China has laid out some lofty goals for its climate action. In September 2020, it pledged that it would peak its carbon dioxide emissions before 2030 and hit carbon neutrality before 2060. This was followed in December 2020 by an announcement to enhance its nationally determined contributions under the Paris Agreement for 2030, including increasing the share of non-fossil fuels in primary energy consumption to around 25%. Earlier this year, it issued rules for its emissions trading scheme for the power sector and carbon trading is expected to begin in late 2021.
How realistic are these goals? How can China's climate policy align with its economic and social goals? And what is the role for fossil fuels in a carbon neutral China?
These questions are more are addressed on this episode of Future Energy Podcasts, with S&P Global Platts Editorial Team Lead for LNG and Energy Transition Eric Yep, Platts Analytics Lead for Global Coal Matthew Boyle, Platts Senior Writer Oceana Zhou, and Dr. Philip Andrews-Speed, senior principal fellow at the National University of Singapore's Energy Studies Institute
Dr. Andrews-Speed has 38 years of experience in the field of energy and resources, and his current research focuses on the low carbon energy transition in China and Southeast Asia as well as on the governance of nuclear energy. He is the author of the book China As A Global Clean Energy Champion, which looks at the institutions of governance that are shaping the trajectory of China's low carbon energy transition.
Get access to the Annual Guidebook mentioned on this podcast: Platts Future Energy Outlooks
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China's climate conundrum: Carbon neutrality 2060 and its implications for fossil fuels
ERIC YEP: Hello and welcome to another episode of Platts Future Energy Podcasts. I'm Eric Yep, editorial team lead for LNG and energy transition with S&P Global Platts. This is our very first Future Energy episode out of Asia and I'm really excited about today's conversation, so let's get things rolling.
At the UN General Assembly in September 2020, China pledged that it would peak its carbon dioxide emissions before 2030 and achieve carbon neutrality before 2060. In December 2020, China said that it would enhance its nationally determined contributions or NDCs under the Paris agreement for 2030, including reducing its CO2 emissions intensity per unit of GDP by more than 65% from 2005 levels, increasing the share of non-fossil fuels in primary energy consumption to around 25%, and expanding the total installed capacity of wind and solar power. In 2021, it issued rules for its emissions trading scheme for the power sector and carbon trading is expected to begin later this year.
Joining me today to shed light on these significant developments in China's energy sector are Dr. Philip Andrew Speed, senior principal fellow at the Energy Studies Institute - National University of Singapore; Matthew Boyle, lead global coal and driver trade analyst, S&P Global Platts Analytics, and Oceana Zhou, senior writer with the Platts News Team.
So let's jump into the Q&A. Phillip, what is your initial assessment of China's net-zero goals and the factors that are driving its pledge, which is generally being viewed as a very ambitious target compared to a lot of other countries?
PHILIP ANDREWS-SPEED: Ambitious, it is, Eric. Achieving net zero by 2060 for China is a big challenge. And particularly for a country like China that is so heavily dependent on coal, and has a big heavy industry. And so this is not like in the European Union or wherever, where it's a lot easier. So it will be a step by step process. And the initial focus will be on peaking emissions before 2030 as was stated.
Why is it doing it? I see a domestic agenda and an international agenda. I think President Xi sees the low carbon transition as part of his legacy. But over the last few years, he's been frustrated by the slow progress that's being made within his own country. By announcing such an ambitious goal, it's a good way to get all the key actors focusing on these issues. And this is precisely what is happening at the moment with local governments and state-owned companies drawing up plans to achieve carbon neutrality on the international stage. Remember that the announcement came when Trump was still president of the USA, you know, it's a diplomatic signal that China is up there or aspires to be up there with the leaders to reach carbon neutrality, and it's a direct challenge to the USA to get its act together. So I'll leave it there.
ERIC YEP: Thanks, Phil. That's a very great introduction to the whole topic. Just to switch over to Matt, Platts has done considerable amount of work on the Future Energy Outlooks for a lot of countries, including China. What is the Platts Analytics view on China's net-zero plans? And what are the main findings under the Future Energy Outlook for its long-term climate goals?
MATTHEW BOYLE: Thanks, Eric. I think a lot of what Philip has said aligns pretty well with the Platts Analytics view when we're looking at China and its targets out to 2050 or 2060.
So before I dive into our most likely case scenario for China, as found in our Future Energy Outlook annual guidebook, I wanted to quickly highlight a couple of factors that are worth taking into consideration when considering China's commitment to emission target reductions. First, China is a leader in renewables globally, accounting for about 50% of global renewables generation growth in 2020. And second, government policy decisions around China's air quality have already contributed to meeting some of China's pledge targets under the 2010 Copenhagen Accord. So it is evident that China has already made some headway towards transitioning towards reduced emissions.
In summary, our demand growth forecast out to 2030 at around about 3% is lower than the government's 3.9% growth target. Platts Analytics base case scenario for China is that they are in line to reach most of their Paris 2030 targets via a combination of renewables and efficiency gains, such as electric vehicles replacing combustion engines, and an economy that becomes overall less carbon intensive. Our most likely case expects China to meet the first two targets. However, our outlook assumes that hydro, nuclear and renewables will be accounting for about 26% of primary energy demand by 2030, with their meeting their specific capacity goal of installed wind and solar of 1200 gigawatts by the end of this decade.
So this will help them in achieving these peak carbon emissions within that time period.
China's policy is really focused around their five-year plans, and they've just announced the 14th five-year plan out to 2030. And although the specific details are yet to be finalized, the latest five-year plan is emphasizing economic growth, which represents a fundamental challenge to any decarbonizing ambitions.
We believe that there are probably two diverging views when it comes to net-zero targets. The first line of thought could be that renewables or green future fuels generation would replace all fossil fuel generation - a sort of swap-in-swap- out approach to power generation. So if you follow this approach, this would require accelerated retirements within China's fleet of power plants. Yet, this could potentially create a stranded asset problem. Then there's another view of implementing carbon capture utilization and storage technology on top of existing assets. So we believe it is plausible there could be a combination of both of these approaches implemented to ensure that China reaches its net-zero targets.
ERIC YEP: Thanks, Matt. It looks like there's a big challenge up for China's whole energy sector. Just to dial back to Phillip over here, how realistic is it for the Chinese government to be able to meet such a big target and what measures will have to be taken for the country to move in this direction?
PHILIP ANDREWS-SPEED: Yeah, it's feasible, but tough. And as I said before, the particular challenge is the issue of coal and of heavy industry. I mean, without doubt, they will need to undertake a radical transformation of the energy sector, of industry, of transport, and of agriculture. If we look at the energy sector, particularly, despite all the improvements that we've seen over the last 15 years in energy intensity and energy mix, there's a long way to go.
At the heart of all this is electrification. And they recently announced that non-fossil fuel energy will form the core of the power sector. This is new, because in the past, it was coal as the core and then non-fossil fuel is a sort of add on. They're also starting to make significant progress in the electrification of transport. Decarbonizing heavy industry will be much more difficult. And this will require technologies like hydrogen, particularly green hydrogen, and carbon capture.
Energy efficiency, as has been mentioned, will be needed across all sectors. However, at the same time, remember, they're not saying that the energy sector will be zero carbon, what they're saying is the economy will be carbon neutral. So they will need to address the issue of carbon sinks, and the most important of which are the country's forests, but also the grasslands and the lakes. And it's not clear exactly how they're going to do this.
Going back to what Matthew said, it's not just the five-year plans that we need to look for, we need to look out for the long term plans often 15 years ahead, for energy technology, and for other parts of the economy.
ERIC YEP: You have also studied the policy and the governance challenges that China faces in the energy sector. How do you see this aspect shaping up for its net-zero targets? And how does China's long-term climate policy now align with its economic and social goals?
PHILIP ANDREWS-SPEED: This goes to the heart of the matter. I mean, not just in China, but many other industrializing economies, even in fully advanced economies. I see three sets of issues: tension between policy objectives, coordination, and how long does this remain a priority.
So tension between policy objectives, certainly in the short term, and we're seeing it already the tension between the desire for economic growth and employment versus the low carbon transition. The tension between the desire for greater energy security of supply and the transition. We've mentioned already, these energy and carbon markets on the one hand that should help drive the transition. But they've also stated that the state-owned enterprises should remain the core, essentially, of the energy economy and of much of the rest of industry. So there's a tension there. And in the same way they want more innovation, but are the state-owned enterprises innovative enough? So there are some tensions and other tensions between different policy objectives.
Coordination - there are really two sorts of coordination. One is the technical coordination: as they build more intermittent renewable energy and the need for long distance transmission, you're going to need a much more integrated and more sophisticated coordination of the grid. But more challenging is the need for coordination between powerful actors with their own interests, particularly local governments, and major energy producing and energy consuming state-owned enterprise. And so there's a real political challenge there. And unfortunately, the legal system in China provides little assistance to resolving these challenges. They have to be addressed administratively.
And finally, in my very simple belief, no national government can hold more than two or three priorities at the top of its list for any sustained period of time. So the question is, you know, how long does this carbon neutrality objective remain at the top of the agenda of China's ruling elite. Maybe for five years or for 40 years? That's a different question.
ERIC YEP: Very interesting, Philip, that you talked about a lot of those policy tensions. Does China have any policy advantages over other countries in terms of meeting its long-term climate goals?
PHILIP ANDREWS-SPEED: Yes and I think we've seen this over the last 15 years. And it's the centralized command and control supported by the ability of central and local governments to direct state funding at state objectives, which can be defined by the state without necessarily relying on voters. So those are the advantages certainly, and that is how some of the achievements in renewable energy, et cetera have been made. However, although it delivers the goods, it is at a very high price. Billions of renminbi have been wasted on shall we say, building the solar PV power industry, companies have gone bankrupt over capacity. It's yielded a global public good, but at a significant cost.
ERIC YEP: Thanks, Phillip. Matt, could you tell us how important is it in this whole policy conversation for the power sector to be decarbonized in China's plan? And within that, how do you see the consumption of coal being affected over the next few years?
MATTHEW BOYLE: Probably touching a couple of points that Phil quite rightly mentioned. I mean, the Chinese market, its electricity market in particular is quite heavily focused on coal, but it is moving into sort of other forms of electricity generation. So our base case assumption is that China will continue to develop clean energy capacity, but will also continue to increase its coal-fired generating capacity as well. So the announcement of a 2060 net-zero target in China sort of suggests that the country will seek to reduce coal as part of its energy mix, but we actually believe that we will actually see it sort of working in tandem or together, you have the coal-fired generation as well as renewable generation and future fuels generation that will come into line. So the outlook for 2060 is expected to be very different under sort of the current plans, but if we were to look at sort of just the 14th five-year plan, and just taking that as a basis, acknowledging that there are certainly other factors at play, especially looking long term, it is likely that the decarbonization in China's power sector is likely to be achieved by that additional renewables generation capacity additions as well as emissions policy.
So our current view implies around five to six gigawatts of new nuclear plant builds annually out to 2050, whereas coal and gas plant additions will stop after 2040.
In terms of plant load factors, loads are expected to increase towards the end of our forecast period to 2050 as capacity comes offline, but then you'll see renewable load factors improve due to efficiency and curtailment and technology improvements.
ERIC YEP: Thanks, Matt. Coming to your area of specialization, the coal market, how do you see the global coal market, and probably more specifically, the Asian coal market shaping up with a lot of these decarbonization efforts across the region, with a lot of the announcements coming in from governments?
MATTHEW BOYLE: There's a couple of factors that you might want to consider here . First I'll talk about China and then I'll talk about Asia in general.
So you got to keep in mind that the China's coal-fired power generation is the largest globally, and it's likely to remain so by 2060. So we believe the use of fossil fuels in the electricity mix will have declined by 2060. But when compared to 2020 levels, however, when considering the time that how the Chinese coal sector will respond - China's coal plant is quite young plants are below, you know, sort of around 15 years of age, and they can run for about, you know, 40 odd years or so. So, a lot of the plants are supercritical and ultra supercritical power stations, so they are actually quite efficient. So we expect those plants to continue to operate throughout our forecast period. And China is also moving towards self-sufficiency and coal as it is now. So with the country's current focus on economic growth and energy security over decarbonization, we believe that means it's likely that China's dependence on coal will continue through to 2060. So I guess you could put it another way, the more focused the government is on GDP growth, the more it necessitates a build out in power generation, and therefore, the more likely they are to rely on their fleet of young supercritical and ultra supercritical coal-fired power plants.
We also believe that currently the economics for renewables and the required investment to replace coal in the power stack, not only in China, but also in Asia, are just not there at the moment.
I mentioned earlier about what methods China may adopt, and you're looking at coal-fired power generation as well as renewable generation and sort of working in tandem or in line. So China has such large coal resources that and because it has such vast resources, and it's got a young coal-fired power plant, there is significant potential, as Philip mentioned before about developing this carbon capture and utilization storage technology, and/or to produce great hydrogen from unused or an economical coal mine.
This could create a form of additional revenue for the industry that may provide the financial incentive to help the industry meet its overall targets as we move out towards that 2060 period.
Looking at the greater Asian market, Platts Analytics first said in 2019, late 2019, I believe it was that China was moving towards self-sufficiency, and would reduce its reliance on the seaborne thermal coal market. So if we were to look out to 2050 and 2060, it is likely the main demand markets will be Asia, with smaller demand pockets in the Middle East and Africa. However, the technology advances that we expect to see in China are likely to be replicated in other coal import demand markets.
On the supply side, coal exports will fall in tandem as demand declines. The seaborne thermal coal market will be smaller than today. But we believe there still will be a role for coal in the future.
ERIC YEP: Very interesting, Matt, that coal is still going to be a hugely significant part of not just China's energy mix, but also for Asia.
Let's move on to the next big field that people have had on their minds with regards to climate change policies of different countries. Oceana, you have covered the Asian and China's oil market for many, many years now. In your view, what is the role of oil in China's decarbonization and net-zero plan?
OCEANA ZHOU: Thanks, Eric. Unlike other countries, oil has not contributed to China's power generation sector for around a decade. But oil plays a key role in China's decarbonization and net zero plan.
The country's transportation sector remains heavily reliant on oil as fuel, and it produces more than one-fourth of the CO2 emissions from energy, just behind the power generation sector.
With the decarbonization and net-zero plan, analysts widely expect China's fossil transportation fuel demand to peak in around 2025. That's about 5 years earlier than earlier expected. It's likely difficult for jet fuel to peak by 2025 as there is still no economic alternative green fuel to replace it. For road transportation fuels – gasoline and gasoil – it can be easier to achieve, even by 2024, as electric vehicles have become popular in China.
ERIC YEP: Speaking of EVs, which has got a lot of market interest, talk about China's electric vehicle plan at the moment.
OCEANA ZHOU: Sure Eric. So the Chinese government in November 2020 launched a new energy vehicle industry development plan to run from 2021 to 2035.
According to this plan, the average electric power consumption of pure electric passenger cars was estimated to drop to 12 kWh per 100 km by 2025 – from the current average of more than 15 kWh. The government also aims for New Energy Vehicle sales to make up 20% of total vehicle sales from current about 5%.
The convenience of recharging or replacing electrical systems would increase significantly over the same period.
ERIC YEP: And how would China's net-zero goal affect the country's energy security? For a country like China, the dependence on imported energy has been fairly significant over the last few years.
OCEANA ZHOU: Well Eric, I have to point out that the decarbonization and net-zero plan in a short term will add cost to the oil industry. But it will also accelerate the process for China to achieve energy security -- reducing dependence on crude oil imports.
Over 70% of the crude oil barrels that China currently consumes are imported. And around 55% of that are processed into transportation fuels.
The country's demand growth for crude oil will slow when transportation fuels consumption peaks.
ERIC YEP: I think you cover a couple of very important points that Philip had mentioned earlier that China's energy transition is linked to energy security very closely, also the role of state-owned energy companies. Could you elaborate a little bit more on how China's national oil companies, the likes of Sinopec and CNPC and CNOOC? What role do they have to play in China's decarbonization? And how do you see them evolving as energy companies? Do you think they will start to look like the Shells and the BPs of the world?
OCEANA ZHOU: This has been a really hot topic for China's national oil companies. PetroChina and Sinopec target to meet net-zero around 2050 and achieve their carbon emissions peak by around 2025.
All the NOCs set up their new division for new energy. PetroChina restructured its business segments and created a segment called "oil, gas and new energy" to emphasize its efforts. China's NOCs are currently drafting their detailed road map to hit the targets.
Going back to your question about the role of the NOCs, they have different strengths so they have different focuses as well, on top of their common initial plan to significantly increase gas production.
PetroChina will use wind, solar and geothermal resources within its mineral rights. Sinopec targets to become the country's No. 1 hydrogen supplier. CNOOC has adopted offshore wind power.
But unlike international oil majors, which have announced their plans to cut or cap their upstream production and refining business while increasing investment in green energy development, Chinese NOCs continue targeting to stabilize their upstream oil production while further boost their gas output. It is because they have to reduce China's dependency on imported energy as the country's oil, gas demand is yet to peak.
ERIC YEP: That's some great insight into the oil side of things as far as China's long-term climate plans are concerned.
Philip, can I check with you on some of the significant developments at the global level that have happened on the climate side, particularly the Biden administration coming into power in the US, and its significantly different approach to global climate policy from its previous administration. How do you see that impacting what China proposes to do as far as its own climate change targets are concerned?
PHILIP ANDREWS-SPEED: Well, I think the US coming back into the climate change fold is clearly good news for the world. So now that we have at least three major leaders, the US, China, and the European Union. The greater the progress made, I mean, not just talk, but the US actually doing something, the greater the pressure will be on China, and vice versa. So I think you've got two protagonists eyeing each other, and will want to show that their emissions reductions are bigger than those of the other. So I think that's good. However, I think the extent to which there will be active cooperation between the two, that remains to be seen. And certainly there was no agreement as I understood from the bilateral meetings in China, there was no agreement to have any joint working groups yet. So let us see what appears.
ERIC YEP: Thanks for answering that very pertinent question about recent developments. Matt, on your site, a big question that people have on the minds with respect to fossil fuels and China's decarbonization - is there such a thing as clean coal, and can that be truly used as a decarbonization tool in Asia's energy mix?
MATTHEW BOYLE: Thanks, Eric, it's a good question. When people are talking about clean coal, what they're talking about is the use of coal in industry or in power generation. So a lot of the new coal-fired power plants have carbon capture or emission abatement technology. So they have implemented the use of what they call scrubbers to sort of capture the SOx and the NOx, the emissions that are created from boiling the coal. So with a lot of the new power stations, they have this technology already there. There is an additional cost for utilizing that technology, and I think that a lot of power utilities are operating on thin margins. So obviously, the ability to sort of implement or to use this technology is there, and a lot more power stations are using it at the moment.
That said, as technology improves, and the ability for like I talked about before carbon capture and utilization storage, that means that there are opportunities to continue to use coal as part of an overall fuel mix. But then also sort of trapping or reducing the amount of emissions that are caused by burning this coal.
You also have government policy as well, which we're seeing very clearly in China, where the use of high sulfur coal or high sulfur fuel in generating or used in industry is banned. And that is sort of a good thing, not only for the environment, but also you're seeing efficiency gains made by some of the power utilities as well by utilizing better fuel quality as part of their burn.
ERIC YEP: Thanks, Matt.
Oceana, over to you for the final question and something that has also caught the curiosity of a lot of people who've been tracking the transportation fuel market. Between hydrogen fuel cells and electric vehicles, where do you see China's transportation fuel demand going?
OCEANA ZHOU: Well, there's no doubt that EV batteries take the majority of vehicle battery market currently. Hydrogen fuel cell is only adopted in public transportation for neighborhoods. Although we can see more hydrogen fuel cell vehicle in the 2022 Beijing Winter Olympics, hydrogen fuel cell with means under development, to lower his costs and to build fuel network to educate customers.
Currently, retail hydrogen price was heard at nearly $10 per kilogram. It needs to fall to around $6 per kilogram to become competitive with gasoline when crude oil price is at about $65 per barrel. So then, in the price aspect, EV batteries win.
As I mentioned earlier, Sinopec aims to become China's top hydrogen supplier. Right now, it mainly has around 30 hydrogen fueling stations and it plans to build 1,000 hydrogen fueling station by 2025.
PetroChina just launched its first station on February 7, and it plans to launch 50 shortly. EV batteries win in this aspect as well, because nearly area every office tower in the central business districts of the first-tier cities in China has charging points. So do most residential buildings, not to mention the electric charging stations across the country.
As the battery swap become popular, Sinopec recently announced to appeal 5,000 battery charge and swap stations in China by 2025.
So it takes time to educate and encourage customers to adopt hydrogen fuel cells, with its higher costs and weaker retail network. We need to wait for hydrogen fuel cell technology breakthrough to make it economical.
ERIC YEP: Thanks, Oceana.
That was a fantastic overview from our speakers on the various aspects of China's energy transition and its long-term climate goals.
Navigating a pathway to a low carbon global economy requires a new plan. The S&P Global Platts Atlas of Energy Transition, produced in collaboration S&P Global Market Intelligence, is your map to the sustainable commodity markets of the future. Explore this interactive report on spglobal.com/atlas.
Thanks for listening.