Winners And Losers In A Net Zero China

International | Apr 28 2021

Serial changes to China’s energy mix, needed to achieve its pledge of reaching peak emissions by 2030 and carbon neutrality by 2060, will create tectonic shifts in commodity markets

-China’s energy imports would under a carbon neutral scenario plunge -95% over 30 years
-To reach carbon neutrality by 2060 China must reduce coal reliance for power generation from 63% to below 5%
-Copper, aluminium, nickel and cobalt to benefit from China’s carbon neutrality goal
-Reducing coal-fired power plants will be China’s pain-point

By Mark Story

Given that China is the world’s largest carbon emitter, its 2060 zero carbon commitment will require a serious policy effort, widespread structural change and wholesale shifts in large parts of its economy. China’s decarbonisation strategy provides a clear goal for corporates domestically and abroad.

As a result, ANZ Bank within its white paper, titled China: Carbon Neutrality by 2060 believes major industries need to undertake long-term transformation to meet the country’s pledge to the Paris Agreement. ANZ believes efforts to reduce greenhouse gas emissions in accord with the Paris Agreement –limiting the temperature increase to 1.5°C above pre-industrial levels– will also require businesses to undertake complex changes.

FNArena presents some of the key findings within the ANZ’s 30-page white paper.

Key findings

To put the enormity of 1.5°C target in context, China will need to reduce its carbon emissions by -85% below its 2020 level. It would also mean lowering China’s reliance on coal for power generation to less than 5% from the current 63%.

While increasing the share of non-fossil fuel to 25% by 2030 looks achievable, reducing coal-fired power plants will be the pain point. Reducing the use of coal remains the key challenge to achieve carbon neutrality, as phasing out a huge number of coal-fired plants can hurt economic growth. China’s leader Xi Jinping has promised to ‘strictly limit’ coal-fired power plants in the next five years as it outlines how the country –the world’s largest user of coal– can deliver on its 2060 commitments.

Equally concerning for net global commodity exporters, China’s decarbonisation policy will have a direct impact on its energy imports.

Globally, China is a net energy importer, accounting for nearly 70% of the net energy imports of OECD countries. China’s energy imports would under a carbon neutral scenario plunge -95% over the next 30 years.

To put that in context, in 2020, China’s energy imports (crude oil, coal and natural gas) accounted for 11% of its total imports, or 19% if iron ore and unwrought copper are included.

As a result of these findings, what’s increasingly evident is that China’s carbon neutrality policy is a macroeconomic not a pure climate policy with massive global implications. To reach carbon neutrality by 2060 and reduce carbon emissions by -85% of its 2020 level, indicates a decline of -34.5% in carbon emissions per unit of GDP every five years from 2021 onwards – almost double the pace that China reached in the past five years.

Revolutionary change in China’s energy mix: Dire consequences for coal

The decarbonisation of electricity generation will see a significant change in China’s energy mix. Given that the energy sector is the largest carbon emitter in China, changing China’s energy mix is the most feasible way to reshape its carbon emissions path.

China’s plans to have 20% of its energy needs met by non-fossil fuel sources by 2025, and 25% by 2030, should be viewed through the lens of its current energy mix. For example, coal, which accounted for 63% of China’s electricity generation in 2019, contributed 7.5bn tonnes (90%) of the energy sector’s total 9.8bn tonnes of carbon.

To help put China’s reliance on coal in context, China’s coal consumption accounted for 57% of its primary energy mix in 2019, much higher than the global average of 27%. However, clean energy, especially natural gas, only accounted for 7.8% of its total energy mix, compared with the global average of 24.2%.

Under the 1.5°C scenario China’s coal power generation will need to fall at a compound annual growth rate of -7% through to 2050. But given the impacts on economic growth, reducing the use of coal remains the key challenge to achieve carbon neutrality.

Over the long run, China needs to increase its non-fossil energy to 80% of its total energy consumption in the 1.5°C scenario and 70% in the 2°C scenario. Unsurprisingly, China’s decarbonisation policy will have a direct impact on its overall energy imports. Given that China accounted for nearly 70% of the net energy imports of OECD countries in 2020, global the implications of these reductions are far reaching.

The transition from fossil fuels –which contribute nearly 85% of the total energy demand– to renewables will be the centrepiece of a plan to cut carbon emissions to zero over the next four decades.

Consequences for commodity demand

China’s pledge to reduce emissions will have significant impact on its commodity supply and demand.

Renewable energy holds the key to China reaching the carbon neutrality goal. The electrification of China transport -responsible for around 10% of total carbon emissions- is critical to reducing China’s dependence on oil.

The government has set a target of 20% of car sales to be new energy vehicles (NEV) by 2025 and 40% by 2030. This requires sales to rise by 17 million vehicles from their current sales level of 1.5 million vehicles. This assumes China’s car sales would reach 42 million units by 2030, and needs EV sales to grow at an annual rate of nearly 30% for the next 10 years.

But given the difficulty securing the supply of metals such as nickel, cobalt, lithium and rare earths, critical inputs for EV batteries, manufacturing so many NEVs will also face challenges.

As well as eliminating the need for imported coal, China’s energy transition will also reduce China’s dependence on imported oil and gas. For example, if China’s share of new sales of alternative fuel vehicles reaches 40% by 2030, China’s total crude oil consumption is estimated to grow by an annual compound growth rate of approximately 1%.

To reach the goal of carbon neutrality, China’s crude oil demand could fall by -75% to 3m barrels per day by 2050. But given its lower emissions, natural gas is a viable alternative for coal, and as such demand will hold up well till 2030 before it declines.

While plans to consolidate the steel sector down to the top five mills – to reduce production to 40% of its current total – poses downside risks to its iron ore imports, the impact is expected to be gradual.

Plans by the Chinese government to increase in the share of recycled aluminium to 30% by 2030 from the current level of 20% – which requires only 5% of the energy to produce primary aluminium –  should also see imports slowing down for bauxite and other input materials.

China’s green drive: Upside demand for metals

Despite the slide in demand for some commodities, metals should benefit the most from China’s green drive. Building renewable infrastructure and electrifying EVs are more metal-intensive than fossil-fuel based electricity generation. The availability of many metals will be crucial for both building renewables energy and electrification of transport. Copper, aluminium, nickel, and cobalt are among a few that will benefit from the carbon neutrality goal.

Nickel demand is likely to rise from 53,000 tonnes (2.5% of total demand) to more than 290,000 tonnes (13% of total demand). Assuming China EV sales targets are met, the EV sector would consume 365,000 tonnes of copper (or nearly 2% of world supply) by 2030. Demand for lithium, cobalt and other critical metals will also rally due to both renewables and electric vehicles.

The ‘greening’ of the financial system

China is expected to become the world’s largest green financial market. Since 2016 China has remained a top green bond issuer in domestic and offshore markets with the issuance of green bonds expected to exceed CNY500bn in 2021.

Green Bonds or Green Loans are debt instruments that raise funds for new and existing projects, assets or business activities with a 'green' or environmental benefit. These include renewable energy, low carbon buildings, low carbon transport, water and waste management.

The issuance of green loans – supporting green projects in the areas of environmental protection, renewables and new energy vehicles- has rapidly increased in the last five years. The outstanding green loans of 21 major banks reached CNY12trn by the end of 2020, 1.7 times the amount in late 2015.

Carbon neutrality’ bonds, a sub-set of green bonds dedicated to the reduction of carbon emissions, have caught market attention since their launch in February this year. As of March, they made up more than CNY30bn of the CNY85bn of green bonds issued.

China’s emissions trading market is expected to overtake the EU and become the world’s largest in the near future. China is also set to establish a national emissions trading fund to allocate the trading income to contributing companies. Carbon finance will play a more significant role in the coming years, with China’s authorities having established the Guangzhou Futures Exchange, which will be devoted to carbon derivatives.

With the diversity of products, formats and issuers coming to market, a wide range of sustainable finance options are available to support China’s decarbonisation plans.

US pledge: Australian rhetoric

During last week’s two day leader’s summit, President Joe Biden promised to cut US emissions by 50-52% by 2030, which is a major upgrade on Obama’s 26-28% by 2025. It’s understood the new target is consistent with the President’s goals of achieving net zero greenhouse gas emissions no later than 2050, and limiting global warming to 1.5°C.

Having explored what a future America might look like if it wanted to achieve Biden’s new climate goals, some studies suggest over half the news cars and SUVs sold at dealerships would need to be powered by electricity.

Studies also conclude, under Biden’s new climate goals nearly all coal-fired power plants would need to be shut down, forests would need to expand, with the number of wind turbines and solar panels across the nation needing to quadruple.

During the same summit, Australian Prime Minister Scott Morrison told fellow world leaders that ‘hydrogen valleys’ are already been built in Australia and will literally transform transport, mining, manufacturing and energy generation.

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