Business implications from China’s carbon goals
China’s efforts to advance environmental sustainability have been making the headlines owing to President Xi Jinping’s pledge for carbon emissions to peak by 2030, and carbon neutrality to be achieved by 2060.
A question that comes often in my conversations with executives is whether Chinese authorities are serious about achieving these goals. I think they are: China is looking to reduce the carbon footprint of its development process not only to improve its environment and people’s wellbeing; but also to increase its energy security by diminishing import dependence on fossil fuels.
The question then is whether achieving these goals is feasible. This was one of the main points of discussion during our latest CxO lunch where we discussed the 14th Five-Year Plan (FYP). To be sure, the roadmap towards carbon neutrality is not very clear. As one of the speakers noted, it will require technological breakthroughs that help China transition to an energy mix that is heavily reliant on renewables and new energy sources – e.g. hydrogen. The problem is that we do not know when these breakthroughs will come, how much investment they will require, and whether they will be successfully commercialized.
On the positive side, China does have the potential to make its emissions peak by as early as 2025 by accelerating its coal phase out and increasing the use of natural gas. But, as one of our recent pieces explains (see here), authorities do not seem to be interested in accelerating the timeline set by President Xi. I see two main reasons for this.
- First is the socioeconomic cost of this transition. Indeed, estimates vary widely, with some noting that China will have to invest about USD 5.5 trillion over the coming decades to reach these goals (see here), while others put this number at USD 20 trillion (see here). But more than the capital required, the fact of the matter is that this transition will be very disruptive across all sectors, and particularly for industry – e.g. steel mills, coal plants, mines, oil and gas. Studies show that this transition has already costed millions of jobs in these sectors (see here for instance). This disruption is precisely what Chinese authorities do not want at a time in which they are trying to maintain employment levels stable and boost consumption. And also because the Covid-19 pandemic continues presenting a risk to the country’s economic recovery.
- The second reason, paradoxically, relates to China’s rising energy security concerns – i.e. the same concerns driving the push for renewables. And this is because transitioning to an energy mix more reliant on renewables will not only require vast amounts of capital as noted above but, more importantly, it will take time. While China relies on imports of oil and gas, it has ample supplies of coal, as shown in the chart below. Which means that authorities are likely to allow for some coal capacity expansion over the next year as a way to offset China’s import dependence on other fossil fuels and while they work on expanding its renewables capacity. In fact, according to a recent report, China commissioned 38.4 gigawatts of new coal plants in 2020, accounting for 76% of the world’s new coal plants that year, and up from 64% in 2019 (see here).
This all means that over the short-term, and at least during 2021, China’s environmental efforts will be outweighed by its economic and national security priorities. As a result, we are not likely to see any radical moves from authorities to reduce emissions.
But once growth is stabilized – which will probably require the pandemic to be fully controlled throughout the world – I do expect China to make more efforts to reduce its consumption of fossil fuels, and incentivize the usage of green products. And this is because increasing China’s environmental sustainability underpins one of the key goals under ‘Xi Jinping Thought’, which is the building of a ‘Beautiful China’, and without which China will not be able to “basically achieve modernization” by 2035.
In fact, in a high-level meeting subsequent to the legislative session that passed the 14th FYP, President Xi committed to making renewable energy the “mainstay” of China’s power system rather than a significant component. This suggests that China’s ambitions should not be understated, with domestic renewables considered as offering greater energy security than fossil fuel imports at a time of geopolitical strains.
What does this mean for companies?
- China’s ‘modest’ environmental agenda over the short-term will provide some leeway for domestic companies and local authorities to plan ahead and start making the necessary investments to reduce emissions and increase energy efficiency. This is therefore a great time for foreign firms to explore potential partnerships with their Chinese counterparts; as well as to map out and build rapport with key stakeholders at both the central and local levels of government, with the aim of having more visibility over the pipeline of potential procurement opportunities and influencing future policies;
- There are likely to be increasing business opportunities for foreign firms to contribute advanced technologies, expertise and international best practices that can help China in its environmental roadmap. For instance, carbon capture and storage technologies for oil and gas facilities; green, non-toxic materials for infrastructure projects and the construction and retrofitting of buildings; innovative plastic composites for NEVs to reduce weight and increase durability; recyclable packaging for consumables; waste management practices to increase heat generation for waste-to-energy plants; and ESG standards for project financing;
- Do however expect increasing regulatory disruption as a result of China’s drive to improve the environment and people’s wellbeing, as well as due to rising national security concerns. It is therefore time to: (i) redouble your GR efforts to be seen as a company that is making a positive contribution to China’s development goals; and (ii) strengthen your local partnerships to improve your organizational agility and understand ‘where to play,’ ‘how to win,’ and who to talk to.