3 building blocks for China’s Energy Transition 

Michael G. Pollitt,
Energy Policy Research Group, University of Cambridge, Centre on Regulation in Europe, Brussels

Monthly Spotlight

Oct 31, 2023

China has made huge strides in its energy and climate policy[i]. It has the world’s largest electricity system and is now the world’s largest carbon market.China has supported the development of huge amounts of renewable and nuclear generation. It is also leading the world on the decarbonisation of the transport sector via electric vehicles and has secured itself as the source of much of the world’s energy equipment. China’s energy industries operate without the need for fiscal support because energy prices have traditionally covered costs.

The most important question related to this energy transition that China now needs to ask itself is the following: is China actually serious about climate change policy?

Many countries say they are committed to net zero or carbon neutrality by 20X0. Often, what they mean by such a commitment is usually more about energy security and a desire to promote domestic sources of energy, rather than a concrete commitment to decarbonisation per se. Independent analyses show that China’s current policies will not get to net zero by the target date[ii]. China as the world’s largest emitter of greenhouse gases has no legal commitment towards net zero[iii]. As the costs of decarbonisation become clear, as they are beginning to do so in Europe, binding commitments and clear interim targets combined with policies that add up in aggregate will be necessary to weather the inevitable resistance to sticking to a credible net zero pathway.

Assuming that China is serious about its 2060 carbon neutrality target, then, three things follow, in my view.

First, China’s climate and energy governance must become more trustworthy. Climate change policy requires trustworthy measurement and trustworthy energy governance. Climate change policy is underpinned by hard science and the need to reduce actual greenhouse gas (GHG) emissions to safe levels. Climate change policy demands that monitoring, reporting and verification (MRV) systems with respect to GHG emissions can be trusted both inside China and abroad. Thus, China’s national carbon market must improve its MRV systems[iv]. Net zero also requires energy institutions and firms worthy of trust because society is trusting those institutions and firms to deliver net zero. Wider society, inside China and beyond, will not continue to support net zero without such trust. Different societies engender public trust in different ways but independent regulation of competing or comparable, privately owned firms is one proven way in the UK, Australia, and the US. China needs regulatory authorities and companies with much higher levels of transparency and accountability than it now has if its society is to be confident that the extra resources which need to be allocated to achieve net zero are being appropriately managed.

Second, China’s commitment to international energy trade and diplomacy must increase. Climate change is a global problem and not even China can solve the world’s climate problem by itself. China needs the rest of the world to decarbonise and to help it achieve climate neutrality. Globally, net zero is best supported by international trade in energy, energy equipment and critical minerals for the energy transition. Reduced trade barriers will lower the cost of energy transition for everyone, including China, and allow it to benefit from the rest of the world demanding low-cost, low carbon goods and services from China[v]. Energy trade protectionism will reduce the incentives of the rest of the world to decarbonise and reduce China’s low carbon export markets. China must set the example that it expects others to follow with respect to achieving climate goals: this must mean not falling into the trap of letting international climate policy be dictated by the narrow industrial policy interests of energy companies or the short-sighted quest for geopolitical advantage at the expense of the long-term interests of the planet.

Third, China must prepare for rising energy and carbon prices over time. The proper pricing of carbon (and other) externalities in energy prices suggests that marginal energy prices must rise over time[vi]. This is because real carbon prices and real fossil fuel prices rise along any sensible pathway to net zero[Vii]. This implies that as long as fossil fuel continues to be the system marginal fuel that the energy prices that final consumers pay should also be rising. A true net zero climate policy makes rising energy prices inevitable in the medium run. Even in the long run with a zero-carbon energy system, the marginal cost of higher fuel consumption will be very high if it is based on intermittent renewable generation. Higher prices do not necessarily mean higher energy bills as a percentage of income, as higher energy efficiency and rising incomes in China will mitigate the bill impact on consumers.

It is important to connect these the three points above. If the energy transition were going to be cheap/easy, then GHG MRV and energy governance and energy trade and diplomacy would be less important.

By contrast, India has some way to go to catch up with where China is now. India’s historical slowness in engaging constructively with global power sector reform to deliver a well-regulated and competitive energy sector has long given it the negative trinity of dirty, insecure and, ultimately expensive to society, energy[viii] India still gives large amounts of electricity free with disastrous short term and long term consequences, for the misuse of energy, water and other resources[ix].  It has not developed renewable resources to the extent that it should have done, and it has not got a carbon market. India could be using its influence to promote energy trade via a South Asian power pool, which could unlock massive hydro-resources in countries such as Nepal and Bhutan, which could be combined with Indian solar resources[x]. It should also introduce its own carbon market and be thinking about how that can couple with other carbon markets around the world. Energy policy failures have in turn hindered its domestic equipment production sector, negatively impacted GDP growth, and worsened its balance of payments in energy. Thankfully there are signs that energy and climate policy is now changing but there is a long way to go[xi].


[i] Pollitt, M.G. (2020), Reforming the Chinese Electricity Supply Sector: Lessons from Global Experience, Palgrave Macmillan

[ii] United Nations Environment Programme (2022). Emissions Gap Report 2022: The Closing Window — Climate crisis calls for rapid transformation of societies. Nairobi.

[iii] Xu, J., Pollitt, M.G., Xie, B.-C. and Yang, C-H. (2020), China’s energy law draft and the reform of its electricity supply sector, Energy Policy Research Group Working Papers, No.2028.

[iv] Dai, C. and Pollitt, M.G. (2023), From Local Carbon Emissions Pilots to the National Carbon Emissions Trading Scheme in China, Energy Policy Research Group Working Papers, Forthcoming.


[vi] Pollitt, M.G. and Dolphin, G. (2022), ‘Should the EU ETS be extended to road transport and heating fuels?’, Economics of Energy and Environmental Policy, 11(2): 125-144. DOI: 10.5547/2160-5890.11.1.mpol

[vii] Pollitt, M.G. and Chyong, C.K. (2021), ‘Modelling net zero and sector coupling: lessons for European policy makers’, Economics of Energy and Environmental Policy, 10(2): 25-40 (DOI: 10.5547/2160-5890.10.2.mpol)

[viii] Sathis Kumar, G. (2017), ‘Anatomy of Indian energy policy: A critical review’, Energy Sources, Part B: Economics, Planning, and Policy, 12(11): 976-985. DOI: 10.1080/15567249.2017.1336814

[ix] Kaur, S. (2023), Unlocking energy-water nexus and incentivizing energy-saving behavior in Indian agriculture. PhD Thesis, University of Cambridge

[x] Oseni, M.O. and Pollitt, M.G. (2016), ‘The promotion of regional integration of electricity markets: lessons for developing countries’, Energy Policy, 88: 628–638. DOI: 10.1016/j.enpol.2015.09.007

[xi] IEA (2021), India Energy Outlook 2021, Paris: International Energy Agency.