China's Carbon Goals

China is poised to rollout a new national emissions trading scheme market demonstrating that China is committed to becoming a global leader in climate mitigation and renewable energy technologies. China's national strategy is to achieve peak levels by 2030 and carbon neutrality by 2060 (the "3060 Target"). This represents a myriad of opportunities for non-Chinese businesses to invest and trade in the renewable energy and green finance sectors.

China's Paris Agreement Targets

Further to China's obligations under the Paris Agreement, China has announced its commitment to peak its national carbon emissions ("peaking" being the point which annual carbon emissions are at their zenith) by 2030 and to achieve carbon neutrality by 2060 ("neutrality" being the point human emissions and absorption of carbon is balanced, i.e. net zero carbon emissions). To reach these targets, China's Ministry of Ecology and Environment has proposed a draft Emissions Trading Scheme Regulation on 30 March 2021 (ETS) which will create a new (or rather, expanded) centralised emissions trading and settlement market.

China's targets might be somewhat behind the ambitious 2050 carbon neutrality target set by other counties under the Paris Agreement (which requires each participating state to set its own Nationally Determined Contributions) but, then again, the carbon reduction challenge before China is unprecedented. Since 2006 China has been the world's largest emitter of CO2 and is currently responsible for around 30% of carbon emissions globally, with 18.47% of the world's population. Some authors have commented that the country will need to cut its 2020 carbon emissions by 85%-90% to achieve its goals. It is a massive challenge for China but one which they are showing their commitment to rise to.

What is China's carbon trading scheme?

Once launched, China's new nationwide emissions trading market will be the biggest emissions trading system in the world, with the volume of total allowances allocated exceeding other regional emissions trading markets such as the EU or U.S. markets. Carbon trading constitutes the bulk of greenhouse gas emissions trading globally. Under a carbon trading scheme, a polluter that wants to produce more carbon emissions is required to purchase the right to emit more and the entity producing fewer emissions sells the right to emit to those polluters. What is somewhat unique about the Chinese scheme is that it includes "carbon intensity" as a reporting metric. Under the ETS, the annual carbon-intensity of an entity is the main qualifying criteria for an entity to be allowed to trade in the national carbon emission trading market. An entity whose annual greenhouse gas emissions reaches 26,000 tons of carbon dioxide equivalent is considered as a qualifying, "key emission" entity.

The carbon intensity metric, along with other data that Chinese entities must report, will inform Chinese decision-makers on how many allowances (essentially, carbon credits) should be allocated to a particular entity.These allowances are then exchanged or traded for the right to emit greenhouse gases. China rolled out a nationwide emissions trading market back in 2016, which primarily included coal or gas-fired power plants. The new nationwide market is expected to cover key emission sectors such as transport, building, energy and aviation.

Is China a climate activist?

The evidence is mounting in support of China as a quiet but increasingly prominent activist on climate. China announced in April 2021 that 'clean' coal and other fossil fuel projects will be removed from the list of eligible projects for green bond issuance purposes. This is an important step which brings China's green bonds rules one step closer to international standards. This is likely to increase investor confidence in China's green bonds as investors are paying more and more attention to how verdant green bonds really are.

China is also ahead of the game in the development of renewable energy technologies. China's unique ability to achieve economies of scale in combination with its focussed development of clean energy technologies has resulted in a reduction of the costs of these technologies. Consequently, China is now the leading exporter of clean energy technology to the developing world and the largest investor, producer and consumer of renewable energy worldwide,[1] manufacturing state-of-the-art solar panels, wind turbines and hydroelectric energy facilities and is the world's largest producer of electric cars and buses. China is also the global leader in the production of batteries to power electric vehicles and store renewable energy on power grids.[2]

Then there is the interplay between China's new green economy and the US economy under the Biden administration. Some commentators[3] have observed that competition between China and the US over climate change dominance could result in the development of a sustainable global green economy.

China and hydrogen

Much of the world is now looking to hydrogen as the 'green fuel' of the future – with Australia, the US, Chile, Japan, Germany and others all taking steps to invest in this now resurgent form of clean energy, particularly in the transport sector. For Australia, there is a new focus on hydrogen produced from renewable energy. China is no stranger to hydrogen, having established the China Hydrogen Alliance to promote uptake of the fuel. Leading oil refiners in China have placed hydrogen at the centre of their clean energy plans, with local governments and State-owned energy companies all pursuing increased use of the fuel. This increased uptake is broadly in line with the China Hydrogen Alliance's targets for hydrogen use in China's energy mix: accounting for only 2.7% of China's energy mix at the end of 2018, the Alliance aims to increase that figure to 10% by 2050.[4] The Chinese government has recognised the value of hydrogen as a future export industry, with hydrogen forming one of six 'future industries' in its 14^th Five Year Plan.[5] Hydrogen could therefore be another key plank in China's pivot to a greener future.

Opportunities for the rest of the world

China's greenward turn presents a myriad of opportunities for the rest of the world, the most obvious being opportunities in the renewable energy space as Chinese SOEs and companies continue their sharp shift to green projects, green financing, and green investments.

Chinese companies need to source material from international markets for renewable energy projects and this will increase opportunities for international markets that export those raw materials.

Renewable Project	Inputs	Main producers[6]
Wind turbines	Steel	China, Thailand, Vietnam, Malaysia, Indonesia
Iron ore	Australia
Copper	Australia, Namibia, Chile, Canada
Aluminium	China, Germany, India
Solar panels	Steel	China, Thailand, Vietnam, Malaysia, Indonesia
Silver	Australia
Silicon	Japan, China, Denmark
Pumped hydro	Steel	China, Thailand, Vietnam, Malaysia, Indonesia
Iron ore	Australia
Transmission wires	Copper	Australia, Namibia, Chile, Canada
Silver	Australia
Aluminium	China, Germany, India
Gold	Japan, Switzerland, China
Batteries	Lithium	Argentina, China, Italy
Graphite	China, Germany, Czech Republic
Nickel	New Caledonia, Finland, Turkey
Cobalt	Australia, China, South Korea, Singapore

Allowing foreign investors to participate in China's carbon market is in line with China's current policy. In early 2018, the first cross-border carbon emission trading transaction was successfully closed in Guangdong Province of China. Further, in May 2020, China's central bank (PBOC), together with other authorities, announced the development of pilot foreign exchange rules for carbon emissions trading to explicitly allow qualified overseas investors (foreign institutions and individuals) to trade in the carbon market of the Guangdong-Hong Kong-Macao Greater Bay Area of China (with foreign exchange or Renminbi). Although the ETS does not include detailed provisions regarding foreign investors' participation in the national carbon market, the expectation is that these rules will be forthcoming.

Safeguarding investments and trade

International trade and investment law continues to develop to meet the needs of international commerce in this space. There are about 3000 bilateral investment treaties and treaties with investment provisions (including FTAs) in the world today. Investment treaties protect against extreme acts by a foreign government such as outright expropriation or nationalisation. But they also require governments to treat foreign investors fairly and equitably, not discriminate against foreign investors, allow repatriation of profits and provide protection and security (e.g. against looting and riots and sometimes beyond this). Importantly, investment treaties protect against actions by provincial governments, government agencies and even the courts. China has investment treaties with more than hundred different nations and is signatory to a further 20 treaties (including FTA's) with investment settlement provisions.[7] Businesses making investments outside of their home markets should carefully assess whether they may be able to benefit from these treaties and whether new investments should be structured specifically to obtain investment protection.

Disputes under these agreements are growing. The total number of publicly known investment claims has now exceeded 1,000 and the largest award of compensation in investment treaty arbitration is the USD 50 billion award arising out of the nationalisation of Yukos Oil Company by Russia.

Green horizons

The proposed Chinese carbon market is unprecedented and, although success is by no means assured, it creates a cornucopia of opportunities for both Chinese and foreign businesses seeking to expand their own green horizons.