China’s target of achieving carbon neutrality by 2060 might at first sight seem extraordinarily – perhaps ludicrously – ambitious, given the country’s status as the world’s biggest emitter of CO2, a by-product of the vast industrial complex which is the foundation of the country’s fast-track economic success.
And much as has been the case for the far-in-the-future decarbonization targets set by the mammoth oil majors there is a chorus of scepticism rooted in the belief that these are simply aspirations stated to align with the green zeitgeist while “brown” carbon-emitting business goes on as usual.
But as has been highlighted in a white paper recently published by the United Nations-supported Principles for Responsible Investment (PRI), there is far more to China’s carbon neutrality ambitions – which are targeted to enable China to meet its obligations under the Paris climate accord – than just empty lip service.
The PRI notes in the report that China is already constructing a framework which will allow it to achieve the new carbon neutrality goal and, most pertinently for the capital markets implications, this includes a range of proposals which promote climate investment and finance.
“Investors are increasingly supportive of policy actions to reach net zero and ready to contribute capital and collaborate with policymakers to design and implement policies that facilitate investment flows at scale,” says Luo Nan, the PRI’s Beijing-based China country head.
A significant axiomatic feature of China’s path to carbon neutrality is the Emissions Trading Scheme (ETS), launched in 2017 and comprising seven regional markets, but one which has yet to be fully utilized and where pricing has been prohibitively fragmented. However, high-volume contract trading which covers the power sector is expected soon to kick off, and is set to expand to encompass the petrochemical, chemical, steel, concrete, nonferrous metals, paper and domestic aviation sectors. The ETS market will be critical to investors’ ability to manage climate-related financial risk in China.
Targets for CO2 reduction have yet to be set nor has an explicit carbon pricing policy or emissions caps. But as the PRI observes: ”Emissions caps [must be] set at levels consistent with a pathway towards the net zero, and at least ten years ahead to ensure the ETS provides a forward-looking price signal.” PRI analysts also suggest that there must be a mechanism to correct for surplus allowances in the ETS.
The most pressing need is for China to reform its power market – electricity production accounts for around 51% of China’s energy-related CO2 emissions, which rose by a hefty 40% between 2008 and 2018.
Those alarming data are explained by China’s reliance on coal-powered electricity production, which represents around two-thirds of the total, with renewables contributing around a quarter – wind and solar power has surged in the overall energy mix, from just 1% in 2010 to 8% in 2018.
The PRI is recommending policy measures including the cessation of approvals for all new unabated coal-fired power plants, the phase-out of all unabated coal power generation and the setting of interim targets to that end for 2025 and 2030.
According to research firm Carbon Tracker, some 40% of China’s coal-fired power stations were losing money in 2018 and almost all will over the next 20 years as air pollution regulations kick in and carbon prices rise. Retiring these loss-making enterprises will save around US$400 billion per annum.
Energy storage, carbon capture and the modernization of China’s power grid to improve demand response via high-voltage transmission between China’s regional electricity markets are also crucial elements of the direction of travel towards full carbon neutrality.
Meanwhile, the shift from internal combustion vehicles to electric vehicles (EVs) is gathering rapid pace in the country – a significant dynamic in a country where 10% of energy-related CO2 emissions are accounted for by road transport.
More than half of all global EV sales are in China – over one million were sold in 2019 – and the country is embarking on a large public investment programme for charging infrastructure, with funding provided by central and local governments.
The strategic economic advantage of a full-on move to EVs for China will be the amelioration of the country’s dependence on imported oil and a consequent enhancement of energy security.
“Large amounts of investment are necessary to facilitate the transition, particularly in the key areas that have been emphasized in this briefing with rising demand for private capital,” says Luo.
“Investors will have opportunities to finance and invest in firms across all the priority sectors. For example, in the renewables supply chain investment opportunities include the developers and installers of renewables and the manufacturers of equipment in renewable technologies.”