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Letter from China: The carbon-neutral battle

It is not as simple as Beijing setting course and all other actors falling into line

Last month’s commitment by Chinese president Xi Jinping to make China carbon-neutral by 2060 underlines how the world’s biggest carbon emitter is taking the global fight against climate change seriously. But to deliver on his promise Xi will first need to win another struggle of equal importance—overcoming entrenched fossil fuel interests.

Fossil fuels have powered China’s economic surge over the past 30 years, but the continued combustion of coal, oil and gas is fundamentally at odds with Xi’s net-zero pledge. Reaching carbon-neutrality will require the world’s leading polluter to kick its addiction to fossil fuels—particularly coal—while building unprecedented amounts of wind and solar capacity.

King Coal’s last stand

This puts Xi on course to clash with powerful stakeholders in Beijing that have an interest in sustaining China’s appetite for fossil fuels for as long as possible. The coal lobby has been in this position before—after Chinese coal demand fell in 2014 for the first time this century, the industry pushed coal-based synthetic natural gas as a greener way to utilise coal resources.

That effort petered out, but coal has already staged something of a comeback in post-pandemic China. Provincial authorities, looking to support local economies, have championed the development of more coal-fired plants. Almost 20GW of new capacity has been permitted in the first half of 2020—the most since 2016.

China became home to half of the world’s operating coal power capacity for the first time earlier this year and now has enough plants in the development pipeline to power Germany

China became home to half of the world’s operating coal power capacity for the first time earlier this year and now has enough plants in the development pipeline to power Europe’s biggest economy, Germany. The construction boom underlines the competing pressures that lie behind China’s economic and climate policies, and the challenge of reining in the fossil fuel lobby.

Driving fossil fuel combustion lower to achieve the 2060 goal will be easier said than done, but is nevertheless critical to meet Xi’s commitment. One ‘blue sky’ scenario in a recent study from Tsinghua University suggests fossil fuels must make up no more than 14pc of China’s energy mix by 2050 in order to limit the global temperature increase to within 1.5°C. This would represent a sixfold reduction from c.84pc last year. Even the less-ambitious scenario of 2°C would require fossil fuels to account for just 26.8pc of the mix by mid-century.

Such severe curtailments will not win support from energy companies. China’s coal sector employs millions of workers, making any major restructuring a politically sensitive issue. China’s NOCs will likewise fight any attempt to tar all fossil fuels with the same brush, as they are pivoting their production portfolios towards gas and will want to see continued government support for the fuel.

Cnooc’s listed unit said last week that it aimed to raise the share of gas to make up half of its total output by 2035. CNPC has previously said it wants gas to make up 55pc of its domestic energy output by 2030, compared with 48pc in 2019 and 46pc in 2018.

Beijing will need to avoid alienating the NOCs, as they stand to play a major role in the transition towards carbon-neutrality. While a significant portion of future energy investments will be funded by renewable and power companies, CNPC, Sinopec and Cnooc must also be leaned on for their large balance sheets and cash-generating ability to cover the significant capex requirements for re­newable energy.

Brokerage Bernstein Research has estimated the three largest NOCs will generate $1.3tn of free cashflow from their oil and gas operations after dividends over the next 30 years, which could help pay a significant share of the $5.5tn bill needed to decarbonise China’s energy system. A two-pronged approach may therefore beckon for Beijing in the short term—encouraging China’s Big Oil to get onboard with the energy transition, while gradually dethroning King Coal.

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