China’s ETS on Path to Halve Carbon Emissions by 2060

Success of China’s national emissions trading scheme depends on rapid extension beyond utilities sector.

A new report from the Asia Investor Group on Climate Change (AIGCC) and Schroders – ‘China Emissions Trading System – A New Dawn’ – claims China’s national ETS has the potential to reduce the nation’s carbon emissions by three to six billion tonnes a year by 2060.

This is equivalent to a 30-60% plunge from 2020 levels the report said.

The ETS, which started trading on 16 July this year, regulates over 2,200 companies from the power sector, including combined heat & power, as well as captive power plants of other sectors. In total, the ETS is estimated to cover over four billion tonnes of CO2, accounting for 40% of national carbon emissions.

This matters in the battle to tackle global warming as China is the world’s largest CO2 emitter, accounting for 28% of global emissions in 2019, due to its heavy reliance on fossil fuel power and heavy manufacturing.

President Xi committed the country to a net zero goal by 2060 last September, with details later laid out in China’s latest five-year plan.

Limited initial impact

The ETS currently only covers the utilities sector which the report stated would mean that the initial impact of the scheme would be limited.

However, it added that the ETS could become “more material for covered industries and companies by the mid-2020s as China aims to peak emissions by 2030”.

This would mean other large emitters such as steel, cement, chemicals and aluminium being covered by the ETS. Although these sectors are expected to be incorporated into the ETS, there is currently no fixed timeline.

At present the utility sector is the highest CO2 emitting sector in China with a 39% share, followed by steel at 18%, cement at 17%, transport fuel at 7% and coal/chemicals at 6%.

The report cautioned that its up to six billion tonnes prediction is based on a number of assumptions including a straight-line reduction in sector intensity caps from current levels to zero by 2060, the inclusion of the steel, cement, chemicals and aluminium sectors from 2025 onwards, low growth for power and aluminium and flat growth for the remaining sectors.

Of added interest to asset owners and managers the report said that the ETS could drive significant changes to revenue and net profit in Chinese companies.

Its analysis found that a US$10/t carbon price would impact 2020 revenue in the chemicals from coal, cement and utilities sectors by between two and 36%.

The report added that in the utilities sector Huaneng Power International, Datang International Power Generation and Huadian Power would be most likely to be “financially sensitive to higher carbon costs”, with CLP, CR Power and Huadian Power likely to have to bear the highest burden of investment.

Embracing the challenge

However, companies in the Chinese power utilities sector appear to be embracing the challenge of climate change.

According to the report China Huadian Power is aiming to close more than 3 GW of coal-fired power capacity in the next five years, add 75 GW renewable power capacity between 2021–2025 and to peak carbon emissions by 2025.

“The launch of the national emissions trading scheme could be one of the most significant drivers of carbon abatement in Asia and with the right settings will be instrumental in delivering China’s goals of peak emissions before 2030 and carbon neutrality by 2060,” said AIGCC Vice Chair and Schroders Head of ESG Integration APAC, Wong Dan Chi.

“Investors need to understand the growing and future impact of the national China ETS on a range of carbon-intensive industries and companies as part of their ongoing management of climate risk across their portfolios.”

AIGCC Chief Executive Officer Rebecca Mikula-Wright, added: “Investors are increasingly seeking to reduce their exposure to climate risks and better position themselves for the opportunities that will be created by China’s commitment to carbon neutrality.

“Carbon pricing is generally supported by investors as an efficient way to mitigate emissions and help price climate risk in the economy. It is important that there is clear market information about the design and operation of any carbon pricing mechanism such as auctions, permit allocations and caps.”

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