Ahead of November’s COP26 summit, China’s State Council released a new policy framework outlining the country’s decarbonisation strategy. The framework offers a step-by-step path to net zero, providing specific decarbonisation targets for 2025, 2030 and 2060. It’s just a start – a series of at least 10 industry-level policies will also be forthcoming to complement the framework.
By backing up the strategy’s lofty goals with defined five-year plans, the authorities have shown strong policy resolve, offering a substantial degree of transparency to the country’s industries and public, helping them to prepare for the upcoming transition. Although this framework has not yet received much attention in the media, we believe that there are a number of key takeaways from the report to which long-term investors would do well to pay attention.
Short-term pain, long-term gain
It is clear from the framework that the government is serious about tackling carbon emissions, both over the short and longer term. Despite the recent slowdown in economic momentum, the framework doubles down on the strict net capacity curbs that are already in place in carbon-intensive industries such as steelmaking, cement, plate glass and electrolytic aluminium. This means no more building of new capacity in these industries unless there is a retirement of old and inefficient factories. This directive could create short-term economic pain, particularly in central China where these industries are concentrated.
The report sets ambitious energy targets, setting out its plan to reach a minimum 80% of non-fossil fuel sources, starting from just 15.6% in 2020, and adding a new explicit capacity target of 1.2bn KWh for wind and solar by 2030. With coal currently contributing 60% of China’s energy mix and oil another 20%, the proportion of fossil fuels will shrink from 80% today to less than 20% by 2060. It is clear that the pace of this decarbonisation will necessarily accelerate significant investments in the country’s green and low-carbon industries – HSBC estimates $31 trillion (around 200% of China’s GDP) will need to be invested in these sectors. The plan also outlines EV penetration rate to 40% by 2030. This appears easily achievable as EV penetration has jumped from 6% at the beginning of 2020 to surpass 20% in November 2021.
Another point worth noting is that the publishing of this framework marks the first time that Chinese authorities have coordinated explicit support among all ministries, including industrial policies, fiscal policy, and monetary policy. A case in point is the new “green financing tool” announced by the People’s Bank of China (PBOC), which provides concessional financing which we estimate will be worth 1 trillion CNY to on-lend to renewables power generation, energy storage and smart grid, in 2022 alone.
In addition, the authorities envision faster development of the carbon trading market, allowing institutional and private investors to participate. Since trading started in July, the national carbon credit market now covers emissions equivalent to 4.5Gt – the largest in the world. The average price is about CNY 45 (USD 7)/tonne, significantly lower than European counterpart (EUR 50-60)/tonne. We believe that there could be good potential for the price of Chinese carbon credit to rise close to international prices over time.
As a final point to note, we have cross-checked China’s targets with the Climate Equity Reference Project’s Climate Equity Calculator, to see if the country’s pledges are coherent with its “fair share” in line with the Paris Agreement. The results show clearly that China’s pledges for 2030 are indeed meeting this fair share target, while, in contrast, the US does not appear to be pulling its full weight. China clearly has a long way to go to meet the ambitious targets it has set for itself, but we believe that the resolve and transparency shown in this report is a very promising start, and one of which investors should take note.
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