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China’s road to net zero: reshape the country and the world
Thu, 23rd Feb 2023- The power sector’s measured decarbonisation means that coal consumption will peak as soon as 2026, and decline steadily thereafter. The fast-paced installation of renewables entails sustained demand for relevant commodity inputs, with geopolitical implications as competition over them intensifies.
- Electrification of China’s road transport will gradually but materially alter the global oil market. Chinese production and exports of electric vehicles will exacerbate existing global tensions around industrial policy and unfair subsidies.
- Energy- and emission-intensive industries such as steel and cement will be under significant decarbonisation pressure. EIU advises companies to watch out for the development of market-based policy tools like emission trading, which will be an indicator of the government overcoming its long-standing institutional inertia.
Balancing transition and stability of the electricity mix
The power sector—China’s largest emitter due to its dependence on coal—is undergoing a transformation. We forecast coal consumption to peak as soon as 2026, although it will fall only slowly after, to the benefit of coal exporters like Australia. Coal power, as the most economically and politically viable reserve option (for example, peak load), remains indispensable in the short term. More environmentally friendly solutions are either too import-dependent (natural gas) and expensive (battery storage), or take too long to build (pumped hydro). Official support for coal-fired generation has, in fact, seen an uptick in response to energy security concerns from the Russia-Ukraine war to domestic power outages, reflecting China’s pragmatism toward climate change mitigation.
Great leap forward in transport
The transport sector’s greenhouse gas emissions will probably peak in the 2030s. China’s transport-related carbon footprint per head was small to begin with, owing to the country’s vast high-speed railway network. It has since become the preferred mode of long-distance transport among the public, over air and road.
Road transport accounts for the vast majority of emissions in the sector. The fleet is undergoing gradual electrification, which will materially alter the global oil market in the coming years. New energy vehicles (NEVs, a term reserved for pure electrics, plug-in hybrids and fuel cells), after billions of renminbi worth of government subsidies, are increasingly competitive against conventional vehicles in the Chinese market; by early 2030 they will have taken about 30% of the market share (sales). We expect regulators to be under growing pressure to set a timeline for phasing out fossil-fuel cars, which it has not done so far.
We expect Chinese production and exports of electric vehicles to exacerbate existing global tensions around industrial policy and unfair subsidies. Exports of made‑in‑China NEVs—including non‑Tesla Chinese brands—have skyrocketed in recent years. German, American and Japanese car manufacturers, who have a strong presence in China and enjoy a high market share globally, risk losing out to their Chinese competitors in the decades ahead.
Decarbonising industries: from exuberance to pragmatism
Emitting about one‑third of China’s greenhouse gas emissions, China’s vast industrial sector has a tougher decarbonisation path ahead. As the world’s largest manufacturing base, the country has high emissions levels naturally. After an arguably overzealous decarbonisation push (which caused heavy disruptions), industry officials have resorted to more pragmatic roadmaps.
We expect decarbonisation pressure to be placed on the most energy- and emission-intensive goods such as steel, cement, chemicals and aluminium (as opposed to manufacturing as a whole), especially commodified products that are not considered instrumental to China’s high-quality growth pathway. China is often the largest producer of these products globally; therefore, the most straightforward pathway to lower emissions is to cut production—a common theme in emission-reduction roadmaps issued so far. On the other hand, the diminishing role of property in the economy is also reducing demand for cement and steel. The campaign to cut energy-intensive production capacity, in place since 2015, will continue the wave of industry consolidation led by large state-owned enterprises (SOEs), and push smaller and inefficient firms out of the market. Businesses should take into account the future rise of China’s producer prices as a result of these developments. They will also reshape global trade of industrial commodities in the coming years.
Energy efficiency improvements and process innovation, which are vital to achieving net zero in the long term, will be increasingly attractive investment opportunities, although they are currently driven by government directives (both of China and the West). Major SOEs, such as the world’s largest steel producer, Baowu, are financing research and development of new technologies. Export-oriented firms are facing pressure from the EU, which will implement the Carbon Border Adjustment Mechanism by 2027 (import duties based on a product’s carbon footprint).
Watch out for better policy predictability and market-based tools
In the near term, institutional inertia and conflicting priorities are hindering further progress and causing considerable policy uncertainty. Many emission-intensive sectors are state-owned, and the government has long resorted to top-down, often unpredictable, directives to drive decarbonisation. Some classic examples are production halts ahead of major political events, and state-driven consolidation in the industrial sector. However, the example with the most impact is arguably the distorted power market.
The government has resisted power market reform out of concerns that liberalisation can lead to instability in the system, and that fluctuating prices may affect consumer and business sentiment. However, the ebb and flow of reform have, in fact, given rise to these risks. State power companies have not relinquished control over generation planning, power transmission, marketing electricity and pricing mechanisms. As such, electricity prices fail to signal energy suppliers to accelerate green investment, or to encourage consumers to improve energy efficiency and undergo restructuring if necessary. Decentralised power systems remain uncommon in China, and instead the government poured billions into clean energy bases in China’s renewables‑rich west, as well as long-distance power transmission networks that connect them to the energy-hungry east. Many lines remain under‑utilised and may never become economical.
A more efficient decarbonisation pathway will depend on market-based tools, and their growth will be the strongest signal that the government is tackling long‑standing institutional bottlenecks. For now, the much-hyped emission trading scheme (ETS) remains in the infant stage. ETS is a complex policy tool that requires years of recalibration—more than a decade in the case of the EU. The Chinese ETS currently covers only coal and gas power, with plans to expand into heavy industries and aviation postponed owing to the economic downturn. The power sector’s unique ETS design prioritises improving the efficiency of China’s coal power fleet (which was already high to begin with) over a full transition away from coal to renewables. Regulators are gradually addressing problems that also occurred in other jurisdictions, like oversupply of credits and data quality.
China's road to net zero: reshape the country and the world
China's pragmatic progress to reach net zero by 2060 across power, transport and industrial sectors is having ripple effects across global trade and geopolitics.
