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China’s Water Crisis Could Scramble the Global Economic Outlook.

China’s alarming lack of freshwater resources is perhaps the single most mispriced macroeconomic risk in the world today. Hard times for China investors are set to get even harder.

China is in the throes of an acute water scarcity crisis, exacerbated by a heat wave of unprecedented severity. The drought has been catastrophic for industries in China. Water is critical to power generation, industry, agriculture, and manufacturing, meaning water scarcity is not only limiting agricultural production in China but also exacerbating an acute domestic energy crisis that mirrors Europe’s, affecting virtually every economic sector, particularly manufacturing. As the rest of the world still imports roughly $3.36 trillion of Chinese economic output a year, few sectors are unexposed to supply-chain shocks emanating from China.

As this dual water and energy crisis has unfolded over the last few months, the Chinese Communist Party has been prioritizing water and electricity for households over industry, virtually ensuring further—and substantial—curtailment of industrial production. These supply shocks will reverberate through global supply chains and financial markets, with frightening and unpredictable consequences for the global economy.

Despite the water crisis, as well as Beijing and Washington’s mutual desire to reduce their economic interdependence, China’s hold on key energy supply chains will likely increase. China’s share of the global polysilicon market—the crucial input to photovoltaic solar panels—recently hit 80%, and may grow even higher. China dominates the supply chain for lithium-ion batteries, graphite, nickel, and most rare-earth minerals used in clean energy, electronics, and defense manufacturing. Polysilicon market prices have nearly quadrupled since January 2021 while lithium metal prices have quintupled, indicating how little slack there is in the market, even prior to the recent heightening of the Chinese water crisis. As Covid-related and other market bottlenecks eased in spring 2022, lithium battery pack prices moderated—but market deliveries have more than doubled year on year—keeping supply quite tight and subject to disruption.

Climate change has almost certainly exacerbated both the drought and heat wave. Ironically, this threatens some of the highly capitalized firms that are darlings of environmental, social, and governance investors and the sustainability crowd. In 2019 Apple had 380 suppliers in mainland China, representing a stunning 46% of its total supply chain. The company has gone to great lengths recently to reduce its supply dependence on China. But Covid-related supply-chain issues in China have caused significant production disruptions because “the vast majority of Apple devices” are still assembled there, highlighting lingering exposure. Tesla, a poster child for the clean-energy economy, in July signed long-term supply deals with two Chinese companies. The effect is to further concentrate its China supply chain for its Shanghai “gigafactory,” as Tesla calls its plant, further increasing its vulnerability to China’s drought. Tesla’s facilities have substantial water demands. Inadequate water availability delayed the opening of Tesla’s Berlin gigafactory.

Indeed, China’s widespread water shortages are already affecting its supply-chain resilience, with industrial users facing severe power cuts in both 2021 and 2022. This leaves China’s economy in a perilous position, forcing the CCP to choose between continued economic growth and depleting water resources. As a result, the implicit assumption that drove much of the global economy for decades—that China can continue to manufacture low-cost goods—is more in doubt than ever. Capital markets face a painful adjustment period as the new reality gets priced in.

Beijing does have options to decrease water consumption or boost supplies, but all carry heavy political costs for the CCP. These include forcing consumption changes, like reduced meat eating, onto Chinese consumers; significantly raising the price of water for farmers and industry; or securing water resources from rivers that cross into neighboring countries. All would be controversial. Beijing is deploying atmospheric interventions. Techniques like cloud seeding boost rainfall, but also likely exacerbate extreme weather patterns. Beijing has long relied on transfers of water from wetter to drier regions. But signs of severe water stress in regions previously considered water abundant, like the Pearl River Delta, suggest that these transfers may soon be infeasible. Large-scale desalination is also not viable, given the massive power consumption required, and the lack of distribution networks to bring water from the coast to China’s interior.

That leaves Chinese policymakers in a difficult place.

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Source: Barrons.com

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China’s latest mega hydro-engineering...

The Red Flag River is a means to expand China’s domestic water security networks. In recent months, China’s Red Flag River Water Diversion Project Proposal (Red Flag River), an astonishing new inter-basin water diversion proposal, has gained much attention on social media in China and also in the downstream countries, especially in India. Named after the famous Red Flag Canal, the proposal aims to annually divert 60 billion cubic meters of water from the major rivers of the ecologically fragile Qinghai-Tibet Plateau, including three transnational rivers (Mekong, Salween, and Brahmaputra), to arid Xinjiang and other parts of northwest China. Chinese social media posts have portrayed the Red Flag River as akin to a gift from the gods to water-thirsty northwest/northern China, and as another example of China’s extraordinary engineering prowess. Indian media, by contrast, see it as a water security threat.

The project was given a semi-official release in November 2017 by the S4679 Research Group, made up of academicians, professors, and young scholars. Led by Tsinghua University’s professor Wang Hao, they have organized several seminars and forums on the Red Flag River. Their activities have been reported by the Chinese government owned media. As an academician of China’s Academy of Engineering, Professor Wang Hao also serves as the engineer-in-chief of China Institute of Water Resources and Hydropower Research and the chair of the Expert Group on Dialogue for the “Red Flag River Issue.” He has been a core member of the Counselor Advisory Committee of China’s Ministry of Water Resources.

The project has its critics, however. Some Chinese scientists, like Zhang Hongquan, question the project proposal’s enormous cost and raise the likelihood of gigantic domestic water loss. Yang Qinye of the Institute of Geographic Sciences points out that the Red Flag River poses “severe challenges” to many fields – geology, technology, ecology, economy, and society in both the water sending and water receiving regions. Similarly, Yang and co-authors further highlight the Red Flag River’s negative impact on the ecological balance and the water balance within China, which would likely result in changes to the ecosystem, such as habitat loss. However, none of these critical works provide concrete evidence to argue their case, nor do they offer a comprehensive assessment of the Red Flag River.

If constructed, the Red Flag River will be the largest, longest, and most expensive inter-basin water diversion project in the world. Attention has so far been paid to the proposal from an engineering perspective and the benefits of the proposed farmland and oasis, which could be a partial solution to China’s food insecurity concerns. Little attention has been paid to a much bigger picture: how the proposal strengthens China’s water security grid system, which may help solve China’s national water quality, quantity, and unequal distribution issues. This paper discusses how the Red Flag River will expand China’s water grid system and potentially provide “double security” to the North China Plain region.

Academics suggest that the Red Flag River is a 6,180-kilometer-long gravity flow water diversion system that seeks “to divert water from Tibet to turn Xinjiang into California.” This could be achieved by using the main channel to send water to southern Xinjiang, all way to Kashi (see Figure 1), while also following the Chunfeng River to divert an enormous quantity of water into the Turpan Basin and northern Xinjiang.

If constructed, the irrigation water from the Red Flag River will be available to Xinjiang and also other arid northwestern provinces, including Gansu and Ningxia. Northwest China is the only water-thirsty region that has not benefited from China’s domestic construction of mega hydro-engineering projects, yet it is also where agricultural productivity is the country’s greatest if water is available. The amount of water to be diverted to northwest China is more than the Yellow River’s annual discharge. This water is expected to create 200 million mu (13.3 million hectares) of arable land in Xinjiang and a 150,000 sq km oasis in northwest China.

In addition to the stated purpose of creating another inter-basin water supply system, we believe the Red Flag River will be able to reinforce the water security of northern China. The completion of the South-North Water Transfer Project (SNWTP) creates a water grid system to secure water supply to Beijing and other major cities in North China Plain – the so-called “sanzhong siheng” (三纵四横). “Sanzhong” refers to the SNWTP’s three routes (the middle and eastern routes have been completed and the western route is in the planning stage); “siheng” refers to the four eastern-flowing rivers (Haihe River, Yellow River, Huaihe River, and Yangtze River). Once the western route of the SNWTP project is constructed, 17 billion cubic meters of water will be diverted from the upper Yangtze to the upper Yellow River in the Qinghai-Tibet Plateau. This route will likely alleviate the Yellow River’s water stress, including the drying up of the river’s lower reaches.

The Red Flag River will also be potentially able to divert an enormous quantity of water to north China through its two main branches: Hongyan River leading to Yan’an in North Shaanxi province, and the Mobei River flowing into Inner Mongolia and Beijing (see Figure 1). This will reinforce its supply of water resources to the North China Plain via the Mobei branch; Guangzhong Plain and Chengdu Plain (Sichuan Basin) via the Hongyan branch, forming a large water security network.

Why do Beijing and North China need to “doubly secure” the water security system? For many years, China has struggled to find solutions to its water quality, quantity, and unequal distribution issues. The Chinese central government’s solution – the construction of enormous hydro-engineering projects – has not only substantially reshaped the water distribution patterns within China but also reduced water scarcity stress in the water receiving regions, making northern China highly dependent on the SNWTP project. For example, the SNWTP supplies over 70 percent of Beijing’s water supply. Doubling its water supply and safeguarding the water security is a strategic move for this rapidly industrialized and urbanized region – the North China Plain.

Over the past couple of decades, many hydro-engineering projects have been constructed in all regions of China with one exception: the northwest. If built, the Red Flag River will be another mega hydro-project in China, but the first one in northwest China. This paper offers a big picture – it not only creates a new water supply system for northwestern China but also connects to the existing water grid system to strategically “double secure” the water supply to Beijing and northern China. As a new and independent water supply system to northwest China, the Red Flag River proposal is to fill the supply gap.

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Source: WaterSciencePolicy.

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Major Challenges for China’s Chemical...

Any review of China’s chemical industry in 2021 is dominated by the two big issues the industry had to wrestle with: climate neutrality and Corona. These are the same issues that will dominate the year 2022. The industry as a whole in the People’s Republic is facing enormous challenges and changes — while at the same time there are great growth opportunities for certain sectors. However, the ongoing global epidemic, including in China, continues to create uncertainty.

The past year 2021 started with a big bang — or perhaps the word warning shot would be more appropriate — when 17 of China’s largest petrochemical companies signed a document on January 15 committing to the climate protection targets announced by the government in Beijing shortly before. CNOOC, Sinopec, Wanhua Chemical and other industry giants pledged to support the central planners' plans for emissions reductions.

Market observers are by majority convinced that China’s chemical executives were largely unprepared when state and party leader Xi Jinping promised in autumn 2020 that China aims to have passed the peak of its carbon dioxide emissions by 2030 and will be carbon neutral by 2060.

So, the chemical industry wants or needs to help meet Beijing’s climate targets, but the painful transformation needed to achieve this has only begun. It will hit larger corporations, especially large state-owned enterprises, less hard because they are able to handle the necessary investments in new technology better than private, especially medium-sized and smaller chemical companies. “The strong will become stronger,” writes the investment house Cinda Securities in its outlook for the current year.

Growth under difficult conditions

Major changes are on the horizon in the medium to long term. By 2025, the capacity of all processed crude oil in China is to be limited to a maximum of one billion tons. At the same time, capacity utilization for important products is to be increased to more than 80 percent.

China’s chemical industry is therefore promising a switch to low-carbon energy sources wherever possible, improvements in energy efficiency, an increased focus on low-carbon products and accompanying measures such as carbon storage and recycling (CCUS for ‘Carbon Capture, Use & Storage’). This is according to the document of January 15, published by the China Petroleum and Chemical Industry Federation.

However, since a large part of chemical production involves breaking down complex carbon compounds using large amounts of energy, it is rather uncertain at this stage how the sector can continue to grow in view of Beijing’s climate targets.

A particular problem for China’s chemical industry against this backdrop is the relative strength of coal chemistry — and in macroeconomic terms, the huge dependence of the entire industry on electricity generated by coal. More than 56 percent of all energy in the People’s Republic comes from coal. The chemical industry is the sector that consumes the most energy in China after the power and steel sectors.

In July, there was bad news for ‘Shaanxi Coal and Chemical’ when the largest coal chemical project on earth — in Yulin, Shaanxi province, with an investment of 20 billion dollars — was put on hold by the government. The reason was the new energy-saving and environmental regulations imposed by the central government. It looked like local governments in China were particularly targeting coal chemistry.

Coal dilemma plays a role in deciding the future

However, the headquarters in Beijing is currently sending mixed signals about the future of the chemical industry as well as coal chemistry. On the one hand, it has announced — among other things in a document published in Glasgow — the strict limitation of new refinery and conventional coal chemical projects. On the other hand, modern coal chemistry should certainly continue to play an important role in China, it said.

While the supply side is facing all kinds of risks for the year which has just begun, demand for chemical products in China, on the other hand, is very robust. In the first three quarters of 2021, cumulative GDP growth in China was 9.8 percent, and the key chemical industry is again forecast to grow in 2022 in most analyses, despite all the upheavals.

According to most observers, the impact of the Corona epidemic will continue to weaken China's chemical industry in 2022. Beijing is pursuing a strategy of strict, but also regionally narrow lockdowns that have a limited impact on production in macroeconomic terms.

“Looking ahead, to 2022, price volatility for chemical products will continue to increase. Against the background of climate neutrality, concentration in the industry will continue to increase. On the other hand, driven by strong demand in downstream industries, attention to new materials and those for semiconductors will continue to grow,” says a market outlook by ‘BOC International’, a subsidiary of the Bank of China.

Winners and chances

The winners of the current transformation trends include new energy carriers such as hydrogen, in which many Chinese chemical companies are currently investing massively, and above all the production of new chemical materials for photovoltaics and other ‘green’ technologies.

Nowhere are new industries such as e-mobility, energy storage or energy production with wind and solar power growing as fast as in China, resulting in enormous growth opportunities, especially for modern high-performance materials. It is no coincidence that Hengli Petrochemical (Dalian), for example, is currently investing in new production facilities for new materials with an annual capacity of 1.6 million tons. Many other companies in China are also investing in the sector.

Another example of a company with a lot of optimism for the new year is Baofeng Energy, one of the largest coal-to-olefin producers in China. The company is “accelerating the construction of hydrogen electrolysis projects with solar power nationwide”, according to a market report by Sealand Securities.

Overall, all major chemical companies in China continue to invest heavily in new production lines this year. Wanhua Chemical, for example, is investing in new capacities of 12.45 million tons per year. Taken together, the picture is one of a national chemical industry in transformation pain, but with continued good growth opportunities.

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Source: By Henrik Bork for Process Worlwide

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New Energy Storage 2021-2030

China aims to install more than 30 gigawatts (GW) of new energy storage capacity by 2025, and 100 GW finished by 2030 as part of efforts to boost renewable power consumption, with energy storage and electrochemical storage remaining critical for China’s energy transition and ensuring a stable electric grid system.

New energy storage refers to electricity storage processes that use electrochemical, compressed air, flywheel and super capacitor systems but not pumped hydro, which uses water stored behind dams to generate electricity when needed. Among all energy storage technologies, electrochemical storage is popular due to its maturity, simple structure, and deployment convenience and will very likely represent the majority of energy storage in future

China currently has total energy storage capacity of about 35 GW as of 2020, of which 31.79 GW is pumped hydro, and 3.269 GW is electrochemical storage. Lithium battery contributed 2.9GW, over 90% of the electrochemical capacity, according to the China Energy Storage Alliance. China is aiming for renewable power to account for more than 50% of its total electricity generation capacity by 2025, up from about 42% now.

Rising giants in storage technology.

CATL: Contemporary Amperex Technology Ltd. (CATL), the largest lithium-ion battery manufacturer in China, provides batteries for electric vehicles, and more recently, products and solutions for energy storage.

In 2018, CATL participated in a 50 MW/100 MWh storage project in Haixi prefecture, Qinghai province. In the same year, the sales revenue from its storage business increased by almost 12 times over the previous year. In 2019 and 2020, it recorded more than 200% growth year on year, reaching CNY 1.9 billion ($295 million) in 2020.

CATL’s storage solution covers major storage scenarios such as storage for power generation, grid storage, and storage on the consumption side. With high-quality battery cells and a in-house battery management system (BMS), CATL provides power generation customers accurately optimized assistance for grid-friendly power output. On the grid side, CATL’s storage system can help greatly in peak shaving and frequency regulation, to boost capabilities for renewable energy fluctuations. Meanwhile, the storage products have been applied in large-scale industrial, commercial and residential areas, and expanded to emerging scenarios such as base stations, UPS backup power, intelligent charging stations, and off-grid and island/isolated systems.

Sungrow: As one of the more significant solar inverter manufacturers and earliest enterprises involved in energy storage, Sungrow has applied its energy storage systems across China, the United States, Great Britain, Canada, Germany, Japan, Australia, India and more. By the end of June 2020, the company had taken part in more than 1,000 energy storage projects globally.

Based on its inverter technology, Sungrow concentrated on R&D to help customers to better support grids with fast power control/adjustment. To help customers minimize the levelized cost of electricity (LCOE), Sungrow promoted a storage system of 1,500 V and with a DC coupling scheme of PV and storage, which can significantly reduce the overall cost of a system.

According to China Energy Storage Alliance statistics about global energy storage projects, Sungrow is becoming the leading enterprise for providing the most comprehensive energy storage products in the field. The company has ranked first in China for storage installations for the past four consecutive years.

Veteran state-owned equipment manufacturer Shanghai Electric established a 2017 joint venture with Gotion Hi-tech, a lithium-ion battery supplier, for market exploration in energy storage and system solutions. The joint venture has expanded its R&D and sales in lithium battery precursors, cells, and battery management systems, and has delivered customized integration solutions for energy storage systems.

At end of 2018, the joint venture, Shanghai Electric-Gotion, began to build its own lithium battery production base in Nantong, Jiangsu province, for the future development of storage. Following 10 months of construction and equipment adjustments, the new facility started production of its first-stage project, with an annual capacity of 5 GWh.

At the 2021 SNEC expo in Shanghai, the company launched its latest storage solution. And its BMS for electrochemical energy storage won the Megawatt Jadeite Award for its innovative design.

Similar to Sungrow, Huawei commenced its expansion into storage by building on its significant inverter product expertise. However, the difference is that Huawei sees the move within a much bigger picture for the future of energy.

From Huawei’s string inverters, the company saw the possibility for its products to build up a network of solar PV, wind power, and smart energy grids. Based on this network, the future energy world, in Huawei’s view, will be centered on data and digital technologies.

In the future, the current grid will still provide physical support for electricity power transmission. Power consumers and generators will connect into the grid for power consumption, or contribution, through bidirectional inverters. Meanwhile, the inverter is also connected to a storage system to store surplus electricity or supply power to the grid based on price levels and grid demand.

The overall ambition is that these nodes are all connected via a cloud network. It’s possible that millions of interconnected nodes could then provide functionality and data. Huawei is aiming to become a platform that can provide all the necessary technologies, hardware, software, solution, and services. Storage system solutions are a starting point for Huawei in this wide-scale effort to reimagine energy infrastructure.

In summery, battery storage investment remains critica and long-term perspective of energy storage investment remains buoyant. The industry remains one of the most critical parts of China’s carbon neutrality plan.

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Making Sense of China’s Pledge to...

Speaking to the United Nations General Assembly on September 21, Chinese President Xi Jinping made what could become the most significant change to China’s Belt and Road Initiative (BRI) to date, pledging Beijing “will not build new coal-fired power projects abroad.” This announcement, depending on how it is interpreted and implemented, could mark a watershed moment in China’s overseas investment practices. While this is a welcome step, it is far more important for China to begin to phase out coal-fired power domestically.

China has complicated global efforts to reduce greenhouse gas emissions, as it has used BRI to finance and build coal-fired power plants around the world. The ten largest funders of coal-fired power globally are Chinese banks, which have financed nearly seventy percent of the world’s coal power projects over the past five years (to include projects both domestically and internationally). In BRI countries, China has financed nearly $45 billion of coal projects.

China’s investments in fossil fuel projects along the Belt and Road have the potential to lock countries into decades of carbon-intensive growth. Modern coal-fired plants have an operating lifespan of more than thirty-five years, yet environmental groups suggest that coal needs to be entirely phased out by 2040 if the world is to meet the Paris Accords’ emissions reduction goals. Echoing that sentiment, United Nations Secretary-General Antonio Guterres stated last month that “accelerating the global phase out of coal is the single most important step to keep the 1.5-degree goal of the Paris Agreement within reach.”

Responding to international criticism of its BRI practices, China released a “Guidance on Promoting Green Belt and Road” in 2017. That same year, speaking at the Belt and Road Forum, Xi proposed to establish “an international coalition for green development on the Belt and Road” and “provide support to related countries in adapting to climate change.” Two years later, Xi went further, pledging to pursue an “open, green and clean” BRI. To date, such rhetoric has not been matched by the reality on the ground, and investments in fossil fuels have continued.

Recently, there have been some indications that Beijing may be working to change that reality. China is now taking steps to overcome a major flaw in its past approach to “greening” BRI: its reliance on local environmental standards, no matter how low those standards might be. This past July, China’s ministries of commerce and the environment jointly issued Guidelines for Green Development in Foreign Investment and Cooperation that recognize problems with host countries’ environmental rules and suggest that companies “follow international green rules and standards.” Even on a voluntary basis, the push to bypass local standards in favor of more stringent and transparent international ones could be a big step.

There have also been some signs of a shift in Beijing to move away from funding coal-fired power abroad, at least in some places. In February 2021, China informed Bangladesh that it would no longer fund coal-fired power plants in the country. After China made its Bangladesh announcement, however, it signed new deals to build coal-fired power plants in Vietnam and Indonesia.

With a pledge directly from Xi, China might finally be getting serious about sustainability along the Belt and Road. Billions of dollars of “dirty” projects will now hopefully be shelved and then cancelled. One report estimated that Xi’s statement could lead to the cancellation of forty-four coal plants worth a combined $50 billion, which would reduce future carbon dioxide emissions by two hundred million tonnes per year.

Still, Xi’s vague wording can be read in a narrow or expansive way, and how China’s ministries interpret his policy directive will ultimately determine its significance. For instance, Xi pledged not to “build” new coal-fired power plants abroad, but it is unclear whether this also includes financing. In addition, do “new” projects include those where financing has closed but construction has not yet begun? What will happen to the seventeen coal-fired power plants currently in the planning phase? Will China offer green alternatives to those countries that had committed to a Chinese-built coal-fired power plant?

Following Xi’s announcement, Bank of China, the world’s largest supporter of coal-fired power over the past five years, stated that beginning in the fourth quarter of this year it would no longer provide financing for new coal mining and coal-fired power projects abroad, but it would continue to support those projects whose contracts it has already signed. This may indicate that Chinese banks will not walk away from deals where financing has already been committed.

It appears that China’s bureaucracy has yet to work out the specifics of Xi’s pledge. When asked to clarify whether China intended to halt financing new coal-powered plants abroad in addition to stopping building them, the spokesperson for China’s ministry of foreign affairs merely repeated Xi’s statement.

While Xi’s pledge is a step in the right direction, the fact that it does not extend to projects within China’s borders will greatly lessen its impact. China, the world’s largest emitter of greenhouse gases, generates one thousand gigawatts of coal power domestically, accounting for over half of the globe’s total and more than four times that of the second- and third-largest users (India and the United States).

China continues to add coal-fired power plants within its borders, bringing forty-one gigawatts of coal power on line in 2020 alone, which accounted for seventy-five percent of the global total. Even if Xi’s announcement reduces future carbon dioxide emissions by two hundred million tonnes per year, that is only half a percent of annual global emissions. Until China moves away from coal-fired power domestically in addition to fulfilling Xi’s pledge to stop backing coal power abroad, it will be much more difficult to address climate change.

The United States and its partners should urge China to move away from coal power at home and abroad. Public efforts to hold China to account may have played a role in Xi’s pledge, but more needs to be done to encourage China to implement this new commitment in a meaningful way, so that it covers not only the building of coal-fired plants but also the financing of them.

If China fails to curtail building coal-fired power plants, the United States should consider imposing import taxes related to the amount of carbon burned to produce goods so that all imports produced by taking advantage of dirty coal-based power would pay a polluter fee. The United States should also join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) while negotiating to include stricter provisions regulating carbon emissions. Given China’s stated interest in joining the CPTPP, this presents an opportunity to make strong environmental standards a price of admission for Beijing.

In his speech, Xi also pledged to “step up support for other developing countries in developing green and low-carbon energy.” As one of the world’s largest producers of solar, wind, and hydropower, it will be critical for China to share its green energy technology with its BRI partners by increasing its financing for and construction of renewable energy.

The world is watching. Xi made his commitment on the world’s stage and it is world leaders that need to hold China to it while urging that China also begin to phase out coal power domestically and that this specific pledge be combined with previous commitments to move BRI in a more environmentally sustainable direction.

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Source: Council on Foreign Relations. By J.Hillman & D.Sacks

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China is leapfrogging the world when...

Earlier this month, one of China's largest conglomerates held a conference in Beijing to address what the company plans to do in support of the government's environmental targets.

One by one, every one of the company's dozens of large subsidiaries, from its financial arms to its specialty steelmaking unit, announced ambitious goals.

Such events are now a feature of corporate life in China. Beijing's ambitious plans to move to peak carbon emissions by 2030 and net zero emissions by 2060 may be a top-down initiative from Xi Jinping himself, but it is being widely embraced not just by the most privileged economic entities, but private entrepreneurs and civil society at large.

Outside China, though, there is widespread questioning of the authenticity of Beijing's commitment, as well as its ability to meet its objectives. Many analysts also question whether a commitment to greener growth inevitably means slower growth.

"China could be trapped in contradictory goals of economic development and emissions reductions," noted Helen Qiao, chief Asia economist for Bank of America in a recent report.

That likely is far too pessimistic. China is well on its way to leapfrogging the rest of the world in everything to do with a cleaner environment. One of Beijing's most powerful tools is by forcing companies to focus on environmental, social and corporate governance, which has become a major catalyst for higher-quality growth, improving the standard of living for its people and retain its edge as the manufacturing workshop of the world.

China will use recent technological advances to make itself cleaner and greener, while simultaneously keeping its edge in value-added manufacturing.

Before last year, China was spending 2.2 trillion yuan ($341 billion) every year on environment-related investment. Beginning in 2030, it plans to increase that to almost 4 trillion yuan. Moreover, for every unit of gross domestic product, China has been reducing carbon emissions at an accelerating rate, leading some economists to wrongly suggest that growth in China was slowing.

Economists calculate that the shift to new, ESG-related technologies could generate 40 million net new jobs.

China already is the world's workplace for making solar panels and wind turbines, the innards of the renewables that will inevitably replace fossil fuels, with its companies accounting for up to 80% of all global production. Given their scale, the cost of renewables becomes more affordable and relatively attractive compared to coal with every passing year.

China has equally ambitious goals for electric vehicles, indeed analysts estimate that 20% of all car sales will be electric by 2025, at a time when other leading carmakers elsewhere are still more vested in hybrid vehicles. Ongoing urbanization increasingly means smarter cities with new infrastructures such as widely available charging stations.

A Seres Huawei Smart Selection SF5 electric vehicle is on display for sale in Shanghai on May 3:

20% of all car sales will be electric by 2025. © VCG/Getty Images

That is good news not only for China and its neighbors -- and the rest of the world. Today, the mainland accounts for 29% of all global carbon emissions.

Climb a mountain today in the northern alps of Japan and new snow is covered by acid rain carried by easterly winds from thermal power plants across the sea. Indeed, many analysts contemplating toxic air, polluted rivers and water shortages leading to drought and sandstorms, until recently wondered if China was on the edge of some tipping point into environmental Armageddon.

But China has been steadily reducing its dependence on coal, with the carbon emissions that follow set to decline from their peak by 2030. Moreover, China is already in the process of transforming its old economy sectors.

In the past, for example, steel making accounted for 17% of the country's total emissions, or 5% of all global emissions, according to data from Goldman Sachs. But the combination of stern edicts on capacity cuts, and cleaner technologies being introduced in steel furnaces, are reducing those emissions over time. The same is also true for aluminum and cement.

There will be winners and losers from these trends -- beyond newly unemployed coal miners who number somewhere between 2.7 million and 6 million workers. Fossil fuel-rich regions in China's heartland will inevitably become poorer, leading to widening disparities with ever wealthier coastal provinces.

There will be defaults among companies in discredited sectors -- as well as in those new economy companies that are mismanaged. It is hard to imagine that every new electric carmaker or battery producer will succeed. Inflation is already rising as new environmental regulations force capacity cuts in commodities processing, pushing up prices.

Still, even as China voices these ambitious targets, it is still building coal-fired plants and -- ironically -- the processes involved in producing things like solar panels are not themselves always the cleanest technology. Despite the inevitable pain, though, most Chinese people believe that green, not oil, is the new gold.

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Source: Nikkei Asia

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China’s Five Year Plan 2021-2025:...

The Chinese government has unveiled the summary of the country’s five-year plan for 2021 to 2025, amid a heavy smog in Beijing. Among other things, the plan sets a target of “basically eliminating” heavy air pollution days by 2025.

As China is responsible for almost 30% of global energy sector CO2 emissions, and emissions have returned to growth in recent years, the new plan gives critical insight into how fast the country is planning to start limiting emissions growth and making progress towards the goal of achieving carbon neutrality by 2060, announced last autumn.

The plan sets a target of 20% non-fossil energy in total energy consumption, and a target to reduce the CO2 emissions per unit of GDP by 18% from 2020 to 2025. Most notable was that two targets that have regularly featured in earlier five-year plans were dropped: a 5-year GDP growth target and a target for limiting total energy consumption. CO2 intensity fell by 18.8% from 2015 to 2020, so the 18% target does not represent an acceleration from past targets and trends.The target for reducing energy consumption per unit of GDP is lower than in earlier plans: 13.5%, compared with 15% in the previous one.

Less obsessed about GDP?

The abandonment of GDP targets, long the cornerstone of the five-year planning process, is momentous, even if it was largely expected. The government will continue to set annual targets for GDP growth, only doing away with a fixed five-year target. This is potentially good news for the environment, as it should give the government more flexibility to pursue other targets, and reduce the pressure to prop up GDP numbers at all costs. The lack of a GDP target does however mean that the implications of the CO2 intensity target are harder to assess.

For 2021, the government is targeting a 6% GDP growth rate. At this rate of growth, the intensity target doesn’t do much at all to limit the growth in CO2 emissions. However, the targeted growth rate in the following years could be lower, as this year is expected to see a rebound from the COVID-19 economic shock and low growth rate last year. China has also tended to significantly over-achieve the intensity targets.

Slowing down emissions growth – maybe

China’s CO2 emissions increased by approximately 1.7% per year from 2015 to 2020, and kept growing at 1.5% even in 2020, despite the pandemic. Assuming that GDP growth over the period averages 5.5%, CO2 emissions could grow at 1.1% from 2020 to 2025, and still meet all the targets announced today. This would be a slight deceleration compared with past years. However, if there is a strong rebound in growth this year and the rest of the period averages 6%, CO2 emission growth could even accelerate under these targets, compared with the past five years.

GDP growth, 2022-2025, per year	5%	5.5%	6.0%
Energy intensity reduction 2020-2025	-13.5%	-13.5%	-13.5%
Total energy consumption growth, 2021-2025, per year	2.3%	2.7%	3.1%
CO2 intensity reduction 2020-20	-18.9%	-18.9%	-18.9%
Coal consumption growth, 2021-2025, per year	0.1%	0.5%	0.9%
Oil consumption growth, 2021-2025, per year	2.7%	3.1%	3.5%
Gas consumption growth, 2021-2025, per year	5.2%	5.6%	6.0%
Non-fossil energy production growth, 2021-2025, per year	7.1%	7.5%	7.9%
CO2 emissions growth, 2021-2025, per year	1.0%	1.4%	1.7%

Indicative calculations of China’s energy consumption and CO2 emissions trends until 2025 under the five-year plan targets, depending on the GDP growth rate. The table assumes that GDP growth in 2021 will be 6.5% and looks at the effect of different growth rates in the following years. The calculations assume that the energy intensity target (-13.5%) and non-fossil energy target (20%) are met but not exceeded – in reality, both could be exceeded. The assumption about the shares of coal, oil and gas is 51%, 19% and 10%, respectively; varying this assumption has only a minor impact on the results for CO2.

Without the energy consumption control target, there’s even less in this five-year plan to constrain emissions growth than in the previous ones. As a result, there’s no guarantee that emissions growth will slow down, let alone stop, by 2025. So it’s leaving the decisions about how fast to start limiting emissions growth to the energy sector five-year plan and other plans expected at the end of the year.

The other headline target, a share of 20% non-fossil energy in total energy consumption by 2025, also largely continues the trend of the past years: the share increased from 12.3% in 2015 to 15.9% in 2020, a 3.6%-point gain. Therefore, the targeted 4.1% increase by 2025 signals a modest acceleration.

A slightly more promising sign was a recent statement by the China Coal Association that coal consumption in 2025 would be capped at 4.2 billion tonnes – close to current level. This target would likely be included in the energy sector plan later, and indicates that the government could target peaking coal consumption before 2025. However, oil and gas consumption are still expected to grow, so peaking and declining CO2 emissions requires coal consumption to not only stop growing but to begin falling again in absolute terms.

A shot in the arm for nuclear?

In a bit of a surprise, the plan includes a target for nuclear power capacity in 2025, of 70 gigawatts, from 52 gigawatts currently. This is less than the increase achieved from 2015 to 2020, but a surprisingly ambitious target given that there is much less capacity under construction currently than is needed to get there. So it can be read as a high-level signal to speed up new projects – such a specific capacity target would usually be relegated to more detailed sectoral plans.

A “major push” for clean energy – while also investing in coal

No specific targets were set for wind, solar, hydro, coal or other energy sources, as was expected – this is a high-level “plan of plans”. However, the language in the document promises a “major push” for clean energy. A wind&solar capacity target of 1200GW by 2030 was already announced by Xi Jinping in December – although more will very likely be needed to hit the other targets, particularly the target for 25% non-fossil energy in 2030. The plans also contain language on “promoting the clean use of coal”, so the contradiction between targeting low-carbon development and continuing to invest in coal and fossil fuels still seems stark in China’s plans.

Overall, the picture is one of very gradual progress in aligning China’s energy and emissions trends with the target of achieving carbon neutrality by 2060. The overall five-year plan just left the decision about how fast to start curbing emissions growth and displacing fossil energy to the sectoral plans expected later this year – particularly the energy sector five-year plan and the CO2 peaking action plan. The central contradiction between expanding the smokestack economy and promoting green growth appears unresolved.

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Source: EnergyandCleanAir.org

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The race for Renewable Energy Domination...

At the start of 2017, China announced that it would invest $360 billion in renewable energy by 2020 and scrap plans to build 85 coal-fired power plants. In March, Chinese authorities reported that the country was already exceeding official targets for energy efficiency, carbon intensity, and the share of clean energy sources. And just last month, China’s energy regulator, the National Energy Administration, rolled out new measures to reduce the country’s dependence on coal.

These are just the latest indicators that China is at the center of a global energy transformation, which is being driven by technological change and the falling cost of renewables. But China is not just investing in renewables and phasing out coal. It also accounts for a growing share of global energy demand, meaning that its economy’s continuing shift toward service- and consumption-led growth will reshape the resource sector worldwide.

At the same time, various other factors are reducing global resource consumption, including increased energy efficiency in residential, industrial, and commercial buildings, and lower demand for energy in transportation, owing to the proliferation of autonomous vehicles and ride sharing.

According to Beyond the Supercycle: How Technology Is Reshaping Resources, a new report from the McKinsey Global Institute (MGI), these trends are slowing the growth of primary energy demand. If rapid adoption of new technologies continues, that demand could peak in 2025. And with less intensive energy use and increased efficiency, energy productivity in the global economy could increase by 40-70% over the next two decades.

While global growth in energy demand is slowing, China’s share of that demand is increasing. By 2035, China may account for 28% of the world’s primary energy demand, up from 23% today, whereas the United States could account for just 12% by 2035, down from 16% today.

China has already made significant progress in reducing its resource intensity: between 1980 and 2010, its economy grew 18-fold, but its energy consumption grew only fivefold. According to World Bank data, that reflects a 70% decline in energy intensity per unit of GDP.

In its 13th Five-Year Plan, the Chinese government aims to reduce energy intensity by a total of 15% between 2016 and 2020. It is already well on its way toward achieving that goal. At China's National People’s Congress earlier this year, Chinese Premier Li Keqiang reported that China’s energy intensity fell by 5% last year alone. Renewables are one reason for China’s declining resource intensity. Hoping to become a world leader in the field, China is already investing more than $100 billion in domestic renewables every year. That is twice the level of US investment in domestic renewable energy and more than the combined annual investment of the US and the European Union.

In addition, China is investing $32 billion – more than any other country – in renewables overseas, with top-tier Chinese companies increasingly taking the lead in global renewable-energy value chains. China’s State Grid Corporation has plans to develop an energy grid that draws on wind turbines and solar panels from around the world. Chinese solar-panel manufacturers are estimated to have a 20% cost advantage over their US peers, owing to economies of scale and more advanced supply-chain development. And Chinese wind-turbine manufacturers, having gradually closed technology gaps, now account for more than 90% of the Chinese domestic market, up from just 25% in 2002.

These trends suggest that China will be a major source of both energy demand and cutting-edge technology, implying that it will have a unique opportunity to provide global leadership. Its experience in reducing energy intensity can serve as a roadmap for developing countries. And its investments in renewables at home and abroad can lead to additional technological breakthroughs that drive down costs for consumers everywhere.

But China will also face challenges as it moves from fossil fuels to renewables within a changing global resource sector. Its economy is still highly dependent on coal, implying sizeable costs as it shifts capacity to other resources such as natural gas and renewables.

Moreover, the construction of solar panels and wind farms in China has outpaced upgrades to its electrical grid, creating a great deal of waste. And Chinese producers, like most others, are feeling increasing pressure to reduce costs and improve efficiency to make up for slower demand growth worldwide. Despite these hurdles, technological innovation should help Chinese producers realize productivity gains and deliver savings to consumers. According to MGI, by 2035, changes in the supply and demand for major commodities could result in total cost savings of $900 billion to $1.6 trillion worldwide.

The scale of these savings will depend not only on how quickly new technology is adopted, but also on how policymakers and companies adapt to their new environment. But, above all, it will depend on China.

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Written By

Jiang Kejun , Senior researcher, Energy Research Institute of China’s National Development and Reform Commission.

Jonathan Woetzel, Director, McKinsey Global Institute

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China, the Green Energy Superpower

Investment in green energy is on the rise, and a world powered entirely by renewables is no longer a distant dream. It is the developing countries however, and China in particular, that is driving this green revolution. And these charts, from the REN21 Renewables 2016 Global Status report and the United Nations Global Trends in Renewable Energy Investment 2016 report, show how China is paving the way to a clean energy future.

1. China has the highest capacity for renewable power production

This chart shows the leading role China is already playing in the green revolution. It currently makes up about a quarter of the global capacity for renewable power, predominantly through wind power.

2. China takes the lead in wind power production

China is also the country with the most wind power capacity, and its lead over the US, in second place, increased by over 30 gigawatts in 2015.

3. Solar power is booming in China

The year 2015 saw huge growth in China’s solar power production. It moved into first place, ahead of previous solar leader Germany.

4. China is the biggest investor in renewable energy

In 2015, China had the biggest financial commitment to renewable energy, investing over $100 billion, an increase from $3 billion just over 10 years ago.

5. China helped push developing countries into the lead

Globally, $286 billion was invested in renewable power and fuels (not including hydro power) in 2015, and for the first time the developing world invested more than developed countries.

Source: World Economic Forum

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New Pollution Action Plan for China

A new set of Environmental regulations on air, water and soil pollution have recently been announced by China`s State Council: the Soil Pollution and Prevention Action Plan (also know as Soil Ten an “extension” of the Water Ten Plan). The plan outlines 10 headline actions split into 35 categories and 231 specific points aimed at making 95% of currently contaminated land fit to reuse for either agricultural purposes or urban development by 2030.

The first national survey on soil quality, released in 2014, showed the gravity of soil pollution. More than 16 percent of the samples taken nationwide were contaminated by heavy metals. Moreover, contaminants were discovered in 19.4 percent of surveyed farmland, 10 percent of forests and 10.4 percent of grassland.

Key targets:

To curb worsening soil pollution by 2020, and control soil pollution risks by 2030, with the aim to create a virtuous cycle in the ecosystem by 2050.
To ensure that over 90% of contaminated land can be utilised safely by 2020, and to increase this to 95% by 2030.
Using the next 2-3 years to focus on large-scale monitoring and finalising plans & laws; reining in chemical industries & heavy metals are key.

Soil pollution is the most difficult to tackle amongst soil, water and air; plus possibly the most expensive. Also, it is not possible to tackle soil pollution without addressing water pollution. Untreated wastewater can contaminate soil and conversely pollutants in soil can be washed into surface & groundwater sources contaminating them.

From the key actions to be taken, the government is signalling that it only intends to get a handle on the total area of contaminated farmland by 2018 and to only establish soil prevention & control related laws by 2020. The Soil Ten Plan singles out 8 specific industries:

Non-ferrous metal extraction & processing
Non-ferrous metal smelting
Oil exploration
Petroleum processing
Chemicals
Coking
Electroplating
Tanning

Action timeline:

By 2016, local governments need to finalise detailed work plans for submission to the relevant ministries;
By 2017, to set up national-level soil environmental quality monitoring points and monitoring networks;
By 2017, provincial soil remediation planning to be finalized and soil remediation result assessment methods to be issued;
By 2018, to finalise investigation of total area of contaminated farmland and assessment of impacts on agricultural products;
By 2020, soil environmental quality monitoring points to cover all the cities and counties; and
By 2020, to establish soil pollution prevention & control related laws and regulation system.

However one glaring challenge in the plan it the relatively limited number of domestic companies with both the experience and infrastructure to clean contaminated land. Foreign companies with the required technologies are already involved in China, albeit participating in pilot projects funded by the World Bank or other international funds.

Analysts have estimated that the soil remediation market could be worth anywhere from RMB1-5 trillion, but authorities have struggled to determine who should pay for rehabilitating contaminated land. Many of the inland provinces targeted are not as rich as coastal regions and much of the responsibility for the costs now lies with relatively impoverished local governments.

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China Greentech report 2014.

The China Greentech Initiative (CGTI) has now released its 2014 report. Greener, Smarter, More Productive, the fifth in a series that was first launched at the World Economic Forum in 2009.

Increased awareness in China of the need to tackle pollution and improve the quality of life in Chinese cities is driving some significant changes in policy. The Report contends that to maintain a national GDP growth target of 7.5% through 2014, Chinese economic policy must be accompanied by an equally resolute vision for cleaner growth. Building on the new approach outlined in last year’s report, the latest edition offers a path forward for China to adopt a greener, smarter and more productive model of development.

The 2014 report asserts that there is a profound opportunity for leading companies to integrate their products and services to customize replicable solutions for China’s project owners and governments in the areas of industrial efficiency, distributed energy, greener buildings and cleaner mobility.

Since the release of the first report, China has emerged as an innovative driver of greentech industry development; and is fast becoming a hub for more productive practices and implementation that can be profitably adopted by global industry stakeholders. The report outlines ambitious new central and local government plans for pollution reduction; and highlights how forward-thinking companies can use innovative technologies, best practices, and global collaboration models to accelerate China's sustainable growth.

Please click here to downlaod the report as a PDF.

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The China Greentech Report 2013. At...

The fourth Report in this series by the China Greentech Initiative, the 2013 Report examines China’s current pollution challenges and assesses the progress made in meeting energy and environmental targets set within the 12th Five-Year Plan. The Report concludes that quantitative targets alone are insufficient for China to move towards a more sustainable model of development, and suggests a new eight-point approach focused on measurable outcomes. Also featured in the 2013 Report are five “Visions and Roadmaps” developed by CGTI partner companies and government advisors across key greentech ecosystems: Built Environment, Electric Vehicles, Low Carbon Eco-Cities, Next-Generation Energy Value Chains, and Sustainability.

To download your free digital English copy of The China Greentech Report 2013: China at a Crossroads, please visit http://report.china-greentech.com.

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China Renewable Energy Sector report...

China`s appetite for renewables will not dissapear anytime soon, it likely fulfilled, and maybe well exceeded, its goals for 10 GW of solar PV installations in 2013. This report is a sector overview of current developments, for the report please click here.

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