China’s commitment to achieve carbon neutrality by 2060 has excited as much as it has questioned observers. Because making the world’s leading CO2 emitter carbon neutral in the next 40 years is no small task and will have major consequences. But the formidable challenges associated with this transition also create many investment opportunities.
China is by far the first carbon emitting country in the world since it emits nearly 30% of global CO2 emissions, estimates the International Energy Agency (IEA), against 15% for the United States and 9% for the European Union. Colossal investments will be necessary to promote the transition, in particular in areas such as transport electrification and nuclear power.
Graph 1: Increase in China’s share of CO2 emissions
Source: IEA. CO2 emissions from fuel combustion, in tonnes.
The speed at which CO2 emissions resumed their upward trajectory last year – and this despite the consequences of the Covid-19 pandemic – shows that a break is needed to put our economies on the right track. So, while the current trend in CO2 emissions is not necessarily reassuring, the recent change in tone at the highest levels merits close scrutiny.
Achieving net zero carbon emissions will require combined efforts in three directions. First, a change in the composition of China’s gross domestic product (GDP), i.e. the share of high-emitting industries such as manufacturing and construction will have to be reduced in favor of lower-emitting activities like services. It should be noted, however, that the gradual deindustrialisation of China began more than ten years ago.
Second, an evolution of the energy mix in order to promote renewable energies. Despite significant investments made in areas such as hydro, wind and solar power over the past decade, China’s economy remains heavily dependent on fossil fuels, and in particular on coal, which is undeniably the source of energy. most problematic energy in terms of carbon emissions.
Third, carbon offset plans, which will also play a key role. Because even with the most radical measures, total decarbonisation will not be possible without compensation mechanisms. In this regard, carbon capture, storage and utilization (CSUC) techniques are expected to become an essential part of the government’s toolbox, along with afforestation and reforestation.
Consequences by sector
In China, around 90% of CO2 emissions come from industry, transport, and the production of electricity and heat. Logically, these three sectors will be the most affected by the transition, especially the production of electricity and heat, which alone represents half of total emissions.
Graph 2: History of China’s carbon emissions
Source: IEA. CO2 emissions from fuel combustion, in tonnes.
And yet, there are also important differences between sectors. For example, emissions from industry already peaked almost ten years ago, while this is not yet the case in power and heat generation or the transport sector. But there are signs that the trend is reversing. Thus, investments in the production of electricity from coal have slowed significantly in recent years.
At the same time, making the transport sector more sustainable will also require radical changes (and major investments): increasing the use of public transport and electric vehicles, and improving the efficiency of conventional vehicles.
Seize investment opportunities
Given the changes required in most sectors to achieve carbon neutrality, the main question for investors is to identify the major risks to which they could be exposed, and to find the most attractive opportunities. The companies most concerned are obviously the producers of fossil fuels, and in particular the oil majors. Their core business is totally incompatible with decarbonization.
But many other sectors will be penalized by a poorly managed transition, notably petrochemicals, steel and cement. Conversely, companies capable of fostering the transition will benefit from the decarbonization movement. In some cases, the likely consequences of this decarbonization are already well known, but in others, they remain difficult to assess.
For the moment, we are seeing opportunities in three main sectors: renewable energies, which should attract the vast majority of investments, electric vehicles and, finally, the renovation of electricity networks and energy storage techniques, as well as the hydrogen sector.
Recent official announcements suggest that an ambitious ramp-up of clean energies should take place in the coming decade, and allow non-fossil energies to represent 25% of the primary energy supply by 2030, against a target previous 20%. Given the gradual decline in the potential of hydropower and the slowdown in the construction of nuclear power plants, this objective favors rapid growth in wind and solar power.
Beijing has also announced that it wants to remain a leader in new energy vehicles (VEN), and recently approved a plan for this sector. This predicts that VEN will account for 20% of total vehicle sales by 2025, up from 5.4% last year. This target for 2025 is lower than the previously announced target of 25%, as it takes into account the difficulties encountered in 2019 and 2020.
Graph 3: China, leader in number of EV charging stations
Source: IEA, “Global EV Outlook”, 2020.
Finally, while renewables will play the most important role in the transition to carbon neutrality, other storage technologies will also be needed to address the daily and seasonal variability issues inherent in wind and solar energy, and to decarbonize all parts of the economy – including the most emitting sectors such as steel and cement production.
In this area, two complementary technologies (batteries and hydrogen) should play an essential role given their ability to convert electricity into chemical energy, and vice versa. China is already the world leader in battery manufacturing (70% of world capacity). Despite the air gap in early 2020, production quickly resumed.
At the same time, advances in hydrogen will also accelerate in the decades to come. The China Hydrogen Alliance, a group of professionals representing the entire industry, estimates that hydrogen could account for up to 10% of China’s total energy mix in 2050, compared to less than 1% today.