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China's decarbonisation drive will need at least $21 tril in investments: Credit Suisse

Jovi Ho
Jovi Ho10/14/2021 04:39 PM GMT+08  • 7 min read
China's decarbonisation drive will need at least $21 tril in investments: Credit Suisse
As China approaches peak emissions, its “growth at all costs” strategy will be increasingly called into question.
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To achieve net-zero emissions by 2060, Credit Suisse estimates China will need to invest about RMB100–130 trillion ($21.1–27.4 trillion) in green infrastructure projects over the next three decades.

This massive investment will be a new growth engine for China’s GDP, which should create new business opportunities and high-quality jobs.

China has demonstrated the weight of this commitment by placing the carbon neutrality agenda on par with other key national programmes and policy priorities over the next decade, says Credit Suisse at a media briefing on Sept 29.

These green investments are part of a broader push in so-called “new infrastructure” investments that began five years ago, including 5G networks, data centres and electric vehicle (EV) charging stations.

Based on Credit Suisse’s China Quantitative Insight1 (CQi) estimates, China’s annual GDP, estimated at US$14.7 trillion ($19.9 trillion) last year, will see its growth rate boosted by 37–43 basis points over the 30-year period because of these investments.

See: Watch out for these signposts as China strives for 'common prosperity': Indosuez

To be sure, China’s decarbonisation journey ahead may appear commendable but its surging emissions over the past decade make this commitment one of necessity and not altruism.

Last month, Ho Ching, former CEO and executive director of Temasek Holdings, called attention to China’s emissions in her closing address at Temasek’s Ecosperity Week 2021.

“Do you know the top five emitters account for 60% of our global CO2 emissions? China and the US together account for 40% of global emissions. China leads with 27%, over a quarter of the global emissions. This is followed by the US at 13%. The next three are the EU at 8%, India at 7% and Russia at 5%,” says Ho.

See also: Tap retail investors to finance green infrastructure: Temasek's Ho Ching

Since 2005, the EU has cut its emissions by a “creditable” 30%, Ho adds, followed by the US with a 12% reduction.

Meanwhile, China’s emissions over the same period grew by over 60%, while India’s more than doubled. “Carbon abatement needs government action now, especially by these top five emitters. Investors and businesses must act too,” says Ho.

World’s largest carbon market

In July, China’s national carbon trading programme, the emission trading scheme (ETS), went live. Credit Suisse expects this to become the world’s largest carbon market, with more than twice the market size of the EU’s ETS.

China’s carbon trading volume in 2019 and 2020 comprised less than 1.4% of its total emissions in the same period. David Murphy, Credit Suisse’s head of CQi, says: “The scale of China’s carbon market is set to grow rapidly and cover a larger portion of the nation’s emissions over the next five to 10 years, thereby opening the door for greater international collaboration on cross-border trading.”

Nonetheless, there remains a very significant task ahead for China, says Credit Suisse. Even if China manages to achieve peak emissions by 2030, it will only have a 30-year runway to achieve carbon neutrality.

By comparison, many European countries enjoy a longer timeframe than China to achieve their zero-carbon goal.

Moreover, as China approaches peak emissions, its “growth at all costs” strategy will be increasingly called into question.

Most developed countries are dependent on low-carbon sectors for economic growth. In contrast, China plans to retain its traditional industrial capacity and is unlikely to be able to tap offshoring of manufacturing capacity to ease carbon emission rates — as seen in Europe and the US — as it seeks to reduce its carbon output to transition to a lower-carbon economy.

Carbon pricing from China’s trade destinations will also gnaw at its future growth. For one, Credit Suisse highlights the EU’s Carbon Border Adjustment Mechanism (CBAM).

The CBAM is an import customs tariff on carbon-intensive production outside of the EU. Exporters with less strict climate policies and higher emission content will pay a carbon price pegged to the EU ETS.

Here, Credit Suisse believes exporters of steel, aluminum, cement and fertilisers may face material risks.

At the country level, China and Russia have uniquely high exposure as the largest suppliers of iron and steel and aluminum. China produces over 1,050 million tonnes of steel, 2,300 million tonnes of cement, 35 million tonnes of aluminium, and 7 million tonnes of copper annually, contributing to 58%, 57%, 57% and 39% of global production respectively.

“The vast production of energy-intensive commodities creates an enormous demand for energy consumption and unfortunately generates huge amounts of carbon dioxide as well,” says Edmond Huang, Credit Suisse’s head of China and Hong Kong securities research.

If the cost of CBAM is passed through, steel and aluminum prices per tonne will increase by 8% and 21% respectively against EU spot prices.

Chinese steel would be 10%– 11% more expensive in 2026, which would accelerate a decarbonisation in Chinese steel, adds Credit Suisse.

See also: Credit Suisse updates investment 'supertrends' amid Covid-19

Phineas Glover, head of ESG research for Asia Pacific at Credit Suisse, points to the CBAM as a “polluter’s dilemma”. “It serves to both enforce the so-called polluter pays principle, and, through the power of market access, overcome what has been the prisoner’s dilemma of global climate policy.”

“However, it will also create big investment opportunities in China,” adds Glover. “In particular, we expect to see an accelerated deployment of renewables and, as carbon prices increase, an increase in coalto-gas switching within industrials. We also foresee an increase in electric arc furnace-made steel, hydrogen and Carbon Capture and Storage (CCS) investment.”

Global green trends

According to Credit Suisse, China is well-positioned to achieve technology independence and leadership in key sectors, given its dominance in the solar, wind, EV and battery supply chains.

Chinese suppliers now control over 80% of the effective capacity in most of the segments across the global solar supply chain, while Chinese wind turbine makers had 45% of the global market share in 2019.

According to industry data and CQi’s estimates, Chinese companies accounted for 42.2% of EV sales and 48.3% of EV battery installation globally last year.

“While these large shares of the global market may trend down over time with other countries building their own capacities to reduce reliance on China, the very strong global demand will likely see China’s exports of green products continue to grow over the next few decades,” says Credit Suisse.

Within the transportation sector, Credit Suisse foresees new energy vehicles (NEVs) and renewable energy as the major beneficiaries of the replacement of traditional internal combustion engine cars and fossil fuels.

The Chinese government uses the term NEV to designate plug-in electric vehicles eligible for public subsidies. These include battery electric vehicles (BEVs), plug-in hybrid electric vehicles (PHEVs) and fuel cell electric vehicles (FCEVs).

Compared to traditional cars, NEVs are expected to cut CO2 emissions by 35% during their lifecycle.

China is already the world’s largest NEV market with a 38% global market share and the highest NEV sales volume. The auto industry is strategic to China’s economy, with its 4% GDP contribution and 10% employment contribution.

Huang thinks the Chinese government has shown strong policy support for the adoption of NEVs. “Looking ahead, Credit Suisse forecasts a 25% 10-year CAGR in China’s NEV volume and a 43% NEV penetration rate by 2030. The NEV market is expected to create a level playing field for Chinese auto companies to fulfil a more prominent role in the global auto industry.”

As ambitious as the world’s green plans may be, the lingering economic effects of the pandemic are likely to weigh down on China’s near-term progress, says Credit Suisse. “The lagging vaccination progress in much of the developing world and the risk of new virus variants have cast a shadow over universal normalisation in the global supply chain and business activity.”

As a result, the Chinese government may have to take a more cautious approach in pushing high-carbon industries to cut production this year and in 2022, says Credit Suisse. “While China’s path to carbon neutrality is not without challenges, Credit Suisse believes that there will continue to be opportunities and benefits in paying close attention to China’s economy as the nation strengthens its position as a leading innovator, global climate change collaborator and strong investor.”

Photo: Bloomberg

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