The US and China jointly pledged to fight climate change by implementing new greenhouse gas (GHG) emission targets. Commitments by these two countries are significant because it is the first time that both countries agreed to concrete figures, though non-binding. The agreement could induce other countries to consider reducing emissions and potentially make such commitments at the Lima climate conference in Dec’14 and Paris (COP21) in Nov/Dec’15.
The US pledges to reduce its emissions by 26-28% below its 2005 level by 2025, while China intends to achieve the peaking of CO2 emissions around 2030 and to increase the share of non-fossil fuels to ~20% by 2030. Based on our analysis, business as usual policies and market dynamics would put the US well short of its emission reduction target. China could achieve its target just before 2030 or earlier: the economic slowdown/transition in China made achieving its target possible. With tighter coal policies and tougher energy efficiency measures, it could reduce emissions further, as coal demand for power generation is about to peak.
But with existing policies, current market dynamics in China and the US should still affect trillions of dollars of oil, gas and coal demand already vs. baseline estimates done by major global agencies. Existing policies and subdued market conditions could lead to lower demand from 2015 to 2030 on the order of ~US$1.3 trillion for oil and as much as ~US$1.6 trillion for coal. In contrast, the likely rise in gas demand could be worth ~US$1.3 trillion. US EIA’s oil, gas and coal demand estimates presented in its 2013 International Energy Outlook (IEO) was used as the reference, business-as-usual case for comparisons. This development would demand a far-reaching reassessment of asset values.
Emission reductions by these two countries could reduce global greenhouse gas (GHG) emissions by 13% vs. the business-as-usual case by 2030. But emissions would still be rising without concerted effort by other countries and more stringent cuts in the US and China. Both EIA’s IEO 2013 and International Energy Agency’s (IEA) World Energy Outlook 2013 expected global GHG emissions to climb from ~33-billion tons in 2013 to ~41-billion tons in 2030, based on current policies. Citi expects measures by China and the US could lower emissions in 2030 to between 35 and 37-billion tons.
Nonetheless, this agreement illuminates a potential pathway towards a sharper reduction of CO2 emissions. With cuts from China and the US, global emissions could flatline before 2030 if annual growth rates of emissions in the rest of the world were cut in half. This is required to bend the trajectory of emissions but would be far from the 450 scenario that the IEA has to keep
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
