President Xi Jinping promises to reduce carbon emissions in speech before the UN General Assembly.

By Paul A. Davies, Michael D. Green, R. Andrew Westgate, and Jacqueline J. Yap

On 22 September 2020, during a speech before the UN General Assembly, President Xi Jinping announced China’s commitment to become carbon neutral by 2060 and reaffirmed China’s commitment under the Paris Agreement to peak its carbon emissions by 2030. China is the world’s largest greenhouse gas (GHG) polluter and emitted approximately 10 billion tons of carbon dioxide in 2018, according to the Global Carbon Project. Given this, China’s commitment to become carbon neutral by 2060 would significantly reduce global GHG emissions and set the stage for China’s development of a green economy.

China’s Commitment to Environmental Protection and Combatting Climate Change

With his announcement, President Xi has renewed China’s commitment to environmental protection. Notably, he stated that “China will scale up its Intended Nationally Determined Contributions by adopting more vigorous policies and measures”.

The President also unequivocally called for a green recovery from the economic damage caused by the COVID-19 pandemic. He promised that China will take this opportunity to pursue a “scientific and technological revolution and industrial transformation”. Referring to the pandemic, he said, “Humankind can no longer afford to ignore the repeated warnings of nature and go down the beaten path of extracting resources without investing in conservation, pursuing development at the expense of protection, and exploiting resources without restoration”.

Focus on Clean Energy and China’s Emissions Trading System (ETS)

Notwithstanding its status as the world’s largest GHG polluter, China has committed itself to furthering a green agenda in recent years. Following its ratification of the Paris Agreement in 2016, China has pursued a number of environmental initiatives. In 2019, China boosted investments in clean energy and provided subsidies for green investment projects in the Yangtze River Economic Belt. These initiatives were designed to not only combat pollution, but also stimulate economic growth. In light of China’s historical reliance on heavily polluting industries and on coal as its primary source of energy, China’s commitment to carbon neutrality by 2060 will likely encourage a rapid shift towards clean energy investments, large-scale renewable energy projects, and the development of a sustainable green economy.

However, China’s status as a world leader in renewable energy has not yet lessened the country’s growing carbon footprint. As a consequence, world leaders have pressured China to undertake even more far-reaching reforms. Speaking last week, European Commission President Ursula von der Leyen urged China to do more in reaching its Paris Agreement targets, while pledging that the European Union will cut carbon emissions by at least 55% by 2030.

The 2060 carbon neutrality commitment will have significant implications for China’s national emissions trading system (ETS) and for companies operating under the ETS in China. First launched in 2017, China’s ETS was slated to cover eight industrial sectors responsible for approximately 25% of global carbon emissions. However, implementation of the ETS has suffered from repeated delays. Moreover, the ETS currently covers only power plants and is restricted to “simulated trading” rather than a true compliance obligation. If China is going to meet its 2060 target for carbon neutrality, the emissions covered by the ETS will need to be offset or eliminated, so the ETS system will likely take on increased importance. Companies with significant emissions in China should expect increasing compliance costs associated with those emissions, whether imposed by the ETS or a new policy initiative.

Next Steps

How China will implement its ambitions remains to be seen. The government’s 14th five-year plan for national economic and social development, to be released by the end of 2020, is likely to shed light on how China will integrate its climate commitments into its national strategic plan. In addition, the upcoming EU-China summit in late 2020 and the UN Climate Change Conference (COP26) on 8 November 2021 will present further opportunities for President Xi to detail China’s environmental plans.

Latham & Watkins will continue to monitor developments in this area.

This post was written with the assistance of Sabina Aionesei in the London office of Latham & Watkins.