President Donald Trump has finally agreed to kickstart the transition of power to Joe Biden’s administration. Despite the fact that he has not formally conceded, global stocks rallied in response to the news following a period of post-election uncertainty.

There are many differences between Biden and Trump’s policies, but one of the main divergences relates to climate change. Biden put the issue at the centre of his campaign, pledging to reverse Trump’s decision to withdraw from the 2015 Paris agreement.

Importantly, the Democrat candidate’s election victory came shortly after China’s surprise commitment to a green post-pandemic recovery. Now that the two big emitters have made public their intentions on climate change, the race to ‘net zero’ is becoming a true international effort – but the global community must continue to push for progress.

Enter the Dragon: Xi Jinping’s surprise announcement

The landmark 2015 Paris agreement required countries to set their own national targets beginning in 2020. While signing the deal was a positive first step, shortly afterwards China had not yet set national targets for carbon neutrality, and Trump became president – vowing to take the US out of the agreement. This left the deal in an ominous position with the world’s two largest carbon emitters (China at 28% and the US at 15%) still not fully engaged.

However, this September – shortly after Trump called the Paris agreement “a one-sided deal” and criticised China for being “the world’s largest source of carbon emissions” – President Xi Jinping told the United Nations General Assembly that China would scale up its intended nationally-determined contributions under the accord by adopting more vigorous policies and measures. In practice, this would see China achieving a peak in carbon dioxide emissions before 2030 and carbon neutrality before 2060. Xi urged other countries to pursue a “green recovery of the world economy in the post-Covid era”.

The timing of this announcement just before the US election had an element of politicking to it, and was also likely made to show the incumbent US President’s policies were outdated. Nevertheless, it is a huge step forward. China has prioritised economic growth as part of its national strategy, but now the country is incorporating climate policy (with goals) into its national plan.

So far, the main pledge China has made with regard to reducing carbon is to phase out non-hybrid internal combustion engines by 2035. Under the new 2060 target, the government will need to address all areas of the economy that emit carbon. With approximately three-quarters of the country’s carbon emissions over the last two decades coming from coal power generation, this area will require the most immediate action.

China will also need to ramp up its investment in renewable power sources, and must find a good renewable base load power solution to substitute for coal. Expect to see increased investments in energy storage, such as battery technology, but also the move to renewable fuels that can be easily transported and stored, such as green hydrogen.

The Eagle has landed: What does Biden’s victory mean for net zero?

In the recent election, Democrats did not manage to take a clean sweep of both the executive and two houses of the legislator, so Biden will need Republican support to enact legislation. This will not be easy, but Biden, who has spent 47 years in politics and most of that time in the US Senate, has a history of striking bi-partisan deals and enacting legislation. There is also a great deal a president can do without enacted legislation through the Senate. Returning to science-based policy-making would be a big first step.

Biden’s team has spoken of how the incoming administration will restrict oil and gas drilling on public lands and waters, increase mileage standards for cars, block pipelines that transport fossil fuels and provide federal incentives to deploy renewable power. Biden has also pledged US$2 trillion of federal government stimulus over his term; aimed at encouraging the adoption of electric vehicles, better insulation of buildings and increased use of renewable energy.

The large amounts of stimulus that have been poured out this year to counteract the pandemic-related slowdown has resulted in US national debt surpassing US$26 trillion. Here, both Democrats and Republicans could see the need for a carbon tax. For Republicans, this would be a way to be fiscally prudent and reduce the debt burden without having to tax income and, for the Democrats, a market-based way to reduce carbon. 

Pushing for progress

Now that the US and China have made public their intentions, the future of the Paris climate deal has been transformed in a matter of weeks.

However, it will be crucial that the UN and the rest of the world continue to push China to ensure it is making progress on their goals. China understands that it has been a laggard in terms of technological developments and it has an opportunity here to develop a new industry in clean power and green technology. It can use this to support its own domestic economic growth and create a strong export market. As Mark Carney, the former governor of the Bank of England has said, the transition to net zero “is creating the greatest commercial opportunity of our age”.

The climate challenge can be thought of as a three-legged stool for the stakeholders that need to participate: consumers, industry and government. Studies show populations are concerned about climate change and are willing to change their own behaviour. Industry can now see the economics working in favour of sustainability and are willing to commit capital to the effort and starve funding for ‘de-merit’ activities.

That then leaves government. While European governments have taken a lead, the final awakening of both the Chinese and US governments will provide the much-needed impetus to reach our carbon targets over the coming decades.

Randeep Somel is an associate portfolio manager at M&G Investments.