Opinion: How Can China Cut Its Emissions From 10 Billion Tons to Zero
China is in the zero carbon race with macro changes and broad sector impact. President Xi Jinping’s high-profile pledges to achieve net-zero carbon emissions by 2060 surprised the market at the end of last year. UBS has recently published a Q-series report across seven sectors and our environmental, social and corporate governance (ESG) and China macro teams collaborated to map out the impact and trajectory of these changes. We identify nine likely sector implications linked to the net-zero target, with an estimated annual investment of over $2 trillion from 2020-60. This economic revolution will demand a GDP trend toward lower energy intensity and primary energy shift from 85% fossil fuel to 85% renewables by 2060. The cost parity timeframe beyond renewables remains the key for the short/medium-term investment debate, as nonsubsidized technology has better visibility on returns.
Amid the backdrop of heightened geopolitical tensions, trade restrictions and the Covid-19 pandemic, we believe leaders in China are keen to make changes that could enhance China’s economic competitiveness, create an internal circulation economy, facilitate sector upgrades, create jobs, drive technological innovations, and improve international relations and sustainability. The unexpected 2060 net-zero carbon target, in our view, will require China to almost rebuild the way the economy has been structured. Although this could be disruptive, we believe it will create many economic, social, environmental and diplomatic opportunities for China. We think China is ready to carry out an unprecedented economic and energy revolution and the key implications are as below.
Net-zero carbon emissions, or carbon neutrality, refers to a state when carbon emissions from consumption energy (coal, oil, and gas) equals to the amount of carbon reductions through tree planting or new technologies, such as carbon capture and storage (CCS). An important note is that carbon neutrality is different from net-zero climate change. Climate neutrality is an even stricter goal as it takes the non-carbon dioxide (CO2) greenhouse gases such as methane into account, and these have to be reduced to zero as well. These non-CO2 greenhouse gases are normally produced by agricultural businesses.
The simple equation of how a country emits carbon through economic activities is summarized in the chart below. For China to reach carbon neutrality by 2060, we believe the combined effects of economic mix and energy mix change would have to fully offset the fourfold growth in GDP from 2020E, and to cut down the estimated 10 tons of 2020 carbon emission to almost zero by 2060. We therefore think this implies a quasi-revolution over the next 40 years to completely change the economic and energy structure.
* Driver 1 – GDP growth: This affects overall carbon emissions as overall economic activities will likely drive the level of carbon emissions
* Driver 2 – Change of the GDP mix: The split of GDP between consumption and industrial drives the energy intensity of the economy, which is therefore linked to the level of carbon emissions. Energy used for consumption is only one-fifth of that of industrial activities
* Driver 3 – Carbon intensity per unit of energy consumed: This relates to the constituent fuel consumed in the key carbon-emitting sectors. By reducing the carbon intensity, we expect implications would occur such that noncarbon emitting alternatives would rise in penetration, potentially replacing traditional carbon-emitting production processes. Figure 3 shows the current breakdown of carbon emissions by sector.
* Driver 4 – Energy intensity reduction: This means the amount of energy consumed per unit of GDP.
Typically, the service industry has lower energy intensity than industrials. Technology advancement could also reduce energy intensity.
We expect China’s net carbon emissions to peak in 2030, at around 10 billion tons, followed by a simple straight-line decline to meet the net-zero target in 2060. The amount of gross carbon reductions required will likely be over 80%, from the current 11 billion tons to 1.9 billion tons in 2060. We use a simple straight-line estimation of the decarbonization path for China post-2030 as there is limited available information so far. We believe this estimate should be a good enough initial gauge of China’s potential economic change. We think carbon reduction methods currently have a limited impact on China’s decarbonization. We assume carbon reductions by 2060 would only provide a 1.7-billion-ton carbon offset, which is slow progress from the 600 million tons now.
To quantify the potential impact of the 2060 target and visualize China’s path towards net-zero carbon emissions, we developed a carbon model to estimate the required reduction in carbon intensity by 2060. The output would be the required reduction of carbon intensity to get to net-zero carbon emissions. This is what we mean by reducing the carbon intensity per unit of energy consumed. In other words, it is mainly driven by a switch in the energy source to a lower or zero-carbon footprint. For example, renewables is carbon neutral while coal, oil and gas currently have carbon emissions of 2:1.5:1. This is relevant on the sector level as we have the carbon emissions breakdown by sector. We will discuss where these noncarbon emitting fuels and production processes are, and quantify their costs as well as the potential penetration rates needed to reach the net-zero target. To quantify the potential penetration rates of disruptive technologies from the calculated carbon intensity, we need to solve the percentage mix equation between the noncarbon-emitting disruptive technology and the carbon-emitting traditional technology. Assuming carbon emission from traditional technologies remains the same and the carbon reduction is shared evenly across sectors, we can calculate the required penetration rates of the zero emission disruptive technologies from 2020 to 2060 to meet the overall net-zero target.
Between now and 2060, our UBS proprietary carbon model shows that for China’s net carbon emissions to fall from 10 billion tons (peak in 2030) to net zero, three things need to happen:
* Amid a fourfold increase in GDP, the mix toward the low-energy-intensity consumption tertiary sector will shift from 54% to 70%;
* A reduction in energy intensity at a 3.2% CAGR in 2020-60 (from 3.7% previously);
* An 84% decrease in carbon intensity through the adoption of multiple non-carbon-emitting technologies
We identify multiple implications across different sectors through the reduction of carbon intensity on energy consumed and a change in energy consumption patterns. Renewables and electric vehicle (EV) implications are established, but some impacts are only emerging such as hydrogen and plastic/petrochemicals. Other developments will be needed to support the transition, such as energy storage, mass modification of the grid and the expansion of carbon trading. We estimate the average noncarbon-emitting technology penetration rate, percentage of new capacity/sales, is required to jump from 9% now to 85% by 2060E. We also think that most of these technologies would reach cost parity after 2030, except renewables (now), EV and batteries (2024-25) and energy storage (2025-2027).
Ken Liu is head of Chinese mainland and Hong Kong utilities research at UBS.
The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.
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