This article in the FT on the potential conflicts between Anthony Blinken and John Kerry left me somewhat puzzled as it seems to suggest that you can separate the issue of climate change from other China issues:

Kerry will want to go to Beijing very early on. He will want to prioritise progress on climate over most other things in the US-China relationship,” said one former Obama administration official.

This is not possible - not for ideological reasons, but due to the extremely tight coupling between emissions outcomes and politics in Beijing.

Let me explain.

This is a Sankey diagram of China’s fossil fuel emissions in 2015 from an excellent paper “A Method for Analyzing Energy-Related Carbon Emissions and the Structural Changes: A Case Study of China from 2005 to 2015” Energies 2020, 13, 2076; doi:10.3390/en13082076. In it you can see on the left where the carbon comes from (coal, mostly) and what it gets utilized for - 68.7% for factories or secondary industries and manufacturing (“making stuff”), 11.2% for transport (“moving stuff”) and Buildings (“heating and cooling stuff”). From there is final demand which is heavily weighted to Structure (“building stuff”), sustenance (ammonia and fertilizers, mostly), heating and cooling and transport.

What jumps off the page here is just how dominant manufacturing and particularly heavy industry is in China’s emissions. China’s National Bureau of Statistics stopped reporting the split between light and heavy industry but up to that point heavy industry - steel, aluminum, chemicals, fertilizers, glass - make up 82-85% of demand. That is a lot but not particularly shocking because as you can see from this table in Vaclav Smil’s Making the Modern World that making these materials is energy intensive. After steel, aluminium, ammonia, plastics and cement there is a long tail of energy intensive stuff that is not big and is not likely to be either.

Even among these, China’s demand for ammonia and fertilizers has flatlined or declined due to technological improvements as well as higher imports for meat and protein. So, that’s unlikely to be a key driver going forward and can also be produced using hydrogen - if China decarbonizes its grid.

So, when evaluating China’s prospects I’ve deliberately ignored a few things:

• Transport Fuels: Will largely follow or lead global trends in electrification, so the question moves to the grid.

• Chemicals: Much as above, and a great deal of plastics and fertilizer carbon emissions can be replaced or modified - but once again, comes down to the grid.

Which leaves:

1. How much construction material and construction does China need to do, and will it need to do?

2. How can it decarbonize its grid and how quickly?

3. Given the material intensity of 1, and that power demand growth will be very high so long as growth in material demand is high isn’t this all that matters?

This observation is not a new one and has been written about before in Transforming the coal and steel nexus for China’s eco-civilization DOI: 10.1111/jiec.13040.

We define the coal and steel nexus to be a system perspective that captures the interdependence and the critical linkages between these two resources. Our results show that the coal and steel nexus in China strengthened in the past three decades but could face transitional changes to 2050. The peak time of both coal and steel demand for China is expected to come before 2030. Consequentially, the volume of rail freight for the carriage of three main types of bulk cargo (coal, iron ores, and steel products) declines from ∼2,000 megatons (Mt) in 2015 to ∼700 Mt in 2050 under the HREP scenario with the two-fold planned growth of railway infrastructure. However, investment in cleaner energy and steelmaking technologies will help China mainly rely on secondary steel resources to maintain domestic demand in 2050, further reducing the demand for coal and iron ores.

So basically to make building materials, you need a lot of coal and power, but you also need infrastructure like rail and shipping that requires steel to move around all those materials. If this sounds recursive that is because it is: how much China builds has an enormous multiplier effect on power demand and emissions. In these models if you assume China cares about transitioning and there is some limit to how much steel and cement per capita a country could need you end up with a model predicting an eventual collapse in primary steel production and iron imports as recycling flows catch up with demand.

This is all fairly intuitive - to develop and build cities you need a lot of cement and steel, but that stuff lasts a long time and if your population slows at the same time you end up with replacement demand as people spend their marginal income on healthcare, entertainment and the like.

This is emphatically not what has happened in China in the last decade. China’s cement intensity for instance has stayed at roughly 3-4x developed country levels for the last decade and shows no sign of slowing, it is the same for steel.

Even four years ago, China’s steel per capita was at levels of highly affluent developed countries that are big industrial exporters. Why is that?

An investment led development model and GDP targets. In a slowdown of one form or another you can always build more stuff. Never mind that 20% of the apartments are empty (and likely more now) or that there are egregious overcapacity issues in rail, freight, power and so on. This is how you print GDP at will - using soft banking and fiscal constraints and with little care for the utility of what you are building. Michael Pettis’ thread on recent Chinese GDP for 2020 said it far better than I can:

Michael Pettis @michaelxpettis

1/16 It is a little frustrating to see the response many analysts had to the GDP growth data Chinese released today. These numbers aren’t especially good, and they certainly shouldn’t have been surprising. Back in April and May, when most analysts... China’s economy picks up speed in fourth quarter, ends 2020 in solid shape after COVID-19 shockChina’s economy picked up speed in the fourth quarter, with growth beating expectations as it ended a rough coronavirus-striken 2020 in remarkably good shape and remained poised to expand further this year even as the global pandemic rages unabated.reut.rs

January 18th 2021

515 Retweets1,221 Likes

So any discussion with China on carbon is inherently a discussion about growth and the nature of that growth. China has limited capacity to generate quality growth much above 2-3% GDP per capita real - and given its declining working age population and all the stuff it pre-emptively built in credit booms it may be lower. Some may argue higher, but countries that routinely print those numbers fall into two categories: very very poor or very much on their way to banking crises.

China could opt for a path that lower carbon and higher welfare for its citizens. More spending on healthcare, amenities, higher technology and the like but it would necessitate walking away from macho-man targets and require a change of thinking about growth from treating it like a national day missile parade to something that is more an outcome of other objectives and targets. I am needless to say not particularly optimistic of this being possible in China today.

For that reason in climate discussions between the US and China investment intensity, real estate and materials should be front and center. It is the best way to establish, and establish quickly how serious climate is as a priority for China and whether there is any political space for action in Beijing.