Mainland China’s climate goal is carbon neutrality by 2060. It will require at least RMB200 trillion investment – more than USD30 trillion. But that will be the economy’s new growth driver.

Most important is the green transformation of the power sector. That will mean the world’s largest emitter of greenhouse gases not only cutting coal production by 80 per cent, but also expanding its wind-power capacity ninefold and solar energy sevenfold according to the International Energy Agency.

A transformation to green power also requires developing a grid infrastructure to smooth out regional imbalances between supply and demand plus improving energy storage to cope with peak and non-peak demand.

The industrial sector contributes 36 per cent of mainland China’s CO2 emissions, second only to the energy sector. Greening the industrial sector implies a 95 per cent drop in industrial CO2 emissions by 2060, through a structural change towards high value-added, less energy-intensive businesses, electrification, and improving energy efficiency.

Mainland China’s steel and cement are responsible for more than 70 per cent of industrial coal consumption. Crude steel production is forecast to drop 40 per cent by 2060, with cement production falling 45 per cent, halving its share of global steel and cement production to about 30 per cent.

But heavy industry will not disappear, so decarbonisation is also important. Electrification, led by a shift from fossil-fuel heating towards industrial heat pumps and electric boilers, is also crucial.

However, energy efficiency could be the single biggest contributor to achieving climate goals. That means more renewables and recycling, such as using more scrap metal in steel making.

It also means greening the industrial parks. Mainland China’s 2,500 industrial parks, where most manufacturing companies are located, also need reforming. Only 5 per cent are green-certified.

The targets of peak carbon by 2030 and carbon neutrality by 2060 are ambitious, yet achievable. But more than a third of the reductions necessary involve technologies not commercially available today. Massive investment is thus required. But finance is not an issue when the domestic savings rate remains relatively high.

The IEA estimates that more than RMB5 trillion new investment a year is needed from now until 2060 – about USD800 billion annually, or over USD30 trillion in total.

Electrification and electricity systems will account for half of that between now and 2060 and end-use efficiency will be about 15 per cent of the green investment.

Reforming energy taxes by carbon pricing – either a carbon tax or expanding the emissions trading system – could help fund other green transformation efforts.

However, mobilising private capital is key to supporting investment. Loan guarantees would help ensure a flow of bankable projects that can be financed privately but institutional investors need encouragement.

Mainland China is now on the cusp of important structural reforms. Advanced manufacturing and green investment are likely to be the new growth engines. Directing more fiscal support toward them should incentivise private-sector participation and support new investment in infrastructure and manufacturing, enabling the economy to maintain medium to high growth over future decades.

 

First published 15th October 2021.

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