainable,basedonconsultationwithpolicymakersandsectorexperts,resultinginemissionspeakingin2030,and0.07GtCO2eofresidualemissionsin2060.27SpecificpolicytargetsunderEPSandADSarepresentedinTable4.26CalculatedusingdatafromWorldDevelopmentIndicators,GlobalPetroPrices.com,Eurostat,STATISTA,theGlobalEthicalFinanceInitiative(GEFI).27TheLEAP(Long-RangeEnergyAlternativesPlanning)modelwasusedtobuildabottom-uptransportsectormodelcoveringallsubsectors,road,railway,waterway,andairtransport,excludinginternationalshippingandinternationalaviation.56ChinaCountryClimateandDevelopmentReportTable4.Transportmodelingscenarios,keypolicyparameters,andresultsKeypolicies,investments,technologydevelopmentTargetsinkeyparameterscomparedtoREFby2060Emissionsreductioninmetrictons(Mt)EnhancedPolicies(EPS)Acc.Decarbonization(ADS)EPSADSModalshift•Investinurbangreenmodes(metros,BRTs,sharedbikes,andsoforth),waterwaysandrailways•Shareofgreenmodesincities15%higher•Freightmodalshiftfromroad6billiontonsgreater•Shareofgreenmodesincities20%higher•Freightmodalshiftfromroad8.5billiontonsgreater2,392Mt3,307MtEnergyefficiency•Incentivizeprivatesectorinvestmentsinfuelsavingtechnologies,digitalization/automationforoperatingefficiency,behavioralchanges•Road:Shareofautonomousfreightvehicles20%higher•Rail:Shareoffuel-savinglocomotives30%higher•Water:Shareoflargeships15%higher•Road:Shareofautonomousfreightvehicles75%higher•Rail:Shareoffuel-savinglocomotives60%higher•Water:Shareoflargeships30%higher4,251Mt7,040MtElectrifi-cationandfuelchange•Encouragenewenergyapplications:electrification,biofuels,andothernewenergysources•Road:EVsharesinprivatevehiclesales100%•Rail:Shareofelectricfreightlocomotives35%higher•Water:Shareofnewenergyshipsales50%higher•Air:Shareofnewenergyaircraft40%higher•Road:EVsharesinprivatevehiclesales100%by2055•Rail:Shareofelectricfreightlocomotives49%higher•Water:Shareofnewenergyshipsales80%higher•Air:Shareofnewenergyaircraft60%higher13,952Mt18,382MtTotalREFemission:60,274Mt•Additionalinvestments:¥62trillion(US$9.5trillion)•Additionalinvestment:¥74trillion(US$11.4trillion)20,596Mt(34%reduction)28,729Mt(48%reduction)TheabovecombinationsofpoliciesandinvestmentsundertheEPSareexpectedtoadvancetransportemissionspeakingto2035andresultinatotalemissionsreductionthatis34percenthigher,fromnowuntil2060,thanthatfortheReferenceScenario.ShownintheemissionstrajectoryinFigure24,about68percentoftotalemissionsreductionwouldcomefromelectrificationandfuelchange,20percentfromenergyandoperatingefficiency,and12percentfrommodalshift.Thesedecarbonizationpathwayswouldrequireadditionalinvestmentsininfrastructureandvehicles—expansionofnetworksoflow-carbonmodessuchashigh-speedrailwayandmasstransitsystems,intermodalfacilities,charginginfrastructures,andincrementalcostsofnewenergyvehicles,whichwouldamounttoUS$9.5trillionoverthe40-yearperioduntil2060.FastertransitionunderADSwouldadvancethecarbonpeakingforthishard-to-decarbonizesectorto2030andresultinadditionalemissionsreductionof8Gtfromnowuntil2060,bringingtheremainingemissionsfromthesectorto0.07GtCO2e,comparedto0.23GtCO2eunderEPS.SuchaddedambitionwouldrequireanadditionalinvestmentofUS$1.9trillionuntil2060.57ChinaCountryClimateandDevelopmentReportFigure24.EPSandADSpolicyscenarioscouldbringforwardthetransportemissionspeakfrom2040to2035and2030,respectivelyEmissionsreductioncomparedtoBAUEnhancedPoliciesScenario020040060080010001200140016001800202020252030203520402045205020552060AcceleratedDecarbonizationScenario020040060080010001200140016001800202020252030203520402045205020552060Peakemissionin2035Peakemissionin2030ReductionfrommodalshiftReductionfromenergyefficiencyReductionfromelectrificationandfuelchangeSource:WorldBankcalculations.WhatwerecommendyyAdvanceelectrificationbeyondpublictransportvehicles,whichaccountforlessthan5percentoftransportemissions,toincludeprivateandcommercialfleet,byensuringpriceparity(throughtaxesandincentives)andprovidingadequatecharginginfrastructure.EVsinChinatakeuplessthan2percentofthetotalfleetandareconcentratedmostlyinpublicbusandtaxifleetsinlargeurbanareas,withaboutaquarterofthecountry’stotalEVcharginginfrastructureslocatedinBeijingandShanghai(whereonly3percentofthepopulationresides).Thisneedstobescaledtoincludeprivateandcommercialfleets,whichwouldrequireincentives(suchassubsidiestolowertotalcostofEVownershipandpreferentiallicensingandparkingrightsforEVusers),investmentincharginginfrastructures(includinginresidentialareasandotherprivatelyownedlands),andtechnologyimprovements.Thisischallengingduetothelackofcoherentleadership,astheabovepoliciesandinvestmentsaregovernedseparatelybymultiplejurisdictionsresponsibleforindustrialpolicies,urbanplanning,environment,andgeneraleconomics.Earlyactionstoaccelerateelectrificationwouldbecriticalforadvancingemissionspeakingintransport,from2040orlaterunderREFto2030–35underaccelerateddecarbonizationscenariosandcanbringaboutanemissionsreductionofabout14.0–18.4Gtfromnowuntil2060,underEPSandADS,respectively.WhileelectrificationcanachievesomeemissionreductionevenwithChina’sexistingpowermix,aspointedoutabove,frontloadeddecarbonizationofelectricitysupplyiscrucialtorealizethefullabatementpotentialofelectrificationinthesector.yyCombineregulatorymeasureswithpricing—onfueluseorcarbonemissions—toencouragefuelandenergyefficiencyimprovementbytheprivatesector.Chinahaseffectivelyimplementedadministrativemeasurestowardstricterfueleconomyandenergyefficiencystandardsofvehiclesovertime.Theseregulatorytools,ifcombinedwithgraduallyinternalizingexternalities28throughfueltaxesorcarbon28ItisestimatedthattheaverageexternalitiescostsofeachprivatevehicleinBeijingisabout¥8,500(8,500yuan)peryear,andonlyaboutone-thirdofitisbornebythecaruser.ThecalculationisbasedontheaverageannualemissionsofCO2andvariouslocalpollutants—carbonmonoxide(CO),nitrogenoxides(NOx),particulatematter(PM),andhydrocarbon(HC)—perprivatepassengervehicleandapplyingtheEU’scarbonpriceandmarginalabatementcostforeachpollutant.Forinstance,in2015,whenthereportwasproduced,MAC(MarginalAbatementCosts)forCOwas¥4,941/ton,forNOxitwas¥29,100/ton,forPMitwas¥52,832/ton,andforHCitwas¥4,541/ton.(CATS[ChinaAcademyofTransportationScience]2015,StudyonLowCarbonDevelopmentStrategyofUrbanTransportationinChina).58ChinaCountryClimateandDevelopmentReportpricing,wouldprovidestrongincentivestoprivateandcommercialfleetoperatorstoreducetheirfuelconsumption—through,forinstance,investinginfuel-efficientvehicles,minimizingemptymileage,increasingoccupancyrates,introducingeco-driving,andsoon.Thiswouldleadtosignificantimprovementinenergyefficiencybeyondmeetingtheminimumstandardsandisestimatedtobringaboutanemissionsreductionofabout4.3to7.0Gtfromnowuntil2060,underEPSandADS,respectively.yyPromotesubstantialmodalshiftsfromprivateroadtransporttopublicmasstransit(forpassengertransport)andtorailwayandwaterway(forfreighttransport),throughdeeperintegrationacrossmodesandpricingincentives.Despitethesuccessinrapidlybuildinganextensivenetworkofhigh-speedrailwaysandurbanmetros,theintegrationbetweenmodeshasbeenweakinChinaduetothelackofinstitutionalcoordination,asplanning,siteselection,andconstructionareseparatelymanagedbyindividualmodalentities.Thisisaggravatedbyacurrentpricingstructurethatdoesnotreflectmostoftheenvironmentalexternalitiesgeneratedbyvehiculartrips,whichhasresultedinthedecreaseintherelativepricesofcarbon-intensivemodes(roadandairtransport)comparedtolower-carbonmodes(railandwaterway)overthelast10years.Meaningfulshiftstolow-carbonmodes,whichrequirebothphysicalandoperationalintegrationacrossmodesandrelativepricingthatreflectsexternalities,canbringaboutanemissionsreductionofabout2.4to3.3Gtoverthe40-yearperiod,underEPSandADS,respectively.yyPromotetechnologydevelopmentforalternativelow-carbonfuelsforharder-to-decarbonizesectors,incoordinationwithenergysectorpolicies.Acceleratedelectrificationofroadtransportandmodalshiftwillstillleavewaterborneandairtransportsystems,whichaccountforabout15percentoftransportemissionandaregrowingrapidly,torelyonhigh-pollutingfuels.Althoughitisdifficulttoelectrifythesemodeswiththecurrenttechnologies,duetothelongdistancesbetweenrefueling/chargingstationsandthelowenergy-to-weightratioofcurrentbatteries,itisexpectedthatalternativeoptionscanbecomecommerciallyviableinthecomingdecades.Economy-widepoliciestopromotetechnologyinnovations,includingthroughR&Dsupport,canencouragefurtherdevelopmentofblueorgreenhydrogen/ammoniaandenhancedbatteriesinconjunctionwithinnovationsintheenergyandindustrialsectors.3.4.4.Low-carboncitiesandbuildingsIn2018,thebuildingsectorinChinaaccountedforabout5percentoftotalcarbonemissions,andprogressongreeningthesectorhasbeenmodest.TheMinistryofHousingandUrban-RuralDevelopment(MoHURD)setoutitsobjectivetoincreasegreenconstructionareasasapercentageofnewlybuilturbanconstructionareasto70percentby2022andhasintroducedcomprehensiveregulationsandguidelinesrelatedtolowcarbonandgreenbuildings.Thegreenbuildingmarkethasseenarapidgrowthinrecentyears,aidedbysubsidies29andregulationsthatrequireallnewlyconstructedbuildingstohaveatleastaone-stargreencertificate.China’stop-tierdevelopersaregettingmorecommittedtogreenbuildings,astheyunderstandthecommercialbenefitsofgreencertifiedbuildings.Nonetheless,onlyabout4percentofexistingbuildingsmeetgreenstandardssetbytheMoHURD.30Financingforthegreenbuildingsectorisalsolagging:onlyabout6percentofgreenbondsareusedforgreenbuildings,contrastingwith30percentglobally.29InChina,two-stargreenbuildingscangeta45-yuansubsidypersqm(about$7persqm),andthree-stargreenbuildingscangetan80-yuansubsidypersqm.And22provincialandmunicipalgovernmentsalsoprovideextrasubsidiesforgreencertifiedbuildings.(GuidanceToAccelerateDevelopmentofGreenBuildings2012)30AccordingtotheChinaConstructionScienceAcademy,retrofitscanhelpreducecarbonemissionspersqmby42percent,andnewgreenconstructioncanreducecarbonemissionspersqmby51percent.Bytheend2020,thereare65billionsqmofbuildings,only4percentwithgreencertification.59ChinaCountryClimateandDevelopmentReportFigure25.DenserChinesecitieshavelowerpercapitaemissions(panelA),butdensityhasbeendecliningovertime(panelB)a)Emissionspercapitaandurbanpopulationdensity2001–2018b)UrbanpopulationdensitybycitygroupsEmissionspercapitaandUrbanPopulationDensity2001-2018UrbanPopulationDensitybyCityGroups2001-2018smallmediumlargemegacities6420TotalEmissionsPC,arsinh(ton)UrbanDensity,arsinh(pop/area)YearUrbanDensity,arsinh(pop/area)1year20152010200521.501.251.000.75200520102015Source:WorldBankcalculations.Note:Urbandensityiscalculatedbyurbanpopulation/builtareaandtheunitistheinversehyperbolicsineof10thousandpeoplepersquarekilometer.Emissionsaretotalemissionspercapita,andtheunitislogoftons.Citygroupsaredefinedasfollows:smallcities—lessthan1million(50citiesin2018),mediumcities—between3and5million(52citiesin2018),largecities—between5and10million(62citiesin2018),megacities—morethan10million(11citiesin2018).Addressingemissionsinthebuildingsectorwillbenefitfrombeingpartofamorecomprehensiveapproachtobuildingdenser,lower-carbon,andmoreresilientcities.CitiesinChinaplayanimportantroleinrealizingcarbongoalsandthegreentransition.Theurbanizationrate,currentlyat60percent,isprojectedtoreach80percentin2035,withanexpectedurbanpopulationofover1billion(LiandSun2020).Urbanbuilt-upareascurrentlyrepresentupto90percentoftotalCO2emissionsinChina.31Loweringtheemissionsintensityofexistingcities,aswellasensuringnewurbanizationfollowsalow-carbonpath,willbecrucialforthetransitiontocarbonneutrality.Oneimportantelementofthiswillbetopromotethedevelopmentofcompact,livable,andwell-connectedcities.ResearchforthisCCDRshowsthatthereisastrongstatisticallysignificantnegativerelationshipbetweenpopulationdensityandpercapitaemissionsoverthepasttwodecades,evenaftercontrollingforincome,economicstructure,andproxiesforenvironmentalpolicy(seeFigure25a).Densercitieshavebothlowertransportemissionspercapitaandlowerresidentialemissionspercapita.Ithasalsobeenwell-documentedthatdenser,betterconnected,andmorepeople-orientedcitiestendtobemoreproductive,withagglomerationbenefitsparticularlyforhigh-skilledservicesindustries.Despitethebenefitsofcompactcities,recenturbanizationinChinahasbeencharacterizedbydecliningpopulationdensity.ChinaistheonlycountryinEastAsiatohavedecliningpopulationdensityinitslargecities,astheexpansionofurbanboundarieshasoutpacedpopulationinflows(WBG2015).Urbanpopulationdensityhasdeclinedacrossallcitysizegroups,withdensitylowestforsmallcities(seeFigure25b).ThisisdueinparttothecombinationofChina’slandtenureandpublicfinancesystem,whichhasprovidedstrongincentivesforlocalgovernmentstogeneratelocalrevenuefromlandsales.Variousreformshavebeenmadetoimprovelandmanagementandmarkets.32China’smegacitiesalsohaveincreasinglystringent31ThemodelingworkwasconstructedfromNationalLandUseCompositionDatafrombetween2009and2018fromtheMinistryofNaturalResources,andfromnationalCO2emissionsinventorybasedon10km-by-10kmgridsfrom2015fromtheMinistryofEcologicalEnvironment.32TheAmendmentofLandManagementLawin2019wasthemostsignificantreformaction.Itpermitsvillagecollectivestoselltheuserightoftheirruralconstructionlandforurbanuse(exceptforresidentialrealestatedevelopment)aslongastheurbanuseconformstothespatialplanandlandusecontrol.Thisnewprovisionbreaksthestatemonopolyinconvertingrurallandforurbandevelopment.TheAmendmentalsodefinesthepublicpurposesforstateexpropriationofruralland,andrequiresbettercompensationandsocialinsurancetoaffectedfarmers.TheAmendmentrequiresthegovernmenttoexerciselandusecontrolonthebasisofanationalspatialplanning.60ChinaCountryClimateandDevelopmentReportpopulationcontrols.However,recentanalysisshowsthatifthecurrenturbandevelopmentpatternandindustriallayoutremainbroadlyunchanged,adoublingofconstructedland(urbanbuilt-uparea)willcomewitha2.7timesincreaseinCO2emissions.33Animportantcomponentofthetransitiontocarbonneutralitywillthusbealteringtheseincentivestoensurecitiesexpandupwardsratherthanonlyoutwards,andthatcitiesarelivableandwellconnected.WhatwerecommendItiscrucialbothtodecarbonizeexistingurbanareasandensurethatnewurbanizationfollowsalow-carbonandgreenpath.Adelayinlow-carboncitydevelopmentmaylockinexcessivecarbon,land,orwaterintensityandcreateorexpandsettlementsthatprovevulnerabletochangingclimaticconditions.Severalpolicyoptionscanbeconsidered.yyToachievealow-carbonurbangrowthpath,cityplannershaveanumberofregulatoryandpricingtoolsattheirdisposal.Theseinclude:(i)regulatorymeasuressuchasfloorarearatiostoinfluencethedensityofdevelopment,(ii)landuseregulationstodiscourageurbansprawlandpromotecompactness,(iii)coordinatedurbanexpansionandpublictransportinvestmentstrategiestoencouragetransit-orienteddevelopment,and(iv)areamasterplanstopromotewalkableneighborhoodsandsmall-blockdevelopment.ThedependenceofChina’scitiesonlandsalesforrevenueshasencouragedsprawl,theintroductionofpropertytaxes,andalternativesourcesoflocalrevenuescouldthusgreatlyencouragemorelow-carbonurbanization.yyStrengtheningcity-levelGHGinventorieswouldbecrucialtohelpcitiesidentifykeyemissionsreductionpotentialsandmonitorprogresstowardtheachievementofcarbongoals.MethodologiesforGHGaccountingalsoneedtobefurtherstandardizedacrosscities,tofacilitateemissionstradingandguideprivateinvestments.Forinstance,China’sGuidelinesforProvincialGreenhouseGasInventories,adoptedbytheNationalDevelopmentandReformCommission(NDRC)in2010asthestandardforcityGHGemissionscalculation,couldbeupdatedtoidentifyemissionreductionpotentialfromaconsumptionperspective.yyCitiesinChinacouldprioritizeneighborhoodregenerationandretrofittingforlow-carbonandgreendevelopment,whichwouldgenerateadaptationandmitigationsynergies.Internationalexamplesofcommunity-levellow-carbonretrofittingincludeenergy-efficientstreetlighting,greenroofs,rainwaterharvesting,greaternature-basedsolutionssuchasconstructedwetlands,ecologicalrestoration,andpermeablepaving,accompaniedwithparticipatoryplanningandcommunityengagement.Community-levelawarenesscampaignsforbehaviorchangescancomplementbottom-upcommunitylevelinterventions.Theseinterventionswouldalsohaveco-benefits,includingimprovedqualityoflifeandlivability,urbanecosystemsprotectionandhazardsprevention,andameliorationofurbanheatislandeffects.Inparticular,techniquesforurbanheatislands’coolingarebeingincreasinglyadoptedinChinesecities,includingleveraging“green”and“blue”spacesforincreasingcoolingeffects—using,enhancing,andchannelingwindflows.Acombinationofurbanregulationssuchasupdatingurbandesigncodeandincentivesfordeveloperswouldbeneededtoscaleupongoingpilots.yyInthebuildingsector,thereisanopportunitytousefiscalincentives,developdisclosurerequirements,andimprovegreenstandards.Fiscalincentivesforthebuildingsectorcanbeshiftedtoincorporateex-postperformancemeasuresforenergyconservationandemissionsreduction,andtoenhancetheroleofgovernmentfundsinbetterleveragingprivatecapital.Carbonmarketscanbeusedascollateraltofacilitateprivatesectorparticipation.Thiswillrequiretheestablishmentofdetectable,verifiable,andreportablebuildingcarbon-reductiontechnologiesandstandardsystems.Moreover,reliablemonitoringsystemsandrequirementsforinformationdisclosureofbuildingenergyefficiencycanbeveryimportant33ThemodelingworkwasconstructedfromNationalLandUseCompositionDatafrombetween2009and2018fromtheMinistryofNaturalResources,andnationalCO2emissionsinventorybasedon10-kmby-10kmgridsfrom2015fromtheMinistryofEcologicalEnvironment.61ChinaCountryClimateandDevelopmentReportfordevelopers,financialintermediaries,andconsumers.Regulatorscanalsoimprovedomesticstandardstomatchinternationalstandardstoattractmoreinternationalinvestment.yyEffectivecoordinationandcollaborationamongcityofficialsandagencieswillbecentraltotacklinginterlinkedclimatechallengesandavoidingfragmentation.Climateactionsrequireintegratedsolutionsandactionsfromdifferentgovernmententitiesandorganizations.Institutionalcoordinationmechanismsformultijurisdictionalmetropolitanregionsandcityclustersarenascent.Chinesecitieshavetraditionallyimplementedgovernmentprogramsandpublicinvestmentfocusingsolelyontheirownjurisdictions,almostincompetitionwithneighboringcities.Respondingtoclimatemandateandactions,especiallyinlargeurbanagglomerationareas,wouldrequireametropolitanregion’sperspectiveandapproach,whichgobeyondtheadministrativeboundariesofsinglecities.3.4.5.Agriculture,landuse,landusechange,andforestry(6percentofemissions,shrinkingby5percentannually)AgricultureChina’sagriculturesectorislargeandhasgrownfast.In2020,China’sagriculturalGDPamountedtoUS$1.13trillion(US$constant,2010),equivalentto7.7percentofnationalGDP.Chinaproduces18percentoftheworld’scerealgrains,29percentoftheworld’smeat,and50percentoftheworld’svegetables.34Chinaalsoplaysanimportantroleininternationalagriculturaltrade.Thecountryisthelargestimporterofsoybeans,maize,beef,andaquaticproducts.Duringthelastfourdecades,China’srealaverageannualgrowthrateofagriculturaloutputvalueandagriculturalGDPwere5.3percentand4.5percent,respectively.Butthisgrowthhasbeenaccompaniedwithmountingenvironmentalcosts.Growthwasdrivenmainlybyincreasesintotalfactorproductivity(TFP),technologicalchanges,andlargeproducersubsidiesprovidedmainlyforrice,wheat,andmaizeproduction.Agriculturalsupporthasledtoexcessiveuseofchemicalfertilizers,resultinginhighpollutionandenvironmentaldegradation.Livestock,syntheticfertilizeruse,andricepaddiesarethelargestsourcesofagriculturalGHGemissionsinChina,inthatorder.Breakingdownsectoremissionsbygas,methane(CH4)leadstheway(46percent),followedbynitrousoxide(N2O,at39percent)andCO2(15percent).35Agricultureandfoodproductionarenotonlyanimportantsourceofemissionsandenvironmentalpollutionbutwouldalsobeamongthemostseverelyaffectedbyclimatechange.SpecificadaptationchallengesarediscussedinChapter4ofthisreport.Sufficetosaythatadoptingclimate-smartagriculturalpracticescouldinmanycasesalsostrengthenresilienceofthesectortotheimpactofrisingtemperaturesandincreasedfrequencyofdroughtsandfloods.Encouragingly,agriculturalGHGemissionsmayhavealreadypeaked.Afterincreasingforseveraldecades,China’sfarm-relatedGHGemissionstookanupwardleapduringthe1990s,beforedecliningbetween2016and2019.AccordingtoUNFoodandAgricultureOrganization(FAO)statistics(2021),GHGemissionsonagriculturallandpeakedat842MtCO2ein2016.Betweenthenand2019,theydeclinedby6percent,returningapproximatelytotheir2007levelsofabout792MtCO2e.Theagriculturalsectoralsorecordedasteadydeclineincarbonintensityfrom2.7in1991toabout1.0in2019.However,emissionsfromdomesticfoodconsumptionhaveoutpacedemissionsfromdomesticfoodproduction.China’scurrentfood-relatedgreenhousegasemissionscouldalreadyaccountfor13to1934Thecountryistheworld’slargestproducerofrice(212milliontons),wheat(131milliontons),andfreshvegetables(174milliontons),andsecondlargestproducerofmaize(392milliontons).35About90percentofsectormethaneisduetoentericfermentation(50percent)andricepaddies(40percent).Asforagriculturalnitrousoxideemissions,60percentareduetosoilamendmentpractices—theapplicationofsyntheticfertilizer(52percent)andmanure(8percent).Andanother18percentarisefromthedecompositionofmanureonpasturesresultingfromthegrazingoflivestock.Ofnote,theseestimatesarebasedonFAOstatistics(2021),andestimatesofsectoremissionsandtheirbreakdownvarybysource.62ChinaCountryClimateandDevelopmentReportpercentofthe2050targetforglobalagriculture,withestimatesofsectoremissionsfor2017,2018,or2019rangingfrom667–967Mtperyear(FAO2021,ClimateWatch2020,Crippaetal.2021,Zhangetal.2022).AccordingtomodelingbyKimetal.(2020),bymidcentury,China’sfood-relatedgreenhousegasemissionswouldincreaseby82percentoverbaselinewereittoadopttheaverageconsumptionpatternofOECDcountries(derivedfromsupplementaldata).WhatwerecommendyyRepurposesubsidiestosupportlow-carbonlanduse.Intheagriculturesector,subsidiesaffectingwateruse,energyuseinirrigation,andfertilizerproductionshouldbereviewedandrepurposedtoensurenetsupportforlow-emissionspracticesforexample,supportingincreaseduseoforganicfertilizeralongsidebalanceduseofinorganicfertilizers,whichhassignificantsoilcarbonsequestrationpotential).Subsidyreformwillneedtobecoordinatedwithtargetedinvestmentinmeasurement,reporting,andverification(MRV)systemsatfarmlevel,toallowthegradualshiftinpaymentstowardenvironmentaloutcomes,agriculturalextension,andinfrastructure(suchasinfrastructureforwater-savingirrigationmethods).Greenproductionpracticescanachieveyieldscomparabletothoseofconventionalagriculturebutcomewithhigherdemandsonfarmerskillsandupfrontcapitalinvestments.Theresultingeconomiesofscalewouldrequirefarmconsolidationandastrengtheningofproducercooperatives,atrendconsistentwithChina’sdemographicdevelopmentsinruralareas.yyCutfoodlossandwaste(FLW)andincreaseefficiencyintradeandfoodsupply.Researchshowsthat27percentoffoodthatisproducedinthecountryforhumanconsumption(349milliontons)maybelostorwasted(Xueetal.2021).AmongthechallengestobeaddressedtotackleFLWistheneedtoimprovemonitoringandadaptpoliciesasbetterinformationbecomesavailable(Cattaneoetal.2021).yyReuseagriculturalwaste.AccordingtoFAOstatistics,mainlandChinaaccountedfor17percentofglobalopenburningofagriculturalresiduesin2019,burning23percentmorebiomassthanallofAfrica,and40percentmorethanIndia(FAO2021).Returningstrawtothesoildecreasespollutionandincreasessoilfertility,thusimprovingsoilcarbon.However,lackofknowledgeandequipmenttoproperlyhandleresiduesleadstotheprevalenceofburningpractices,particularlyamongsmallholderfarmers.Thereuseofstrawasfertilizer,feed,energy,andrawmaterialcouldbepromotedbyrepurposingagriculturalsubsidiesandintroducingmechanizationservices.ReducingFLWandreusingcropresiduesarefurtherexamplesofpoliciesthatwouldmakeChinamoreresilienttoclimatechangewhilealsoreducingemissions.Nature-basedsolutionsareafurtherexample.Table5.EstimatesofannualsequestrationpotentialfromdifferentNbSNbSActivityMitigationpotential(MtCO2eyr-1)20302060Nutrientmanagementa137198Forestmanagementa380228Afforestationa9949Grazinglandmanagementb152Total768627Source:TheNatureConservancyandWangetal.(2014).Temporaldistinctionforgrazinglandmanagementisnotknown.Ecosystemsandnature-basedsolutions(NbS)Nature-basedsolutionscouldcontributetoChina’sGHGmitigationwhiledeliveringecosystemandhumanhealthco-benefits.NbSareactivitiesthatprotectnaturalresourcesandrestoreandconserveecosystems63ChinaCountryClimateandDevelopmentReporttoenhancecarbonsequestration.Theseincludeafforestation,improvedforestmanagement,nutrientmanagement,improvedgrazinglandmanagement,drinkingwatersourceprotection,floodcontrol,andwetlandsrestoration.AnalysispreparedforthisreportfurthershowsthatNbSneednotcomeattheexpenseofotherlanduse—forexample,forfoodproduction(Box6).Amoreefficientallocationofproductiveandprotectivelandusesacrossspacecanenhancetheefficiencyofbothandthusachievegreaterresilienceaswell.ThemitigationpotentialofNbSisnotwell-quantifiedinChina;however,preliminaryestimatessuggestpotentialofatleast768MtCO2eperyearin2030or8percentofChina’stotalby2060(seeTable5).NbStimelines,whichallowforrapidsequestrationwithinthisdecade,complementlonger-termmitigationstrategiesintheindustrialandenergysectorthatrequirelargecapitalinvestments.AnadditionaladvantageofNbSisthatsequestrationcanbeusedtooffsetdifficult-to-mitigateemissions,substantiallyreducingtotalcostsofachievingcarbonneutrality.Chinahashadconsiderablesuccesswithlandrestorationandmanagementtechniquesatscaleoverthepastthreedecades.ChinainvestedoverUS$380billioninlandmanagement(around0.3percentofGDPannually)from1990–2018,inresponsetonaturaldisasterslinkedtoecosystemsdegradation(Bryanetal.2018).Asaresult,China’sforestcovergrewfrom12percentintheearly1980stoover23percentoftotallandareatoday,andbetween2000and2010,nationalcarbonsequestrationincreasedby23.4percent,soilretentionby12.9percent,andsandstormpreventionby6.1percent(Ouyangetal.2016,Chenetal.2019).Despitethesesuccessesandfurtherpotential,anddespitesynergieswithChina’senhancedbiodiversityconservationgoals,36furtherimprovementsinlandmanagementarenotemphasizedintheNDCorotherhigh-levelplanningdocuments.3736Chinahostedthefirstpartofthe15thConferenceofPartiesoftheConventiononBiologicalDiversityinKunming,China,inOctober2021.Thedraft(atthemomentofwriting),Post-2020GlobalBiodiversityFramework,hasmultipletargets,includingtargetsrelatedtoprotectedareasandtargetstoenhanceecosystemconnectivityandintegrity,andtoreversethetrendofspeciesextinction.37TheNDCtargetsanincreaseintheforeststockvolume(by6billioncubicmetersfromthe2005level),butnoothernature-basedcarbonsequestrationactivities,suchasforestmanagement,nutrientmanagement,andgrazinglandmanagement.64ChinaCountryClimateandDevelopmentReportBox6.Synergiesbetweencarbonsequestration,foodproduction,andotherecosystemservicesNbSmayfacetrade-offsbetweencarbonsequestration,agriculturalproduction,andotherecosystemservices.Trade-offsmayarisewhenthesameareaoflandissuitableforfoodproduction,carbonsinkthroughfast-growingtreespecies,ornaturallandscapeconservation/restoration.Spatialplanningthatidentifieslocationswheretrade-offsareminimizedcanensurethatNbSdonotimpactlivelihoodsandfoodsecurity.Toexplorethepotentialforsynergiesandtradeoffs,theWorldBankandChineseAcademyofSciencesusedaspatiallyexplicitlandscapemodel.Withinthemodel,eachpointinthelandscapegeneratesecosystemservicesasafunctionofitsecosystemtype,vegetationcover,climaticconditions,terrainconditions,soilconditions,biomass,andtheconditionofthesurroundingpoints.Themodeliscalibratedusinghigh-resolutionspatialdatafromthenationalecosystemsassessmentin2015.TheanalysisfoundthatChina’s“landuseefficiency”hadimprovedconsiderablysince2000,meaningthatecosystemservicesandfoodproductionhaveimprovedintandem(Figure26).Theanalysisalsofoundfurtheropportunitiesforimprovement.Chinacanincreaseland-basedcarbonsequestrationby33.9percent,throughrestorationofnaturalecosystems,withnonetdecreaseinfoodproduction.Thereisahighdegreeofsynergybetweencarbonsequestrationandwildlifehabitat,withbiodiversityscore(wildlifehabitat)increasingby27.6percent,waterretentionby30.9percent,andsoilretentionby3.9percent.ThisanalysisshowsthatmanyNbScanbenefitbothclimateresilienceandclimatemitigation.Factoringintheseco-benefitsturnsthemintooneofthelowest-costabatementmeasures.Figure26.China’slanduseefficiencyhasimprovedsince2000EstimatedproductionpossibilitiesfrontierforChina’secosystemservicesandfoodproduction.EcosystemserviceFoodproduction10040035030025020015010050020020002015BD0Source:ChineseAcademyofSciencesandWorldBank.65ChinaCountryClimateandDevelopmentReportWhatwerecommendHarnessingnature-basedsolutions(NbS)potentialforcarbonneutralitywillrequirearangeofland-useplanningandregulatoryreforms,technicalguidance,andnewsourcesoffinancing.ThemostimportantpathwaystowardunlockingNbSpotentialinclude:yyAccelerateforestrysectorreform.Despitesignificantreformsinthepasttwodecades,thesectorremainsdominatedbyfast-growingsingle-speciesplantations,whichhaveexpandedforestcoveratthecostofforestqualityandforestresilience(inthecontextoffire,pests,anddiseases).Profitabilityremainslow,andthustheinvestmentneededforimprovedmanagementislacking.Improvementscouldbeobtainedthroughsimplificationstothetimberharvestingquotasystem,withreallocationofrightstoallowindividualforestoperationstosettheirowntimber-harvestingplans.Remotesensingnowprovidesmonitoringopportunitiesthatreducemoralhazardrisks.Thesechangescanbeconditionedonapplicationofupdatedforestryguidancethatwouldrequiremultispeciesplantationswithimprovedbiodiversity,climateresilience,andgreatercarbonsequestrationpotential.yyHarnesscarbonfinanceforNbS:TheintroductionofChina’semissionstradingscheme(ETS)providesanopportunitytofinanceNbSthroughthesaleofcarbonoffsets.CreditsforforestactivitiesareavailableunderChinaCertifiedEmissionReduction(CCER)proceduresandmaybeusedtomeetfirms’obligationsundertheETS.WorldBankestimatessuggestthattheETScouldsupportaroundUS$7.50billiontocarbonNbSprojects,anduptoUS$22.5billionannuallywhentheETSexpandstocoverallmajorsourcesofemissionsinChina’seconomy.38ThereisaneedtoformallyissuefullregulationsforCCERmethodologies,projects,andtransactions,aswellasdevelopawiderrangeofNbS-relatedmethodologies(foractivitiesbeyondforestry).39Premarketpurchasemechanisms(suchaspurchasepriceguaranteesbythegovernment)couldbeusedtoincentivizeprivateinvestmentinNbStypesthataremoreexperimental(suchaswetlandrestoration)andforwhichrisksmaybehigher.yyImprovetheefficiencyofeco-compensationschemes:DespitethepotentialofCCERsandothercarbonfinanceprograms,land-use-basedinvestmentswillstillrelyonforestandagriculturalcommodityrevenuesorpublicfunds.FinancingNbSatscalewillthusgohandinhandwithcontinueduseofecologicalcompensationprograms,whichprovidepublicsubsidies(overUS$30billionannually)forenvironmentallybeneficialland-managementactions.Thereissignificantroomforimprovementinefficiencyofeco-compensationbyconditioningpaymentsonecosystemoutcomeproxies(suchasplantationdiversity)ratherthanoutputs(plantationarea),tighterspatialtargeting(thatis,prioritizingareaswiththehighestbiodiversityandcarbonsequestrationpotential),anduseofreverseauctionmechanisms(WBG2021).yySupportdemandforNbS-relatedproducts:Recognizingproductcertificationsystems(suchastheChinaForestCertificationCouncil[CFCC])inpublicprocurementpoliciescouldbeusedtoincreasedemandforcertifiedlow-carbon(andenvironmentallysensitive)timberproductsthatincreasereturnson(andthusincentivizeinvestmentin)NbS.Inaddition,inclusionofthesteelandcementindustriesintheETSwouldcreatealevelplayingfieldbetweentheirproductsandlong-lastingtimberalternativesinconstruction.38TheuseofCCERsiscappedat5percentofETSparticipants’emissionsobligations.RaisingofthecapcouldincreasedemandforoffsetsandthusNbSfinancing.39Methodologiesforshrubforestrestoration,mangroverestoration,andwetlandsanddripirrigationinarablelandhavebeendevelopedbutnotyetapproved.Methodologiesrelatedtofertilizeruseefficiencyhaveyettobedeveloped.66ChinaCountryClimateandDevelopmentReport3.5.Economy-wideandenablingpoliciesforcarbonneutralityAgrowth-friendlyandinclusivedecarbonizationstrategyrequirescarefullydesignedeconomy-widepoliciestocomplementsectoralclimatepolicyactions.Economy-wideclimatepoliciesarenecessarytointernalizeboththenegativeexternalityofcarbonemissionsandthepositiveexternalitiesfrominnovationthatresultintheunderprovisionoflow-carbontechnologies.Butachievingcarbonneutralitywillrequiremorethanlow-carbonpoliciesalone.Howquicklyandsmoothlytheeconomyadjuststoachangeinrelativepricesdependsinlargemeasureonhowflexibleandefficientfactorandproductmarketsare.Broaderstructuralreformstopromoteamoredecisiveroleofmarketforcesinguidingtheallocationofcapital,labor,andR&Dinvestmentarehencecriticaltoenabletheeconomytoadaptmoreefficientlytochangingpricesignalsandregulations,therebyloweringadjustmentcosts.Adoptingclimateactionswithinsuchcomprehensivepolicyframeworkwouldhelpeasetheinevitabletrade-offsandmaximizethepotentialsynergiesbetweenChina’sclimateanddevelopmentobjectives.Thissectionwillexploretheoptionsforeconomy-widepoliciesthatcanfacilitatethetransition—macroeconomicandstructuralpolicies,greenfinanceandlabormarkets,andthejusttransition.3.5.1.Macroeconomicandstructuralpolicies:carbonpricing,competition,innovation,andtrade1.ExpandtheroleofcarbonpricingCarbonpricingiswidelyseenasoneofthemostefficientwaystodriveeconomy-wideabatement(see,forexample,Stiglitzetal.2017).Unlikeadministrativemeasures,carbonpricingdoesnotrequirepolicymakerstomakedetailedcentralizeddecisionsonthemostcost-effectiveabatementinvestments.Instead,carbonpricingsignalsthecostsofemissions,allowingdecentralizedmarketparticipantstodiscovercost-effectiveabatementoptions,reallocateresources,anddynamicallydriveinnovation.However,thereareseveralprerequisitesforcarbonpricingtobeeffective;foremost,functioningmarketswherepricesignalsdrivethebehaviorofbothproducersandconsumers.Inheavilyregulatedorstate-owned-monopolymarketstructures,however,theeffectsofpricesignalsareoftenmuted.Figure27.Chinastillsubsidizesfossilfuelstotheorderof0.2percentofGDPFossil-fuelsubsidies(USDbillions)010203040506020102011201220132014201520162017201820192020OilElectricityGasSource:EnergyMonitorChina’snationalemissionstradingsystemhasstartedtolaythefoundationsforamarket-drivenabatementpolicyapproach.Withtradableemissionsrightscoveringmorethan4billiontonsofCO2—40percentofChina’semissionsorroughly12percentoftotalglobalCO2emissions—China’sETSistheworld’slargestcarbonmarket.AtpresentitcoversChina’spowersector,with2,225ofthelargestcoalandgas-firedpowerplants.TheETSisarate-basedsystem,meaningthatittargetsreductionsincarbonemissionsintensity,definedasemissionsperunitofoutput.Assuch,China’sETSisnotyetacap-and-tradesystem.EnterprisesunderChina’sETSreceiveallowancesthatarecalculatedbasedontwofactors:theplant’s67ChinaCountryClimateandDevelopmentReportoutputandtherelevantcarbonintensitybenchmarkfortheplant,withdifferentbenchmarksfordifferentfuelandplanttypes.Forexample,gas-firedpowerplantsfaceadifferentcarbonintensitybenchmarkthancoal-firedpowerplants,anddifferent-sizedcoal-firedplantsfacedifferentbenchmarks.Theinitialallowancesareallocatedfreeofchargeratherthanauctioned.PlantscanthenbuyorsellpermitsintheETS,aswellaspurchaseChinaCertifiedEmissionsReduction(CCER)certificatesinacomplementarymarkettooffsettheiremissions.Allocationsarealsosubjecttoseveral“ex-postadjustments,”whichgiveextraallowancesincertaincircumstances.Complianceobligationsforcoalpowerplantsarealsocappedat20percentabovetheirverifiedemissions.Inaddition,themaximumpenaltyfornoncomplianceis¥30,000(aboutUS$4,400).ThecurrentETSdesignhasseveralimportantimplications.Firsttherate-baseddesignandallocationsystemprimarilyincentivizesplant-basedimprovementsinenergyefficiency,ratherthanfuelswitching.Italsomeansthattherearevaryingcarbonpricesignalsacrossbenchmarkgroups,furtherdiminishingcompetitionbetweendifferentgroupsofplants—forexample,less-andmore-efficientcoal-firedplants.Second,thecomplianceframeworkresultsinanimplicitpriceceiling,asbeyondacertaincarbonprice,firmsmayfinditmoreprofitabletopaythepenaltyfornoncompliancethanbuymorepermits.Finally,thelackofanabsoluteemissionscapmeansthatfirmsarenotincentivizedtoreduceabsoluteemissions,butonlytoimproveemissionsintensity.Inaddition,energymarketdistortionsdampenthepotentialeffectofcarbonpricing.Forexample,inthepowersector,dispatchquotaslimittheeffectofpricesignalsonthecompositionofoutput.Powersysteminvestmentsandassetretirementdecisionsarealsolargelycentrallyplanned,ratherthanguidedbypricesignals.Electricitypricesaresetadministratively,mutingpriceeffectsonend-userbehavior.Forpricesignalstobeeffective,priceswouldneedtobemorereflectiveofcosts(includingcarboncharges),generatorswouldneedtofacecompetition,andpowerwouldneedtobetradedacrossintegratedregionalorindeednationalpowermarkets.Inotherwords,withoutpowermarketreforms,carbonpricingmighthavelimitedeffectsonencouragingfuelswitchingandreducingpowersectoremissionsandsimplyimposehighercostsonaninflexiblesector.Finally,Chinastillsubsidizesfossilfuelstotheorderof0.2percentofGDP(Figure27).Assumingsomeofthemarketdistortionsmentionedabovearesimultaneouslyaddressed,simulationssuggestthatamorebroadlyappliedcarbonpricecouldhelpChinaachievecarbonemissionstargetsandalsobecomeanimportantsourceofrevenue.AmorebroadlyappliedandhighercarbonpricerisingtoUS$50toUS$75pertonofcarbonbytheendofthisdecadecouldhelpreduceChina’semissionsbyabout15to20percent(Figure28).Adverseeffectsofcarbonpricingongrowthandequitycouldbeaddressedbyrecyclingrevenuestocompensatethemostaffectedhouseholds.Compensatingincomelossesisimportantbothfromadistributionalperspectiveandforsocialacceptabilityofthereform.40Simulationsinsection3.3provideastylizedillustrationofhowrevenuerecyclingmechanismscanalterthedistributionalimplicationsoflow-carbonpoliciesifwelfarelossesarefullycompensated.Inpractice,perfectcompensationofhouseholdincomelossesmayneitherbepracticallyfeasiblenorsociallydesirable,astheylikelyimplydisproportionatetransferstoricherhouseholds.Morerealistically,existinggovernmenttransfersystemscouldbedeployedto40Althoughrevenuerecyclingthroughtransferstohouseholdsisprimarilyconsideredhere,theliteraturehasalsodocumentedalternativerecyclingmechanisms,includingschemesbasedonthe“doubledividendtheory”(thatis,usingcarbontaxationtoreduceothermoredistortionarytaxation,suchaslabortaxation).Double-dividendrecyclingschemeshavepositiveeffectsontheeconomyfromanefficiencyperspective,althoughtheyhavethedisadvantageofbeinglessvisibletothepublicandthusmaynotcontributetosocialacceptabilityofthepolicy.Onthecontrary,eventhoughdirectrebatescanbemoreattractiveforpublicopinionandbelessharmfulforlow-incomehouseholds,theytendtobelessefficient.Garcia-Murosetal.(2022)showthatthepotentialtrade-offsbetweenequityandefficiencyoftheisolatedrevenuerecyclingschemescanbeaddressedbycombiningrecyclingregimesthatcompensatelow-incomehouseholdswhilealsoreducingdistortionarytaxes,becausetheyhavepositivesynergiesthattranslateintogreaterefficiencygainsandprogressiveimpacts.68ChinaCountryClimateandDevelopmentReporttargetcompensation(table6).Thetargetingofcompensationmechanismscouldbeimprovedbyexpandingcoverageofsafetynetsamongthepooresthouseholdsandsettinganincomethresholdabovewhichhouseholdsareconsideredineligibleforthecompensation.Figure28.Acarbonchargerisingto$75/tCO2by2030couldreduceemissionsby15to20percent(panelA),whileraisingadditionalrevenuesof2.7percentofGDP(panelB)A.AbatementpotentialB.TotalrevenuesraisedIndex(2018=100)real2018US$bn%GDP20182019202020212022202320242025202620272028202920302019202020212022202320242025202620272028202920302031100501,200.0forecastFiscalrevenuesbnUS$(lhs)Fiscalrevenues%ofGDP(rhs)1,000.0800.0600.0400.0200.00.05.0%4.0%3.0%2.0%1.0%0.0%CNY500($75)carbonchargeCNY335($59)carboncharge2015NDCSource:SimulationsusingWorldBankCarbonPricingAssessmentTool(CPAT).Table6.RevenuerecyclingusingexistinggovernmenttransfersandpensionsystemsShareofhouseholdsShareofhouseholdsthat...ShareofhouseholdsthatreceivegovernmenttransfersORpensionsANDwouldnotloseincome(Inclusionerror)ShareofhouseholdsthatwouldloseincomeANDdonotreceivegovernmenttransfersORpensions(Exclusionerror)ReceivegovernmenttransfersReceivepensionsReceivegovernmenttransfersORpensionsLostincomeunderNDCAll25.955.267.296.91.431.6Q151.755.378.798.90.420.7Q243.547.868.996.32.930.6Q331.345.962.697.71.136.6Q416.256.764.697.70.934.5Q512.461.265.595.41.732.5Source:WorldBankcalculationsbasedonthe2018ChinaFamilyPanelSurveyandComputableGeneralEquilibrium(CGE)modelingresultsforscenario1relativetoBAU.69ChinaCountryClimateandDevelopmentReportWhatwerecommendForcarbonpricingtobecomeamoreeffective,growthfriendly,andinclusiveinstrumentindrivingefficientdecarbonization,severaloptionscouldbeconsidered:yyFurtherstrengthentheETSdesign:First,benchmarksfordifferenttypesofpowerplantscouldbeconvergedandunifiedtostrengthenpricesignals.Transitioningfromthecurrentdifferentiatedallowanceallocationtowardaunifiedallocationwouldgenerateuniformcarbonpricesignalsandenhanceincentivestooptimizeabatementacrossdifferenttechnologiesandassets,encouragingnotjustefficiencyimprovementswithinagivenbenchmarkgroup,butalsofuelswitching.Second,overtimeamass-basedETSdesign,withafixedtotalemissionscapandclearandpredictableforwardguidanceonexpectedannualtighteningofthecap,couldincreaseeffectivenesswhileallowinginvestorstoplanaheadandfactorexpectedcarbonpriceincreases.TheETSshouldbeexpandedtootherhigh-carbonsectorssuchassteel,iron,andcement,butaneconomy-widesystemwoulddeliverthegreatestefficacyandefficiency.Reformsofpowermarkets—discussedinsection3.3.1—areaprerequisitefortheETSoranyotherformofcarbonpricingtobeeffectiveandshouldbeatoppriority.yyRecyclerevenuesfromcarbonpricingtomitigatepotentiallyadversegrowthanddistributionalimpacts.Introduceauctioningasthedefaultallocationmechanismofinitialallowancestoprovideconsistentpricesignalsandgeneraterevenuesthatcanberecycled.Recyclingcouldbetailoredtobalanceimprovingdistributionaleffectsthroughtransferstohouseholdsandtopursuegrowth-enhancinginvestmentsofcutstofactortaxestoboosteconomicactivity.Thecoverageofthesocialprotectionsystemcouldbeexpandedtoreachvulnerablehouseholdsthatareexpectedtoloserelativelymorefromhighercarbonpricesbutarenotcurrentlycoveredbythesystem.Imposinganincomeupper-boundthresholdforeligibilitywouldfurtherimprovetheprogressivityofthecompensationmechanismandlowerthenegativeimpactongrowth.yyStrengthenpolicycoordinationwithotherinstruments.EvenwithaneffectivecapandtradeETS,complementarypoliciesaimingtoreduceemissions—forexample,subsidiesforlow-carboninvestment—mayendupaffectingthecompositionbutnotthevolumeofemissions.41Tomitigatethiseffect,permitsupplyoremissionsvolumeswillneedtobeadjustedifotherpoliciescomplementtheETS,therebyreducingdemand.Notably,ChineseenergymarketregulatoryauthoritiesshouldworktoensureanalignmentoftheETSandtheEnergyConsumptionPermit(ECP)tradingmechanismforenergysavingsandenergyconsumptionpermits,currentlyunderconstructionbytheNDRC.Supervisedandregulatedoffsetmarketscanalsoenhanceefficiencyofemissionstrading,allowingcompaniesthatfindittoocostlytoreducetheiremissionsintheshorttermtopurchaseoffsets.yyReformingremainingfossil-fuelsubsidieswillalsobekey,whereascomplementarycarbontaxescouldbeconsideredforsectorsnotcoveredbytheETS.Abasicfirststeptoalterpriceincentiveswouldbetophaseoutexistinginefficientfossil-fuelsubsidies.Carbontaxes,whichareadministrativelymucheasiertoimplementthantheETS,couldbeappliedinsectorsforwhichtheETSwouldentailhightransactioncosts.41Foragivenemissionscap,additionalnon-ETSpoliciestoreduceemissionswillimplyafallinpricesandhencelowermarginalabatementincentives,therebyoffsettingtheinitialfallinemissionswithriseselsewhere.AnotherwaytosaythisisthatETSisdirectlytargeting(andalwaysachieving)aspecificemissionsvolume.70ChinaCountryClimateandDevelopmentReport2.FosterdecarbonizationthroughSOEreformsandcompetitionState-ownedenterprises(SOEs)continuetoplayadominantroleinChina’seconomy,especiallyincarbon-intensivesectors.SOEsareestimatedtoaccountforaround25to40percentofGDPandaround40percentofemployment.42SOEscontrolvaluechainsforsectorsresponsible,directlyorindirectly,forthemajorityofChina’semissions:coal,electricity,oil,gas,steel,andcement.ItisestimatedthatSOEsgenerateabouthalfofthecountry’stotalGHGemissions(ClarkandBenoit2022).AddressingemissionsgeneratedbySOEswillthereforeformakeycomponentofreachingChina’sgoalofcarbonneutralitybefore2060.SOEdominancehassomeadvantagesbutcouldalsoimpairefficientdecarbonization.Statedominancehasgiventhegovernmentsignificantcapacitytoimplementlow-carbonpolicies,includingforinstancetherapidscale-upofrenewableenergyinrecentyears.However,thereisalsoevidencethatsuggeststhatChina’sstatesectorisoneoftheconstraintstofasterproductivitygrowth,withSOEsexhibitinglargeandpersistentproductivitygapswithprivatefirms(KrollandKou2018,Song2018).Researchhasshownthatthetotalfactorproductivity(TFP)performancegapisgreaterinkeycarbon-intensiveindustriessuchasutilities,transportation,steelmaking,andchemicalmanufacturing(JurzykandRuane2021).Yet,SOEstendtohaveeasieraccesstobankcreditandmorefavorableloanterms,comparedtoprivatecompanies(LamandSchipke2017,Gatley2018;GengandPan2021,Lardy2019).Moreover,dominantmarketpositionsofSOEsandanunpredictableregulatoryenvironmentmayimpairdynamicmarketentrybyprivatesectorinvestors,whichcanplayanimportantroleindrivinginnovationanddiffusionofnewtechnologies.Forexample,followingabruptregulatorychangestoChina’srenewablesubsidypolicyandfeed-in-tariffsin2018,theprivatemarketshareinsolarpowerfellfrommorethan70percentofinstalledcapacitytolessthan40percentbytheendof2019.WhatwerecommendReformstoleveltheplayingfieldandenhancecompetitioninkeysectorscouldplayanimportantroleinenablingthestructuraltransformationoftheeconomy,withSOEreformanimportantcomponentofthisagenda.yyImprovemarketaccessandcompetition.Althoughmarketentryisallowedforprivateorforeignfirmsinmanyfields,licensing,capitalrequirements,andaccesstophysicalinfrastructurenetworksposemajorchallenges,raisingoverallbarrierstoentry.Renewedeffortswouldalsobeneededtoenhanceentryofnewfirmsandincreaseproductmarketcompetition,particularlyinservicessectors,whichwillneedtoexpandsubstantiallyoverthecomingdecadesandarecurrentlyfarfromtheglobalproductivityfrontier.yyEncouragelow-carboncorporatestrategiesinSOEs.Althoughenablingstrongerprivatesectorparticipationiscrucial,SOEsarelikelytoremainkeyplayersinChina’seconomy.EncouragingthemtoadoptstrategiesthatarealignedwithChina’soverallclimategoalswillthusbeimportant.Anumberofstate-ownedChinesecompanies,includinglargeoilandenergyplayers,arealreadydevelopingcarbonemissionsreductionplanswiththeaimofachievingthetargetbefore2030.Movingintoimplementation,SOEsandtheirshareholderscouldidentifyandadoptspecifictargetstosupportnationalclimate-relatedgoals.Adoptingcarbonaccountingandmonitoringsystemstogetherwithenhancedtransparencyanddisclosurearoundclimate-change-relatedpractices,includingthepublicationofSOE-specificclimateobjectivesandperformanceaspartoftheSOEsectorannualreporting,wouldhelpinformSOEcorporatemanagementaswellasmonitoringandoversight.SOEscouldalsoberequiredtoundertakeclimateriskscreening,whenappraisingandapprovinganinvestmentandfinancing,andtoadoptgreenprocurementpoliciestoencouragelow-carbonsupplychains.42EstimatingtheshareofSOEsischallengingbecausestatisticsarenotreleasedbyownershipstatus.SeeZhang(2019)(link)orLinetal.(2020)(link)forestimatesanddiscussion.71ChinaCountryClimateandDevelopmentReportyyStrengtheninsolvencyandcorporaterestructuringframeworks.Thesewouldbecriticaltomanagestrandedassets,facilitateorderlyandefficientmarket-basedmarketexit,andreduceexcesscapacities,whileensuringfinancialmarketsstarttoadequatelypriceregulatorytransitionrisks.3.Leveltradecostsforlow-carbonproductionLikeelsewhereintheworld,thereareimplicittradepolicydistortionsthatfavortradeinhigh-carbonproducts.AnalysisforthisreportdemonstratesthatChina’sNon-TariffBarriers(NTBs)andimporttariffsareonaveragehigheronlower-carbonproducts(Figure29).Thisisestimatedtoresultinanimplicitsubsidyonimportsofhigh-carbonproductsequivalenttoaround$68pertonofCO2.Thispatternofincentivesthatfavorhigh-carbonproductshasstartedtochangeoverthepastdecade.Sincetheannouncementofthe30-60targets,therehasalsobeenanincreaseddiscussionaroundchangingtheexportandimporttariffstructure.InApril2021,theCustomsTariffCommissiondeclaredthatitwouldscrapimporttariffsoncertainsteelproductsandrawmaterials,increaseexporttariffsforironandotherproducts,andremoveexportrebatesforcertainsteelproducts.Thishasbeenaccompaniedbyfurtherplannedimporttariffreformsin2022.Thecountryhasalsointroducedeco-efficientindustrialparksandgreenspecialeconomiczonesinanattempttoboostlow-carbonproduction.However,fewerthan5percentofindustrialparksweregreencertifiedin2019(WBG2019).Figure29.ImporttariffsandNTBsarehigheronlower-carbonproductsCorrelationbetweencarbonintensityandthevalueofimporttariffs/NTBsa)Importtariffsb)NTBsLineslope=-28.3(8.4)TariRateNTBAdValoremRateLineslope=-85.6(8.4)1.8.6.4.20-.21.8.6.4.20-.20.001.002C02Rate(Ton/$).0030.001.002C02Rate(Ton/$).003SourceandNotes:WorldBankcalculationsbaseduponShapiro(2021.Eachpointisanindustry,andCO2rateistotal(direct+indirect)emissionsmeasuredfrominvertinganinput-outputtable.Thesolidredlineisthelineartrend.Eachgraphexcludesthetop1percentofCO2rates,tariffs,andtheNTBrate.Standarderrorsareclusteredbyindustry.WhatwerecommendyyReviewandreviseNTBs,exportpromotion,andinvestmentincentivestoleveltheplayingfieldforlow-carbonproduction.Inadditiontotheexistingplannedtariffreformstoreducetheincentivetoexporthigh-carbongoods,NTBscouldbereviewedtoidentifycriticalhigh-carbonproductgroupsthatareimplicitlybeingsubsidizedorlow-carbonsupplychainsthatarebeingnegativelyaffected.Anewframeworktomonitorandreducetheuseofindustrialpolicyincentivesthatimplicitlybenefitshigher-carbonindustrieswillbeneeded.Ontheothersideofthecoin,furtherfiscalandfinancialsupporttopromoteanddevelopeco-industrialparkscouldfurtherreorientincentivesinfavoroflowercarbonproduction.72ChinaCountryClimateandDevelopmentReport4.Strengthenlow-carboninnovationpolicyInnovationpolicywillalsoplayacriticalroleinthelow-carbontransitionbyresolvingmarketfailuresthatcanleadtounderinvestmentinlow-carbontechnologies.Thesemarketfailuresincludeknowledgespilloversfrominnovationthatarenottakenintoaccountbyprivatefirms;pathdependencyofresearch,whichgivesestablishedtechnologiesanadvantageandcreatesentrybarriersduetoeconomiesofscale;sunkcosts;andnetworkeffects.Theyalsoincludedifficultiesinaccessingfinancingforemergingtechnologiesduetohighuncertainty/risk,alonglaguntilinnovationpaysoff,andlackofknowledgeandinformationamonginvestors(Stiglitzetal.2014,Acemogluetal.2016,Aghionetal.2016).Globalevidencesuggeststhattargetedinnovationpoliciessuchasfeed-intariffsforlow-carbonproductshavemoresignificantimpactsonlow-carboninnovationthanrisingenergyandcarbonprices,whichtendtohavemoreincrementalimpactswithinexistingfirms(Grubbetal.2021).Chinahasmobilizedimmenseresourcesforlow-carbonR&Dinvestment,fuelingrapidgrowthinlow-carbontechnologiesandintellectualproperty.Chinaaccountedfor24percentofglobalenergyR&Dspendingin2019,withgrowthof70percentrelativeto2015.China’sstart-upshaveattractedmorethanone-thirdofglobalearly-stageenergyventurecapitaloverthepastfiveyears,accordingtotheIEA(2021).Chinahasalsoseenrapidgrowthinclimate-relatedpatentingoverthepastdecade,asdiscussedinChapter2,mirroringthecountry’soverallgrowthininnovationactivity.Patentinghasbeenparticularlystronginlow-carboninformationandcommunicationtechnologies,buildings,andsolar.However,intermsofhigh-valuelow-carboninventionspatentedintwoormorepatentoffices,performancehasbeenmoremoderate,withChinaremainingwellbelowJapan,theUS,andGermany.Low-carbonpatentingalsorepresentsonlyasmallshareoftotalpatenting,at5percentofinventions,comparedwithtwicethatpercentageformostindustrializedcountries(GlachantandTouboul2021).Tostimulatethewiderangeoflow-carbontechnologiesneededtoreducecarbonemissions,Chinawillneedtoprioritizefurtherreformstotheinnovationsystemtoreducedistortions,acceleratediffusion,andfosterdiscovery.Duringthepastdecade,Chinahasmadereformstonationalinnovationpolicyapriority,withsuccessinseveraltechnologicalfields,butsomereformsremainincomplete.ThereisevidencethatinnovationinputsinChinadonotconsistentlytranslateintosuccessfultechnologyinnovationoutputs(Kennedy2017).State-ledR&DinvestmenttendstoexhibitabiastowardlargeSOEsandincumbents.Incontrast,globalevidencehasshownthatnewentrantsaremorelikelytopursuedisruptivetechnologies,sorenewedeffortswillbeneededacrossawiderangeofreformareastoenhanceandsupportentryofnewfirms.Reformstoenhancetheinnovationsystemwillbeevenmoreimportantforthesuccessfuldevelopmentoffar-from-marketlow-carbontechnologies—likecarboncaptureandstorage(CCS)andnuclearandgreenhydrogen.Historically,China’sinnovationpolicyhasbeenparticularlysuccessfulinmanufacturing-orientedtechnologiesandcost-basedcompetitionamongproducersthatcommoditizeanddrivedownmanufacturingcostsofexistingtechnologies.Futurecarbonneutraltechnologies,likeCCSandnuclearandgreenhydrogen,differfromwind,solar,andstorage.Theyhavebeendescribedas“complexproductsystems,”whichwillrequiremoredesign-intensiveandbreakthroughinnovation(Royetal.2021).Chinawillalsoneedtoensurethatindustrialpoliciessupportinnovationanddonothinderit.ThejointDevelopmentResearchCentre(DRC)andWorldBankInnovativeChinareportin2019identifiedseveralwaysinwhichChinacansupportinnovationandproductivitygrowth,whichremainmorerelevantthaneverforthenet-zerotransition.Akeymessageisthatforindustrialpoliciestobeeffective,theyhavetobelessdistortionaryandsupportandcomplementmarketcompetition.Industrialpoliciesarelesseffectivewhentheyundermineopenandfairmarketcompetition,whenmarketsareprotected,andfavoredfirmsbenefitfromtargetedsupport.Itwillbecrucialtostreamlineindustrialpolicies,improvegovernment-industrydialogueandmonitoringofindustrialpolicies,instillgreaterdisciplineinlocalgovernments’policiestoensurethatalltypesofbusinessescanenjoyequalsupportforlow-carboninnovation,andensurethetimelyexitofnonviablefirms.73ChinaCountryClimateandDevelopmentReportWhatwerecommendToimproveinnovationforthelowcarbontransition,thefollowingcouldbeconsidered:yyPursuefurtherreformstotheinnovationsystemandmovefromquantitytoqualityofresearchandpatenting.Increasetransparencyandstrengthenevaluationofresearch,makinggreateruseofobjectivepeerreviewing;rewardhigh-quality,ratherthanhigh-output,research;andredirectpublicsupporttohigh-qualitydomesticandinternationalpatents.Particularfocuscouldbegiventopotentialbreakthroughtechnologiesthatarecurrentlyattheprototypestage.Therewillalsoneedtobeafocusonimprovingtheprivatesector’sR&DaccessandspendingandlevelingtheplayingfieldbetweenSOEsandtheprivatesectorinreceivinginnovationsupport.yyDevelopanenhanced,coordinatedapproachtofar-from-markettechnologies.Fosterinterministerialandinterprovincialcoordinationforfar-from-markettechnologiestobringtogetherdifferentstakeholdersandgenerateknowledgespillovers.yyUpgradesupportforearly-stagegreeninnovation,especiallyforstart-ups.Considerupgradinganexistinginstitutiontocentralizefinancingforenterprisegreeninnovation.Enhancesupportofecosystemsandexpandthenetworkofincubatorsorganizedaroundexistingscienceandtechnologyparks,withlinkstoexistingbusinessesandprofessionalnetworks.yyProvidegreatersupportforfacilitatingdiffusionofenergy-efficienttechnologies.Developanationwideand/orprovincialsystemforhelpingsmall-to-medium-sizeenterprises(SMEs)todeployenergy-efficienttechnologies.Usepublicprocurementtocreatemarketsforinnovativegreenproductsandtechnologies,especiallyforSMEs.Enhancetargetedsupportandincentivesforenergy-efficienttechnologies.yyPromoteamoreopenandgloballyintegratedgreeninnovationsystem.Theurgencyoftheclimatechallengenecessitatesglobalcooperationoninnovation.Itwillbeessentialtoexpandsupportforinternationalcooperationinresearchandpatentsongreeninnovation,includingbyengaginginternationalresearchersandcompaniesingovernment-fundedgreeninnovationprojects.Expandsupportforinterfirmandbusiness–sciencecooperationinresearchandpatents.3.5.2.GreenfinanceChinahasalargefinancialsystemthatholdsgreatpotentialtosupportitsdecarbonizationgoals.WithahighdomesticsavingsrateandalargefinancialsystemequivalenttooverfourtimesitsGDP,Chinacanmobilizeasubstantialamountofcommercialcapitalandreorientittowardsectorsthataremostinneed.Financingfromdomesticpolicyfinancialinstitutionscanhelpunlockfurthercommercialcapital,whileinsurancecanincreasehouseholdandbusinessresilienceagainstclimate-relatedrisks.Markedprogresshasbeenmadeinthepastdecadetoestablishagreenfinancialsystem.Attheendof2021,theoutstandinggreenloansofmajorChinesebanksreachedUS$2.3trillion,upfromUS$0.85trillionin2016,whileoutstandinggreenbondsincreasedtoUS$254billionfromUS$37.6billion.Despitethisrapidgrowth,greenassetsstillaccountforonlyafractionofChina’sfinancialmarket,withgreenloansandbondsmakingupabout8percentand1percent,respectively,ofthetotal(Figure30).Greenequitymarkets,especiallyforearly-stageriskcapitalnecessarytospurinnovation,remainshallow.Thebankingandcapitalmarketauthoritieshavedevisedahostofmeasurestocreatenewmarkets(suchasgreenbonds)andguidefinancialinstitutionstowardclimate-friendlyfinancing.Newinstruments,suchassustainability-linkedbondsandsustainability-labeledinvestmentproducts,havealsoemerged.Importantstandards,suchasthegreenprojecttaxonomy,havebeendevelopedandupdatedtoreflectthelatestinternationalconsensus.74ChinaCountryClimateandDevelopmentReportFigure30.Green-labeledloansnearlytripledbetween2016and2021Growthingreenfinancialmarkets2,0001,5001,00050020162017201820192020202102,500Greenbonds(USDbn)%oftotalbonds(RHS)%oftotalloans(RHS)Greenloans(USDbn)9.08.07.06.05.04.03.02.01.00.0Source:CBIRC,PBC,WindInfoHowever,thefinancialsystemfacessignificantchallengesindeliveringcommercialfinancing,giventhesizablegreeninvestmentdemand,particularlytotheenergysectorandearly-stageventures.Asnotedabove,thepowersectorandtransportinfrastructuresalonewouldrequirebetweenUS$14-17trillionworthofadditionalinvestmentsin2020–60,or1.14percentofGDP.Otherstudiessuggestthetotalfinancinggaptill2060couldamounttoUS$7trillion(CICC2022;Maetal.2019,2020).Theenergysector,particularly,presentsthelargestsourceofclimatefinancedemand,butithasexperiencedconsistentlylargefinancinggaps.Forexample,tosupportcleanpowergeneration,energystorage,andgridinvestments,theelectricityindustryisestimatedtorequire49percentoftotalnet-zerofinancing.43However,lessthan28percentofgreenloansandbondsgotocleanenergyandpowersectorscurrently.BreakthroughsandcommercializationofclimatetechnologieswillbecentraltoChina’sdecarbonizationsuccess,butthenecessaryearly-stageriskfinancingiscriticallylacking.Atthesametime,privateequityandventurecapital(PEVC)investmentsinclimate-techremainsmall:in2021,onlyUS$8.7billionworthofPEVCfinancingwenttocleantechsectors,whichislessthan4percentofthemarkettotal.44TheshareofseedstageandSeriesAcapitalwasevenlower.45Thesystemfacesthefollowingfivecriticalchallenges:First,carbonaccountinginfrastructureislacking,whiletheriskofgreenwashingishigh,asregulatoryframeworksforclimate-relateddisclosureandtheauditandassurancemarketareyettobeformulated.Reliableandaccessiblecorporateemissionsinformationiscriticalfortheproperfunctioningofclimatefinancialmarkets.DespitepasteffortsbytheNDRCandtheMinistryofEcologyandEnvironment(MEE),existingcorporateemissionsdataisfragmented,rarelyverified,hardtoaccess,andhardtouseduetothelackofstandardization.UndertheMEE’snewpolicy,disclosureofcarbonemissionswillbemandatoryformoreclearlydefinedgroupsofenterprises,butthescopeofreportingisstilllimited.46Clearspecificationsoncarbonaccountingmethodologies,aswellasarrangementsfordataqualitycontrol,access,andsharingwithcommercialentitiesandothergovernmentagencies,arelacking.Theexistingdataongreenloansand43AccordingtoChinaInternationalCapitalCorporationLtd.(CICC)estimates,thetransportsectorhasthesecondlargestfinancingneed,equivalenttoUS$5.9trillionin2020–60,or2percentoftotalnet-zerofinancing,followedbythebuildingsector(US$3.5trillion,16percent),industrials(US$1.3trillion,6percent),andagriculture(US$0.6trillion,3percent).44BasedonZero2IPOdata(link).45AssetManagementAssociationofChina(AMAC)datain2019showsPEVCsallocate36–42percentofraisedfundingtoseedandstart-up-stagecompanies.46AdministrativeMeasuresofEnterpriseEnvironmentalInformationDisclosure(MEENo.242021).OnlyenterprisesthataresubjecttotheMEE’smandatorycleanproductionaudits,heavypolluters,publiclylistedcompanies,andcorporatedebtissuersthatreceivedenvironmentalprotectionpenaltiesinthepreviousyearareincluded.75ChinaCountryClimateandDevelopmentReportsustainability-labeledinvestmentproductsareself-reportedandsubjecttolimitedscrutiny,meaningtheriskofgreenwashingishigh.Eventhoughthereportinglevelofgreenbondsishigh,thereportingqualityislow,ascomparedtoothercountries(CBI2021).Meanwhile,theenvironmentalauditandassuranceindustryisyettobeproperlyregulated.Existingserviceprovidersvaryinqualification,servicequality,appraisalprocess,andmethodologies.Second,partiallyasaresult,financialinstitutionsareyettofactorclimate-relatedrisksintoportfoliomanagement.Commendableinitialstepshavebeentakentocarryoutclimatestresstestsamongmajorbanksandtopilotfinancialinstitutionenvironment-relatedregulatoryreporting.Butclimate-relatedfinancialrisksareyettobeintegratedintofinancialinstitutions’riskmanagement,governance,andfinancialdecision-making,whileinitialhigh-levelanalysisshowsthat29.4percentofbankloans(US$6.8trillion),43percentofcorporatebonds(US$3.9trillion),and30.4percentofstocksbycapitalization(US$4.7trillion)47couldbeexposedtoadverseimpactunderadisorderlytransitionscenarioand39.3percentoflending(US$9.1trillion)couldbeexposedtophysicalriskperilsthroughfloodandtropicalcyclonedamages.48Third,Chinaisyettofullyharnessfinancialproductinnovationsforthetransition.Greenloansaccountforabout95percentoftotalgreenfinancing(Lan2021).Despitemarketexpansion,theshareofbondfinancingremainssmall.Moreover,thereisasignificantshortfallofequityfinancing.Greenequityfunding,includingfromprivateandpublicmarkets,remainsverylimitedandaccountsforonly3percentoftotalgreen-labeledfinancing(Lan2021).Inaddition,theboundaryforpolicyandcommerciallendingisoftenblurred.Contrarytoprinciplesofcrowd-inandadditionality,policybankssometimesendupcompetingwithcommercialbanks.49Finally,financialproductinnovationsarelacking.Sustainability-linkedbondswereinauguratedin2021butauthorizedinasubsegmentofthebondmarketonly.Lackingauthorizationandregulatoryguidance,similarinstrumentsforbankingsectorandotherfinancialmarketsdonotexist.CarbonderivativeshavenotbeenappliedtothenationalETS,50althoughtheycanincreasemarketliquidityandfacilitatebetterpricediscovery.Fourth,commercialbanksandcreditmarketsfavorSOEs,eventhoughprivatefirmsaremoreproductiveinlow-carbontransformation.Asnotedabove,privatefirmsexhibitsignificanthigherlevelsofproductivityinkeydecarbonizationsectors,buttheiraccesstogreencreditislimited:mostrenewableenergybanklendinghasgonetoSOEs,whichalsoreceivedmorelong-termfinancingthanprivatefirms.51Privateissuershavebecomeanincreasinglymarginalgroupinthegreenbondmarket,accountingforonly3.3percentofissuancesand1.6percentoftotalbondsvaluein2021.Fifth,stateinvestorsalsodominateprivateequitymarkets,loweringefficiencyofcapitaldeployment.StatecapitaltoPEVCfunds—mainlyfromSOEsandGovernmentGuidanceFunds—roserapidlyinrecentyears,becomingthelargestsourceofPEVCfunding.52YettheuseofSOEandguidancefundcapitalisoftensubjecttoadministrativereviewsandaudits,requirementstopreserveandappreciatestateassets,andgeographicandindustryrestrictions,whichtendtoslowcapitaldeploymentandresultinsuboptimalinvestments.Asnotedabove,statecapitalthusfavorsexpansion—andmature-stagecompanies—which47UsingtheBattistonetal.(2017)classificationofClimatePolicyRelevantSectors(CPRS).48Thecharacterizationofphysicalfinancialriskhereisgeographybasedanddescribestheimpactonoutstandingloansonly,duetolimitedavailabledataforotherassetclasseswithgeographicbreakdowns.49China’spolicybankshavebeenlargegreencreditproviders.ChinaDevelopmentBankisthelargestgreenlenderamongall24majorbanks,whoseoutstandinggreenloansaccountedforabout15.5percentoftotaloutstandinggreenloansin2021.50Thisisinpartbecausefinancialinstitutionscannotparticipateinthecarbonmarketforthetimebeing.Legalambiguityaroundthenatureofcarboncredit—whetheritqualifiesforsecurity—couldbeanotherreason.51SOEsareestimatedtohavereceived79percentoftotalbanklendingforrenewableenergyprojectsand61percentmorelong-termloans(over10years)invaluetermsthanunlistedprivateborrowers(BloombergFinanceL.P.2021).52IncludinginformsofSOEsubsidiaries,localgovernmentinvestmentplatforms,andgovernment-guidedfundoffunds.Statecapitalintotalmakesupabout40percentoffundsraisedin2020,accordingtoZero2IPOdata.76ChinaCountryClimateandDevelopmentReportisunconducivetoclimatetechnologicalinnovationsandcancrowdoutcommercialfinancing.Despiteregulatoryencouragements,participationofdomesticinstitutionalinvestors(suchaslifeinsurersandpensionfunds)remainslimitedinrecentyears,53accountingfor5.5percentoftotalfundsraisedin2021.Lackingexperienceandexpertise,theseinvestorsremainhighlycautiousofPEVCinvestmentsingeneralandofearly-stageventuresinparticular.54WhatwerecommendyyEstablishahigh-qualitycorporateemissionsaccountingsystem.TheauthoritiescouldstartbytargetinglargeenterprisesandrequiringmandatoryreportingoncorporateGHGemissionswithexternalassurance.55ExistingtechnicalspecificationsoncarbonaccountingcouldbeexpandedandstandardizedwithappropriateexceptionsandsimplificationstoavoidoverburdeningSMEs.Capitalmarketauthoritiescouldalsoconsiderimposingenhanceddisclosurerequirementsforpubliccompanies,especiallythoseoperatinginhigh-transitionriskindustries.Materialclimateeffectscouldbereflectedinfinancialstatements,followingapplicableaccountingstandards.Thecarbonaccountingsystemcouldthenbemadeaccessibletoawiderangeoffinancialinstitutionsandinteroperablewithexistingfinancialsectordatabases.yyMandateclimate-relatedfinancialreportingandenhancemarketconductsupervision.Largebanks,insurancecompanies,investmentfunds,andassetmanagersshouldbeencouragedtoaccountforfinancedemissions,56forregulatoryreportingand/orpublicdisclosurepurposes.Financialauthoritiesshouldsetclearregulatoryexpectationswithrespecttoindicatorsandmetrics,methodologies,andmandatoryassurance.Regulationofassuranceandauditmarketshouldbeformalized,toprovideclarityonmarketentryandqualificationrequirementofserviceproviders.Scrutinyoverclimate-andsustainability-labeledfinancialproductofferingsshouldbeincreasedtosafeguardintegrityofgreenfinancemarkets.yyIntegratebottom-upclimatescenarioanalysisintoprudentialsupervision.Buildingonongoingclimatestresstesting,financialsectorauthoritiescouldconsidercarryingoutadditionalbottom-upclimatescenarioanalysis,possiblyamongdomesticsystematicallyimportantbanksandinsurers.Guidingtoolssuchasdatatemplatesandqualitativequestionnairescouldbeconsidered,whilefinancialinstitutionsgainexperienceandbuildcapacity.Suchanexercise,togetherwithothertop-downanalysis,shouldberegularizedovertimeandbecomepartofclimate-relatedprudentialsupervisorytools.yyUseblendedfinancetomobilizecommercialcapitalforunderfinancedclimateventuresandsectors.Financialsectorauthoritiescouldexplorewaystounlockthecatalyticfunctionofavailableconcessionalfinance,includingfromdomesticpolicybanks,publiccapital,donorandphilanthropicfunds,andinternationaldevelopmentfinancialinstitutions.Giventhesignificantshortfallofearly-stageclimatefinancing,supervisorsoftheinvestmentfundindustry(theChinaSecuritiesRegulatoryCommission[CSRC]andtheAssetManagementAssociationofChina[AMAC])maywanttoaddblendedfinancetotheirworkpriorities,authorizepilots,anddeviseregulatorymeasures.53ItshouldbenotedthatcommercialbanksandinsurancecompanieshadbeenlargePEVCfundingsourcesinthepast.Butincontextofshadowbankingcrackdownandassetmanagementmarketreforms,theshareoffinancialinstitutionfundingshrankfromabout35percentin2016toabout10percentin2020,accordingtoZero2IPOdata.54AccordingtoZero2IPO,insurancecompaniesallocatedonlyabout5percentofassetstoprivateequity(PE)dealsinthefirstthreequartersof2021;theshareofcapitalallocatedtoearly-stagefirmswasonly0.4percent.55Itshouldbenotedthiseffortwillbeinsynergywiththeauthorities’ongoingworktoexpandthenationalcarbonmarket,whichalsorequiresreliablestatisticsfromcompaniesinkeyindustriesandcredibleMRVschemes.56Accounting-financedcarbonavoidanceandremovalscouldbeapossiblenextstep.77ChinaCountryClimateandDevelopmentReportyyTighterscrutinyshouldbeappliedtoguidancefunds,whereasmarketaccessbyforeigninstitutionalinvestorscouldberelaxed.Relevantauthoritiesshouldsignificantlytightenconditionsforestablishingnewguidancefundsandimplementadditionalityrequirementsforexistingfunds.Financialsectorauthoritiesshouldexplorewaystoincreaseparticipationofcommercialinstitutionalcapital.EventhoughdomesticinsurersandassetmanagementfirmsgainexperienceinthePEVCmarket,authoritiesshouldconsiderrelaxingmarketaccessforforeigninstitutionalinvestors,especiallythosethatdemonstrategoodclimateinvestingrecords.NumerouslocalpilotsoftheQualifiedForeignLimitedPartner(QFLP)programcouldbeconvertedintoanationalscheme,withastreamlinedapprovalprocessandlargerquota.yyAmoreactiveandcoordinatedpolicyapproachisneededtobringaboutusefulclimatefinanceinnovations.Theauthoritiesshouldseektoaddressfundamentalbottlenecks(suchaslegalstatusofcarbonassets)thatprecludeclimatefinancialinnovationsandactivelyestablishregulatoryframeworksfornewproductssuchassustainability-linkedinstrumentsfortransitionfinancing.Theauthoritiesshouldalsostrengthencoordinationamongthemselves,giventhestillsegmentedbondmarketandsometimesoverlappinggreenfinancemandatesbetweenthebankingregulatorandthecentralbank.Collaborationwithotherlineministriesforimportantfinancialproductsthatembodyamorecross-sectornature,suchasdisasterriskinsuranceandcarbonderivatives,shouldalsobeactivelysought.yyAcceleratebroaderfinancialsectorreforms.Inadditiontoaddressingtheuniquechallengesofgreenfinance,theauthoritiesshouldacceleratefinancialsectorreformsthatwillimprovecapitalallocationacrosstheboard,particularlyeliminatingimplicitguaranteesinfinancingandsettingaclearboundarybetweenpolicyandcommerciallending.Overall,thefinancialsectorauthoritiesshouldtakeasystematicviewtowardclimatefinancepolicymakingandreinforceitwithongoingfinancialsectorreforms.yyGreenfinancereformswouldsupportbothadaptationandmitigation.Improvedaccountingofemissionsandassessmentofclimaterisksiskeytoallowingmarketstosignaladjustmentneedsandensuringrisksareproperlypriced.GreenfinancereformswouldthusservebothChina’smitigationandadaptationneeds.3.4.3.EnsuringajusttransitionThelow-carbontransitionwillhavedistributionalimplications.Householdswillbeaffectedthroughseveralchannels.Risingenergyprices—eitherbecauseofexplicitcarbonpricingorregulations—willaffecthouseholdconsumption,withpoorerhouseholdsoftenlessabletoadjustandsubstituteintolower-carbonalternatives.Householdswillalsobeaffectedbychangesinthelabormarket,withsomeexperiencingjoblossesandtransitions,andpositiveornegativeimpactsontheirwagesandothersourcesofincome.Thespecificpoliciesadoptedalsomatter.Asdiscussedinsection3.5.1,carbonrevenuescouldberecycledtomitigatesomeoftheseimpactsthroughcompensationtohouseholdsthroughtransfers,withanexpandedsocialsafetynetthatisabletoeffectivelycovervulnerablehouseholds.Roughestimatesillustratethatbetween10to15percentofChina’sworkforcemaybeemployedinhigh-carbon-intensiveindustries.57Mostofthehigh-carbonjobsareconcentratedinmining,energy,manufacturing,andtransport,withanimportantroleforinformalemployment.Manyofthejobshaverelativelylowskillintensity.Employmentintheseindustrieshasbeendecliningoverthepastfiveyears,whileemploymentinlow-carbonindustrieshasbeenrisingtomorethanoffsetthelosses.ThenumberofgreenjobsinChinawasabout54.42millionin2015.58Aroundathirdofgreenjobsareintransport,andoverafifthinmanufacturing.Greenjobsaremoreconcentratedincoastalareas.AmongtheprovincesinmainlandChina,Shandong,Jiangsu,andGuangdongstandoutfortheabsolutenumberofgreenjobsin57Theanalysisisusingthe3-digitindustrycodeandcarbon-intensitydatafromtheUK.Excludingagriculture,432subindustriesinChinaareclassifiedintofivegroups:extremelyhigh,high,medium,low,andextremelylowincarbonintensity.58UsingChina’soccupationalclassificationandtheONETdefinitionofgreenjobs.78ChinaCountryClimateandDevelopmentReport2015.Greenjobstendtohavehigherhumancapitalrequirementswithimportantimplicationsforeducationandskillsdevelopment.In2015,theproportionofgreenjobsrequiringacollegedegreeorabovewas15.7percent,comparedto13.3percentforthenongreenjobs(Figure31).Figure31.CurrentlyworkersingreenjobshavehighereducationalattainmentthaninnongreenjobsEducationalattainmentbyjobtypein2015506040302010NoschoolingPrimaryschoolJuniorsecondaryschoolSeniorsecondaryschoolSecondaryvocationalschoolCollegeUndergraduatePostgraduate0%GreenIDGreenESGreenNENo-greenSourceandNotes:The2015NationalSampleSurveyof1percentofthepopulation.GreenjobsdefinedusingtheONETclassification.Achievingcarbonneutralitywillrequireasizablelabormarkettransition.Ofcourse,notallhigh-carbonjobswillbelostbutmanywillbesubjecttochangingtechnologiesandhenceskillrequirements.Employmentestimatesfromthemacroeconomicmodelingprovidedabovedemonstratedthat,althoughjobgainsarepredictedtooutweighjoblossesduetotherelativelylowlaborintensityofhigh-carbonsectors,thejobgainsarelikelytobeindifferentsectors,occupations,andregions.Themacroeconomicsimulationssuggestthattheenergytransitionwouldleadtoanemploymentdeclineofaround600thousandworkersinthecoalindustrybetween2019and2030.Thisisontopoftheestimated2millionjobsthatwouldbelostmerelybycontinuingexistingenergypolicies.ThisisbroadlyconsistentwiththeIEA’s(2021)modelingestimatesofdeclinesof1.6to1.9millionworkers.Malelow-skilledworkersinruralinteriorprovincesareparticularlyatrisk.BaseduponChina’scurrentemploymentstructureandontheCGEmodel’sScenario1,relativeto2018,77percentofjoblossesareconcentratedamongthelowerskilled,58percentinChina’sinlandprovinces,and64percentwouldaffectmen.Jobgainswouldtakeplaceinsectorsthatrequirepredominantlyhigh-skilledorsemiskilledlabor(Figure32).Netjobgainsarelargerinurbancoastalareaswhereasruralareasininteriorprovincesexperiencenetjoblosses.Thelow-carbontransitionwouldresultinanestimated52millionadditionalhigh-skilledjobsby2030,highlightingthechallengeofupskillingthelaborforce.Othermodelingestimates,suchasthosebyDellaVignaetal.(2021),suggestevengreaterjobgainsinareaslikerenewableelectricitygeneration,powernetworks,electricvehiclesandtheirinfrastructure,copper,batteries,andbiofuels.5959DellaVignaetal.(2021),CarbonomicsChinaNetZero:TheCleanTechRevolution.(link)79ChinaCountryClimateandDevelopmentReportFigure32.Joblosseswilldisproportionatelyaffectlower-skilledmen,workinginland,whereasjobgainsaremorelikelytobeinurban,skilledjobsincoastalregionsDistributionofjobslostandgainedinCGENDCScenario1relativeto2018,holdingjobcharacteristicsfixeda)Workers’characteristicsincontractingsectors(%relativeto2018)b)Workers’characteristicsinexpandingsectors(%relativeto2018)41.724.456.942.258.375.643.122.835.0020406080100GenderUrban/RuralRegionSkill36.148.258.477.263.9MaleFemaleMaleFemaleUrbanRuralUrbanRuralCoastalInlandCoastalInlandUnskilledUnskilledSemi-skilledSkilled51.841.615.37.5020406080100GenderUrban/RuralRegionSkillSourceandNotes:WorldBankcalculationsbaseduponCGEmodelingresults2030relativeto2018,combinedwithaveragesectorcharacteristicsbasedupon2018ChinaFamilyPanelSurveyhouseholdsurveydata.Sectorcharacteristicsareheldfixedattheir2018levels.Thegeographicconcentrationoftheeconomicandsocialimpactsofthecoalexitwillrequirespecialattention.Threeprovincesaloneaccountfortwo-thirdsofdirectcoalsectorjobs.60Toachievecarbonneutralitybefore2060,China’stransitionawayfromcoalwillhavetohappenatascaleandpacethatishistoricallyunprecedented.Eventhoughrapidprogressinthedevelopmentofcost-effective,low-carbonenergytechnologieshasmadeafasterenergytransitiontechnologicallyandeconomicallyfeasible,thesocialandeconomictransitionrisksofthecoalphase-downwillneverthelessneedtobecarefullymanaged.AlthoughChina’scoalsectorissmallinrelativeemploymentsize,likeelsewhereintheworld,China’scoalregionsarecharacterizedbyheavilyspecialized,oftenmono-industrialeconomicstructuresandarereliantoncoal-intensivevaluechainsforemployment,income,andfiscalrevenues.Evenwithinprovinces,coalminingjobsareofteningeographicallyisolatedplaces,andincommunitieswithastrongsenseofcoalidentity.Experiencesuggeststhatconcentratedjobandfinanciallossescanhavelong-lastingimpactsonlocaleconomiesandcommunitiesifbroadandforward-lookingmeasuresarenottakentosoftenthelabormarket,financial,andsocialimpactsofthetransition;assistworkerstomovetonewopportunities;andprovideotherformsofgrowth,employment,andrevenuesinaffectedcommunities.61Targetedplace-basedinterventions,educationpolicy,retraining,flexiblelabormarkets,andsocialsecurityarecriticalcomponentsofenablingajusttransition.Manyworkerswillneedtomovetonewopportunities,meaningthatpoliciesthatenablegreaterlabormobilityacrossregions,sectors,andoccupationsandfromruraltourbanareascanreducethenegativeimpactsfeltbyworkersincontractingfirmsandindustries.Alaborforcewithstrongfoundationalandtransferrableskillswillbeabletomorereadilyadapttoevolvingskillsdemand,whileretrainingprograms,vocationaleducation,andlifelonglearningcouldmitigatelossestoolderindividualswholacktheskillsetsrequiredtoobtainjobsinexpandingindustries.Inaddition,strongsocialsecuritysystemswithportablebenefitswillneedtosupportlabormarketreallocationsandprotectworkersindecliningindustries.60Heetal.(2020),“EnablingaRapidandJustTransitionAwayFromCoalinChina”(link).61ThepotentialrisksarewellillustratedbyBritain’scoalphase-outinthe1980s,whereasbycontrast,theDutch10-yearcoalphase-outcaseshowsthatwell-plannedcoaltransitionsthatincludesupportfor—andreceivesupportfrom—workers,unions,andaffectedcommunitiescangorelativelysmoothlyandwithoutlong-termadverseimpacts.80ChinaCountryClimateandDevelopmentReportWhatwerecommendyyContinuedeepeninglabormarketpolicyandhukoureformstoenhancelabormobilityandadvancelabormarketintegration.Thehukousystemstillcreatesbarriersformigrationtolargemunicipalitiesandmegacities.Mostsocialsafetynetsarefragmented,andbenefitsarenotportable.Therefore,furtherlabormarketpolicyandhukoureforms,includingpoolingsocialinsuranceschemesandcreatingportablebenefits,couldnotonlyfacilitatethegreenandlow-carbontransitionbutalsobringmultiplebenefitstotheeconomyandsociety.yyDevelopacomprehensiveandcoordinatedlabormarketpolicypackage,including(i)compensationandincomesupportmeasuresforlaid-offworkersandtheirfamilies;and(ii)activelabormarketprogramssuchaspublicemploymentservices,training,re-skilling,andentrepreneurshiptohelpre-employmentoflaid-offworkers.yyTargetedplace-basedsupportandinvestment,focusingoneconomicgrowth,diversification,andregenerationincoalregions.Althoughitwillbeimportanttoimprovelabormobilityandenableworkerstotransitiontogrowingareasoftheeconomy,itwillalsobeessentialtoconcurrentlyfocusonboostingtheeconomiesofcoalregionstoensuretheyarenotleftbehind.Diversifyingtheeconomiesoftheseregionsthroughpoliciesthatpromoteregionalgrowthandregenerationcouldplayanimportantrole.Investmentstoimprovelivabilityandnaturalenvironmentofcoalregionscouldbepartofthis.Temporarysubsidiesand/ortaxincentivescouldbeprovidedtoattractnewbusinessesandhelpgalvanizeprivateinvestmentsinindustrialrepurposing.Assubnationalrevenueswillbeconstrainedbyeconomicrestructuring,mobilizingnationalfiscalsupportthroughadditionalintergovernmentaltransferswillberequiredtoensuresustainablefinancingofbasicpublicservicesandsocialsupport,includingassistancetoworkersaffectedbyjoblosses.yyDevelopagreen-skillsstrategyandpathwaytomainstreamgreenskillsintotrainingandeducationforgreenjobs.Increasedinvestmentingreentechnologieswillalsobringopportunitiesforjobcreation.Tomeettheincreasingdemandofgreenskillsforgreenjobs,thegovernmentshouldrevisititsskillsdevelopmentstrategiesandsystemsandworkwithschools,traininginstitutions,employers,andworkerstoincorporategreenskillsintotherelevantprograms,particularlyinthetechnicalandvocationaleducationandtraining(TVET)programs.Thisretoolingshouldincludemodularandcompetency-basedcurricula/trainingmaterialsintrainingandre-skillingprogramsandpromotelife-longlearningfortheworkforcetolearntheskillsrequiredingreenjobsthroughon-the-jobtrainingorin-servicetrainingandapprenticeship.3.6.ExternalpoliciesforacarbonneutralglobaleconomyChinacanplayanimportantroleinsteeringglobalclimatecoordination.Thereisnoviablepathfortheworldtostaywithinthe1.5C(2.7F)degreeswarminglimitwithoutdecarbonizationinChina.Inadditiontodirectcontributionstoemissionsreduction,theactionsoflargeemitters,likeChina,canalsostrategicallyinfluencethedecisionsofothercountries,byalteringexpectationsoverpotentialpositivefutureclimateoutcomesandoptimalchoicesforothercountries(Box9).ThisstrategicimportanceofChina’sdecisionswasdemonstratedbyChina’scarbonneutralitypledgeinSeptember2020.China’spledgewasfollowedbyawaveofnewpledgesinothercountries,withtheshareofglobalGHGemissionscoveredbyanet-zeropledgereachingalmosthalfoftheglobaltotal(Figure33).81ChinaCountryClimateandDevelopmentReportFigure33.ChinahasuniquepotentialtoinfluencetheclimatepolicychoicesofothercountriesandshiftglobalpricesGHGemissionsofcountrieswithnet-zeropledges14121086420May-17May-18May-19China’scarbonneutralitypledgeGHGofnewpledgesCumilativeGHGcoveredMay-20May-21403020100SourceandNotes:a)WorldBankcalculationsusingNetZeroTrackerdata.Thisincludesthepledgesoftheworld’stop40largesteconomiesonly.b)WITSandOurWorldinData.Note:SolarpanelstradedataaresumofHS854140(solarcells)andHS901380(solarheliostats).BeyondthestrategicimpactofChina’sclimateactionforglobalcoordination,Chinaisalsolargeenoughtoshifttherelativepricesoffossilfuelsandlow-carbonalternatives,alteringabatementcostsforothercountries.Chinaisalreadythelargestexportdestinationfor120countriesglobally.Ontheconsumptionside,China’slow-carbontransitionwillchangethecompositionofthecountry’simports,withashiftindemandfromfossilfuelsandcarbon-intensivevaluechainstolower-carbonones.Thishasdirectnegativeimplicationsforcountriesexportingfossilfuels;Chinaistheworld’slargestimporterofcoal,oil,andnaturalgas,with7,72,and42percentofChina’ssupplyin2019comingfromimports,respectively.Globalnuclear,hydroelectricity,andrenewablesmarketsandexportersofenvironmentalproductstoChina,ontheotherhand,areclearbeneficiariesofChina’sclimateaction.Indeed,China’simportsofenvironmentalgoodsincreasedby15percentannuallyfrom2000to2020,accordingtoWorldIntegratedTradeSolution(WITS)data.DellaVignaetal.(2021)estimatethatelectrificationandcleanenergywillalsoraiseChinesedemandforaluminum,copper,lithium,andnickelby8to32percentannuallybetween2019and2060.Chinaisalreadyaleaderintermsofgreenexportcompetitiveness,andexpandedproductionoflow-carbontechnologiescouldcreatenewglobaltradeandinvestmentopportunities.ChinarankedfifthontheGreenCompetitivenessIndexin2019,aboveJapanandKorea.ChinaoutperformsalladvancedeconomiesintermsofitsGreenComplexityPotential,anindexthatmeasureshowmuchpotentialacountryhastodiversifyintocomplexgreentechnologyproducts.Chinaisalsotheleadingdownstreamproducerofkeyenvironmentalgoodslikesolarcells,windturbines,andbatteriesforelectricvehicles.Inthesolarvaluechain,Chinadominatesupstreamproduction,producingaround70percentoftheworld’ssolarpanels,andaccountsformorethan50percentofwindturbinesuppliers.Lastly,Chinahasthelargestproductioncapacityforlithium-ionbatteriesofelectricvehicles,accountingfor70percentofglobalcapacitybytheendof2020(IEA2020b).Asalargeandgrowingconsumermarket,China’simportdemandalsohasmajorclimateramifications.Forexample,ithasbeenshownthat29to39percentoftropicaldeforestation-relatedcarbonemissionshavebeendrivenbyinternationaltradeofagriculturalcommodities,particularlybeefandoilseedexports(Pendrilletal.2019).InmajorproducingcountriessuchasBrazilandIndonesia,thelossoftreecoverinthelasttwodecadesiscloselylinkedtotheproductionofthesecommodities(oilpalmandpulpandpaperinIndonesia;beefandsoybeansinBrazil).Chinaisnowtheworld’slargestsinglecountryimporterofsoy,beef,andtimber,andChina’simportsofagriculturalcommoditieshavebeenshowntoinducedeforestationinproducercountries(WWF2021).DatafromPendrilletal.(2020)showsthatoverthree-quartersofChina’strade-relateddeforestationwaslinkedtosoyandbeefproductsfromBrazil.StepssuchasthejointUS-China82ChinaCountryClimateandDevelopmentReportpledgetobanimportsemanatingfromillegaldeforestationinNovember2021andChina’srevisedForestLawinJuly2020,whichrequiresChinesefirmstotracetheirtimbertoalegalsource,arepushingforwardthisagenda.However,strictenforcementoftheForestLaw,withclarityoncoveringimportedtimber,alongwithstepped-upambitiononothercommodities,couldcatalyzepositivechangetohaltdeforestationandbiodiversitylossacrosstheglobaleconomy.Figure34.Chinacanalsoshiftglobalabatementcostsandclimateoutcomesthroughitsinfrastructurefinancingandexportsa)China’soutboundenergysectorinvestmentsb)Environmentalgoodsexports($million)10.80.60.40.22013RenewableenergyshareFossilenergyshareWasteWaterTreatmentRenewableEnergyRelatedNaturalRiskManagementWasteandRecyclingEnvironmentallyPreferableGoodsEnvironmentallyMonitoringAirPollution2014201520162017201820192020$20020002002200420062008201020122014201620182020$00SourceandNotes:a)WorldBankstaff,basedondatafromAEIInvestmenttracker.Fossilincludesinvestmentincoalandoilandgasassets.Renewablesincludehydro,solar,wind,andalternativesources.b)WITS.Chinaisalsoamajoroutwardinvestor,particularlyininfrastructure,andcanshapeglobalclimateoutcomesthroughitsinvestmentportfolio.Chinaprovidesmoreinfrastructurefinancetodevelopingcountriesthananyothercountrydoes,andChina’spastoutwardinvestmenthasbeenmorebrownthangreen,althoughthatwasstartingtochangein2020withChina’sgrowingcomparativeadvantageinrenewables(Figure34a).InOctober2021Chinaannouncedthatthecountrywillnolongerbuildcoal-firedpowerplantsabroad,withtheannouncementbeingquicklyfollowedbyanannouncementtohaltfundingfornewcoalminingandcoal-firedpowerprojectsabroadbytheBankofChina.ThisreflectstheimportanceofChina’sinfluenceoverwhethernewinfrastructureprojects—powerplants,pipelines,roads,railroads,andthelike—builtindevelopingcountriesarehigh-carbonorlow-carbonandhenceemissionstrajectoriesnotonlyatpresentbutfordecadestocome.Inaddition,thecountryhasalsoannouncedthatitwillstepupsupportforotherdevelopingcountriesindevelopinggreenandlow-carbonenergy.However,beyondtheseinitialrecentsteps,thereismorethatcouldbedonetodecarbonizeChina’sforeigninfrastructurefinanceportfolio.83ChinaCountryClimateandDevelopmentReportBox7.ThepotentialimpactsofglobalclimatepolicyactiononChina’seconomyInadditiontoChina’simpactsontheworldeconomy,mitigationeffortsbyChina’stradingpartnerscouldalsohavesizableramificationsforChina’seconomy.Forinstance,theEU’sGreenDealaimstocuttheblock’scarbonemissionsby55percentin2030relativeto1990levels(theFITfor55package),andtheEUisoneofChina’slargestexportdestinations.TocomplementtheGreenDeal,theEUalsointendstoaddaCarbonBorderAdjustmentMechanism(CBAM),whereEUimportsofspecificproductsincludedontheEU’sEmissionsTradingScheme(ETS)becomesubjecttoacarbontax.TounderstandtheprospectiveimpactsofglobalclimateactiononChina’seconomy,thisreporthasmodeledthreescenarios:an“NDC”scenariowheresignatorycountriesoftheParisAccordimplementcarbonpricingpoliciestoreachtheirNDCcommitments(thisincludestheEU’sinitialNDCtarget);an“EUGreenDeal”scenariowheretheEUachievesthe55percentdeclineinemissionsusingcarbonpricing;anda“CBAM”scenarioontopoftheEUGreenDeal,withataxonEUimportsequivalenttothedifferencebetweenthecarbonpriceintheEUandthecarbonpriceoftheimportdestination,onallEUETSsectors.ScenariosaremodeledusingtheglobalENVISAGECGEmodelfollowingChepelievetal.(2022).TheNDCscenarioisusedasareference,andimpactsofthemoreambitiousmitigationactionbytheEU,aswellasimplicationsoftheEUCBAMscenario,aremeasuredrelativetothisreferencepath.TheaggregateimpactoftheimplementationoftheseEUclimatepoliciesonChina’soutput,trade,andrealincomeby2030mayberelativelysmall,buttheimpactsonspecificindustriescouldbesubstantial.ThecombinationofthesemeasurescouldlowerChina’srealincomebyaround0.07percent,relativetothebaseline,by2030.ThisdeclineofrealincomeforChinawouldmostlybetheoutcomeofthemoreambitiousEUmitigationefforts,whichcouldresultina0.05percentdropinrealincome,whereastheEUCBAMresultsina0.02percentdecline.MorestringentEUclimatemitigationcombinedwithbordercarbonadjustmentswouldresultinadecliningdemandforenergyintensivegoodsproducedinChina.Exportsofchemicals,nonmetallicminerals,andwoodproductscouldalldeclinesubstantially—inarangeof4to8percent.Thiswouldtranslatetothereductionsindomesticproductionby0.2to0.7percentacrosslistedcommoditygroups.SomeChineseproducerscouldbenefitfromglobalclimatepolicies.Moreambitiousclimatemitigationeffortswouldalterthecompositionofglobaldemandandtradepatterns.Althoughadverselyimpactingdemandforfossilfuelsandenergy-intensivecommodities,stringentclimatepolicieswouldshiftglobaltradetowardservicesandlightmanufacturinggoods,suchaselectronics.Forinstance,expansionofrenewableenergygenerationintheEUwouldresultinrisingdemandforChinese-producedsolarpanelsandwindturbines,whilefurtherelectrificationofthetransportsectorwouldboostdemandforEVbatteriesandotherparts.Asaresult,Chineseexportsofelectronics,motorvehiclesandparts,andothermanufacturedgoodscouldincreaseby0.3to0.8percent,translatingintoa0.3to0.4percentincreaseinoutputforthesesectors.Globalclimatepolicyeffortswouldalsoboostintegrationofthesehigh-valuedcommoditiesintoglobalvaluechains(GVCs).EstimatessuggestthatEUclimatemitigationeffortscombinedwiththeCBAMpoliciescouldincreaseGVCparticipationratesforChineseelectronics,motorvehiclesandparts,andothermanufacturedgoodsbyaround0.2percent.84ChinaCountryClimateandDevelopmentReportWhatwerecommendyyStrengthenmeasurestoencouragesustainableproductionpatternsandreducetheimportofcommoditiesthatareillegallyharvestedintheircountryoforigin,particularlybeef,soy,andtimber.ThiscouldbuildupontheprovisionregardingthelegalityoftimberinthelatestrevisionoftheForestLawandgraduallyexpandtocoverothercommodities.StrictenforcementoftheForestLaw,andclarificationonitsapplicationtoimportedtimber,couldprovideastrongsignalontheimportanceofsuchregulations.TheChinesegovernmentcouldalsoincorporatemeasurestomitigatethedeforestationeffectsofcommodityimportsinbilateralandmultilateraltradeagreements.Inaddition,theState-ownedAssetsSupervisionandAdministrationCommission(SASAC)couldalsomandateSOEstoassurethesustainabilityofthecommoditiestheybuy.yyCreatestricterrulesforoutwardforeignfinance:Widermandatesbeyondcoal,toothertypesofforeigninfrastructureinvestment,couldextendthisfurther.Informationdisclosureandguidanceonstandardswouldalsobeimportant.Chineseauthoritieshavebeenmovingtocompelcompaniestodisclosemoreclearlytheenvironmentalimpactsoftheirdomesticinvestments;rulescompellingcorporatedisclosureoftheenvironmentaleffectsandcarbonfootprintofoverseasinvestmentswouldbeavaluableextension,alongwithguidelinesonenvironmentalstandardsandcarbonfootprintsmorebroadly.yyAssistotherdevelopingeconomieswithlow-carbonprojects:Chinacouldtakestepstoencouragedevelopingeconomiesinwhichitfinancesinfrastructuretooptforlower-carbonprojects.TechnicalassistanceusingChina’sownexperienceinrampinguprenewableenergycouldhelpothercountriesforgeaviablelower-carbonpathanddeepenmarketsforlow-carbontechnologies.yyConductenergyandfinancingpolicyreformswithinChina:ReformstoChina’sdomesticenergymarket,asdiscussedabove,couldimproveincentivesforChina’sdominantstate-ownedenergycompanies(alongwithnewfirms)tofocusonlower-carbonendeavorsintheiroverseasinfrastructureinvestments.Domesticfinancingreformscouldfreeuplower-costcapitalfordeploymentdomesticallyandabroadandincentivizeborrowingspecificallyforlow-carbonendeavors.85ChinaCountryClimateandDevelopmentReport4.PolicyPathwaysforresiliencetoachangingclimate©junrong/Shutterstock86ChinaCountryClimateandDevelopmentReport4.PolicyPathwaysforresiliencetoachangingclimate4.1.ClimaterisksandvulnerabilitiesThepreviouschapterhasanalyzedChina’smitigationpolicyoptionsinsomedetail,givenChina’sprominenceinglobalemissions,butChina’sadaptationneedsalsorequireattention.Evenwithstrongmitigationefforts,climateriskswillremaininpartbecauseglobalclimateoutcomeswilldependontheactionsofothercountries.Fortunately,inseveralareas,suchascityplanning,agriculturalandlandmanagementpractices,thedevelopmentofgreenfinance,nature-basedsolutions(NbS),andthecreationofanoffsetmarket,andinbuildingmoreresilientsocialprotectionsystems,mitigationandadaptationactionsaresynergetic.Thischapterhighlightsprioritiesforgovernmentaction.Chinaisalreadyexperiencingrisingtemperaturesasaresultofclimatechange.From1951to2020,Chinaexperiencedatemperatureriseof0.26℃perdecade,significantlyhigherthantheglobalaverage(CMA2021).Thelast20yearshavebeenthewarmestyearssincethebeginningofthe20thcentury,with9outofthe10hottestyearssince1900occurringafter2000(CMA2021).Theaveragetemperatureof10.53℃in2021wasthehighestonrecordsince1951andaround1℃higherthanusual,basedoncalculationsbytheChinaMeteorologicalAdministration(CMA)(CMApressrelease,01/06/2022).In2021,bothaverageandhighesttemperaturesinmanycitieswererecord-breaking,whiletheaveragenumberofhotdaysacrossChinawassecondhighestonrecordsince1961(CMApressrelease,01/06/2022).Extremeweathereventshavebecomemorewidespread,intense,andfrequent.From1961to2020,averageannualprecipitationshavealsobeenincreasing,atarateof5.1mm/decade,whiledisplayingsignificantregionaldifferences(CMA2021).Duringthesameperiod,extremeprecipitationeventshavebeenincreasing.Moreover,extremehightemperatureeventshaveincreasedsignificantlysincethemid-1990s,whiletheaverageintensityoftyphoonslandinginChinahasstrengthenedsincethelate1990s(CMA2021).In2021,severalclimateeventshavebrokenhistoricalrecords,includingthatforthehighestaveragetemperatureandthehighestrainfall,whichoccurredinZhengzhoucityofHenanprovincewithcatastrophicfloodsin2021,andthatfortyphoonlength(CMApressrelease,01/06/2022).Climatechangeisprojectedtoposesignificantfurtherrisks.Surfaceaveragetemperaturesareprojectedtorisetoaround0.6℃to8.7℃bytheendofthecentury(WorldBankClimateChangeKnowledgePortal62).Overallannualprecipitationisestimatedtoincreaseinthenextseveraldecades.From2011to2100,therateofprecipitationincreaseisprojectedtobeabout0.6percentto1.6percentperdecadewhicharehigherthantheglobalaverage(MEE2018).StudiesalsopredictthatsealevelsalongtheChinesecoastmayrisebetween52cmto109cmonaverage,relativeto1986–2005(Arnelletal.2018).China’srichestcitiesareincoastalareas,andmanyofthemwilllikelywitnessthefullscaleofclimatechangeimpactsalreadyby2050,resultingintheimmediateneedtoprotectthemselvesfromrisingsealevelsandthegrowingriskoffloods,storms,andtyphoons(Figure35).By2050,Shanghaiisexpectedtohaveover3,500sqkmofexposedsettlements,whichisalmosttheentiresettlementareainthecity.Thestoryisnearlyidenticalinothercoastalcities,aswellasincitiesalongtheYangtzeRiver(NanjingandWuhan)thatwouldneverthelessbeartheconsequencesofsea-levelrise.62https://climateknowledgeportal.worldbank.org/country/china/climate-data-projections.87ChinaCountryClimateandDevelopmentReportFigure35.Settlementareaexposedto10percentannualchanceofflooding,givenmedianprojectedsea-levelrise(sqkm)ShanghaiTianjinHangzhouGuangzhouNanjingShenzhenWuhan010002000300021002050Note:TheclimateprojectionsinthisanalysisaredirectlyadaptedfromtheClimateChangeKnowledgePortal(CCKP),whichcomputesarangeofclimateindicatorsusingmedianvaluesofmultimodelensemblesderivedfromthesixthphaseoftheCoupledModelIntercomparisonProject(CMIP6).Source:CityResilienceProgramteam(WorldBank).ShiftsinclimaticpatternswillinfluenceChina’secologicalsystemsinthe21stcentury.Springphenologywilloccurearlier,andautumnphenologywillbepostponed,affectingthegrowthofplants.DistributionandcoverageofwetlandsinChinawillchange,withacontractionof60percentofwetlandsareaunderalow-emissionsscenarioand86percentunderahigh-emissionsscenarioin2100,jeopardizingimportantfunctionsofwetlands,suchascarbonsequestration,waterretention,andwildlifehabitat(MEE2015,2018).Thecompositionandstructureoftreespeciesintheforestswillbealtered,whiletheareasuitableforafforestationwithcurrentprevalentspeciesaswellasraretreeandendangeredspecieswillshrinkbymorethan9percent(MEE2015).Climatemodelspredictthattheprobabilityoffireoccurrencewouldincreasebyaround80to99percentandtheburnedareawouldincreasebyaround1700km2peryearby2050(CMCC2021).Inaddition,thelengthoftheforestfireseasonwillbesignificantlyprolongedunderfutureclimatechangescenarios,addingcoststofirepreventionandmanagement.Extremeweathereventssuchasheatwaves,floods,anddroughtswillbecomemorefrequentandsevere.AccordingtotheWorldBank(2021),ifcurrentclimatetrendscontinue,themedianannualheatwaveprobabilitywillbe5to22percentbytheendofthe21stcentury,upfrom2percentcurrently.Climatechangeisforecasttoincreasethefluvialfloodrisk,includingflashfloodrisk,inChina,asextremeprecipitationeventsbecomemorefrequentandmoreintense.Forexample,bymidcentury,thechanceofaonce-in-50-yearsextremeprecipitationeventmayincreasethreetofourtimesinpartsofWesternChina(Woetzeletal.2020).Overall,theaverageestimateofvariousclimatemodelssuggeststhatfloodrisk(riskofoccurrence)inChinawillincreasebyabout10percentby2030and20percentby2100(ADB2015),whichisgoingtocausedamagestohumanlives,property,andinfrastructure.MostpartsofChinaareforecasttoexperiencedroughtswithhigherseverityandfrequency,aswellaslongerduration,bymidcenturybecauseofclimatevariability.Basedonthe3rdNationalAssessmentReport(2015),runoffinmajorChineseriverbasinsisgoingtodeclinebyabout2to11percentunderdifferentscenarios.4.2.China’sexistingadaptationpolicycontextChina’spolicyframeworkforadaptationfollowsahierarchicalsystemof“top-leveldesign—nationalstrategy—sectoralandlocalaction”(Pengetal.2015).TheNationalStrategyonAddressingClimateChange2014–2020,releasedbytheStateCouncil,setsthetop-leveldesignguidanceonclimateadaptation,whichstipulatestheobjectiveto“substantiallyincreasenationalclimateadaptioncapacity.”TheNationalStrategyforClimateChangeAdaptation,releasedin2013,setsouttheoverallpolicyrequirementsforadaptationandprioritytasksinkeysectorssuchasinfrastructure,agriculture,waterresourcemanagement,marineandcoastalzonemanagement,humanhealth,tourism,andotherindustries.Centralministriesmanaging88ChinaCountryClimateandDevelopmentReportdifferentsectorsdeveloptheirsectoralstrategiesandtechnicalguidance,whilelocalgovernmentsandtheirsubsidiarytechnicaldepartmentsinrelevantsectorsissuelocalgovernmentworkprogramsonclimateadaptation.InJune2022,ChinareleasedtheNationalStrategyonClimateAdaptation2035.Aseparateimplementationplanisexpectedtocomplementthestrategy.Strategiesandprogramshavealsobeenputinplaceatthesectorallevel,withprogressmadeonincreasingurbaninfrastructureresilience.Allkeyministrieshaveeitherproducedtheirrespectivesectoralstrategiesandprogramsonclimateadaptation,orincorporatedadaptation-relatedrequirementsintheirregularsectoralprograms.Forexample,adaptationinurbaninfrastructurehasimprovedovertime(Fuetal.2021).TheNationalDevelopmentandReformCommission,theMinistryofHousingandUrban-RuralDevelopment,andotherlineministriesreleasedtheActionPlanonClimateChangeAdaptationinUrbanAreasin2016,clarifyingthemainactionareasforadaptationincitiesandproposingtoselecturbanareaswithclimaterepresentationtocarryoutpilotsforclimate-adaptivecities.TheChinaMeteorologicalAdministration,theleadingministryinclimatescienceinChina,hasdevelopeditsworkplanoncontinuouslyassessingandmonitoringclimatechangeimpacts.Overtheperiodof2007–16,atotalof184domesticclimate-relatedpolicydocuments(laws,policies,strategy,actionplans,andwhitepapers)havebeenissued,manyofwhichincludeprovisionsonclimateadaptation(Zhangetal.2018).4.3.AdaptationandresiliencepolicypathwaysDespiteprogressinsettinganationalpolicyframework,thereareopportunitiestoimproveadaptationeffortsbothatthenationalandsectorlevel.AdaptationpolicygapsareanalyzedfollowingtheframeworkprovidedinHallegatteetal.2020,whichproposessixprinciples:(i)Foundations:rapid,robust,andinclusivedevelopment;(ii)PriorityArea1:facilitatetheadaptationofpeopleandfirms;(iii)PriorityArea2:adaptlanduseplansandprotectcriticalpublicassetsandservices;(iv)PriorityArea3:helpfirmsandpeoplemanageresidualrisksandnaturaldisasters;(v)PriorityArea4:managefinancialandmacrofiscalissues;and(vi)Application:prioritization,implementation,andmonitoringprogress.Usingquantitativeindicators,Figure36showsthatChinacomparesrelativelywell,relativetootherBRICScountries,withrespecttothefoundations,andPriorityAreas1and4.ItperformsrelativelyworsewithrespecttoPriorityArea3:helpingfirmsandpeoplemanageresidualrisks.Usingbothquantitativeandqualitativemeasures(thelatterbasedonexpertinterviews),keygapscanbefoundintheapplicationofadaptationprinciples(Figure37).Theseincludethelackofguidanceandinformationfordecision-makersatthelocallevel,insufficientresourcemobilizationandmonitoring,thelackofinstitutionalcoordination,andthelackofsector-specificguidanceinhighlyvulnerablesectorssuchasagricultureandwater.4.3.1.Facilitatetheadaptationcapacityofpeople,firms,andlocalgovernmentsChina’sadaptationpolicylandscapeneedstobefurtherstrengthened.Coordinationacrossinstitutionsandlevelsofgovernmentcouldbeenhancedtoprovidebetterinformationandincentivesforprivateactorstoprepareforandinsureagainsttheeffectsofawarmingclimate.Riskassessmentreportsareproducedbyseparateagenciesandinascatteredmanner,hinderingtheabilityofhouseholds,firms,andlocalgovernmentstomakeeffectivedecisions(Fuetal.2021).Moreover,lessthan10percentofclimateadaptationpoliciesaredevelopedandreleasedasmulti-agencyefforts,indicatingafragmentedsectoralapproach(Zhangetal.2018).In2018,theMinistryofEcologyandEnvironment(MEE)tookoverfromtheNationalDevelopmentandReformCommittee(NDRC)astheleadagencyonclimatechange.Atthelocallevel,thebureausforecologyandenvironmenthavelimitedabilitytoguideorsuperviselocal-levelclimateactions,astheyareatthesamehierarchicallevelasagenciesreportingtootherlineministries.Theperiodicreportingprocess,ledbytheMEE,reliesonsectoralself-reportingandlackscoherentassessmentcriteriaframeworks.Aninterministerialtaskforceonclimateadaptationmightprovidethenecessaryplatformtostrengthencooperation.Issuesoffragmentationandpolicycoordinationarealsopresentinclimatemitigation,suchasinurbanplanningorthedevelopmentofNbS.Thecreationofaninterministerialtaskforcecouldaimtolookatbothpolicyareascomprehensively.89ChinaCountryClimateandDevelopmentReportFigure36.AdaptationprinciplesinBRICS(Brazil,Russia,India,China,andSouthAfrica)countries(quantitativeanalysis)Figure37.AdaptationprinciplesratingsinChina(qualitativeandquantitativeanalysis)FoundationsPriorityarea4Priorityarea1ApplicationPriorityarea4Priorityarea3Priorityarea2Priorityarea1Foundations0123450.20.40.60.81.0Priorityarea3Priorityarea2ChinaRussiaSouthAfricaIndiaBrazil4.173.653.833.643.393.75Source:WorldBankstaff,basedonqualitativeindicatorsandexpertinterviews,drawingontheAdaptationPrinciplesframeworkproposedinHallegatteetal.2020.Nationalguidingpoliciesdonotprovideacoherenteffectivenessevaluationframework,whilelocalgovernmentlacksquantitativetargetsandmonitoringsystemsonclimateadaption(Zhangetal.2018).Thisresultsinlocalauthoritiesneglectingadaptationinactualpolicyimplementation(Pengetal.2015).Similarly,urbaninfrastructureadaptioneffortshaveyettoprovidesufficientprotectionagainstincreasedrisksofclimatedisasters(Fuetal.2021).TheHenanfloodsinJuly2021exposedthelowawarenessatthelocallevelofthepotentialdestructiveimpactsofextremeclimateeventsandthefailureoflifelineinfrastructuretowithstandsevereshocks(StateCouncil2022).Amorestreamlinedandcoherentmonitoringandreportingframeworkisrequiredtomonitorprogressonclimateadaptation.Adaptationpolicyreliesheavilyonregulatoryapproachesandpublicfinance,whileprovidinglittleincentiveforprivate-sector-ledadaptationefforts(Zheng&Lin2021).ChinaisexpectedtorequireUS$0.25trillionannuallyforfullyfinancedadaptationprograms(Chaietal.2019).ThisimpliesafinancinggapofUS$127billioneachyear,highlightingtheneedtobroadenfinancingchannelssuchasblendedpublic-privatefinance,resiliencebonds,andcarbontradingmechanismstorewardgreensolutionsandfosterecosystem-basedadaptation(Dingetal.2021).Despiteyearsofexplorationanditsestablishment,catastrophicinsurancecontinuestohaveroomforimprovement,particularlyintermsoftheunderlyingcatastrophicriskmodels.Whatwerecommend:yyStrengtheninterinstitutionalcollaborationandvulnerabilitydataaccesstohouseholds,firms,andlocalgovernments.Afirststeptowardimprovedcollaborationwouldbetomakeexistingdatabasesonclimatevulnerabilitymorebroadlyaccessibletogovernmentandnongovernmentactors.Withoutsuchinformation,planningprocessescanbemisguidedandpermissioncanbesignificantlydelayed,whileprivatedecisionsfailtotakeclimaterisksintoaccount.Beyonddatasharing,thecreationofaninterministerialtaskforceorleadinggrouponadaptationcouldraisetheprominenceoftheissueandfacilitatecoordinationacrossagencies.yyEnhancelocalgovernmentcapacitytoaddresspluvialfloodingandlandslidehazards.ClimateprojectionsforChinesesettlementsshowintensifyingextremeprecipitationinthecomingdecades.Thisalarmingtrendcouldexertdifferentialimpactsindifferentlocations:inurbancenters,elevatedpluvialfloodhazardscouldexpandthereachoflocalizedfloodingandcausemoredisruptions;intheperipheries,especiallyinplaceslikeHangzhouandChengdu,communitiesinmountainousareascouldfaceheightenedprobabilitiesoflandslide.Localgovernments,byandlarge,stilllackthecapacity90ChinaCountryClimateandDevelopmentReportandknowledgetoovercometheimplementationchallengesandengagetheresidentsontheground.Therefore,tobringtheideasintoreality,capacitybuildinghastobeincorporatedintothebroaderclimateadaptationframeworktoallowforinstitutionalizationofknowledgeandparticipatorygovernance.Moreover,governmentsatthesubcitydistrictlevelcouldbenefitfrompeerlearningandcollaborationbetweenurbanandruraldistrictstojointlyaddressthechallengeofextremeprecipitation.yyDevelopanadaptationeffectivenessevaluationframework.Givenseriousimplementationweaknesses,bettertoolsareneededtoassesstheactionsofstakeholdersatthelocallevelandmakeadjustmentsasappropriate.China’stargetsettingandcadreevaluationsystemprovideshigh-poweredincentiveswhentargetsareeasilymeasurableandmadebinding.However,basiccomponentsofimprovedadaptationmanagementareoftenmissing,suchasassetmanagementsystemsthataccountforclimate-relatedlifecycleassetcosts.Moreover,givencompetingdemandsonlocalofficials,targetsmayneedtobecombinedwithfiscaltools,suchastargetedintergovernmentaltransferstoencouragegreaterattentiontoclimateadaptationinpublicinvestmentplans.AshiftinthestructureofPPPcontractsinpublicinfrastructureforlow-costdeliverytowardminimizinglifecycleoperatingcostscouldleverageprivatesectorexpertiseforimprovedadaptivemanagement.yyDevelopnewfinancialtoolstoattractprivatefundingforadaptationinvestments.Withimproveddataavailabilityondisasterrisk,privateinsurancemarketscansetappropriateincentivesandhelpmobilizefundingforriskmitigation.Whereaffordabilityconstraintslimittheabilityofhouseholdsandbusinessestopurchaseadequateinsurance,fiscalsupportcouldmakeinsurancecontractsviable,andwheremoralhazardisakeyrisk,insurancecanbemademandatory.Thegovernmentcouldalsoinsureitsownfiscalrisksthroughtheissuanceofdisasterriskmanagementbonds,therebystrengtheningitsownincentivesforriskreduction.4.3.2.IntegrateadaptationinlanduseandwateruseplansPhysicalrisksfromclimatechangewillaffectthecountry’sagriculturalproductionpotential.Changesincropyieldsandtheavailabilityofarablelandwillaffectagriculturaloutputandcouldincreaserisksunlessproductionpracticesareadapted.ObservedchangesinagriculturalfloodingindifferentpartsofChinacouldinfluencefarmingsystemsandcropareas(Zhangetal.2016),asextremeeventsintensify.InnorthernChina,risingtemperaturesandvaryingprecipitationpatternswillshifttheboundariesofcultivationfurthernorthward,thusincreasingsuitablecultivationareas.However,cropyieldsmaybeimpactednegativelyandtherewillbeanexpansionofpestsanddiseaseincidence(MEE2015).Thevulnerabilityofagricultureinthisregionwillbefurtherincreasedbythefrequentoccurrenceofintensedroughtspredictedbyclimatemodels(MEE2015,Zhangetal.2015).Frequentandintenseheatwaveswillnotonlyhurtagriculturalproduction,butalsothreatenhumanhealthandreducelaborproductivity.Provincesinthecentralregioncouldexperiencelargenegativeeffectsontheproductivityofoutdoorworkers,rangingfrom-2percentto-15percentby2060(Liuetal.2021).Waterresourcesarealreadybeingimpactedbyclimatevariability,andclimatechangewillseverelyaffectChina’swatersystems.AquantitativeassessmentforChina,basedonamultimodeldatasetduringthe1971–2010period,suggestedthatclimatevariabilitydominatedthechangesinstreamflowinmorethan80percentofriversegments,whiledirecthumanimpactdominatedchangesmostlyinnorthernChina(Liuetal.2019).AnassessmentoffuturewatersupplyanddemandscenariosforAsia,basedonglobalclimatechangeandsocioeconomicscenarios(Satohetal.2017),foundthatwaterdemandinsectorssuchasirrigation,industry,andhouseholdswillincreaseby30to40percentbetween2010and2050.Waterstressislikelytobecomemorepronounced.Bymid-21stcentury,thelargeriversystemsinChinaandinternationaltransboundaryriverbasinscouldfaceseverewaterscarcitychallengeswithclimatechangeactingasastressmultiplier.TheYangtzeRiverDeltaandPearlRiverDeltawillfacesubstantialrisksfromsea-levelrise,estimatedtoreachupto80cmrelativeto1986–2005(Arnelletal.2018).91ChinaCountryClimateandDevelopmentReportWhatwerecommendyyDevelopguidanceandplaninvestmentsthatpromotescience-basedadaptationmeasuresinagriculture.Bothagricultureandwaterresourcesmanagementhaveyettodevelopdedicatedsectoralguidanceonclimateactionandadaptationresponse.Ofthethreecountry-levelfunctionalzonesdefinedinthenationallandplanningframework(agriculture,urban,andecological),theagriculturalfunctionzonedoesnotyethaveanoverarchingadaptionpolicyframework(Fuetal.2020).Adaptationinagriculturefocusesonpromotingwater-efficientandhigh-standardfarmland,mainlydesignedforbetteryieldratherthanclimateadaptation.Itisnecessarytoplanthelayoutandstructureofcropproduction,andtoimproveagriculturalproductionconditionsbasedonscientificclimateresearch,takingintoaccountavailableadaptationtechnologies(Zhouetal.2016).Notethatinvestmentsinimprovedagriculturalpracticesthatlowertheexcessiveuseofchemicalfertilizerswouldnotonlyhavesignificantclimatemitigationbenefits,butbyreducingeutrophicationofwaterbodies,wouldalsoincreasefreshwateravailabilityforecosystems,strengtheningclimateresilienceinthefaceofgreatervariabilityinwaterresources.yyInvestinproactivewater-relatedriskmanagement.WaterresourcesmanagementinChinaisprimarilyfocusedondealingwithcurrentfloodinganddroughtrisksthroughinfrastructureupgradesandwater-saving.Thefocusisoftenonefficiencyimprovementratherontheimpactsofachangingclimate.WaterscarcityisafamiliarissueinnorthernChinesecities.Despitemassivewaterdiversionprojectstobuttresscities’watersupply,growingdesertsandshrinkingaquifersstillseriouslyjeopardizewatersecurity.However,eveninsouthernChina,watersuppliesareincreasinglystrained.GuangdongProvince,whereGuangzhouandShenzhenarelocated,recentlyenduredadroughtinDecember2021duetohistoricallylowrainfallandsalineintrusion.Asitstands,China’spercapitawaterresourcesisonly2,100cubicmeters,one-thirdoftheglobalaverage.Asclimatechangebringsmoreunpredictabilityintotheweatherpattern,thereisasignificantpossibilityofworseningdroughtincertainpartsofChinainthenearfuture,dependingontheemissionsandsocioeconomicdevelopmentscenario.TheNationalWater-SavingActionPlan(2019),akeystrategythatguidesnationaleffortsonwater-saving,makesnoreferencetoclimateoradaptation.Toensuregreaterresilienceforallwaterusers,fromhouseholdsandcitiestofarmersandindustrialenterprises,thelatestclimatescienceneedstobeincorporatedintointegratedclimateandhydrologicalmodelstounderstandthespatialandtemporalpatternsofwateravailability.Suchscience-basedanalysisshouldthenbereflectedinnationaltargetsforwater-useefficiency,waterwithdrawals,andindustrycodessuchasecologicalflowrequirements.ThiswillrequirenotonlytheeffortoftheMinistryofWaterResourcesandprovincialwaterdepartments,butalsothecollaborationoflineagenciesoneconomicplanning,agriculturedevelopment,andindustryandecosystemmanagement.Inthepublicsector,proactivewater-relatedriskmanagementenablesgovernmentstodiversifyinfrastructurethatmakesoptimaluseofstormwaterandurbanwaterways,floodcontrol,aquiferrecharge,andwaterreuse.Private-sectoractorsshouldalsounderstandtheirwaterimpactsandrisksandengageinwaterstewardshipeffortsfocusedonmeasurableimpactinwatershedhealth.yyStrengtheningtheroleofnature-basedsolutionsinclimateadaptation.CurrentlyNbSpoliciesareappliedinsixdifferentecosystemtypesundertheresponsibilitiesoffourdifferentlineagencies63(Yanetal.2021).Policytoolsaremostadvancedinsectorsgoverningnaturalecosystems(forests,grassland,wetlands)asaresultofpastexperienceandexistingexpertise,whereasforagricultureandurbanecosystems,thepolicyframeworksareweaker.ThereisalackofasystematicnationwidepolicyframeworkthatintegratesNbSinexistingpolicy-makingprocesses,asNbSfallsunderthejurisdictionofmultipleministrieswithoutasharedunderstandingofitsroleinclimateadaptationoreffectivecoordinationandcommunication.Inparticular,thekeyministryleadinggovernmentresponsetoclimate63Thesixecosystemsandcorrespondinglineagenciesareforest,grassland,wetland(NationalForestyandGrasslandAdministration),farmland(MinistryofAgricultureandRuralAffairs),ocean(MinistryofNaturalResources),andcities(MinistryofHousingandUrban-RuralDevelopment).92ChinaCountryClimateandDevelopmentReportchange(theMinistryofEcologyandEnvironment)hasnotyetfullyrecognizedtheroleofNbSinclimateresponse.4.3.3.Protectcriticalpublicassetsandservices,particularlyinurbanareasClimatechangealsothreatensChina’surbanspaces,withcitiesexpandingmorerapidlyinareasexposedtoclimaterisks.China’srapidurbanizationrateoftenmeansthatcitiesareexpandingintohazardousfluvialandpluvialfloodzones.CitiesinChinawillbeathighriskofcoastalflooding,whilecoastalerosionwillcausedamagestolands,beaches,piers,shoreprotectiondams,andprotectiveforests.BasedonestimatesbyTheFinancialTimes(BernardandShepherd2021),theGDPatrisk(in2019purchasingpowerparity)inShanghaiandGuangzhou,togetherwiththeirsurroundingareas,couldsurpass,respectively,US$1.6trillionandUS$291billionayearbytheendofthecenturyunderahigh-emissionsscenario.IntheEastAsiaandthePacificregion,riskyurbangrowthisoutpacingsafegrowth,withhigh-risksettlementsexpanding60percentfasterthansafeones.China’strendsareakeydriver:between1985and2015,built-upareasinChinaincreasedby165percent,andsettlementsinthehighestfloodhazardcategorygrewby223percent(accountingfor46percentoftheworld’snewhigh-risksettlements).AnalysispreparedforthisreportshowsthatlargeurbanareassuchasShenzhen,Hangzhou,Guangzhou,Shanghai,andTianjinallsawtheirexposedsettlementsexpandbyover500percentduring1985–2015,exacerbatingthealreadyseriousfluvialfloodhazard(seefigure38).Figure38.Growthofsettlementareasexposedtofloodhazards(1985–2015)a)Fluvialfloodhazardb)PluvialfloodhazardGrowthofsettlementareaexposedtofluvialfloodhazard(%)Growthofsettlementareaexposedtopluvialfloodhazard(%)Source:CityResilienceProgramteam(WorldBank).Moreover,sea-levelriseandstormsurgeconstituteaseriousandimminentthreattoChinesecities.ClimateCentralestimatesthatthehomesof43millionpeopleinChinacouldbebelowthehigh-tidelevelby2100,andinmostcasesasearlyas2050,andmanyofthesehomesarecurrentlylocatedinoneofthedense,low-lyingcoastalcities.Thescaleofimpactistremendous,butlocalgovernmentstendtolacktheexpertiseandincentivetoaddressthisurgentissue.AlthoughthenationalgovernmenthasunveiledtheActionPlanforUrbanAdaptationtoClimateChangein2016,thepoliciesandinitiativeshavenotyetfullytrickleddowntothecitylevel.Theresultingmismatchbetweentheimminentthreatandthedearthofadaptationactionscouldcausecatastrophicoutcomeswhenthenextcoastalfloodinevitablyoccurs.93ChinaCountryClimateandDevelopmentReportWhatwerecommendyyCombinegreyandgreeninfrastructuresolutionsinmanagingfloodanddroughtriskstocities,settlements,andkeyinfrastructure.Section3.4.4arguedthatregulatorymeasuressuchasfloor-arearatiosandland-useregulationstodiscourageurbansprawlandpromotecompactnesscaninfluencethedensityofdevelopment.Thiswillcontributetoreduceexpansioninhigh-riskareas.However,residualrisksareunavoidable.MosturbanadaptationinSouth,East,andCentralAsiahasbeenreactiveinnature(Dulal2019,Singhetal.2021),raisingquestionsonpreparedness,proactivebuildingofadaptivecapacities,andwhetherpresentactionscanlockcertaincities/sectorsintomaladaptivepathways.Adaptationoptionsrangefromtypicalinfrastructuralmeasuressuchasbuildingfloodprotectionmeasuresandseawalls,andclimate-resilienthighwaysandpowerinfrastructure,toscaled-up,sustainableland-useplanningthroughzoning;developingengineeringconstructionstandards;andadoptionofnature-basedsolutionsmeasuressuchasprotectingurbangreenspaces,improvingpermeability,andmangroverestorationincoastalcities(Brinketal.2016,Fink2016,Yuetal.2018).Waterinfrastructurewillalsorequireadetailedunderstandingofthevulnerabilityattributesofinfrastructures,includingtheirexactlocation,thebeneficiariesthattheyserve,andtheirexistingfloodprotectionstandards.64yyLocalizeadaptationstrategiesagainstsea-levelriseandstormsurge.Fortunately,citiesinChinaareequippedwithsomeexistingadaptations.Shanghai,forexample,isalreadysurroundedbyhundredsofkilometersofseawallstofendofftheintrusionofseawater,butwithclimatechange,intensifyingextremeprecipitation,andpossibilitiesofcompounddisasters,thecurrentfloodprotectionmightprovetobeinadequateandoverlycostly.Furthermore,othercoastalcitiesmaynotenjoythesamelevelofprotectionandresourcesthatShanghaidoes.Therefore,effective,large-scaleadaptation,suchasearlywarningsystems,coastalmangroves,andimproveddrainage,becomeespeciallycrucial.Moreover,tomaximizethebenefitsforcommunities,citygovernmentsshouldinvolvelocalresidentsintheimplementationprocesstonotsimplyraiseawareness,butalsotoleveragecommunityresourcesfordisasterpreventionandresponse.4.3.4.HelpthemostvulnerablemanageresidualrisksandnaturaldisastersFoodpriceshocksandclimate-changeinducedagriculturalproductionshockswillbekeychallengesfacedbythevulnerablepopulationsinChinaoverthenextfewdecades.Theimpactsofclimatechangeonthepoorwillbeverydifferentdependingonwheretheylive,whichsectortheyworkin,andthesourcesfromwhichtheyderivetheirincome(Hallegatte,Przyluski,andVogt-Schilb2011).Eventhoughagro-climaticzonesandclimaterisksdiffersubstantiallyacrossthecountry,theconcentrationofpoorerhouseholdsinruralareaswithahighdependenceonagriculturalincomesmakesthemhighlysensitivetochangingyieldsandhigherconsumptionprices.65Whathappenstoagriculturalpricesisalsocriticalforthevulnerableinurbanareasinlightoftheirimpactonthepurchasingpowerandrealincomeofpoorhouseholds.64AcasestudyofChina’swastewatertreatmentplants(WWTPs)tounderstandthelevelofrisksfacedbythiscriticalwaterinfrastructureforriverfloodsandearthquakes(Huetal.2019)showsthatclimatechangewillsignificantlyincreasetheexposureofChineseWWTPstofloods,evenovertheshortterm,withlargepotentialimpactsonusers.Foraneventwitha30-yearreturnperiodunderascenarioofmoderateclimatechange,35percentoftheWWTPs(472outof1,346plants)supplying176millionpeoplecouldexperiencesignificantlyhigherfloodriskby2035.65Strikingly,however,expendituredistributionacrossvariousexpenditurecategoriesremainsfairlyconstantacrosstheincomespread.Householdsspendonaverage37percentoftotalexpenditureonfoodandanother25percentonserviceslikeeducation,medicine,fitness,insurance,entertainment,andcommunications.94ChinaCountryClimateandDevelopmentReportFigure39.Householdsinthelowestincomedecileshighlydependongovernmenttransfersandlaborincomeparticularlyfromagriculturea)Sourcesofhouseholdincomesb)Sectoralcontributiontolaborincome00002040601001208020304050607040608010012345789620406080100120140160180140160180Contributiontototalincome[%]Sectoralcontributiontototallaborearnings[%]Totalhouseholdincome[yuan/cap/day]Totalhouseholdincome[yuan/cap/day]Incomepercapitadecileproperty/capitaltaxincomeprivatetransfersgovernmenttransferfinancial/corporationincomelaborincomeothernon-laborincomesManufacturingAgricultureConstructionUtilitiesMiningServicesbottom10percentilebottom20percentileSource:WorldBankcalculationsusingHallegatteetal.(2017),ShockwavesModelingforChinaFigure40.ThewelfareofpoorerhouseholdsisparticularlysensitivetotheimpactoffoodpricesSensitivityoftotalhouseholdexpendituretofoodexpenditureshocks(percentchangeasaresultofa1percentshockinhouseholdfoodexpenditure)0Bottom-20AllBottom-20All0.10.20.30.50.60.4UrbanRural+31%+46%Source:WorldBankstaffestimatesAnalysispreparedforthisreportevaluatesthesensitivityofhouseholdwelfaretohypotheticalclimatechangeimpactshocks.Sourcesofhouseholdincomesaregroupedintofivemutuallyexclusiveandcollectivelyexhaustivestreams:laborincome,financialincome,propertyincome,publictransfers,andprivatetransfers.Oversuccessiveiterations,themethodologyfortheanalysisgeneratesrandomandindependentperturbationsforeachchannel.Moreover,torepresentfoodpriceshocks,theanalysisincludesshockstofoodexpenditure.Althoughtheseabstractshocksdonotrepresentclimatechangedirectly,theyaredevicesforstudyingdifferenttransmissionchannelsofclimaterisks.Thesensitivityofhouseholdexpendituretotheseincomeandexpenditureshocksisusedasawelfareimpactmetric.Whilethisreportdidnotinvestigategenderdifferentiatedimpacts,climateshocksandclimaticdisastersmayalsowieldnegativeimpactsongenderequality.66Whenitcomestovulnerabilityandadaptation,gender66Usingapaneldataseriesover100lowandmiddleincomecountriesbetween1981and2010,Eastin(2018)95ChinaCountryClimateandDevelopmentReportdifferencesarealsonotedinChina.Researchonasampleof31majorcitiesinChinashowsthatheatwavestendstoincreasemortalityforwomen,theelderlyandthosewithloweducation(Yangetal2019;Yangetal2013).Empiricalevidencealsopointsatdifferencesinthewaymale-headedhouseholdsandfemale-headedhouseholdsrespondtoclimatechange.Male-headedhouseholdsaremorelikelytoadoptnewtechnologyforwaterconservationandtoincreaseinvestmentinirrigationinfrastructure(Jinetal2015).ThelaborproductivityimpactsofclimatechangearelikelytodominatetheoverallwelfareimpactstotheChinesepopulationatlarge.Themodelingexercisesuggeststhata1percentreductioninlaborincomethroughalaborproductivityshockisestimatedtoreducehouseholdexpenditurebyroughly0.4percentonaverage.Asnotedabove,climatechangeimpactonlaborproductivitymaybeashighas15percent(Y.Liu,Z.Zhangetal.2021),resultinginapotential6percentreductioninhouseholdexpenditure,intheabsenceofadaptation.Lowerincomehouseholdswillbeimpactedmainlybychangesinfoodprices,particularlyinurbanareas.WhereaslaborproductivityimpactsofclimatechangearelikelytomattermostforaggregateGDP,agriculturepriceshocksmattermoreforthewelfareofthepoor.Simulationssuggestthata1percentpriceriseinfoodprices—withnochangeinagricultureproductivityandconsumptionsubstitution—leadstoa0.45percentreductionintotalhouseholdexpenditureforthepoorest2decilesofthepopulation,onaverage.Thehighershareofincomethatpoorpeoplespendonfoodmakesthemparticularlyvulnerabletorisingpricesorpricevolatilityonfooditems.Poorerhouseholdsinurbanareasare46percentmoresensitivetofoodexpenditureshocksthantheaverageurbanhousehold(Figure40).Inruralareas,poorerhouseholdsare31percentmorevulnerablethantheaveragehousehold.Themodelingestimatessuggestthatpoorerhouseholdsinurbanareasare13percentmoresensitivetofoodexpenditureshocksthantheirruralcounterparts.Thisisbecausetheyspendalargershareoftheirtotalexpendituresonconsumptionoffooditems.Thereisconsiderableregionalvariationintheseverityofthetypeandmagnitudeofclimatechangeimpactsonwelfare.Whereasthepoorerpopulationsinthebottom2decilesinthecoastalandcentralregionareroughly40percentmoresensitivetofoodpriceshocksthantheaveragepopulationinthoseregions,thoseinthewesternregionareabout30percentmoresensitivethantheaveragehouseholdinthewesternregion.Thetotalshareoffoodexpenditureislowerinthewesternregion,whichexplainssomeofthesedifferences.Thepoorinthewesternregionare,however,moresensitivetoclimatechangeshockstolaborproductivitythanthoseinotherregions.Thisisinpartdrivenbythelargerdependenceonoutdoorworkersinagricultureinthisregion.WhatwerecommendyyImprovethetargetingofsocialtransferstoaddressclimatevulnerabilities.Climateimpacts,particularlyclimate-induceddisasters,areincreasinglyadirectcauseofpovertyinChina(Liu2019).Thereisasignificantoverlapbetweenclimate-vulnerableareas,ecological-sensitiveareas,andpoverty-strickenruralareas(Oxfam2015).Poorruralhouseholdersaredirectlyexposedandsensitivetoclimateimpacts(especiallydisasters)andhaveloweradaptivecapacity(Zhangetal.2019).Moreover,theabilityofthepoortobenefitfromgovernment-fundedprojectsmaybehamperedbyelitecapture(Zhang2014).Thereisapotentialmismatchbetweendirectgovernmentsubsidiesandthecriticalneedstotargetthemostvulnerablegroupsinclimate-affectedregions.Attheplanninglevel,povertyalleviationprogramsshouldincorporateclimateconsiderationsandtheunevenimpactsondifferentsocio-economicgroups.Targetedeffortstoimprovingpoorcommunities’climateadaptationcapacityincludeimprovinglocalsocialadaptivecapacitiesthroughfosteringlocalinstitutionsandcooperatives(ZhangandAi2018)andimprovingaccesstoclimateinsurance,smallloans,andeducationandtrainingopportunities(ZhouandSun2016).showsthatdeviationsfromlongtermmeantemperaturesandincreasingincidenceofclimate-relateddisastersareassociatedwithdeclinesinwomen’seconomicandsocialrights.Raoetal(2019)emphasizetheneedforadaptationpolicytomovebeyondthecountingofnumbersofmenandwomenexposedtoclimatechangetoamoredetailedunpackingoftherelationsofpoweratplay,theanalysisofinclusionandexclusionpatternsindecision-making,andingrainedculturalbeliefsrelatedtoequalopportunitiesandrightstopeopleacrosssocialhierarchies.96ChinaCountryClimateandDevelopmentReport5.Fromanalysistoaction©konggaStudio/Shutterstock97ChinaCountryClimateandDevelopmentReport5.FromanalysistoactionThisCCDRhasasked,andattemptedtoanswer,howChinacanachievethebestpossibleoutcomesbothfortheclimateandthecountry’sdevelopment.ThereporthasidentifiedwaysinwhichChinacanachieveclimateanddevelopmentgoalsinparallel.Table7providesasummaryofshort-termprioritiesbydetailingwhytheymatterandhowtheyoughttobeimplemented.Themeasurescombineeconomy-wideandsector-specificreformsinthekeyemittingsectors.Theyaresequencedtotakeadvantagefirstofno-regretstepsandlower-hangingfruit—forexample,theavailabilityoflow-costrenewabletechnologiesinthepowersector.Someofthemeasures,liketheacceleratedrolloutofrenewableenergygenerationcapacity,maythereforeresultinspeedyreductionsinemissions.Others—forexample,refiningChina’sETSorinvestinginlow-carbonresearchanddevelopment—maynotcauselargeimmediategainsbutcouldestablishimportantfoundationsfordeepdecarbonizationinthelongrun.Together,thesemeasuresconstitutecriticalfirststepsthatChinacouldtakeoverthenextfiveyears.Giventheuncertaintiesinvolved,policiesandtheirimpactswillhavetobemonitoredandadaptedovertime.Table7.Short-term(thenext5years)policyprioritiesRationalePolicyOptions1.DefinethetrajectorytocarbonpeakinganddeliverclearsignalstofirmsChinahasmadelong-termcommitments,butshort-termemissiontargetsremainambiguous.•Provideclearforwardguidancebysettingannualmass-basedemissionscapsoverthenextdecade,supportedbyaconsistentcarbonaccountingframeworkforfirms,provinces,andcities.2.AcceleratethepowersectortransitionwithmarketreformsandinvestmentsinrenewablesThesectorishighlyreliantoncoal,anditoccupiesthelargestshareoftotalemissions.Greenenergytechnologiesareincreasinglyavailableandaffordable.Thedemandforelectrificationindownstreamsectors(transport,industry)isrising.•Increase,by2030,solarandwindpowergenerationcapacityto1200GW-1,700GW,supportedbyadditionalenergystorageof200GWandmoreflexibleelectricitygrid.•Adoptinternationalbestpracticeinsystemplanning,reliabilityregulations,andvariablerenewableenergy(VRE))generationforecastanddispatchtoenablephasingdownofcoaluse.•Expediteelectricitymarketreforms,includingpricingreforms,developmentofancillaryserviceandcapacitymarkets,andinterprovincialpowertrade.•Promotedemandmanagementmeasures,includingenergyefficiency,distributedrenewableenergy,anddemandresponseprograms.3.Decarbonizekeyenergydemandsectors—industryandtransportEmissionsfromtransportandindustryareincreasing.Thereispotentialtoswitchtocleanenergysources,includingelectrification,efficiencyimprovement,anddemandmanagement.•Adoptmacroeconomicpoliciestosupportrebalancingfromindustryandinvestment-ledtoservicesandconsumptiondrivengrowth.•Setclearandambitiousemissionsreductiontargetsandtechnologystandardsinthecementandironandsteelindustries.•Accelerateelectrificationoftheprivateandcommercialfleets,movingawayfromfocusonpublicbuses,providingtaxincentivestowardpriceparity,nonmonetaryincentives,andadequatecharginginfrastructure(inconjunctionwiththelowcarbonenergytransitiontodecarbonizepowersupply).•Incentivizetransportuserstoimprovefuelandoperatingefficiencythroughpricingandregulationsonvehicleandfuelstandards.•Promotemodalshiftstopublicmasstransitandlow-carbonfreightmodes(railwaysandwaterways)throughmodalintegrationandpricingincentives.98ChinaCountryClimateandDevelopmentReportRationalePolicyOptions4.EnhanceclimateresilienceandadaptationinrurallandscapesandurbanareasTheland-usesectorcanbeharnessedtoincreaseresilience,anditcanbecomeanetcarbonsinkprovidingopportunitiestooffsethard-to-abateemissionsinothersectors.•Developanadaptationpolicyframeworkforagriculture,increasetheuseofnature-basedsolutions,andusescientificandmeteorologicalinformationtoinformwateruseandwaterresourcesplanning.•IncreasetheprofitabilityofinvestmentsinNbSbyacceleratingforestrysectorreform,reorientingeco-compensation,andleveragingcarbonoffsetmarkets.•Repurposepublicsectorsupporttoagriculturetosupportlow-carbonlanduseandpromotethereuseofagriculturalwaste.•Strengthenpolicyframeworkonurbanland-useandspatialplanning,todiscouragesprawl.•Strengthenstandardsandprovidefiscalincentivesforenergyconservationandemissionsreductioninthebuildingsector.•Strengtheninterinstitutionalcollaborationandvulnerabilitydataaccesstohouseholds,firms,andlocalgovernments,anddevelopanadaptationeffectivenessevaluationframework.5.Harnessmarketstodrivecost-effectiveeconomy-wideabatementandinnovationEconomy-wideclimatepoliciesarenecessarytointernalizeboththenegativeexternalityofcarbonemissionsandthepositiveexternalitiesfrominnovation.•Expandtheuseofcarbonpricingmechanisms,includingtheETS,withafocuson(i)buildingmarketinfrastructure,(ii)unifyingperformancebenchmarks,and(iii)introducingpermitauctioningasthefoundationforagradualtransitiontowardaneffectivecapandtradesystemwithanabsoluteemissionscap.•EnhancecompetitionbetweenSOEsandnon-SOEstoallowmarketforcestodriveallocationofcapitalandR&Dresources.•Revisenontarifftradebarrierstoeliminateincentivestotradeinhigh-carbonproducts.•ReformR&Dsupportforlow-carbontechnologies,movingfromquantitytoqualityofresearchandpatenting.•Harnessthefinancialsectorbyestablishingcorporateemissionsaccountingsystems,mandatingclimate-relatedfinancialdisclosures,andusingblendedfinancetofavorinnovation.6.Mitigatethesocialcostsofthetransitionandpreparethelaborforceforthelow-carboneconomyThelow-carbontransitionwillhavedistributionalimplications.Householdswillalsobeaffectedbyrisingenergypricesandbychangesinthelabormarket.•Improvelabormobilitythroughhukoureformandactivelabormarketprograms.•Providetargetedassistancetocommunitiesthatwillexperienceconcentratedjoblosses.•Revisitgovernmentskillsdevelopmentstrategiesandsystemsandworkwithschools,traininginstitutions,employers,andworkerstoincorporategreenskillsintotherelevantprograms.7.FosterglobalclimateactionWithChinabeingthelargestsourceofinfrastructurefinancinginlow-incomeeconomies,adoptingclimate-friendlyinvestmentpracticeswouldamplifyglobalimpact.•EncourageChineselenders,includingpolicybanks-ChinaDevelopmentBankandChinaEximtoadoptcleanfinancingprinciples(“theEquatorprinciples”),andoperationalizethephasingoutoffinancingofcoalandothercarbon-intensiveinfrastructure.99ChinaCountryClimateandDevelopmentReportPoliciestoachievedecarbonizationandclimateresiliencedifferintermsofimpactandurgency.Eachpriorityisassessedonathree-dimensionalscale:(i)climateimpact,(ii)developmentco-benefits,and(iii)abilitytoavoidlock-ins(Figure41).ImpactisdefinedastheabilitytosubstantiallycontributetomitigateGHGemissions,whereasurgencyisdefinedastheabilitytoavoidlockingthecountryintohigh-carbon/maladaptedpathways.Manyinvestmentscanhavelong-termimplicationsandaredifficulttoreverse.ThisisshowninFigure42,whichrepresentspolicyoptionsalongthetwodimensionsofclimateimpactandabilitytoavoidlock-ins.Thefigureshowstheimportanceofanearlydefinitionofaclearpathtocarbonpeaking(#1);thedefinitionoftargetsfortheironandsteelindustries(#7);andthepromotionofinvestmentsinsolarandwindpowergenerationcapacity,togetherwithstepstophasedowncoal(#2).Thesewouldallhavestrongclimatemitigationimpactsandwouldhelpreducethelock-inofinvestmentsinhigh-carboninfrastructure.Keytoavoidinglockingintoanunsustainablepatternisreducingurbansprawlthroughbetterlanduseandcityplanning(#11).KeytoachievinghighclimateimpactsistheexpansionofcarbonpricingthroughtheETS(#16)and,tomaximizeresilience,developinganadaptationpolicyframeworkforagricultureandstrengtheningadaptationinwaterandthroughtheuseofnature-basedsolutions(#26).Figure41.PrioritizationapproachforrecommendationsAvoidLock-ins:WhentoactImpactExpectedclimateanddevelopmentoutcomesHigh333HighMedium222MediumLow111Low-moderateClimateDevelopmentNotes:Ratedbyaqualitative(1–3)scoring.Arangeofcomplementarymeasureswouldreduceadjustmentcostsandmaximizedevelopmentco-benefits.Figure42(b)and(c)showhowpolicyactionsrankintermsofdevelopmentco-benefitsversusclimateimpactsandversusavoidinglock-ins,respectively.Developinganadaptationpolicyframeworkforagriculture,increasingtheuseofNbS,andusingscientificandmeteorologicalinformationtoinformwateruseandwaterresourcesplanning(#26)appearsasatoppriority.Actionstoacceleratedecarbonizationcanalsogeneratedevelopmentco-benefits.Suchisthecasewitheffortsoflocalgovernmentstoprioritizeneighborhoodregenerationandretrofittingforlow-carbondevelopment,especiallyinareaswithlargepotentialforpollutionreduction,livabilityimprovement,andurbanecosystemrestoration(#12).PromotingprivatesectorinvestmentsandinnovationbyenhancingcompetitionbetweenSOEsandnon-SOEstoallowmarketforcestodriveallocationofcapitalandR&Dresources(#17)cangenerateefficiencygainsthatbenefitbothgrowthandreduceemissions.100ChinaCountryClimateandDevelopmentReportFigure42.Prioritizingpolicyactionstomaximizeclimateanddevelopmentoutcomes12345678910111213141516171819202122232425262728Climateimpact12345678910111213141516171819202122232425262728ClimateimpactDevelopmentco-benefitsAvoidslock-insLowLowMediumHighLowMediumHighMediumHighHighMediumLow12345678910111213141516171819202122232425262728Avoidslock-insDevelopmentco-benefitsLowMediumHighHighMediumLowa)b)c)Note:Short-termactionsareevaluatedusingthreedimensions,orfilters:climateimpact,developmentco-benefits,andavoidinglock-ins.Eachdimensionisassessedaccordingtoa“Low/Medium/High”scale.Thethreepanelsshowthethreedimensionsinapair-wisefashion,withathirddimensionrepresentedbythesizeofthebubble.Priorityactionsareshowninthetop-rightquadrantsofeachchart.Legend:1.Definethetrajectorytocarbonpeaking;2.Increasesolarandwindpowercapacity;3.Expediteelectricitymarketreforms;4.Promoteenergydemandmanagementmeasures;5.Incentivizecleanheatinginbuildingssector;6.Enhancepolicypredictabilityandaccesstofinanceforfirms;7.Settargetsforironandsteelindustries;8.Accelerateelectrificationofprivatetransport;9.Vehicleandfuelstandards;10.Modalintegrationandpricingincentivesinpublictransport;11.Reduceurbansprawlandplanning;12.Neighborhoodregenerationandretrofittingforlow-carbondevelopment;13.Energyconservationandemissionsreductioninthebuildingsector;14.Supportclimate-smartagricultureandwastere-use;15.Increaseprofitabilityofnature-basedsolutions;16.Expandcarbonpricing;17.EnhancecompetitionbetweenSOEsandnon-SOEs;18.Eliminateincentivestotradeinhigh-carbonproducts;19.Shiftfromquantitytoqualityofresearchandpatenting;20.Promoteclimate-relatedfinancialsectorreform;21.Hukoureformandactivelabormarketprograms;22.Targetedassistancetocommunitieswithconcentratedjoblosses;23.Revisitprofessionalskillsdevelopmentstrategies;24.Strengthenclimate-riskdataaccesstohouseholds,firms,andlocalgovernments;25.Developanadaptationeffectivenessevaluationframework;26.Adaptationpolicyframeworkforagriculture,water,andNbS;27.Improvetrainingandawarenessforlocalcommunities;28.Greenfinancingprinciplesforoutboundinvestments.Source:WorldBankGroupstaffassessment.101ChinaCountryClimateandDevelopmentReportListofabbreviationsADBAsianDevelopmentBankADSaccelerateddecarbonizationscenarioAMACAssetManagementAssociationofChinaBAUbusinessasusualCAITClimateAnalysisIndicatorsToolCCDRCountryClimateandDevelopmentReportCCERChinaCertifiedEmissionReductionCCScarboncaptureandstorageCEADsCarbonEmissionAccountsandDatasetsCFCCChinaForestCertificationCouncilCGEComputableGeneralEquilibriumCHPscombineddistrictheatingplantsCSRCChinaSecuritiesRegulatoryCommissionEPSenhancedpolicyscenarioETSemissiontradingschemesEUEuropeanUnionEVselectricvehiclesFAOFoodandAgricultureOrganizationFDIForeignDirectInvestmentFLWfoodlossandwasteGDPGrossDomesticProductGECgreenelectricitycertificateGHGGlobalGreenhouseGasICEVsinternalcombustionenginevehiclesICTinformationandcommunicationstechnologyIEAInternationalEnergyAgencyIMFInternationalMonetaryFundMANAGEMitigationAdaptationandNewTechnologiesAppliedGeneralEquilibriummodelMEEMinistryofEcologyandEnvironmentMoHURDMinistryofHousingandUrban-RuralDevelopmentMRVmeasurement,reporting,andverificationsystemNBSNationalBureauofStatisticsofChinaNbSnature-basedsolutions102ChinaCountryClimateandDevelopmentReportNDCNationallyDeterminedContributionND-GAINNotreDameGlobalAdaptationInitiativeNDRCNationalDevelopmentandReformCommitteeOECDOrganizationforEconomicCo-operationandDevelopmentPEVCprivateequityandventurecapitalPWTPennWorldTablesQFLPQualifiedForeignLimitedPartnerRCPRepresentativeConcentrationPathwaysREFreferencescenarioSMEssmallandmediumenterprisesSOEsstate-ownedenterprisesTFPtotalfactorproductivityTOUtime-of-useUKUnitedKingdomsUNFCCCUnitedNationsFrameworkConventiononClimateChangeUSUnitedStatesVATvalue-addedtaxVREvariablerenewableenergyWDIWorldDevelopmentIndicatorsWHOWorldHealthOrganizationWITSWorldIntegratedTradeSolutionWTOWorldTradeOrganization103ChinaCountryClimateandDevelopmentReportAppendix:DetailedResultsofMacroeconomicSimulations(MANAGECGE)BaselineCarbonNeutralitywithCompensation(NDC)2022203020402050206020222030204020502060DeviationfromBaseline(Percent)AverageGrowth,%RealGDP5.044.413.392.511.740.12-0.01-0.11-0.26-0.31RealGDPpercapita4.664.223.392.671.950.12-0.01-0.11-0.26-0.31PerCapitaIncomeandConsumptionRealGDPPerCapita(Constant2020USD)11,76116,76023,79731,59135,7190.05-0.02-1.05-2.79-5.94RealHouseholdConsumptionPerCapita(Constant2020USD)4,7557,15211,08416,26819,846-0.01-0.092.010.38-4.11RealExpenditureSharesinRealGDPPrivateConsumption(%ofGDP)40.4342.6746.5851.5055.56-0.02-0.031.441.681.08GovernmentConsumption(%ofGDP)14.1214.1214.1214.1214.120.000.000.000.000.00PrivateInvestment(%ofGDP)45.9943.0638.5933.2428.870.020.03-1.46-1.75-1.26GovernmentInvestment(%ofGDP)0.000.000.000.000.000.000.000.000.000.00Netexports(%ofGDP)-0.540.150.711.151.450.000.000.020.070.18SectoralSharesinGDPAgriculture4.784.223.603.032.640.000.000.060.080.13Industry45.1642.6539.4636.6434.840.01-0.04-0.19-0.60-2.35Services50.0753.1356.9360.3362.51-0.010.040.130.522.22104ChinaCountryClimateandDevelopmentReportBaselineCarbonNeutralitywithCompensation(NDC)2022203020402050206020222030204020502060DeviationfromBaseline(Percent)EmploymentNumberofemployed(Thousand)693,778694,567683,631667,213643,1430.00-0.02-0.18-0.52-1.43ExternalBalanceCurrentAccountBalance(%ofGDP)-0.92-0.90-0.89-0.90-0.910.000.00-0.01-0.03-0.06FiscalAggregatesFiscalrevenue(%ofGDP)28.3227.3426.4726.2426.440.020.100.000.201.49Fiscalexpenditure(%ofGDP)19.4418.0117.3216.9817.050.000.031.992.332.55Budgetdeficit(%ofGDP)2.82.631.640.87-0.190.030.08-2.08-2.33-1.55EmissionsEmissions(millionsoftonsCO2)12,33613,13710,3368,9467,584-1.0-3.0-18.7-59.3-86.3Emissionsperunitofoutput(tonsCO2)109.680.144.029.022.0-1.0-3.0-17.8-58.1-85.4MemorandumItemsPopulation(Millions)1,4511,4831,4941,4811,4620.000.000.000.000.00WorkingAgePopulation(Millions)1,0109869068698150.000.000.000.000.00105ChinaCountryClimateandDevelopmentReportCarbonNeutralitywithRevenueRecyclingtoInvestment(NDC)CarbonNeutralitywithRevenueRecyclingtoInvestment(ADS)2022203020402050206020222030204020502060DeviationfromBaseline(Percent)DeviationfromBaseline(Percent)AverageGrowth,%RealGDP0.12-0.010.00-0.14-0.180.130.01-0.05-0.19-0.19RealGDPpercapita0.12-0.010.00-0.14-0.180.130.01-0.05-0.19-0.19PerCapitaIncomeandConsumptionRealGDPPerCapita(Constant2020USD)0.05-0.02-0.12-0.71-3.120.060.14-0.04-1.52-2.31RealHouseholdConsumptionPerCapita(Constant2020USD)0.00-0.11-0.09-0.99-4.98-0.02-0.36-0.66-2.92-4.52RealExpenditureSharesinRealGDPPrivateConsumption(%ofGDP)-0.02-0.040.01-0.14-1.07-0.03-0.21-0.29-0.73-1.26GovernmentConsumption(%ofGDP)0.000.000.000.000.000.000.000.000.000.00PrivateInvestment(%ofGDP)0.020.04-0.010.120.940.030.210.280.671.18GovernmentInvestment(%ofGDP)0.000.000.000.000.000.000.000.000.000.00Netexports(%ofGDP)0.000.000.000.020.120.000.000.010.060.07SectoralSharesinGDPAgriculture0.000.000.000.000.040.00-0.01-0.010.000.02Industry0.01-0.04-0.01-0.34-2.090.00-0.24-0.40-1.21-1.69Services-0.010.040.010.342.050.000.250.411.201.67EmploymentNumberofemployed(Thousand)0.00-0.02-0.01-0.14-0.820.00-0.07-0.10-0.42-0.71ExternalBalanceCurrentAccountBalance(%ofGDP)0.000.000.00-0.01-0.030.000.000.00-0.01-0.02106ChinaCountryClimateandDevelopmentReportCarbonNeutralitywithRevenueRecyclingtoInvestment(NDC)CarbonNeutralitywithRevenueRecyclingtoInvestment(ADS)2022203020402050206020222030204020502060DeviationfromBaseline(Percent)DeviationfromBaseline(Percent)FiscalAggregatesFiscalrevenue(%ofGDP)0.030.10-0.120.151.520.070.750.731.291.79Fiscalexpenditure(%ofGDP)0.010.02-0.03-0.04-0.040.020.150.120.070.06Budgetdeficit(%ofGDP)0.030.08-0.090.131.260.060.620.611.131.71EmissionsEmissions(millionsoftonsCO2)-1.0-3.0-18.7-59.3-86.3-2.0-18.2-43.4-73.7-86.3Emissionsperunitofoutput(tonsCO2)-1.0-3.0-18.6-59.0-85.9-2.0-18.3-43.4-73.2-86.0MemorandumItemsPopulation(Millions)0.000.000.000.000.000.000.000.000.000.00WorkingAgePopulation(Millions)0.000.000.000.000.000.000.000.000.000.00DeviationsfrombaselineareexpressedaspercentofbaselinelevelforRealGDPPerCapita,Emissions,andCarbonPrice.Forallothervariables,deviationsfrombaselineareexpressedaspercentagepointsofGDPinthecorrespondingscenario.AverageGrowth,%RealGDP0.170.050.05-0.11-0.150.13-0.020.040.02-0.06RealGDPpercapita0.170.050.05-0.11-0.150.13-0.020.040.02-0.06PerCapitaIncomeandConsumptionRealGDPPerCapita(Constant2020USD)0.170.400.810.58-1.730.060.040.070.06-1.25RealHouseholdConsumptionPerCapita(Constant2020USD)-0.04-0.070.08-0.65-4.49-0.01-0.06-0.02-0.38-3.45RealExpenditureSharesinRealGDPPrivateConsumption(%ofGDP)-0.09-0.20-0.34-0.63-1.56-0.03-0.04-0.04-0.22-1.24GovernmentConsumption(%ofGDP)0.000.000.000.000.000.000.000.000.000.00PrivateInvestment(%ofGDP)0.090.210.350.621.440.030.040.040.221.16CarbonNeutralitywithRevenueRecyclingtoInvestment(NDC)CarbonNeutralitywithRevenueRecyclingtoInvestment(ADS)2022203020402050206020222030204020502060DeviationfromBaseline(Percent)DeviationfromBaseline(Percent)GovernmentInvestment(%ofGDP)0.000.000.000.000.000.000.000.000.000.00Netexports(%ofGDP)-0.01-0.01-0.020.010.120.000.000.000.010.08SectoralSharesinGDPAgriculture-0.02-0.04-0.06-0.050.010.000.000.00-0.010.02Industry0.170.441.001.11-0.360.00-0.04-0.03-0.39-2.20Services-0.15-0.40-0.95-1.070.35-0.010.040.030.402.18EmploymentNumberofemployed(Thousand)0.020.050.140.08-0.570.00-0.010.02-0.02-0.45ExternalBalanceCurrentAccountBalance(%ofGDP)0.000.000.010.01-0.020.000.000.000.00-0.01FiscalAggregatesFiscalrevenue(%ofGDP)0.140.370.330.732.200.020.10-0.150.111.49Fiscalexpenditure(%ofGDP)0.070.190.280.350.370.000.02-0.07-0.09-0.11Budgetdeficit(%ofGDP)0.090.190.000.201.340.030.09-0.050.251.56EmissionsEmissions(millionsoftonsCO2)-1.0-3.0-18.7-59.3-86.3-1.0-3.0-18.7-59.3-86.3Emissionsperunitofoutput(tonsCO2)-1.2-3.4-19.3-59.5-86.1-1.1-3.0-18.7-59.3-86.1MemorandumItemsPopulation(Millions)0.000.000.000.000.000.000.000.000.000.00WorkingAgePopulation(Millions)0.000.000.000.000.000.000.000.000.000.00108ChinaCountryClimateandDevelopmentReportReferencesAcemoglu,Daron,UfukAkcigit,DouglasHanley,andWilliamKerr.2016.“TransitiontoCleanTechnology.”JournalofPoliticalEconomy124(1):52–104.ADB(AsianDevelopmentBank).2015.AddressingClimateChangeRisks,Disasters,andAdaptationinthePeople’sRepublicofChina.Mandaluyong,Philippines:ADB.(link)Aghion,P.,C.Hepburn,C.,A.Teytelboym,andD.Zenghelis,D.2019.“PathDdependence,IinnovationandtheEconomicsofClimateChange.”InHandbookonGgreenGgrowth,editedbyR.Fouquet..Cheltenham,UK,andNorthampton,MA:EdwardElgarPublishingAlvarez,M.(2019).“DistributionalEffectsofEnvironmentalTaxation:AnApproximationWithAMeta-RegressionAnalysis,.EconomicAnalysisandPolicy,62(C):,382-–401.Arnell,N.,Q.Chao,Q.,Y.Xu,Y.,J.Liu,J.,K.Liu,K.,&andT.Jiang.,eds.2018.“DirectRiskofClimateChange.InCommitteeonClimateChangeandChinaExpertPanelonClimateChange.”UK-ChinaCo-operationonClimateChangeRiskAssessment:DevelopingIndicatorsofClimateRisk.(link)Battiston,S.,A.Mandel,I.Monasterolo,etal.2017.“AClimateStress-TestoftheFinancialSystem.”NatureClimateChange7:283–88.Bernard,S.,andC.Shepherd.2021.“China’sSea-LevelRiseRaisesThreattoEconomicHubstoExtreme.”FinancialTimes,June12,2021.(link).BloombergFinanceL.P.(2021).WhitepaperontheFinancingofChinaRenewableEnergyProjects.NewYork:Bloomberg.Brink,E.,etal.,2016.“CascadesofGreen:AReviewofEcosystem-BasedAdaptationinUrbanAreas.GlobalEnvironmentalChange,36:111–23.doi:10.1016/j.gloenvcha.2015.11.003Bryan,B.,etal.2018.“China’sResponsetoaNationalLand-SystemSustainabilityEmergency.”Nature559:193–204.(link)CATS(ChinaAcademyofTransportationScience).2015.StudyonLowCarbonDevelopmentStrategyofUrbanTransportationinChina.Beijing:CATS.Cattaneo,A.,M.Sánchez,M.Torero,andR.Vos.2021.“ReducingFoodLossandWaste:FiveChallengesforPolicyandResearch.”FoodPolicy98:101974.CBI(ClimateBondInitiative).2021.PostIssuanceReportingintheGreenBondMarket2021.London:CBI.((link)Chai,Q.M.,S.Fu,X.Y.Wen,G.Y.Liu,andQ.H.Xu.2019.“FinancialNeedsinImplementingChina’sNationallyDeterminedContributiontoAddressClimateChangeBy2030.”ChinaPopulation,ResourcesandEnvironment29(4):1–9.(link)(Chinese)Chang,T.Y.,J.GraffZivin,T.Gross,andM.Neidell.2019.“TheEffectofPollutiononWorkerProductivity:EvidenceFromCallCenterWorkersiInChina.”AmericanEconomicJournal:AppliedEconomics,11(1):151–72.(link)Chen,C.,etal.2019.“ChinaandIndiaLeadinGreeningoftheWorldThroughLand-UseManagement.”NatureSustainability2:1221–29.109ChinaCountryClimateandDevelopmentReportChengJ.,D.Tong,Q.Zhang,etal.2021.“PathwaysofChina’sPM2.5AirQuality2015–2060intheContextofCarbonNeutrality.”NationalScienceReview8(12),2021:nwab078.https://doi.org/10.1093/nsr/nwab078ChinaTransportSectorDevelopmentStatisticalBulletin.2020.Beijing.CICC(ChinaInternationalCapitalCorporationLtd.)Research,CICCGlobalInstitute.2022.GuidebooktoCarbonNeutralityinChina:MacroandIndustryTrendsUunderNewConstraints(1sted.2022).NewYork:Springer.Clark,A.,andP.Benoit.2022.GreenhouseGasEmissionsFromState-OwnedEnterprises:APreliminaryInventory.NewYork:ColumbiaCenteronGlobalEnergyPolicy.(link)ClimateWatch.2020.HistoricalGHGEmissions.Washington,DC:WorldResourcesInstitute.(link)CMA(ClimateChangeCenterofChinaMeteorologicalAdministration,NationalClimateCenter).2021.BlueBookonClimateChangeinChina(2021).Beijing:SciencePressLtd.CMA(ChinaMeteorologicalAdministration).2021.“TheNationalWeatherTrendsin2020andForecastsinJanuary2021.”Pressrelease,January6,2021.(link)CMCC(FondazioneCentroEuro-MediterraneosuiCambiamentiClimatici).2021.G20climateClimateRriskAatlas:China.Lecce,Italy:CMCC.(link)Crippa,M.,D.Guizzardi,E.Solazzo,M.Muntean,E.Schaaf,F.Monforti-Ferrario,M.Banja,J.Olivier,G.Grassi,S.Rossi,andE.Vignati.2021.EmissionsDatabaseforGlobalAtmosphericResearch,versionv6.0_FT_2020(GHGtime-series).EuropeanCommission,JointResearchCentre(JRC)[Dataset].(link).CSY.2019.ChinaStatisticalYearbook.Beijing:ChinaStatisticalPublishingHouse.DellaVigna,M.,etal.2021.CarbonomicsChinaNetZero:TheCleanTechRevolution.NewYork:TheGoldmanSachsGroup,Inc.(link)Ding,H.,T.Yu,W.Xi,L.Lu,W.K.Fong,Y.Cao,andK.Li.2021.AcceleratingClimate-ResilientInfrastructureInvestmentinChina.Washington,DC:WorldResourcesInstitute.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