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.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
This document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Past performance is no guide to the future. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the authors at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. For definitions please see the glossary at jupiteram.com. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and not a recommendation to buy or sell.
Issued in the UK by Jupiter Asset Management Limited, registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. Issued in Hong Kong by Jupiter Asset Management (Hong Kong) Limited (JAM HK) and has not been reviewed by the Securities and Futures Commission. No part of this commentary may be reproduced in any manner without the prior permission of JAM, JAMI or JAM HK. 28580