The strategic game behind “carbon neutrality”

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From November 1st to November 12th, 2021, the 26th Global Climate Conference (COP26) will be held in Glasgow, Scotland, UK. This meeting combined three international conventions meeting of the parties – the 26th meeting of the parties to the United Nations Framework Convention on Climate Change, the 16th meeting of the parties to the Kyoto Protocol (CMP16) and the third meeting of the parties to the Paris Agreement (CMA3 ), in short, the purpose of COP26 is to set specific carbon reduction shares and timetables for each country. Zonghengjun hopes to take this opportunity to talk about “carbon neutrality”.

In recent years, it is obvious that global climate change is intensifying, and floods, droughts, typhoons and even epidemics may be directly or indirectly caused by climate factors. The theoretical premise of global “carbon neutrality” governance is that since the industrial revolution, humans have burned a large amount of fossil energy and released a large amount of carbon dioxide, which has led to the intensification of the “greenhouse effect” of the earth. If it is not effectively controlled, the average temperature of the earth in 2060 will be higher than that of the industrial revolution. An increase of 4°C in the past is equivalent to a nuclear war, when all human beings around the world will be affected.

On December 12, 2015, the 195 member states of the United Nations jointly signed the “Paris Climate Agreement”, replacing the “Kyoto Protocol”, with a view to jointly curbing the trend of global warming. The “Paris Agreement” stipulates that the global average temperature rise should be controlled within 2°C compared with pre-industrialization, and strive to be controlled within 1.5°C, and the global “carbon neutrality” goal should be achieved between 2050 and 2100. That is, the balance between emission and absorption of greenhouse gases. To this end, countries need to set carbon emission reduction targets, namely “Nationally Determined Contributions” (NDCs), and update their emission reduction progress every five years.

However, the “Paris Agreement” only reached a global consensus, and did not specify the emission reduction targets and timetables of various countries. Subsequently, some major countries and regions successively announced clear emission reduction targets:

In September 2018, California Governor Jerry Brown signed a carbon neutrality order, and the state passed a law to make electricity 100% renewable by 2045.

In June 2019, the French National Assembly voted to enshrine the net-zero target into law, and in a June 2021 report, the newly formed High Commission on Climate recommended that France must triple the rate of emissions reductions in order to achieve its “carbon neutrality” goal.

In January 2020, the Austrian coalition government was sworn in, pledging to achieve “climate neutrality” by 2040 and 100% clean electricity by 2030, based on binding carbon emissions targets.

In March 2020, the European Commission announced the draft of the European Climate Law, and decided to make it clear in the form of legislation that Europe will achieve “carbon neutrality” by 2050, that is, net greenhouse gas emissions will be reduced to zero by 2050. The draft calls for all EU institutions and member states to take the necessary steps to achieve these goals. The European Commission is working towards achieving the EU-wide 2050 net-zero emissions target under the “Green Deal” announced in December 2019, a long-term strategy presented to the UN in March 2020;

In September 2020, Chinese leader Xi Jinping stated at the general debate of the 75th United Nations General Assembly that China will increase its nationally determined contribution, adopt more powerful policies and measures, and strive to peak carbon dioxide emissions before 2030. Strive to achieve carbon neutrality by 2060, which is written into the “14th Five-Year Plan”.

In October 2020, Japanese Prime Minister Yoshihide Suga announced in his first policy speech to the Diet that Japan will achieve net zero emissions of greenhouse gases by 2050 and become fully carbon neutral.

On October 28, 2020, South Korean President Moon Jae-in also stated that carbon neutrality will be completed by 2050.

The positions on climate warming governance can be divided into five categories according to willingness and ability:

First, countries that actively support climate governance but have no actual ability to participate mainly refer to the islands/island group countries in the Pacific Ocean and Central America. For them, climate warming is a matter of life and death, because the melting of glaciers in the Arctic and Antarctic caused by the greenhouse effect, as well as the rise of the earth’s sea level, may directly cause the islands they live to suffer “extinct disaster”. However, due to the fact that the country is too small and its international influence is too weak, although these countries firmly support climate governance, they have no ability to influence international decision-making. Once there is any trouble, they are likely to become “climate refugees” for the first time.

Second, developed countries that actively support climate governance also have the ability to make rules, such as France, Germany, and the Democratic-led US. Undoubtedly, the group of countries most enthusiastic about “carbon neutrality” governance is undoubtedly Europe represented by France and Germany, and the United States, which is governed by the Democratic Party (Clinton, Obama, Biden), is also a fan of climate change, because on the one hand they have completed the With industrialization and the domestic low-end manufacturing industry chain has already been transferred, the cost-benefit ratio of “carbon neutral” governance is high.

Third, actively supporting climate governance is also capable of governance, but the typical representative of developing countries that emphasize the separation of responsibilities is China. China is actually the most staunch supporter of “carbon neutrality” governance outside of the EU. There are three core reasons: First, China has basically completed basic industrialization and is transforming into a more advanced industrial chain, and needs to take the opportunity of “carbon neutrality” Forcing its own industry to upgrade; second, China needs to participate in and even partially lead the formulation of new international rules based on this framework through “carbon neutral” governance, and must not allow Europe and the United States to gain monopoly rule-making power in this field again; Representatives of developing countries are also natural spokespersons in the field of carbon governance. China emphasizes the division of responsibilities for climate governance and is responsible for developing countries as a whole. There’s no chance at all.

Fourth, the most typical representative of developing countries that are forced to support climate governance but are in an embarrassing situation is India. It has to be said that under the “carbon neutral” governance framework, the most miserable are those developing countries represented by India that have not yet completed basic industrialization. Because “carbon neutrality” governance will put it in an embarrassing “development dilemma”: if you continue to use the “demographic dividend” to undertake the transfer of the international industrial chain and engage in industrialization, it will inevitably increase carbon emissions, which means that you will pay high “Carbon tax”; if you give up industrialization to pursue the original ecology, then it is equivalent to completely “flattening”, and the future can only be at the mercy of people.

Fifth, the resource countries that are forced to support climate governance but have completely opposite actual positions are typically represented by Russia. The logic of this is very simple – “carbon neutrality” will inevitably be accompanied by the rise of clean energy, that is, the decline of fossil energy represented by oil, and countries that rely on oil for a living represented by Russia, Saudi Arabia, Venezuela, etc. are naturally opposed. Russia even fundamentally suspects that there is a relationship between the rise of the earth’s temperature and human industrial activities. Many Russian experts believe that the earth’s climate change is cyclical, and its main influencing factor is natural factors, and the impact of human industrialization can almost be ignored. However, most of these resource countries have fallen into the so-called “resource trap”, and they cannot play a leading role in the field of global governance.

First, the essence of “carbon neutrality” is the allocation of shares by developed countries for the future industrial development rights of human beings.

The basis of the “carbon neutrality” logical closed loop is to control the global warming rate in 2060 to 1.5°C to 2°C through the efforts of all countries, so that the global carbon emissions that can be tolerated in the 40 years from now to 2060 can be reversed. total. The countries that made the commitments and emission reduction timetables for “carbon neutrality” were the first to cut the cake, so the remaining shares and time for other countries became smaller and smaller. In other words, the earlier the countries acted, the more Active, the countries that act later, the more passive. When the new global carbon governance rules are fully formed, I am afraid that some countries will tax the international community for cutting their own trees. See you, COP26 has just passed the “Glasgow Leaders on Forests and Lands”. Using the Declaration, involving a total area of ​​more than 13 million square miles of forests, this decision is obviously very unfriendly to countries such as Brazil, which are rich in forest resources. The Amazon forest is the lungs of the whole earth. What about the lungs of the earth?

Second, a new “green trade barrier”: the EU “Carbon Frontier” Adjustment Mechanism (CBAM).

On December 11, 2019, the European Commission adopted the “European Green Deal”, which stipulates that by the end of 2030, the EU’s greenhouse gas emissions are planned to be reduced by 50% to 55% from the 1990 level. The EU believes that other countries that are inconsistent with the EU’s carbon emission targets will pose a risk of carbon leakage, that is, in the context of global trade, stricter climate policies in one region will lead to the transfer of high-carbon products and related carbon emissions to another region. In order to prevent the resulting “carbon leakage” problem, the EU has replaced the EU Emissions Trading System (EU-ETS) with a “carbon frontier” adjustment mechanism, in order to offset the “carbon footprint” of goods from outside the EU by imposing import carbon tariffs. carbon leakage” risk. The EU will impose carbon tariffs on imports of cement, electricity, fertilizers, steel and aluminium from countries and regions with relatively lax carbon emissions restrictions. The CBAM is planned to be implemented from January 1, 2023, with a three-year transition period, and the carbon tariff will officially begin to be levied on January 1, 2026.

The implementation of the carbon border adjustment mechanism is that the competent authorities of EU member states sell CBAM certificates on demand to importers of high-emitting commodities in various countries. The industries covered by CBAM are cement, steel, aluminum, fertilizer, and electricity. The essence of carbon tariffs is a trade measure. With the announcement of CBAM and its future implementation, carbon emission accounting rules and carbon tariff setting rules will surely become a new hot spot in the formulation of global trade rules. The “carbon border” adjustment tax will greatly increase the cost of exporting carbon-containing products from China and other export-oriented countries to the EU, thus forming a “green trade barrier” between China and the EU.

The EU carbon border adjustment mechanism cannot effectively promote global emission reduction, and is essentially a “green trade protection” measure in the name of climate. After the establishment of the “carbon emission trading” system market in the EU, the transaction costs of carbon-intensive industries have continued to rise, and the profit margins of enterprises have also declined accordingly. As a mandatory emission reduction measure, the “carbon frontier” adjustment tax will increase the cost of the production and transaction links of emission-reducing countries, thereby reducing their return on capital and causing their energy-intensive industries to lose their competitive advantage. Therefore, under the global value chain structure, developed countries such as the EU will tend to transfer some energy-intensive and polluting industries to other developing countries, which is the so-called “cross-border transfer of pollution”. These host countries could have used some of their own comparative advantages, such as pursuing benefits from the development of labor-intensive or resource-intensive industries, and exporting products with high energy consumption, high carbon content and low added value. However, once the “carbon frontier” adjustment tax is implemented, the cost of the above-mentioned countries’ products will greatly increase, which will eventually lead to a reduction in the market share of their export products in Europe. In the long run, it will have a significant inhibitory effect on companies with high carbon emissions in developing countries.

Third, establish a globally unified cross-border carbon trading market: China has a 10-year catch-up period.

On July 16, 2021, after 7 years of pilot projects, China’s national carbon emissions trading mechanism was officially launched. This is an important part of China’s efforts to reduce greenhouse gas emissions, peak carbon emissions by 2030, and achieve carbon neutrality by 2060. step one. The first compliance cycle involves 2,225 key emission units in the power generation industry, accounting for 30% of national emissions, and will cover about 4 billion tons of carbon dioxide. The launch of China’s carbon trading mechanism has doubled the proportion of carbon emissions traded in the world. In the future, China’s carbon market is expected to develop into the world’s largest carbon market.

At present, most of the countries that have established carbon trading markets in the world are concentrated in developed economies, such as the United States, Canada, and New Zealand. At present, an international unified carbon trading system has not yet been formed, and each carbon trading system is mostly based in its own country. China is one of the very few economies that, as a developing country, is actively establishing a carbon-neutral market.

Compared with the EU, China is still a latecomer in the field of carbon trading. From the perspective of its own development stage and carbon neutrality schedule, there is a “development time gap” between China and Europe, and the EU is using this time difference to advance the layout of cross-regional international carbon trading. It will try to shape the future global unified cross-border carbon trading market with EU standards. If the plan is realized, the euro will become the main settlement currency in the international carbon trading field, and the EU will also gain the right to set standards for the international cross-border carbon trading system.

The author judges that once the EU achieves a certain landmark carbon emission target, it will immediately try to promote the EU-standard large-scale carbon cross-border trading system on a global scale. At present, 2030 is a very important time node. Therefore, the 10-year period from 2021 to 2030 is China’s accelerated catch-up period in the field of carbon neutrality. China must ensure that it also has a set of mature standards and a certain scale of cross-border carbon trading network system around 2030.

Fourth, the biggest highlight of COP26: China and the United States reached an agreement – a carbon game relationship between China, the United States, and the European three “fighting landlords”.

Western media generally believe that the biggest highlight of the COP26 process is the “accidental” agreement between China and the United States, which “endowed the UN climate conference with practical significance” and prevented it from becoming an “empty talk hall”.

Why is the media evaluation of the “carbon neutral” governance agreement between China and the United States so high? Because from the perspective of strategic game, the relationship between the three most important players in the “carbon neutral” field – the EU, the United States, and China – is similar to “fighting landlords”, but the EU is the “landlord” , while China and the United States are more like “farmers” to some extent: the EU has the most first-mover advantage in the field of “carbon neutral” rulemaking, the most mature technology and regulations, and good policy coherence, some kind of To a certain extent, France and Germany anchored the EU’s re-emergence approach to “carbon neutrality”; China is obviously a “new player”. Although it has limited experience in technology and rules, its carbon emission volume is still low. Great (the effect of emission reduction is naturally the most obvious, and the volume associated with the carbon trading market is also the largest), and the future potential is also great; the United States belongs to the “repeated horizontal jump” and “half-hearted” players. It is not so much “carbon neutrality”. The national policy of the United States, rather than the national policy of the Democratic Party, was when Clinton of the Democratic Party joined the “Kyoto Protocol”, Bush Jr. of the Republican Party withdrew, Obama of the Democratic Party joined the “Paris Climate Agreement”, Trump of the Republican Party withdrew, and now the Biden of the Democratic Party is back “Paris Agreement”, but it seems that it is difficult for him to be re-elected at present, and Trump’s approval rate has reached a record high, and it is unknown that the United States will withdraw from the “Paris Agreement” again three years later.

To sum up, the three giants that determine the future of “carbon neutrality” are China, the United States, and Europe, and the relationship between the three is extremely complicated. Sino-US cooperation can effectively “check and balance” the “carbon hegemony” of the EU. There are technological advantages, rule advantages and policy advantages of climate governance, but due to the transfer of manufacturing industry, its carbon emission share is very small. Therefore, China and the United States can work together to exert greater influence on the practical level of carbon governance. How to fight the “fighting landlords” of carbon governance requires a high level of strategic wisdom.

So, what is the strategic significance of “carbon neutrality” for China?

First, China’s internal economic transformation needs.

China’s economic development is facing an important transition period, and is undergoing a transition from quantitative increase to qualitative increase. For a long time before, China only became the “world factory” by exchanging its own cheap labor, environmental damage and pollution for the transfer of the international manufacturing industry chain. Now that China has completed the stage of capital accumulation and technology accumulation, the next step is to upgrade the overall industrial system, improve its position in the global industrial chain, eliminate more downstream polluting enterprises, and reshape the environmental ecology.

Second, participate in the formulation of international rules.

Since becoming the “world’s factory”, China has naturally become the world’s largest carbon dioxide emitter, for which it has been criticized by environmentalists in developed countries. On May 6, 2021, a report released by the Rhodium Group, an American think tank, showed that China’s greenhouse gas emissions accounted for 27% of the world’s total in 2019, exceeding the sum of developed countries and far surpassing the second-ranked United States (11). %) and third-placed India (6.6%). According to the above logic, since the signing of the Paris Climate Agreement in 2015, in the field of limiting carbon emissions, although it seems that the developed countries have set limits first and have not set clear emission reduction targets for developing countries, but In fact, the more advanced economies represented by the European Union give priority to carbon control, the smaller the share of carbon emissions left to developing countries as a whole, which is equivalent to directly restricting the future development of these countries (which have not yet started the process of industrialization or are just primary industrial countries). The development space, in disguise, makes the structure of the world’s division of labor more solidified, and allows developed countries to always maintain the advanced nature of developing countries. Therefore, China, as the largest developing country, must actively participate in the “carbon neutrality” initiative, and even require itself to meet the carbon limit standards of developed countries, in order to participate in the formulation of new international rules and safeguard its own right to future development.

Third, China’s energy transition needs.

As we all know, Europe is almost the most active group of developed countries in carbon neutrality. An important reason is that Europe as a whole has a similar energy structure to China. They are both oil-poor countries, and their oil and natural gas resources are highly dependent on imports. Therefore, it is urgent to change the energy structure and get rid of the dependence on fossil energy as soon as possible. Therefore, the EU’s demand for new energy transformation is even greater than that of the United States, which has abundant oil reserves. This is also why Europe (represented by France) is extremely clinging to the Paris climate agreement and the US is wobbly.

The situation China faces in the energy field is very similar to that of Europe. More than 60% of its oil resources depend on imports, and almost all of its natural gas resources depend on imports, and the safety of related logistics routes is also worrying from time to time. China’s own energy reserves and energy structure are dominated by coal, and the carbon dioxide pollution caused by coal combustion is the enemy of carbon neutrality. Therefore, China also urgently needs to reshape its energy structure by promoting carbon neutrality and vigorously develop new energy sources such as nuclear energy and photovoltaics.

Fourth, “carbon neutrality” drives the new leading industry to be expected to overtake in corners.

Carbon neutrality will greatly restrict traditional industries such as railway infrastructure, steel, cement, and coal, and it will also spawn new industries. China is expected to overtake in some new areas and gain world-class competition opportunities. One of the most representative industries is the new energy vehicle.

As we all know, China has always lagged behind developed economies such as Europe, America, Japan and South Korea in the field of traditional automobiles, but new energy vehicles in the context of “carbon neutrality” may become a typical case of China’s “overtaking on curves” in the new era of automobiles. However, China and Europe will face new competition in this area. It is reported that Europe is becoming the pioneer of electric vehicles in the world. According to the latest “Electric Vehicle Index” released by McKinsey management consulting firm, in 2020, the sales of electric vehicles in Europe will reach 1.4 million, an increase of 138% over the previous year, surpassing China and the United States. Currently, Europe accounts for 43% of the global market share, slightly higher than China’s 41% and much higher than the US’s 10%.

Fifth, a new currency anchor in the post-dollar era?

After the establishment of the Bretton Woods system, the U.S. dollar has always played the role of an international currency because it is bound to gold; after the “Nixon Shock”, the U.S. dollar was bound to OPEC, and since then, global seigniorage has been collected by means of “petrodollars”. Today, since the United States has gradually withdrawn from Afghanistan and the Middle East, the world has ushered in the “post-petrodollar era”. At present, the United States binds the US dollar to US bonds, which is obviously not a good currency anchor.

For the EU and China, there may be two windows for internationalizing the euro or the renminbi in the future – “carbon settlement” and “digital sovereign currency”. It now seems that the euro is likely to anchor “carbon settlement” as a new currency anchor in the future to promote the internationalization of the euro; on the Chinese side, the digital renminbi has been implemented. As the largest carbon emitter, if the future anchors “carbon emission rights international” Settlement” is also reasonable.

To sum up, carbon trading and carbon international settlement may become a new currency anchor for the internationalization of the euro and the RMB in the future.