China's proposal to achieve net zero emissions by 2060 could be the turning point for fossil fuel markets and the global energy transition, but the scale of the task is huge and the roadmap still vague, writes Eric Yep.
At a virtual meeting of the UN General Assembly in September 2020, Chinese President Xi Jinping said the country planned "to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060"—Beijing's first formal announcement of along-term plan to lower carbon emissions within a fixed timeline.
Around five years ago at the Paris climate change conference, Xi said China planned to achieve peak CO2 emissions by 2030, but Beijing has never really committed to a zero carbon emissions target before, let alone at a global forum.
If the pledge is translated into a plan and executed successfully, it has potential to be the most significant development in the energy and fossil fuel markets in decades, but China—a country that still depends on coal for more than half its primary energy—has a big gap to bridge between current reality and stated ambition.
China's plan coincided with Japan formalizing its zero-carbon agenda for 2050 and South Korea following suit. The EU's net-zero plan is also currently for 2050. Beijing's plan, however, will be far trickier to implement. Japan and South Korea are both developed economies in which overall energy demand is unlikely to grow much, making decarbonization easier. China, on the other hand, still needs to cater to growing energy demand, which may account for its target being set for 10 years further out, in 2060.
China's plan is also a departure from the argument made by emerging economies of "common but differentiated responsibility," where developing or underdeveloped economies would opt out of absolute caps on emissions to avoid constraining their growth and poverty reduction efforts, according to Eurasia Group.
In 2020, signatories had been due to update their Nationally Determined Contributions, national commitments for carbon cuts agreed under the Paris Climate Change Agreement, but the pandemic has likely delayed most countries from doing so, further emphasizing the boldness of China's pledge.
"The Paris Agreement on climate change charts the course for the world to transition to green and low-carbon development. It outlines the minimum steps to be taken to protect the Earth, our shared homeland, and all countries must take decisive steps to honor this agreement," Xi said in his speech. "China will scale up its Intended Nationally Determined Contributions by adopting more vigorous policies and measures."
China's stance on carbon emissions puts the country's next 14th Five Year Plan, which starts in 2021, firmly in focus as the main policy tool to pursue its climate goals.
Tsinghua University's Institute of Climate Change and Sustainable Development looked at various scenarios for the country's pathway to decarbonization in a series of workshops and presentations in October 2020. It said Beijing would have to follow a two-pronged strategy to achieve an emissions-reduction pathway that could limit global warming to 1.5 or 2 degrees Celsius—a first-phase plan to meet the stated carbon emissions target by 2030-35 and a more well-defined plan for net-zero emissions by 2050.
This means that China will have to overcome inertia in its energy policymaking and come up with a far more rigorous strategy than its current CO2 reduction plan, and deploy it as early as possible, hence the focus on the 14th Five Year plan.
China is initially expected to set peak carbon emission targets for cities and highly populated and industrialized coastal regions in the coming years, which would be the logical next step after setting country level targets, according to Beijing-based climate experts.
"The Chinese near term announcement is a bit underwhelming: a reiteration of the goal of peak CO2 emissions by 2030 or earlier. Our own Global Integrated Energy Model has China CO2 emissions essentially plateau and peak in the 2026-2028 time period—so we've got that already built in," said S&P Global Platts' head of future energy analytics, Roman Kramarchuk.
"To be sure, all eyes will be on the next Chinese five year plan in March, and there may have been some need for them to publicly reiterate the Paris NDC targets—because their current stimulus package has actually been rather energy intensive (with even a loosening of restrictions on coal)," Kramarchuk said in reaction to China's announcement. "Granted all countries are supposed to be reviewing their NDC this year—but so far, few have upped their ambition," he added.
Other China watchers also showed some skepticism: "This is certainly an unexpected and ambitious announcement, and we will have to wait for publication of the plans to achieve this goal," senior principal fellow at the Energy Studies Institute, National University of Singapore, Philip Andrews-Speed, said. "However, if I look at the components of the economic recovery plan, I do not see that it is notably green or low carbon. Even much of the ‘new infrastructure' strategy is either not new or is not strongly low carbon."
Andrews-Speed said more importantly, recent developments in the energy sector do not bode well for the longer term, with the continued expansion of coal-fired power generation capacity and a call for greater energy self-sufficiency—which includes support for coal liquefaction—a particular concern.
"The only way around this that I can see is carbon capture and storage/use. It is reasonable to assume that the next 40 years will see the commercialization of CCS/U technology. The challenge will be to scale it up to manage the vast scale of China's carbon emitting industries," he said.
Turning point for fossil fuels
For fossil fuel markets, the domino effect of Chinese energy policy cannot be underestimated, as it is the largest energy consumer and producer in the world.
To achieve a 1.5 C scenario, China's total energy consumption would have to peak in 2030, then start a gradual decline by 2050, when over 85% of the total energy consumption and around 90% of the power generation would come from non-fossil fuels, with less than 5% of power coming from coal, according to Tsinghua University's ICCSD.
"The end-use sectors will see the increased use of electricity to replace direct combustion of fossil fuels," He Jiankun, professor and director of the Low Carbon Economy Lab of Tsinghua University, said.
"The share of primary energy for electricity generation will increase from the current 45% to about 85% by 2050, and the share of electricity in end-use energy consumption will increase from the current 25% to about 68%," he said.
The scenarios mapped out by ICCSD outline four distinct trends:
- Coal has almost peaked in China and will plateau for about a decade before it begins to drop sharply
- Oil follows a similar trajectory to coal, but with some scope—though not much—for additional demand growth in the next decade
- Natural gas has yet to hit its peak by 2030 before it begins to decline, but still has a greater role in the energy mix than oil by 2050
- Finally, a steady but undisputable growth trajectory for non-fossil fuels.
Clearly, demand for coal will contract the most under China's new emissions plan—a worrying development for global coal markets because China accounts for more than half of global coal consumption and is the world's largest coal-consuming country.
Coal accounted for about 58% of China's total primary energy consumption in 2019, followed by petroleum accounting for 20%, then hydroelectric (8%), natural gas (8%), nuclear power (2%), and other renewables (nearly 5%), according to the US Energy Information Administration.
The key question is whether 2030 will lead to an inflection point or simply a plateau in CO2 emissions, Platts Analytics said in its scenario planning report dated September 2020.
"Central to this question is how China's young (and growing) fleet of coal-fired power plants will be treated in the upcoming 14th Five Year Plan. Thus far in 2020, over 20 GW of new coal capacity has been commissioned, and more provinces have been authorized to bring online coal capacity through 2023 to stimulate the economy," the report said.
"From a long-term decarbonization perspective, the major issue is one of stranded assets: that 80% of China's [coal-fired] fleet is made up of units that have come online over the past 15 years and about half of the current operational fleet is comprised of efficient supercritical and ultra-supercritical units," it said.
Platts Analytics said it assumes China will have about 600 GW of operational coal capacity by 2050, around the same as the total number of high-efficiency units currently online or set to come online in the coming years, and the closure of aged plants really accelerates between 2050 and 2060.
Policy aside, China's carbon plan will introduce three new, and potentially powerful, elements to accelerate global energy transition—the muscle of China's national energy companies, which wield the most influence in its energy sector; the creation of carbon-based markets in China; and the backing of Chinese financial institutions.
While several international oil majors have made big strategic shifts to align more closely with the global energy transition, much of their effort will be futile in Asia where state-owned national oil companies hold sway over local energy investment and infrastructure. Moreover, NOCs are in greater control of demand-side fundamentals. In Asia's power sector, which will be the battleground for competing fuels, control is even more concentrated in government-owned entities, from distribution utilities to power grid operators and generation companies, where deregulation has been slow.
For example, State Grid Corp. is China's largest utility and operates around 90% of the country's electricity grid. Recently, downstream gas market liberalization led to the creation of PipeChina, the region's largest midstream infrastructure company. With a market capitalization and operational base larger than many private oil companies, China's NOCs Sinopec, PetroChina and CNOOC could move the needle on fossil fuel consumption.
State-owned enterprises accounted for a 36% share of global energy investment in 2019, and around 40% of power, oil and gas investment. This represents a reduction over the last five years as Chinese companies slowed investment in big coal-fired power plants, while 2020 is set to recalibrate capital expenditure globally due to the coronavirus pandemic.
China's development of its carbon market will also be vital to using market-oriented mechanisms to drive energy transition. China's commodity exchanges in Dalian, Shanghai and Zhengzhou already host some of the world's most liquid commodity contracts, such as iron ore, steel products, agricultural products and energy commodities, and will underpin the creation of a full-fledged carbon market. The CSRC—the futures regulator—also recently announced it had set up a working group to establish a new futures exchange in Guangzhou, and there is speculation that the exchange's first product will be carbon emissions.
One of the main recommendations of Tsinghua University's ICCSD was to improve the national carbon market and expand the scope of the sectors covered, and establishing a measurement, reporting and verification system (MRV) for carbon markets.
Lastly, a decarbonized economy will directly affect China's energy security due to its large imports, not just from the Middle East, but now also from energy producers such as Australia and the US, with whom its relationship has become geopolitically unstable. Its plan for the electric vehicle ecosystem, for instance, is aimed at rejuvenating the manufacturing economy and becoming a leader in technology.
"As well as being a policy to combat climate change, the [zero emission] plans are part of Beijing's approach to combating pollution and creating high growth in green and digital industries and jobs," geopolitical consultancy Eurasia Group said in its October report.
"The reforms will affect China's relationship with the rest of the world, requiring new supply chains with producers of the raw materials needed for this transformation, including copper, lithium, and cobalt. Meanwhile, China will seek to reduce its exposure to regions with high geopolitical instability, including some Middle East oil producers," it added.