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China’s Progress Towards a Net-Zero Future

Insights 12

China’s Progress Towards a Net-Zero Future

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05 Jul 22
Insights 12 Our Thinking Page
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In brief

  • Global CO2 emissions have doubled since 1970, and China is responsible for half of that increase.
  • If the world has any chance of meeting net-zero goals, China must be involved.
  • Some people dismiss the Chinese government’s climate promises as little more than propaganda. We believe that is probably an error.
  • But investors need to step up -- they have a huge role to play in encouraging China to do better on climate.

Introduction

Global carbon dioxide (CO2) emissions have doubled since 1970.1 China is responsible for half of that increase (see Chart 1). Now the country contributes nearly one third of global emissions.

Chart 1: Emissions of CO22

Annual CO2 emissions from fossil fuels (billion tonnes)

Source: Our World in Data

China’s attitude towards the net-zero transition therefore matters hugely. Its progress in reducing emissions could well be the difference between a sustainable and unsustainable climate. It is therefore essential to engage with China, even if that comes with huge complications. And we see reason, albeit with great caution, for optimism.

Three reasons

In recent years the Chinese government has offered mixed messages on its climate plans. At the COP26 meeting last year, China successfully negotiated for a joint statement to include a promise to “phase down” the use of coal -- not “phase out,” as others wanted. At the same time, though, President Xi Jinping has publicly stated that China’s emissions will start falling by 2030 -- and that the country would reach carbon neutrality by 2060.

Some people dismiss the Chinese government’s climate promises as little more than propaganda. We believe that is probably an error, for three reasons. First, it is unlikely that Xi would make such public commitments if the government was not committed to them -- not least with the 20th National Congress of the Chinese Communist Party now in sight.

Second, it appears as though the Chinese government views climate change as an issue where cooperation with the West is in China’s national interest (in contrast to issues such as geopolitics and financial regulation). Climate policy is, to a greater extent than most issues, a “safe zone” where China has genuine ambitions to find global solutions.

In addition, China has a geopolitical objective to be “energy independent,” as part of a wider project to reduce its dependence on inputs from abroad.3 In practice this necessarily involves cutting imports of foreign oil and gas, and building up domestic production of energy, in large part via renewables.

Third, the evidence suggests that the government has been fairly successful in meeting climate commitments of the past.4 For instance, in 2009 China said it would cut its “carbon intensity” -- the amount of CO2 produced per unit of GDP -- by 40-45% from its 2005 level by 2020.5 It appears to have achieved this goal (see Chart 2).6 It has also made decent progress in improving air quality.7

Chart 2: Carbon intensity of China and the world8

Carbon emissions (kg) per $1 of GDP

Source: World Bank

What does China need to do?

What does China need to do specifically? Changes to its energy system are crucial. In particular, it needs to move away from coal use.9 It extracts and burns more coal than the rest of the world combined.10 This has implications for the rest of the economy. According to one estimate, battery-powered electric vehicles in China may emit a higher quantity of CO2 than petrol-power vehicles.11

However, we see some progress in China’s transition to a net-zero future. In the five years to 2021, China added 480,000 megawatts (MW) of renewable energy capacity (see Chart 3). The rest of the world combined added 570,000 MW.12 These are undoubtedly impressive numbers. Today about 30% of Chinese electricity production comes from renewables -- a far higher share than in the US -- and the share is rising quite rapidly.13

Chart 3: Installed renewable electricity capacity, year-on-year growth14

Renewable-energy capacity, MW, year-on-year growth (%)

Source: IRENA

Discussions of Chinese climate policy often ignore the role of the private sector, even though it contributes a large share of Chinese GDP. There is little doubt that Chinese companies have a long way to go to catch up to Western companies in terms of sustainability commitments, as a recent study by the OECD indicated.15 A study published by the World Economic Forum concluded that “Chinese companies still lag behind their global peers in the scope and quality of their environmental, social and governance (ESG) disclosures.”16

In our work with companies based in China, however, we discern a willingness to improve. By mid-2020, over 1,000 Chinese A-share companies17 had published annual ESG reports, up from 371 companies in 2009.18 Over 80% of CSI 30019 constituents produced ESG reports in 2020, up from 49% in 2010.20 And we think there is likely to be more progress in the coming years. In June 2022 a coalition of Chinese companies and business groups introduced a set of voluntary ESG guidelines.21 Alibaba, an e-commerce company, pledged to be net zero by 2030 on Scope 1 and 2 emissions -- an ambitious target.22 Even more ambitiously, in February Tencent announced its plan to achieve carbon neutrality in its own operations and supply chain (i.e., including Scope 3) by 2030.23

Conclusion

Clearly there is no room for complacency, and China has a long way to go. But if the world has any chance of keeping climate change within sustainable limits, China has to be involved. The world will also continue to rely heavily for inputs from China for renewable-energy production, in particular lithium for batteries and solar-energy equipment.

It is wrong to believe that China will never change. But investors need to step up -- they have a huge role to play in encouraging China to do better on climate.

  1. https://ourworldindata.org/co2-and-other-greenhouse-gas-emissions
  2. https://ourworldindata.org/co2-and-other-greenhouse-gas-emissions
  3. This is part of its “dual circulation” strategy.
  4. https://theconversation.com/chinas-climate-change-record-beijing-tends-to-meet-its-targets-but-sets-the-bar-too-low-172138
  5. https://www.fmprc.gov.cn/ce/cedk/eng/zdgx/t646842.htm
  6. https://data.worldbank.org/indicator/EN.ATM.CO2E.PP.GD?locations=CN
  7. https://www.weforum.org/agenda/2021/02/china-tackling-air-pollution-big-data/
  8. https://data.worldbank.org/indicator/EN.ATM.CO2E.PP.GD?locations=CN
  9. Readers will see below that China is also highly reliant on renewable energy. If so, then how can their energy system be so polluting? The reason is that coal is a truly polluting energy source. Overall, therefore, China remains a very “carbon-intensive” economy. As chart 2 shows, it produces about 500g of CO2 per dollar of GDP, compared to the global average of 300g. https://data.worldbank.org/indicator/EN.ATM.CO2E.PP.GD
  10. https://www.iea.org/reports/coal-information-overview/consumption
  11. https://www.alliancebernstein.com/lu/en-gb/adviser/insights/investment-insights/deciphering-chinas-2060-carbon-neutral-plan.html We note that other analyses find that Chinese EVs may have lower emissions than internal combustion engine vehicles. However, the fact that there is even debate over this issue shows how polluting China’s energy system truly is. See also: https://theicct.org/wp-content/uploads/2021/12/Global-LCA-passenger-cars-jul2021_0.pdf
  12. http://pxweb.irena.org/pxweb/en/IRENASTAT/IRENASTAT__Power%20Capacity%20and%20Generation/RECAP_2022_cycle1.px/table/tableViewLayout1/
  13. https://ourworldindata.org/renewable-energy
  14. http://pxweb.irena.org/pxweb/en/IRENASTAT/IRENASTAT__Power%20Capacity%20and%20Generation/RECAP_2022_cycle1.px/table/tableViewLayout1/
  15. https://www.oecd.org/environment/cc/g20-climate/collapsecontents/Climate-Disclosure-Standards-Board-climate-disclosure.pdf
  16. https://www.weforum.org/agenda/2020/12/green-wave-of-esg-investment-is-breaking-in-china/
  17. That is, companies listed in RMB on the Shenzhen and Shanghai stock exchanges.
  18. https://www.china-briefing.com/news/what-is-esg-reporting-and-why-is-it-gaining-traction-in-china/
  19. The top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange
  20. https://am.jpmorgan.com/ca/en/asset-management/institutional/investment-strategies/sustainable-investing/esg-china/
  21. https://www.bloomberg.com/news/articles/2022-05-31/china-unveils-esg-reporting-program-in-bid-to-catch-global-peers?sref=6tXgzJQu
  22. https://www.alibabagroup.com/en/news/article?news=p211217
  23. https://www.tencent.com/en-us/articles/2201287.html

Important Information

The ‘Insights 12: China’s Progress Towards a Net-Zero Future' is a report prepared by Generation Investment Management LLP (“Generation”) for discussion purposes only. It reflects the views of Generation as at June 2022. It is not to be reproduced or copied or made available to others without the consent of Generation. The information presented herein is intended to reflect Generation’s present thoughts on sustainable investment and related topics and should not be construed as investment research, advice or the making of any recommendation in respect of any particular company. It is not marketing material or a financial promotion. Certain companies may be referenced as illustrative of a particular field of economic endeavour and will not have been subject to Generation’s investment process. References to any companies must not be construed as a recommendation to buy or sell securities of such companies. To the extent such companies are investments undertaken by Generation, they will form part of a broader portfolio of companies and are discussed solely to be illustrative of Generation’s broader investment thesis. There is no warranty investment in these companies have been profitable or will be profitable. While the data is from sources Generation believes to be reliable, Generation makes no representation as to the completeness or accuracy of the data. We shall not be responsible for amending, correcting, or updating any information or opinions contained herein, and we accept no liability for loss arising from the use of the material.