latamen
China: charting the course to carbon neutrality

China: charting the course to carbon neutrality

20-04-2021 | Insight
China’s pledge to become carbon neutral by 2060 has left many observers both excited and perplexed. Making the world’s largest CO 2 emitter carbon neutral within the next 40 years is no mean feat, and will have far-reaching consequences. But the formidable challenges associated with the transition also come with many investment opportunities.
  • Jie Lu
    Jie
    Lu
    Head of Investments China

Speed read

  • Achieving carbon neutrality by 2060 will require radical changes
  • Formidable challenges lie ahead, but also investment opportunities
  • Renewables, electric vehicles and energy storage technologies set to benefit
China is by far the largest carbon emitter in the world. The country currently accounts for close to 30% of global CO 2 emissions, according to the International Energy Agency (IEA), versus 15% for the US and 9% for the European Union. 1 Colossal investments will be required to help the transition, especially in areas such as renewables, the electrification of transport and nuclear power generation.

Figure 1: China’s rising share of global CO2 emissions

Source: IEA. CO 2 emissions from fuel combustion in metric tons.

The rapid pace at which CO2 emissions re-embarked on their upward path last year, in spite of all the havoc caused by the Covid-19 pandemic, is a testament to the disruption needed only to put our economies on the necessary trajectory. So, while current trends in CO2 emissions may not be comforting, the recent change of tune at the highest level clearly warrants close attention.

While current trends in CO2 emissions may not be comforting, the recent change of tune at the highest level clearly warrants close attention

Net zero carbon emissions will require combined efforts in three directions. Firstly, a shift in the country’s gross domestic product (GDP) mix, away from carbon-intensive industries such as manufacturing and construction, towards more carbon-light activities such as services. In fact, China’s gradual move away from industrial activities started over a decade ago.

Secondly, a change in the country’s energy mix, away from coal and oil towards renewables. Despite sizable investments in areas such as hydro, wind and solar power over the past decade, China’s economy remains heavily dependent on fossil fuels. In particular, China is extremely reliant on coal, which is arguably the most problematic energy source in terms of carbon emissions.

Finally, carbon compensation plans will also play a key role. Even with the most radical measures, full decarbonization is unlikely to be achieved without compensation initiatives. From this perspective, carbon capture, utilization and storage (CCUS) techniques, as well as forestation and reforestation, will likely become an indispensable part of the government’s toolbox.

Implications by sector

Around 90% of China’s CO2 emissions come from electricity and heat production, industry, and transport, with electricity and heat production representing half of all emissions.2 Logically, these three areas will be affected most by the transition, with electricity and heat production at the forefront.

Figure 2: China’s historical carbon emissions

Source: IEA. CO 2 emissions from fuel combustion, in million metric tons.

Yet there are also important differences across sectors. For instance, while industry emissions already peaked almost a decade ago, emissions from electricity and heat production, as well as from transport sectors, have yet to. But there are signs that the tide is slowly turning. For one, investments in coal-fired power generation have been slowing sharply over the past few years.

Meanwhile, moving towards a more sustainable transport sector will also require drastic changes, as well as sizable investments. These include a greater use of public transport infrastructures, an accelerated increase in the use of electric vehicles, and a further improvement in the efficiency of conventional oil-powered vehicles.

Seizing investment opportunities

Given the changes needed in most sectors to achieve carbon neutrality, the key issue for investors is to identify any major risks they might be exposed to, and to find the most attractive opportunities. Arguably, the most exposed companies are fossil fuel producers and in particular oil majors. Their core business is fundamentally at odds with decarbonization.

Companies able to support the transition are poised to benefit from the decarbonization trend

But many other industries also stand to suffer from a badly-handled transition, including petrochemicals, steel and cement. Conversely, companies able to support the transition are poised to benefit from the decarbonization trend. In some cases, the likely impact of decarbonization is already well known, but in others, the consequences remain difficult to fully grasp.

For now, we see opportunities in three major areas. Renewables are expected to retain the lion’s share of investments. But electric vehicles are also expected to be among the big winners. Finally, upgrades in power networks and energy storage technologies, as well as the hydrogen industry are likely to capture a significant portion of total investments too.

Recent official announcements suggest there will be an ambitious ramping up of clean power over the coming decade, with the share of non-fossil fuels in primary energy now expected to reach 25% by 2030, compared to an earlier target of 20%.3 Given the gradual exhaustion of hydropower potential and slowing nuclear power additions, this targets implies a rapid step-up of wind and solar.

Beijing has also made it clear that it wants to continue leading the way in new energy vehicles (NEVs), with a recently approved plan for the industry. According to the plan, NEV sales are expected to reach 20% of overall new car sales by 2025, up from 5.4% last year.4 This target for 2025 is lower than the previously stated target of 25%, as it takes into account the rough patch of 2019 and 2020.

Figure 3: China leads in the number of EV charging points

Source: IEA, ‘Global EV Outlook’, 2020.

Finally, while renewables will play the most critical role in the transition toward carbon neutrality, additional storage technologies will be also needed to address intraday and seasonal variability issues inherent to wind and solar energy, and to decarbonize all parts of the economy – including the most carbon intensive ones, such as steel and cement production.

From this perspective, two complementary technologies – batteries and hydrogen – are likely to play a key role given their ability to convert electricity into chemical energy and vice versa. China is already the world leader in terms of battery manufacturing, accounting for around 70% of global capacity.5 Despite the air pocket experienced early in 2020, production recovered rather quickly.

Meanwhile, developments in hydrogen are also set to accelerate over the coming decades. The China Hydrogen Alliance, a trade group representing the sector at large, estimates hydrogen could account for up to 10% of China's total energy mix in 2050, compared with less than 1% today.6

1 Source: IEA. Based on CO2 emissions from fuel combustion for 2019.
2 Source: IEA. Based on CO2 emissions from fuel combustion for 2019.
3 Myllyvirta, L., 15 December 2020, “Analysis: China’s new 2030 targets promise more low-carbon power than meets the eye”, Carbon Brief article.
4 Yu, C., 4 November 2020, “High-quality growth of new energy vehicle sector prioritized”, China Daily article.
5 Gül, T., Fernandez Pales, A. and Paoli L., May 2020, “Batteries and hydrogen technology: keys for a clean energy future”, IEA.
6 China Hydrogen Alliance, 2018, ‘White Paper on China Hydrogen and Fuel Cell Industry’, white paper.

Leave your details and download the full white paper

Disclaimer

This report is not available for users from countries where the offering of foreign financial services is not permitted, such as US Persons.

Your details are not shared with third parties. This information is exclusively intended for professional investors. All requests are checked.

This article is taken from our climate investing platform

Climate investing: from urgency to solutions
Subjects related to this article are:
Logo

Important information

The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).

This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.

This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.

I Disagree