Achieving carbon neutrality in recent years has become a key policy objective for the Chinese government and has been taking shape in the form a series of domestic policy shifts, yet the path to carbon neutrality remains riddled with obstacles. Within this context, the European Chamber of Commerce in China have published their latest report Carbon Neutrality: The Role of European Business in China’s Race to 2060, The survey was distributed to selected European Chamber working groups and companies over a six week period between September and October 2021, with a total of 55 respondents, in a range of relevant industries such as chemicals and petrochemicals (16%), automotive and automotive components (15%), machinery (9%), and professional services (9%).
The data draws on the expertise of European companies operating in China with extensive experience working on decarbonisation-related challenges in their home markets to outline the key barriers that risk undermining China’s carbon neutrality drive and make suggestions on how best to address them. In a bid to foster deepened EU-China cooperation European companies may be of vital importance in the country’s needs to accelerate its carbon neutrality drive.
EU 2050 & European Companies
The European Union, has long held carbon neutrality as a vital component of its ethos and is already deep into the process of developing and rolling out the European Green Deal, the EU’s main growth strategy to transition the economy to a sustainable economic model with the overarching objective for the EU to become the first climate neutral continent by 2050.
In line with the EU’s pledge to achieve carbon neutrality by 2050, the majority of European companies surveyed in the European Chamber of Commerce’s Annual Business Confidence Survey 2022, a whopping 87 per cent, are targeting carbon neutrality by or before this date, further showcasing the advancement of European business in this area and how it may assist China’s dual carbon goals (Two thirds of European companies in China have set, or are in the process of setting, specific decarbonisation targets for their China operations.)
De-Carbonisation in China: A Snapshot
For China, significant changes began after a virtual address to the 75th UN General Assembly all the way back on September 22nd 2020, when Chinese President Xi Jinping stated that China would deliver a strong emissions-reduction target for the country, with emissions peaking before 2030 and striving to reach carbon neutrality before 2060. These pledges are a significant step forward in the climate ambitions from the world’s largest carbon emitter and the second largest economy,
However, from a business environment perspective, investors should note that such drastic action will pose a significant impact for the transition of many sectors, including energy, transportation, industry and construction. Not to mention, the rapid transformation process also requires technological breakthroughs and large-scale investments, along with existing companies in the marketplace to outline their own carbon neutrality commitments (e.g. Alibaba Group aims to achieve carbon neutrality in its own operations and slash emissions across its supply chains and transportation networks by 2030.)
Challenges to Achieve Carbon Neutrality
China is aiming to achieve carbon neutrality under extremely challenging conditions relative to the rest of the world, as its per capita electricity consumption is continuing to increase and economic growth is also still largely dependent on manufacturing for both domestic consumption and exportation.
Within such circumstances, European companies present in the Chinese marketplace have found such an environment more difficult to reach their own decarbonisation goals. As evidenced in the latest report released by the European Chamber of Commerce in China, Carbon Neutrality: The Role of European Business in China’s Race to 2060, 69 percent of respondents have outlined that they are finding more difficult to achieve their company’s decarbonisation and/or carbon neutrality goals in China, a damning statistic for the country which is the largest emitter of carbon dioxide gas in the world.
As the country seeks to increase investment in climate security in order to create a new economic growth engine & to accelerate sustainable development through the ongoing low-carbon transition, while the ultimate goal to be achieved clear, the path towards attainment is less so.
China’s 14th Five Year Plan (FYP), a top-level policy blueprint for the years 2021-2025 officially endorsed by China’s National People’s Congress (NPC) on March 11th 2021, had carbon neutrality as a pillar of its proposals, however, was without the inclusion of a carbon emissions cap (The cap on emissions has been set for the EU as a whole and continues to decrease annually at an increased annual linear reduction factor of 2.2%.), instead with commitments to reduce energy intensity by 13.5% from 2020 levels, and carbon intensity by 18% (However, it should be noted that the methods and mechanisms for achieving these goals are not yet defined at the time of writing.)
The Chinese Government has subsequently provided broad guidance in the form of its ‘1+N’ policy framework, however, the working document lacks the level of specificity that businesses need in order to make well-informed investment decisions that factor China’s plans into their own global corporate decarbonisation strategies, as 65 per cent of European Chamber members report that a lack of industrial guidance and best practice sharing from the government or NGOs could prevent them from achieving their decarbonisation goals.
The experience that European companies may bring from working in their home markets can also help in this regard, to ensure that policies are practical and implementable, presenting a strong reasoning for the deepening European Union (EU)-China industrial cooperation and welcoming of European companies and technologies.
Opportunities & Barriers
China’s carbon neutrality targets represent a significant investment opportunity for investors, as the country’s environmental, social, and corporate governance (ESG) standards have been aligning with international ESG standards at a rapid pace. Concurrently, China is undertaking one of the largest energy grid transformations towards renewable energy globally.
In December 2020, China released a white paper announcing plans to further open the energy sector during the aforementioned 14th Five Year Plan with the changes purportedly reducing restrictions on foreign investment in coal, oil, and gas power generation and the renewable energy business, offering more opportunities for foreign investors.
Particularly, in the renewable energy sector, although Chinese companies dominate market share (in particular state-owned firms), they do not always have the most advanced technologies and may need to rely on the know-how and expertise of new investors in order to spur on the development required to reach their goals.
Therefore, as there are significant opportunities of collaboration and growth in China’s carbon neutral drive, further removal of legal constraints and formal investment barriers would greatly incentivize foreign investment and would facilitate the deployment of innovative solutions developed by European enterprises in the Chinese marketplace.
There is also the need for a more transparent, open and flexible power market. While China leads globally in installing new renewable energy generation capacity, barriers prevent businesses from fully utilising it. This is a serious challenge for 69 per cent of businesses, whose decarbonisation efforts in China could be derailed without sufficient access to renewable energy.
An increase of renewable energy in China’s energy mix will be pivotal for achieving carbon neutrality. The global decarbonization goals of companies in China and globally prioritize the access to and investment in renewable energy (access to and investment in renewable energy ranked as top priority for both companies in China and globally.)
In order to realize such aims increasing the use of renewable energy is imperative. European businesses are in a strong position to contribute to China’s renewables drive, as well as to comment on associated challenges, by drawing on the experience and successes they have accumulated in their home markets.
China achieving its ambitious aim of reaching carbon neutrality before 2060 would lower global warming projections by around 0.2 to 0.3 degrees celsius and may move global carbon neutrality ahead by 5-10 years, therefore a notable acheivement to strive for not only domestically in China, but for the planet as a whole. Investor confidence is also on China’s side, with over two thirds of European Chamber member companies outlining that they believe that carbon peak and carbon neutral targets can be attained. (Carbon Neutrality: The Role of European Business in China’s Race to 2060)
However, it should be noted that in order for China to accelerate its climate action, companies need to be able to bring their experience, technologies and solutions developed in other jurisdictions into the Chinese market at speed and scale. This will require the removal of formal investment barriers, by way of example, 54 per cent of European businesses operating in the environment sector report they missed opportunities in China in 2021 due to market access restrictions or regulatory barriers, (Carbon Neutrality: The Role of European Business in China’s Race to 2060.) Such undermining of investor confidence acts as a barrier that risk undermining China’s carbon neutrality drive and the global climate.
China’s road to carbon neutrality is littered with complications and challenges along the way, however, European companies seem optimistic according to the latest data projections. Indeed, an overwhelming task to undertake but the opportunities are abound for European investors to contribute to this initiative due to their advanced technologies and expertise.
Finally, it is important to note that we should be wary of passing the costs of carbon reduction solely onto the final consumer. As with all aspects of this energy transition, a balance shall be struck between all stakeholders throughout the value chain and the final prices of our goods and services should not bear the ultimate burden of our sustainable future.