Decarbonization will help China move up the global value chain
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Decarbonization will help China move up the global value chain

China’s targets for carbon neutrality call for an economic transformation on an unprecedented scale. This also presents significant opportunities for businesses and investors. But will the current global energy crisis derail China’s ambitions? Can it maintain its dominance in the clean energy supply chain? Policy experts, industry insiders and investors share their views. 

China’s quest for carbon neutrality will be difficult and expensive, but a focus on zero-carbon technology could ultimately help the country realize its ambitions of ascending the global value chain. 

That was the view among academics, investors and thought leaders at the 13th Credit Suisse China Investment Conference. A range of speakers expressed confidence that China’s transition to net-zero will continue to guide economic growth well beyond the current cycle. 

Tianyin Sun, Deputy Director of the Center for Green Finance Research at Tsinghua University

Despite a challenging backdrop, with geopolitical frictions and energy security considerations high on the agenda, Tianyin Sun, Deputy Director of the Center for Green Finance Research at Tsinghua University, sees China’s transition as a long-term project that will benefit society and the economy. 

“The transition towards carbon neutrality in China will involve a wide-ranging and profound systemic, economic and social transformation,” he said. “It will promote the transformation and upgrading of China's economy and its energy structure.”

Green growth

As the world’s biggest emitter of greenhouse gases, China needs to achieve much greater reductions than anywhere else to achieve net zero. It must also do so in a relatively compressed timeframe.

Under its “dual carbon goals”, China has pledged to peak its carbon dioxide emissions by 2030 and achieve net zero by 2060. Those ambitious targets give it just 30 years to go from peak to neutral – compared to the 71-year gap between the EU’s peak emissions in 1979 and its 2050 net-zero target.

China already leads the world in renewable energy capacity and is expected to widen its lead over the next few years as clean energy becomes a much bigger part of the mix.

According to scenario analysis by Tsinghua University, for China to achieve net zero by 2060, the share of renewable energy – including wind, solar and hydropower – in primary energy consumption will need to grow from the current 15% to 65%. That will also entail cutting China’s reliance on coal from 57% of its energy needs to no more than 10%. The share of oil and gas must also decline, while nuclear energy is expected to grow from 2% to 15% by 2060. 

Supplying the transition

Kishore Mahbubani

Boqiang Lin, Dean of the China Institute for Studies in Energy Policy at Xiamen University

The majority of China’s clean energy infrastructure will be built domestically. According to Boqiang Lin, Dean of the China Institute for Studies in Energy Policy at Xiamen University, this will further support China’s development as the world’s leading supplier in the clean energy sector. 

“There is not a big technology gap between China and international players in clean energy equipment, but China’s supply chain is more competitive,” said Lin. “This gives us an opportunity to be at the forefront of clean energy technology.”

China already controls 80% of all the key manufacturing stages of solar panels, with that share expected to rise to more than 95% in the coming years, based on current manufacturing capacity under construction. And China produces wind turbines at less than half the cost of the global average, positioning it well to supply capacity expansion in less established wind markets such as Latin America and Eastern Europe.2

Transitioning the state sector

Given the heightened focus on climate and energy security concerns, Lin expects China’s government will become more involved in energy markets through the mobilization of state-owned enterprises (SOEs). The scale of China’s transition is set to ramp up quickly as the SOEs enter the new energy market. 

“Until now, the transition of SOEs has not been discussed much, but given that they account for 80% of China’s energy market, unless they are involved, China cannot realistically decarbonize.” 

The petrochemical giants among China’s SOEs have a tough task ahead, but their size will help them, revealed Shuang Wang, Deputy Director and Senior Project Manager of the China Petroleum and Chemical Industry Federation.

“It turns out that large-scale integrated refinery projects emit less carbon than small- and medium-sized ones,” she said.

As such, consolidation – in addition to overhauling processes and seeking efficiencies through digital transformation – could be a big feature in the decarbonization journeys of Chinese petrochemicals firms. 

The goal of moving up the value chain is also relevant for the petrochemical industry. 

“Right now, most upstream oil is used to make fuel for energy, but in the future, we want to use it as a raw material to make high-value chemical products,” said Wang. “[While] upgrading the refinery sector, we are encouraging the chemical industry to upgrade as well.” 

Emerging solutions

As well as scaling up existing renewable energy supply chains, China is also exploring solutions such as hydrogen and carbon capture, utilization and storage (CCUS) to help decarbonize industries such as steel, chemicals and non-ferrous metals. 

CCUS is seen as a way to ensure energy security as the share of renewables in China’s energy mix grows. Owing to the intermittent nature of renewables, China is expected to retain a modest share of fossil fuels as it decarbonizes. CCUS offers a way to eliminate the emissions they will produce. 

“China already has state-of-the art clean coal technology, and its power plants could become even cleaner with CCUS,” said Wang. 

Hydrogen, meanwhile, enables the storage and transport of energy derived from renewables. Lin pointed out that sunshine falling on a fraction of the Gobi Desert could supply all of China’s energy needs. “Hydrogen provides a means to store it and transport it where it is needed,” he said. 

Again, as China produces and implements CCUS and hydrogen technologies at scale, it will be better placed to supply them to the world. 

Financing headwinds

Jeroen Bos, Global Head of Sustainable Investing at Credit Suisse Asset Management

The investment needed to fund China’s energy transition is immense. Sun at Tsinghua University cites estimates of 100 trillion to 500 trillion yuan (about US$14 trillion to US$70 trillion), of which he expects only 10-15% to come from public funding. 

In that context, international investors will be an important source of funding for China’s transition. But China may face hurdles in accessing overseas investors as global regulators tighten their definitions of sustainable instruments.  

Europe’s new Sustainable Finance Disclosure Regulation (SFDR), which comes into effect on January 1, 2023, requires sustainable investments to ‘do no significant harm’ – potentially limiting their application as a source of transition funding. 

“Companies that are transitioning might not be completely sustainable today – that's why they need to transition,” said Jeroen Bos, Global Head of Sustainable Investing at Credit Suisse Asset Management. “This could limit their ability to qualify for so-called sustainable investment.”

“The increase in transparency the regulator is pushing for is great, because transparency helps better investment decision-making, but it could have some negative side effects.”

Weather warning

Wenjian Zhang, Assistant Secretary-General of the World Meteorological Organization

China has very real reasons for needing to redirect its economy towards more sustainable, low-carbon growth. 

Since June, China has been battered by deadly storms, droughts and heatwaves: temperatures in southern China exceeded 40 degrees for 70 consecutive days – the most severe heatwave on record. 

Wenjian Zhang, Assistant Secretary-General of the World Meteorological Organization (WMO), warns that extreme weather events will become more severe and more frequent as global temperatures rise. These will exact a considerable economic toll – equivalent to more than 5% of GDP in some developing countries, according to Zhang. 

“In China, from January to September, floods alone led to losses worth 286 billion yuan as well as displacing 5.26 million people,” he said. 

Droughts and heatwaves are also imperilling the global energy transition. Over the past year, severe droughts, for example, have been drying up rivers and reservoirs, causing a big reduction in hydropower generation around the world. 

This underlines the urgency of tackling climate change before we reach a “tipping point” beyond which the situation could become irreversible, said Zhang.