November 18, 2014

A bird in the hand is worth two in the bush: Deutsche Bank Research Talking Point on the climate protection agreement between US and China

At the APEC Summit the US and China reached an accord on long-term targets to combat climate change. The US plans to cut its CO2 emissions by 2025 by 26-28% compared with 2005 levels.

In China CO2 emissions are to peak by 2030 at the latest. Although many reservations will probably be expressed that this is too little to contain the negative consequences of climate change to a manageable degree, given the realities in international climate policy such a compromise is the bird in the hand that may be preferable to the two in the bush.
Following the EU's recent decision to cut its CO2 emissions by 2030 by at least 40% (compared with 1990), the APEC summit saw the US and China reach an agreement on long-term targets to tackle climate change. According to official US government statements, the US has declared that it will reduce its CO2 emissions by 2025 by 26-28% compared with 2005 levels. In China CO2 emissions are to peak by 2030 at the latest. How are these targets to be interpreted?
In the US the year 2005 marked the historic peak in energy-related CO2 emissions. Since then emissions have trended downwards, which is mainly due to the replacement of coal by (unconventionally sourced) natural gas in the energy sector, more efficient road vehicles and economic growth during this period that is only moderate on a long-term comparison. When comparing the US climate targets with those of the EU the differing base years must be taken into account. If the US target declared for 2025 is set against the standard base year for international climate change policy of 1990, the reduction is a mere (or no less than) 13% or so. As such, 2005 is unlikely to have been chosen as the base year at random.
For the US it remains to be seen whether and to what degree the target will be amended as a result of the domestic political discourse. The Republicans, who gained the majority in the US Senate at the recent congressional elections, are known to be less ambitious than the Democrats when it comes to tackling climate change. So it is still unclear whether the US can actually travel to the UN Climate Change Conference at the end of 2015 in Paris with the CO2 reduction target it has declared. The international community wants to agree an ambitious and legally binding climate change treaty that is to come into force in 2020.

China's CO2 emissions to continue rising for time being

China's now declared target of halting the absolute increase in national CO2 emissions by 2030 at the latest takes account on the one hand of the fact that the country is involved in a process of catching up economically with the developed nations and that its per capita emissions are still lower than in Europe and far lower than in the US. On the other hand, it is a signal that emerging markets – and China first and foremost – will have to switch to absolute emissions reductions over the longer term, if the threat from climate change is taken seriously.
In both the charts below we have assumed that the growth in China's CO2 emissions will steadily decline and come to a halt by 2030. This would already constitute a success. In the last decade, after all, China's CO2 emissions have more than doubled, which is a result of the country's increasing integration in the global value chain (WTO accession 2001) and the accompanying economic boom. For the US and the EU we have assumed a linear decline in CO2 emissions until 2025 and 2030 respectively. The charts show that according to such a scenario Chinese CO2 emissions would be about 75% higher than those of the US and the EU combined in 15 years. Read more on Deutsche Bank Research

How future climate targets might look
Potential climate targets in absolute terms

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