China’s Climate Challenge

While it remains the world’s largest carbon emitter, China is making significant progress in areas such as alternative energy and electric vehicles.

As the world’s largest producer of greenhouse gases (generating around 28% of total emissions in 2019), China’s environmental record is closely scrutinised. The current Winter Olympics in Beijing, for example, have attracted criticism for being fully staged on resource-intensive artificial snow, even though the previous games in Pyeongchang, Korea and Sochi in Russia were also almost entirely played out on man-made surfaces. At the same time, China is claiming the games are the first carbon-neutral Olympics, an achievement reached by a combination of retrofitting buildings from the 2008 summer games, renewable power and the use of non-internal combustion engine vehicles.

Even China’s emissions performance is nuanced – on a per capita basis, they are dwarfed by those of the US, but are rising.

Deirdre Cooper, Co-Head of Thematic Equities and Co-Portfolio Manager of the Global Environment Fund at global asset manager Ninety One, says the world’s ability to meet net zero targets will depend on countries such as China and India. “China is not all perfect in terms of its environmental performance, but there are many areas to be optimistic about, such as electric vehicle sales,” she says, adding that no country on the planet is yet doing “everything” it needs to do to achieve net zero.

Ninety One has significant allocations in China, she adds, and supports the Paris Agreement’s reference to “common but differentiated responsibility and respective capabilities” that acknowledges transition to net zero will be slower in emerging markets. “While asset owners want low-carbon portfolios, emerging markets are significantly more carbon intensive,” she says. “It would be wrong to allocate capital away from these markets as they need funding for their transition.” Cooper cites a recent International Energy Agency (IEA) report that highlights the importance of mobilising international capital to fund transition in emerging markets, without which transition may falter.

Engagement with companies in China can have real impact, says Cooper, particularly if aligned with the Chinese government’s common prosperity initiative, which aims to narrow the wealth gap in China and includes climate-related actions. Three of the companies Ninety One engages with in China became first-time carbon emission reporters last year. The asset manager will now work with these companies to develop science-based emission targets. “We are focused on helping them to deliver what is sensible. The first step is to get the data reported, then we can move on to science-based or external review targets. Progress is slower than in Europe, for example, but it is moving in the right direction,” she says.

As China enters the Year of the Tiger, this explainer attempts to set out assess progress to date and future challenges on its road to net zero.

What are China’s stated net zero goals?

China’s 14th Five Year Plan, which was approved in March 2021, targets a decline in energy and carbon intensity of 13.5% and of carbon intensity per unit of GDP of 18%. Other binding targets include increasing the share of days with good air quality in cities up to 87.5% (from 87% in 2020) and increasing forest coverage to 24.1%. Non-binding targets include the proportion of non-fossil fuels in primary energy consumption, set at 20%, up from 15% in the previous plan. In general, the new plan promotes low-carbon development and the circular economy with new approaches to transport, energy production, and waste management policies.

The country’s current official nationally determined contribution (NDC) to the Paris Agreement aims to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060; to lower CO2 emissions per unit of GDP by over 65% from the 2005 level; to increase the share of non-fossil fuels in primary energy consumption to around 25%; to increase forest stock volume by six billion cubic metres from the 2005 level; and to bring the country’s total installed capacity of wind and solar power to over 1.2 billion kilowatts by 2030.

In line with other major emitters, China will come under pressure to accelerate its plans in the lead-up to COP27 in Egypt.

China is still a big consumer of coal: what impact does this have on its goals?

The demand for electricity in China remains strong and the country continues to burn coal, albeit at a slower rate than in the past. Around 69% of mainland China’s electricity was produced from fossil fuels – predominantly coal – in 2019.

At the Leaders Climate Summit in April 2021, President Xi Jinping announced that China would control coal generation until 2025 when it will start to gradually phase it out. Independent analysts Climate Action Tracker estimate China’s emissions to have been 13.8 GtCO2e in 2020 and set to reach 13.2-14.5 GtCO2e in 2030 under current policies. This would put China within range of overachieving on its NDC non-fossil fuel targets, but it would be insufficient to meet the Paris Agreement 1.5C limit for global warming.

Climate Action Tracker also noted that China commissioned 38.4 GW of new plants (a net 29.8 GW increase) in 2020, representing 76% of the world’s total commissioned coal plants, signalling “another year where China held back the rest of the world’s progress in declining plants”.

China’s national Emissions Trading Scheme (ETS), which has initially focused on coal- and gas-fired power plants, became operational in 2021. Financial data company Refinitiv says issuance of Chinese emissions allowances (CEAs) for the first period covered (2019-2020) was slightly higher than what was required. Trading has been limited compared to the more liquid carbon markets in Europe and North America.

Refinitiv expects the Chinese Government will take more measures during 2022 on the legal status of the ETS, including reviewing allowance allocation, monitoring, compliance and penalties. An analysis published last year by the Asia Investor Group on Climate Change said China’s ETS would need to expand rapidly to cover other parts of the economy to keep the country on track to achieve net zero by 2060.

What is China doing to increase use of non-fossil fuel energy?

To meet its commitment to increase the share of non-fossil fuels in its energy mix, the Chinese government has committed to investing US$15 trillion in renewables over the next 40 years. Among its targets is to increase the total installed capacity of solar and wind to 1200 GW by 2030. Renewables made up 10% of total energy supply in China in 2019. Growth in renewable energy is mainly in electricity through hydropower, solar energy and wind power.

China is among the world’s leading renewable energy technology producers and exporters, and also has the largest fleet of wind and solar plants, says Hu Min, Co-Founder of the Innovative Green Development Program, a China-based consultancy focusing on green and low-carbon development. The total installed capacity of wind and solar power reached over 530 GW by the end of 2020. The National Energy Administration has proposed to increase provincial grids’ minimum purchase of non-fossil fuel power to 40% by 2030 from 28.2% in 2020. This is likely to help China achieve its 2030 renewable energy development goals three to five years ahead of schedule.

During 2020, China installed half of the globe’s new offshore wind capacity (3GW). In July 2021, the installation of China’s first floating offshore wind turbine began in the South China Sea. Floating platforms enable turbines to be placed further out to sea, where winds are stronger. The domestically designed turbine is designed to withstand typhoons and extreme waves.

The IEA’s Bioenergy Technology Collaboration Programme says China has “important opportunities” to further deploy bioenergy, particularly through the replacement of coal by solid biomass in existing assets, the increase of transport biofuels (which are still less than 1% of transport biofuels) as well as biogas to replace natural gas.

In nuclear energy, China (along with Russia) lead the world in terms of new grid connections and construction launches. The IEA says 22% of the nuclear reactors under construction globally are in China. Construction began on three new nuclear reactors in 2020, and in the next several years it is expected to launch a number of new projects to reach a total capacity of 110 GW by 2030.

More progress is needed in the energy sector, says Ninety One’s Cooper. While China’s power sector is leading other countries in installations of wind and solar energy plants, it is still adding coal to its energy mix to meet electricity demand. In part due to its centralised political and economic structures, the country is “generally very good” at mobilising infrastructure projects and can move more quickly on these than other countries, she adds.

What progress is China making in decarbonising transport?

China led global growth in electric car markets in 2021 as sales nearly tripled to 3.4 million; more electric cars were sold in 2021 in China alone than were sold in the entire world in 2020. The IEA says the annual increase is the fastest electric car market growth in China since 2015, significantly outpacing the more gradual recovery of the country’s overall car market. The official government target for electric cars is a market share of 20% for the full year in 2025. Growth was helped by government subsidies, but these are being scaled back. The IEA believes the growth in sales in 2021, despite the beginning of the subsidy tail-off, suggests the market is maturing.

In January, guidelines for extending charging services for electric vehicles were released, stressing the need for efforts to accelerate the construction and installation of charging facilities in residential areas, improve battery charging and swapping capabilities in urban and rural areas, step up the development and application of new technologies, and add more expressways to the rapid charging network. By 2025, 60% of expressway service areas will have rapid charging stations. The guideline emphasised the construction of a charging facility network in rural areas.

China also accounts for 90% of the world’s electric buses and trucks, and virtually all of its electric two- and three-wheelers. It has installed over 800,000 public charging stations, almost twice as many as the rest of the world. China produced 44% of the world’s electric vehicles during the past decade. The country also controls the global EV battery supply chain, including 80% of the world’s raw material refining and 60% of its battery component manufacturing.

With the upcoming COP15 biodiversity meeting being held in China, what is the country doing to improve its performance?

China is one of the most biodiverse countries in the world, with the largest volume of forest plantations and a forest coverage of 20.36% of total land area. The government has set a target of increasing forest stock volume to 19.7 billion cubic metres by 2030.

There are many areas of concern, however. Around 90% of grasslands in the country are experiencing degrees of degradation and desertification and 40% of China’s major wetlands are facing threats of severe degradation, especially mudflats and mangroves.

The Convention on Biological Diversity (CBD) says accelerated urbanisation and industrialisation have brought threats to and increased pressure on the habitats of species and ecosystems. “Over-exploitation and disorderly development of biological resources have aggravated the negative impacts on biodiversity,” says the CBD.

“Environmental pollution has greatly impacted aquatic and river coastal biodiversity and habitats. The release of invasive alien species and genetically modified organisms into the environment has increased pressures on biological security. The production of biological fuels has created new threats to biodiversity conservation. The impacts of climate change on biodiversity are yet to be evaluated.”

In October 2021, China issued its first white paper on biodiversity, timed to coincide with the first leg of COP15 and the Kunming Declaration. The paper sets out the Chinese government’s plan to restore, improve and stabilise degraded ecosystems such as grasslands. Projects include conservation and restoration of natural forests, sandstorm source control in Beijing and Tianjin, stony desertification control, the Three-North Shelterbelt Forest Program and other key forest programs.

Other projects include turning marginal farmland into forests and grasslands, returning grazing lands to grasslands, conservation and restoration of lakes, rivers and inland wetlands, and conservation and restoration of mangrove forests and coastal wetlands.

What are the incentives for investment in climate-related initiatives in China?

In November, People’s Bank of China (PBOC) announced it would provide financial institutions with low-cost loans to help firms cut carbon emissions. The carbon emission reduction supporting tool is designed to help financial institutions to provide loans to firms on the premise of independent decision-making and risk-taking.

The bank will provide 60% of loan principals made by financial institutions for carbon emission cuts, with a one-year lending rate at 1.75%. The carbon emission reduction loans can be rolled over twice. Financial institutions will apply for the low-cost funding from the PBOC after the loans for carbon emission reductions are made.

The PBOC will require financial institutions to publicly disclose information on carbon emission reduction loans and carbon emission cuts financed by such loans.

China’s green bond issuances are set to exceed US$100 billion this year, according to S&P Global Market Intelligence. The issuance of Chinese green debt, including instruments that meet only local standards, could grow by at least 80% this year after raising US$94.77 billion in 2021.

China is expected to align its definition of green projects with global consensus on sustainable taxonomies to draw more international investors, after excluding fossil fuel-related projects when they revised the list of projects eligible for issuing green debt in April 2021.

S&P Global adds that monetary easing in China should also bode well for the onshore green bond market.

In common with other major markets, notably Europe, China has seen a growth and diversity in sustainable debt issuance in 2021, launching carbon-neutral and sustainability-linked bonds domestically, and piloting social and sustainable development bonds.

According to a recent report by the Climate Bonds Initiative and CIB Research, cumulative issuance of domestic labelled green, social and sustainability debt was RMB3.3 trillion in the first half of 2021, whilst the cumulative issuance of carbon neutral bonds reached RMB140.6 billion over the same period, accounting for 57.3% of the total amount of green bonds issued.


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