China’s Pledge for Carbon Neutrality [Part 1]: Effects on Policy and Corporates

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  • China’s Pledge for Carbon Neutrality [Part 1]: Effects on Policy and Corporates

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    Xi Jinping pledges for carbon neutrality; specific policies yet to be announced

    In late September of 2020, President Xi Jinping have an address to the United Nations General Assembly (UNAG), announcing that China will aim to be carbon neutral by 2060, about 40 years from now. Far from aiming for a direct decrease in carbon emissions from day one of the announcement, the Chinese President gave a more realistic picture. The country would be forecasted to hit its highest CO2 emission sometime before 2030 before seeing an actual decrease. In the meantime, governing bodies will begin to put out more regulation and policy to drive the country toward zero-emission. Specific measures have yet to be announced. Analysts at Reuters note that if China did attain carbon neutrality, the country could contribute to a 0.2 – 0.3 degree Celsius slowdown in global warming in the 21st century.

    China’s carbon emissions have ranked high among most countries due to its dependency on manufacturing

    China makes up about 29% of the globe’s CO2 emission, according to Reuters. According to it National Bureau of Statistics (NBS), the country’s emission grew at 2% in 2019, and it burns more coal than all other countries combined. A major factor behind this is that manufacturing makes up a larger proportion of China’s overall economy than similarly developed nations. Thus, there is a higher consumption of energy per person due to the enormous amount of power needed in the country, and consequently a larger carbon output from burning fossil fuels.

    14th Five Year Plan will highly influence the direction of China’s carbon neutrality efforts

    According to a Citi Research study on the changes to the proportion of China’s primary energy consumption from 2019 to 2060, the combined make up of oil and coal would need to fall from 77.3% all the way down to a 27.1% mix; coal would see reductions as high as three to four times compared to 2019 proportions.

    Other industry analysts have asserted that non-fossil energy needs to make up an even higher 90% of energy sources for power generation by 2050 in order to meet the 2060 target year for carbon neutrality. President Xi’s announcement comes at a pivotal time, during which China is in the middle of wrapping up discussion for its 14th five-year plan, which will guide economic development starting March 2021 all the way through 2025. Experts such as those from the Standing Committee of the National People’s Congress (one of the highest governing bodies in China) have asserted that legislation in the plan will include an Energy Law, Energy-Saving Law, and Law on Combatting Climate Change, which are all in the works. These laws would ensure there are carbon caps as well as local level regulation for carbon markets and carbon dioxide sequestration. Priorities and decisions identified in the plan will dictate progress for China’s carbon neutrality efforts.

    There are, in fact, different targets on the path to decarbonization, which will affect the path that the government and market would need to take. In the chart below, created by Tsinghua University Institute for Climate Change and Sustainable Development (ICCSD), most scenarios account for the fact that China is on the charted path towards its highest carbon output, and thus inflection point, in 2030. The rapid global temperature target scenarios of preventing the globe from warming 2C and 1.5C cannot afford to account for this inflection point. This is because in a ‘rapid’ scenario, the assumption is that carbon output would be decreasing as soon as possible, ideally from the first few years. On the other hand, normal and enhanced mitigation scenarios simply do not make the cut to significantly reduce CO2 output by 2050.

    ICCSD charts two more realistic scenarios compared to the two rapid scenarios, one in which it recommends a pathway with a global temperature target of 1.5C, 2050 CO2 net zero research team’s recommended scenario, and another for 2C, which it denotes as a long-term decarbonization scenario.

    Source: ICCSD Study

    In terms of investment, the ICCSD research team’s recommended 1.5C scenario would require RMB140tr (USD21tr) in funding, while the 2C scenario would need RMB100tr (USD15tr). For context, the 2C scenario’s funding would make up about 1.5-2.0% of the Mainland’s GDP over those 30 or so years.

    Energy-intensive companies will need to consider non-traditional types of fuels as alternatives and integrate smart technologies into their industry chain

    Industries most effected by plans to go carbon neutral are of course the power industry, and other energy-intensive sectors such as iron and steel, cement, building materials, chemicals, non-ferrous metals, and manufacturing. These directly or indirectly account for 45% of the country’s emissions. Such industries will need to integrate use of smart technologies and clean fuel sources in order to reduce their carbon output. The case is similar for more traditional energy providers as well, such as coal-fired power generators, oil producers, coal-fired power equipment companies, and those in the rail transport industry. Consequently, the renewable energy and alternative fuels space will benefit long-term as well as gas distributors, and electric auto manufacturers. Hydrogen, ammonia, and methanol are also potential types of fuels that will attract major investors and buyers. Sinopec, a large Chinese petrol company, is also looking into hydrogen production opportunities.

    Needless to say, most industries in the Mainland will be affected by the 2060 carbon neutral plan. How this will affect the investment landscape in China will be covered in part 2 next week.


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