Overview
Thematic insight
This looks attainable given China’s past achievements. However, the path that is necessary beyond the medium term for China to achieve its net-zero goal by 2060 looks highly challenging. To speed up the green transition, China needs to swiftly shift its energy mix toward clean sources. China also needs to significantly boost energy efficiency in transportation, industry and construction.
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China has pledged to achieve carbon neutrality by 2060, pointing to a much faster green transition than pledged by major advanced economies. For that, in the upcoming 14th Five Year Programme, China is likely to aim for more ambitious targets than those under the Paris Agreement, including raising the non-fossil fuel share in primary energy consumption to possibly 20% by 2025.
China's green ambitions
Our analysts see four main reasons why Chinese policymakers are taking the green transition more
seriously than ever at this juncture:
The first stage (2021-2030) is challenging, but not implausible. China needs to aim at more demanding targets than submitted under the Paris agreement, e.g. the share of non-fossil fuel energy in primary energy consumption to reach 20% in 2025 – five years ahead of the Paris Agreement, and 25% in 2030.
A challenging path ahead
Based on the recommendations laid out by the Tsinghua University Institute for Climate Change and Sustainable Development, the path towards carbon neutrality by 2060 can be divided in two stages:
Our message is simple: we can’t abandon the Green Deal to transform our economy. We must act faster.
Emmanuel Macron
President of the French Republic
18 May 2020
This is Europe's man on the moon moment.
Ursula von der Leyen
Head of European Commission
14 May 2020
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However, the second stage (2031-2050) will be highly challenging. China will need to see a much steeper decline in emissions with an energy consumption peak around 2035 and carbon emissions approaching.
Transportation
The Chinese government has set an ambitious goal of boosting the share of NEV (New Energy Vehicle) in new vehicle sales to 20% by 2025 and 50% by 2035 in
the NEV Industry Development Plan.
The mainstay of government support to the sector is shifting from direct subsidies to regulations and infrastructure, with greater emphasis on life-cycle emissions
Building
China’s efforts to switch from coal
to cleaner energy for heating have contributed to the declining share
of coal in primary energy consumption
in the few years. Outside heating,
China can do a lot more to
promote green building
Industry
The industrial sector accounts for 48% of total final energy consumption and 28%
of carbon emissions in 2018. Currently,
the major sub-industries demanding energy are metals, chemicals and non-metallic mineral products, which can
be targeted for emissions reduction
Achieving carbon neutrality means China needs to rapidly raise the share of non-fossil energy in its energy mix, as nearly 90% of China’s total carbon emissions come from its energy consumption. Two lines of action are necessary:
Shift the energy mix: promising but challenging
Embrace the opportunity of China’s green transition
Power
This is focused on solar and wind,
and includes utilities (power generation) and equipment makers
Environmental Industries
This cluster includes carbon capture and storage, waste management
and engineering firms active in
boosting energy efficiency
Mobility
In terms of the investment opportunity
set, the electrical vehicles ecosystem
is the major energy efficiency cluster.
It also includes alternative sustainable mobility, such as electrical scooters
China has seen significant improvement in energy efficiency in the past two decades, without which it would be consuming 15% more energy at present.
First, climate hazards and pollution are already a present threat to social welfare
Second, the long-term costs of climate change would be unbearable to China without a significant acceleration in policy efforts starting from now.
Third, a faster energy transition away from fossil fuels could help China better mitigate the energy security risk posed by rising geopolitical tensions.
Fourth, cost reduction in renewable energy is making the transition increasingly achievable. Equally important, the green transition is not necessarily negative to growth or job creation, even though it means greater pressure on carbon-intensive sectors to downsize.
The SG China Green Tech basket tracks the performance of a basket of 40 China stocks exposed to the Green transition.
Stocks have been filtered by size, market accessibility, balance sheet strength and growth metrics. China first needs to expand its green energy supply and secondly, needs to boost energy efficiency. The basket has therefore been built around alternative power generation and energy efficiency, mostly for the transportation sector. More specifically, there are three clusters:
Introducing the SG China Green Tech Basket
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Boosting energy efficiency: a revolution awaits
China has seen significant improvement in energy efficiency in the past two decades, without which it would be consuming 15% more energy at present.
more aggressive reductions in the most polluting fossil fuel, coal
more active promotion of renewable energy. Within that, solar and wind are expected to play a bigger and faster role than others (including nuclear, hydropower, hydrogen, biomass, etc.) thanks to their greater financial feasibility amid technological advancements and lower costs
It is estimated that investments of RMB100-138tn will be needed to finance the green transition, equivalent to 2-2.5% of annual GDP. China needs to devise a funding strategy that emphasises on market mechanism and promote green financing by developing more green products and converging with global standards.
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This page contains financial analysis which reflects the opinion of the Cross-Asset Research department of Societe Generale, at the date of its publication. It does not necessarily reflect the views of the other departments of Societe Generale nor the official opinion of the Societe Generale group. This content has been prepared for use by institutional and professional investors and is not intended for retail investors. Investors should consider this report as only a single factor in making their investment decision.
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THEMATIC INSIGHT
Embrace the opportunity of China’s green transition
China's green ambitions
1) a COVID vaccine - Europe is the epicentre of the second wave and thus COVID continues to weight on its economy. Except Utilities, all the European sectors have underperformed their global peers. Most of them are trading with a discount. A vaccine would therefore be a catalyst for European equities.
A challenging path ahead
It is estimated that investments of RMB100-138tn will be needed to finance the green transition, equivalent to 2-2.5% of annual GDP. China needs to devise a funding strategy that emphasises on market mechanism and promote green financing by developing more green products and converging with global standards.
Shift the energy mix: promising but challenging
Second, the long-term costs of climate change would be unbearable to China without a significant acceleration in policy efforts starting from now.
Third, a faster energy transition away from fossil fuels could help China better mitigate the energy security risk posed by rising geopolitical tensions.
Achieving carbon neutrality means China needs to rapidly raise the share of non-fossil energy in its energy mix, as nearly 90% of China’s total carbon emissions come from its energy consumption. Two lines of action are necessary:
Boosting energy efficiency: a revolution awaits
Achieving carbon neutrality means China needs to rapidly raise the share of non-fossil energy in its energy mix, as nearly 90% of China’s total carbon emissions come from its energy consumption. Two lines of action are necessary:
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Contact
This page contains financial analysis which reflects the opinion of the Cross-Asset Research department of Societe Generale, at the date of its publication. It does not necessarily reflect the views of the other departments of Societe Generale nor the official opinion of the Societe Generale group. This content has been prepared for use by institutional and professional investors and is not intended for retail investors. Investors should consider this report as only a single factor in making their investment decision.
© Societe Generale 2021
Cookies Policy
Legal Information
By continuing to use our website, you are accepting our use of cookies. The cookies we use are "analytical" cookies. They allow us to recognise and count the number of visitors and to see how visitors move around the site when they are using it. To find out more or to change your cookie preferences, please refer to our cookies policy.
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