Significance of China's net-zero target

Its carbon pledge is a massive financial and technological undertaking. India must prepare for energy transition too

In the last week of September 2020, Chinese president Xi Jinping made a major announcement in his address to the United Nations General Assembly. He committed China to a target to achieve net-zero carbon emissions by 2060. This was a huge announcement and one that has gotten a little lost in the chaos around the renewed surge in Covid-19 cases in the West.

China is the 800-pound gorilla for greenhouse gas(GHG) emissions, so this announcement has profound implications for limiting global warming to 2 degrees Celsius. It also has a bearing on the energy transition across the world. Even though the European Union (EU) has committed itself to net-zero carbon emissions by 2050, the Chinese announcement was unexpected and will put pressure on other wealthy economies to set their own explicit targets. If Joe Biden is elected in early November, the United States (US) will in all probability also set an explicit net-zero timeline. Most had not expected China to hit the net-zero milestone till the end of the century. The announcement was a major positive surprise. These targets are critical, as based on the current GHG emission trajectory and carbon budget available for fossil fuels, the world will have to hit net-zero emissions by 2050, in order to give us a chance to limit global warming to 2 degrees Celsius.

The importance of the Chinese announcement is underscored by the size and complexity of the energy transition required to hit the 2060 target.

China is the world’s largest consumer of energy, with its primary energy consumption 40 per cent higher than the US and almost double that of the EU. In terms of GHG emissions, China accounts for almost 30 per cent of global emissions. In fact, China emits more greenhouse gases than the US and EU combined.

China today has fossil fuels accounting for 85 per cent of its energy mix. By 2060, fossil fuels will have to drop to below 20 per cent of the energy mix, with renewables going up to 80 per cent. Within power generation specifically, coal-based generation makes about 66 per cent of China’s total power generation. This will have to be reduced to zero by 2060. All the coal-based power will be replaced by solar, wind and nuclear.

Just to give a sense of how difficult this transition will be, one can look at the experience of China itself over the last 30 years. Between 1990 and 2019, the share of fossil fuels in the energy mix declined from 96 per cent to 85 per cent. This ratio has to drop to less than 20 per cent in the coming 40 years. For power generation, coal’s share went down from 71 per cent to 66 per cent (source:BP). Despite all the investments in renewables, coal’s share only dropped 5 percentage points in the last 30 years! We need this share to go to zero from 66 per cent of total power generated in the coming 40 years if China is to hit its net-zero target. A tall order indeed. These minuscule declines in fossil fuel percentages are despite China being the world leader in solar and wind, in terms of installations and capacity. 

For this energy transition to take place, research houses have calculated that China will have to make investments of between $6 trillion and $6.5 trillion in the coming 40 years. This will present a huge opportunity. Clean tech and renewables both in China and globally will be one of the major investment themes of the coming decades.

Some other takeaways from this transition will be the impact on oil consumption. China has accounted for 30-35 per cent of incremental demand for oil over the past two decades. Consumption projections show Chinese oil demand will peak by 2025, at 14 million barrels per day and then start to decline. This implies that global oil demand will also peak between 2025 and 2030. We will have finally hit peak oil.

For coal, China consumption has peaked already at about 2 billion tonne. This number will decline to near zero over the next 40 years. Coal assets have a clear terminal value problem. The vast majority of the world’s current coal reserves will never be burned.

Gas is the only fossil fuel that seems to have some life left, given that it will be used for combined cycle power generation as a backup to handle the intermittency of renewable power. Even in China, natural gas consumption will actually grow over the coming 40 years.  

Among the various renewable technologies, at least for China, solar seems to be the big winner. It will move from 1 per cent of the energy mix to 25 per cent by 2060; it has already hit grid parity in China. Solar has had the steepest decline in costs over the last 20 years, and there is scope for continued cost takeout. It will be the lowest cost source for power over the coming years. Wind will grow too, with its share moving from 3 per cent of China’s energy mix to 20 per cent( source: BP, Bernstein).

Illustration: Binay Sinha

The big new technology is predicted to be hydrogen, which is forecasted to move from almost nothing today to  13 per cent of China’s energy mix by 2060. Hydrogen, produced in future by electrolysis of water using renewable power, will have large applications in fuel cells and commercial transport. Having an energy density more than 100 times greater than lithium-ion batteries, hydrogen is ideal in powering heavy commercial transport vehicles, with longer range and a much shorter charging time.

While we talk of net-zero carbon emissions, there is an acceptance that carbon emissions will never go to zero. We will still have some GHG emissions as oil is used for jet fuels and petrochemicals. Natural gas will continue to be used for power and industrial purposes. By net zero, the assumption is that carbon emissions will be reduced to the extent possible and the balance emissions would be offset by carbon capture technologies, afforestation and so on. Even in the case of China, even after $6 trillion investments, and obsolescence of coal, emissions would reduce from 9,500 MT today to about 1,500 MT in 2060 ( source: BP, Bernstein). It does not go to zero. This 1,500 MT has to be offset by carbon capture and other technologies.

India will also come under pressure to declare a zero net-carbon target date. It is only a matter of time. We are one of the larger GHG emitters in the world. We matter. Seeing the example of China, it is clear that this energy transition is not trivial. It will require massive resources and access to new technologies like hydrogen fuel cells. We must make sure we do not become entirely dependent on imports as is the case with lithium-ion batteries.

The most profitable public sector units (PSUs) today are the exploration/production and oil marketing/refining companies. Clearly, their days are numbered as standalone, pure-play oil companies. They will have to re-invent themselves, without being stuck with large losses as they need to rejig their business model. Not easy for any company at that scale, let alone a PSU.

The Central government has made a good beginning in renewables, especially solar. We are taking steps to ensure we have access to technology, supply chain and production capacity. We must keep up the momentum and make sure states do not destroy the investment environment for renewables. We must also launch a hydrogen programme as the time has come for this technology after many false starts.

The writer is with Amansa Capital