InsightsChina starts its long path to net zero

China starts its long path to net zero

For the global effort to address climate change, the announcement by President Xi Jinping that China will become a net-zero emitter of carbon by 2060 was a landmark.

Bernhard Obenhuber
Oct 12, 2020

Photo by SAM LIM from Pexels

For the world’s largest emitter — producing 28% of global emissions — it signals an acceleration of what is already a monumental effort to decarbonise its economy.

It also underscores the increasing economic materiality to sovereign issuers of environmental, social and governance factors.

But first, it is difficult to overstate the environmental impact of the surprise pledge, made by Xi to the UN on 22 September. According to Climate Action Tracker (CAT), an NGO which follows climate policies around the world, this commitment is “the most important announcement on global climate policy in at least the last five years”. If met, it would lower global warming projections by 0.2 to 0.3C, making it the single largest reduction ever tracked by CAT.

As importantly, it will encourage other countries to propose more ambitious targets as part of the ongoing process under the Paris Agreement to update the national emissions goals submitted in 2015. While China’s target — which is not dependent on other countries’ decisions — is 10 years later than EU’s 2050 climate neutral pledge, it implies a much shorter period of carbon-intensive development compared with that seen in the developed world.

“If China leads by example with a sustainable economic recovery from the pandemic, it will not only provide an important political signal to the rest of the world, but it could also trigger a wave of new investments in clean technologies and infrastructure across the world, particularly in countries that are part of the Belt and Road Initiative,” writes Nicholas Stern, Chair of the Grantham Research Institute on Climate Change.

China’s net-zero target follows an earlier, more modest goal to ensure that its emissions peak “around 2030”. It is likely to meet this target in several years, given the country’s massive investments in renewables and the gradual transition of its economy away from carbon-intensive primary industry towards technology and services.

Enormous challenges

Nonetheless, China faces enormous challenges in transitioning its carbon-intensive economy away from fossil fuels and on to a pathway towards net-zero carbon emissions — and President Xi did not set out the policies by which it will do so.

Last year, the Energy Transitions Commission and the Rocky Mountain Institute published a report examining how China could decarbonise its economy by 2050. Among its findings, it concluded that it would have to double its existing power generation at the same time as retiring a coal fleet that provides around two-thirds of its electricity. This would involve a 15-fold increase in its wind and solar capacity.

It would also need to entirely electrify its passenger vehicle fleet and railway system and embrace hydrogen for heavy transport and industrial heat. Nonetheless, the report argued that “it is technically and economically possible for China to achieve net-zero emissions by 2050 at a very small economic cost to growth and consumer living standards, and China is well placed to gain technological competitive advantage from the transition to net-zero emissions.”

A target date 40 years in the future may seem beyond the time horizon of most investors and sovereign risk analysts. However, the economic impacts are likely to be felt much earlier — and are likely to be positive over both the short and long term, according to analysis by Cambridge Econometrics.

The researchers estimated that the “huge scale of investments required” would increase China’s GDP by as much as 5% later this decade. Over the longer-term, the reduced need for fossil fuel impacts will also deliver “a modest ongoing positive impact”.

Net-zero and China’s ESG score

The quantitative ESG risk score will not change much in the near term because of this announcement. While the announcement is positive, the ESG index focuses rather on implementation and results. As China gradually decarbonises, the E part of the risk score will also gradually improve, all else being equal.

At the same time, the more comprehensive ESG rating model incorporates an assessment of the environmental policy environment: such an announcement and subsequent policy commitments will have a positive impact on the ESG rating.

Certainly, there is a long road to travel from a speech at the UN to the decarbonisation of the world’s most populous country. But, to quote China’s Lao Tzu, and latterly Mao Tse Tung, a journey of a thousand miles must begin with a single step.

Written by:
Bernhard Obenhuber