What happens in China is central to the global effort to limit the extent of future climate change. China is already the largest emitter of greenhouse gases by far, even as it continues its process of urbanisation and economic modernisation. Under a traditional model of energy-intensive economic growth fed by fossil fuels, this would thwart the world’s chances of keeping climate change at levels considered relatively safe. But a new paradigm of low-carbon economic growth could be the answer. Consistent with China’s own national interests, this paradigm emphasises technology and is driven in large part by concerns other than climate change.

In the lead-up to the UN’s 2015 climate change conference in Paris, China has taken a global leadership position on climate change policy. China’s submission to the Paris negotiations still urges developed countries to do more on climate change. But it also says that China ‘will promote global green low-carbon transformation and development path innovation’.

Those last few words are the key. China has realised that it has a strong self-interest in addressing climate change. Cutting carbon emissions goes hand in hand with China’s other national objectives, including cleaning up air pollution and improving China’s energy security, principally by cutting back on the reliance on importing fossil fuels.

China could become the dominant provider of many new low-emission technologies. China is already the world’s largest producer of solar cells and wind turbines. And it could aspire to global leadership in areas such as electric vehicles advanced electric grid technologies and ‘smart’ buildings with minimal energy footprint.

China’s headline climate goal is a reduction in the emissions intensity of its economy (or the ratio of carbon dioxide emissions to GDP) of 60–65% from 2005 to 2030. Though ambitious, the target is realistic because of the huge potential for energy efficiency and for moving away from coal, which still dominates China’s energy supply.

China is on track to meet its 2020 target of a 40–45% cut in emissions intensity. The key factor to success has been improving energy efficiency throughout the economy. But to meet the 2030 target, China will also need to see a structural shift in its economy towards services and high-value added manufacturing, as well as a shift in the composition of its energy supply away from coal and towards carbon-free alternatives.

China has also pledged to reach its peak carbon dioxide emissions level by around 2030. China’s economic growth is now moderating and it is therefore quite possible for emissions to peak before 2030. China’s submission to the Paris conference targets a sharp increase in non-fossil fuel energy sources, to around 20 per cent of the total energy mix by 2030.

Renewable energy is no longer an expensive luxury: the cost of electricity from solar panels, for example, is now almost competitive with new coal fired generating capacity. And low-emissions electricity capacity is growing rapidly. Still the policy effort to get to a point where these alternative power sources provide a large share of total energy in China will be enormous, because solar and wind power are coming off a very low base in China and the system overall is still geared towards large, centralised plants.

Command-and-control approaches have dominated China’s energy and climate policy toolbox. But market-based policy instruments are to play a much bigger role in the future. In line with a general drive to liberalise the economy, China is preparing a national emissions trading scheme, foreshadowed for introduction in 2017. The cap-and-trade scheme is to cover electricity generation and heavy industries.

For emissions trading in China to become fully effective, there will need to be significant changes in how the energy sector. Large parts of heavy industry and the electricity system are still run by state regulation or as state-owned enterprises. Making emissions trading effective will require giving a much greater role to pricing mechanisms, especially in the electricity sector.

Such reform can be hard to do as it cuts across established interests, but over time the introduction of emissions trading could be a catalyst to push ahead with faster market reform in China’s heavy and energy industries.

China’s move towards effective emissions markets will be a gradual one. But it can have a big signalling effect. What plays out in China will reverberate across Asia and the world. Governments and businesses will feel the effects of China’s low-carbon push. It is high time for countries that have strong trade and investment relationships with China to engage deeply on the new economic and strategic trends that come from China’s climate policy.

Developing countries have a choice as to whether their economies grow in the traditional way.

Technological and economic push factors are at work. Cheap Chinese-made solar panels have created a fast growing market for renewable energy. The same can happen with other new energy technologies. China is in a good position to influence global product market trajectories and steer financing for infrastructure investments in other countries.

The pull factors are not to be underestimated. If China succeeds in cutting short the dirty phase of industrialisation through technology and accelerated structural change, then why would any country be content with second best technology and an outdated model of development?