China’s net-zero ambitions: the next Five-Year Plan will be critical for an accelerated energy transition

In recent decades, China has moved to the centre of the global economy. Thanks to its economic reforms, the country pulled hundreds of millions of people out of poverty and witnessed an unprecedented level of urbanization and economic activity. From European luxury companies selling to affluent Chinese consumers to Latin American copper mines supplying material for its infrastructure, China’s modern economic expansion has been a major driver of global growth.

However, these achievements have had significant side effects. The need to develop a new urban building stock and infrastructure, combined with the inherited economic structure from the pre-reform period, meant a very high reliance on energy-intensive heavy industry. China accounts for around half of global consumption of steel, copper, aluminium and cement. While important progress was made in improving the energy efficiency of individual industrial facilities and adopting state-of-the-art technology, the structure of Chinese growth has locked-in high levels of energy intensity.

With abundant coal supplies in China, coal-based power generation was ramped up to meet rapidly growing electricity demand. The share of coal in China’s energy mix, for example, is one-and-a-half times higher than it was in the United States in 1950.

This combination of an energy-intensive growth model and a carbon-intensive energy supply created an enormous carbon footprint. In the last 20 years, CO2 emissions in China grew six times as fast as in the rest of the world, and China accounted for almost two-thirds of the growth in global CO2 emissions. By the time Covid-19 struck, China had higher per capita CO2 emissions than the European Union. 

In this context, the statement by President Xi Jinping to the United Nations General Assembly in September that China would strive to be carbon neutral by 2060 should not be seen as a technical change in the details of energy and environmental policy. Rather, it potentially represents the biggest climate undertaking ever made by any country.

Achieving this goal of net-zero emissions would represent a milestone in modern Chinese history comparable to 1949. To do so, would require China to quickly embark on an ambitious multi-decade effort to transform its economy, as it did after 1978. Net zero would have to serve as a guiding principle for policymaking that is comprehensively embedded into structural reforms, investment policies and innovation priorities.

China is not starting with a blank slate. Efforts to expand renewables and energy efficiency over the last decade provide a solid foundation on which to build. Nevertheless, these efforts in need to be deepened and accelerated all dimensions, and the coming ten years will have to become a decade of action.

China has already made impressive progress on reducing local air pollution to “make skies blue again.” But achieving a net-zero CO2 emissions is far more difficult than simply reducing particulate or sulphur dioxide emissions. It would require a lasting nationwide transformation of the entire economy over the next 40 years, a structural change comparable in ambition to the reforms that extensively overhauled the country’s economy starting in the late 1970s.

If done right, it would not only create a new low-carbon energy system, but also a new economy and society. A zero carbon target of 2060 for China is broadly consistent with the IEA’s Sustainable Development Scenario, which depicts a global transition compatible with the goals of the Paris Agreement, as well as international objectives for reducing air pollution and increasing access to energy. 

This ambitious journey should start with the Chinese government’s 14th Five-Year Plan, which is under preparation now and will shape the Chinese economy in the 2020s. A marathon cannot be won only by sprinting at the end. Given the size of the Chinese energy system and the amount of low-carbon energy it will need by mid-century, a rapidly accelerated deployment of already available tools like renewable electricity and energy efficient technologies is essential. This would not only create environmental benefits but could strengthen the economic recovery from the coronavirus shock. If this deployment were to take place at a speed and scale consistent with efforts to limit the global temperature rise to 2°C, then China’s CO2 emissions would not simply peak by 2030 – they would decline by an amount greater than the current emissions of India.

The new Five-Year Plan should aim to reduce greenhouse gas emissions while maintaining sustained economic development. To do this, it will need to strive to develop sectors with a low carbon intensity such as digital technologies and other high-tech industries. It will also have to promote a switch to low-carbon growth models by encouraging innovation and the expansion of the services sector. It should deal with emissions from existing energy-intensive assets, control the development of energy-intensive and heavy chemical industries, and optimize the structure of industrial investment. And it would need to set the conditions to continue scaling up investment and innovation in clean energy technologies. Overall, the new Five-Year Plan should serve as a credible framework for a substantially enhanced Nationally Determined Contribution by China for the implementation of the Paris Agreement that goes significantly beyond China’s original 2015 submission.

The IEA’s analytical and policy design expertise could greatly assist China in this challenging undertaking. Recent IEA analysis, especially in the revamped Energy Technology Perspectives series, offers timely advice and analysis on the infrastructure and innovation requirements for rolling out the clean energy technologies that are needed to achieve net-zero emissions objectives. China will have to apply an ambitious and comprehensive set of policies to move along the decarbonisation path in a timely manner.

Low-carbon energy sources are not simple like-for-like replacements for fossil fuels throughout the economy. A credible decarbonisation pathway must achieve a step change in the energy intensity of the economy to maintain prosperity while easing the strains around the necessary deployment of low-carbon energy supplies. In the IEA World Energy Outlook’s Sustainable Development Scenario, which is consistent with President Xi’s 2060 zero-carbon ambition, China’s final energy consumption by mid-century ends up lower than it is today, despite the Chinese economy almost tripling in size. To achieve this in the next three decades, the energy intensity improvement of the Chinese economy will need to reaccelerate almost to the rate observed during the 1980s and 1990s economic restructuring. 

In the Chinese context, this will require progress on two related priorities. First, the broad reforms aimed at rebalancing the Chinese economy and encouraging the growth of the services and high-tech sectors need to continue. By mid-century, the services sector should reach 80% of China’s GDP. This might require tackling incentives in the finance sector and enabling better financing of service enterprises, especially the ones that have been hit by the fallout from the coronavirus epidemic. Regional policy needs to encourage clean growth and retraining of workers in the provinces where conventional heavy industries are concentrated.

Second, China should apply a stringent set of standards and regulations on energy efficiency for buildings, appliances and equipment, and scale up the financing of energy efficiency investment. A strong energy efficiency policy of this kind can support employment in the construction sector and enhance the competitiveness of Chinese appliance manufacturers. For both vehicles and electric motors, China has best-in-class standards, and its energy service companies are highly active, especially in industry. Nevertheless, these efforts need to be further intensified, with innovations in advanced technologies being developed and deployed to upgrade and modernize the industry. 

The electricity sector, currently the single largest source of China’s CO2 emissions, is the decisive area of efforts to tackle climate change. It is also the platform for the most rapidly developing and scalable low-carbon technologies, such as wind and solar. Moreover, electrification offers a promising option to replace fossil fuels in many areas of transport and heating. A consistent, system-level effort is needed for China’s energy transition to benefit from the opportunities of the transformation of the electricity. For example, if an electric car charges on electricity generated by coal power – often the case in China today – the climate impact is worse than driving a conventional petrol-powered car.

First and foremost, clean power generation sources need to scale up considerably faster. Wind and solar will have to do a lot of the heavy lifting, with deployment significantly exceeding the 2018 peak year-after-year. But China’s successful programme of building nuclear power plants can also make a major contribution. There is a strong investment appetite for renewables in China. But clear long-term guidance and policy support are needed to leverage it, and the regulatory issues behind the weakness in renewable investment of the past two years should be addressed. Given China’s strong position in clean energy technology value chains, this is also a big driver for economic growth and job creation. The job-creation rate of wind power, solar energy and energy efficiency is between 1.5 and 3 times that of traditional energy industries.

With ever-growing variable renewable production, the power system will need to mobilize flexibility. China’s large hydropower capacity and its newly constructed gas turbines will continue play an instrumental role in this. There is large potential for making demand more flexible and utilizing the growing fleet of electric cars with smarter, more flexible charging.

One unrealized opportunity so far is the country’s very capable large information technology companies, which are currently less active in the clean energy sphere than their US counterparts. International experience suggests that transparent and competitive markets supported by carbon pricing are effective in guiding the power sector, and in unlocking new business models and flexibility sources. China has started to implement market reforms in the electricity sector. Such reforms  would be beneficial even for a conventional energy system, but China’s announced ambition for its energy transition greatly increases their importance.

China will have to make strategic decisions on its massive coal power plant fleet. If Chinese coal plants emit as much CO2 as they would under continued high utilization, the transition will fail. In fact, beyond 2040 – well within the lifetime of China’s young fleet – there is practically no carbon budget for unabated coal generation. The next Five-Year Plan should set a clear cap on coal capacity and unabated coal use consistent with the long-term transition objective.

The least efficient, most polluting plants would need to shut down. Others would be repurposed for flexible operation, supporting growing renewable production while maintaining electricity security. More recently designed plants are usually capable of this, or their flexibility can be increased at a minor cost. Last but not least, part of the coal fleet can be turned into a low-carbon backbone by being retrofitted with carbon capture technologies.

Carbon capture, utilisation and storage (CCUS) technologies are a good fit for China’s core strengths. CCUS retrofits are chemical engineering projects, well suited for the skills of Chinese industry. A CO2 pipeline system will have to be built, and depleted oil and gas reservoirs will need to be converted into storage facilities. Both those tasks fit naturally with the activities of the Chinese oil majors. Due to geographical and geological reasons, a lot of the investment would be in Northeast China, a region facing economic challenges that would benefit from greater capital inflows. 

China’s industrial sector churns out materials and products that are in demand domestically and around the world. As the “workshop of the world,” Chinese factories alone consume almost as much energy as the European Union’s entire economy. A lot of this industrial capital stock is recent and could continue to operate for decades. All the goods and materials the factories produce are then transported, with Chinese trucks representing 4% of total global oil demand. Out of the top ten container ports in the world, five are along China’s southeast coastline between Shanghai and Guangzhou. Industry often requires high temperature heat where the replacement of fossil fuels is difficult. In some cases, significant process emissions are added to fossil fuel use. In long-distance transport, cost and weight considerations make oil the dominant fuel.

There is no doubt that electrification will be extended to light vehicles and even to some extent to heat and industry as well. Hydrogen offers an opportunity to indirectly extend electricity’s reach, and it can be produced by increasingly abundant renewables, including in Western China. Hydrogen can power trucks, replace coal in steel mills, and serve as a building block for some primary chemicals. While the basic scientific principles are well understood, most of these technologies are at the demonstration or prototype stage. China already has important R&D programs and pilot projects in these fields, which should continue and accelerate. There is a need for China to develop a national hydrogen strategy to guide the sustainable development of the burgeoning hydrogen industry. China is uniquely positioned to bridge the “valley of death” between R&D and mass deployment, given its investment capability and policy institutions.

In addition to its contribution to the electricity sector, CCUS is perhaps even more important for Chinese industry. Industrial CCUS applications are often cost efficient and will enable deep emission cuts from China’s modern industrial facilities. While energy system analysis clearly shows that China has by far the largest potential role for CCUS – given its large industrial sector and young facilities – its current deployment policies need to become dramatically more ambitious. Of more than 40 CCUS projects in development around the world, only 4 are in China. CCUS development is strongly policy dependent, and China will need to put in place an appropriate investment framework. Investment  in both CCUS and hydrogen can play a major role in a sustainability oriented economic recovery effort.

Average age and typical lifetime of assets in the iron and steel and cement industries, China

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Average age and typical lifetime of assets in the chemical industry, China

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A dedicated IEA report will investigate China’s potential for CCUS and hydrogen and advise on the regulatory and infrastructure aspects of kick-starting these key technologies.

There is still considerable uncertainty about the exact technology pathways: how far direct electrification can be pushed and to what extent facilities should use CCUS or convert to hydrogen. These are not purely technical questions. The Chinese government will need to reflect on the social and regional implications and choose a pathway best suited to the context.

A Chinese energy transition has a great potential to help the rest of the world move faster as well. It is Chinese mass manufacturing that turned solar panels from a Western European luxury to the cheapest clean energy source that is transforming Africa’s energy prospects. China has the potential to repeat this for carbon capture, hydrogen and a broad range of new industrial processes. 

A Chinese energy transition strategy will need to take into account the geographical challenges of resource and population distribution. The highly populated, industrialized eastern coastal provinces have some of the highest densities of energy use in the world. It is difficult to envisage them being self-sufficient based purely on low-carbon energy, although nuclear power and offshore wind will certainly help. Still, China will need to plan to produce large proportions of its clean energy in western parts of the country and then transport it to its eastern urban centres in the form of electricity or hydrogen.

The ongoing programme of direct current transmission rollout will play a major role. In addition, new pipeline systems for both hydrogen and CO2 will be needed. Electric vehicle charging stations will have to be rolled out, integrated digitally and connected to a reinforced distribution grid. The Chinese high-speed train network replaces much more oil than all the electric cars in the world combined. But transport demand within the country has grown so rapidly that even the massive new rail network has only served so far to slow down the growth of the domestic aviation industry. Within cities, public transport, shared mobility services and urban design that favours walking and cycling will all play a role. The journey towards a zero-carbon society is a major task in terms of infrastructure and should be integrated into planning and investment decisions.

To realize President Xi’s 2060 net zero announcement, huge challenges will need to be overcome, as highlighted by recent IEA analysis. Given its recent industrialization, the fleet of coal plants, steel mills and cement factories in China are young. And due to the high share of industry and construction in the Chinese economy, the reliance on hard-to-abate sectors is significantly higher than the global average. On the other hand, China is the biggest investor in low-carbon energy sources and has strong technological capabilities. Its industrial value chains already support major wind, solar, nuclear and electricity storage industries. It has an unparalleled ability to develop new infrastructure and industrial systems, and it has been scaling up its innovation capabilities. While the barriers are real, China can muster exceptional resources to tackle them.

Share of reliance on hard to abate sectors and role in key low-carbon technologies, China vs. the world

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Due to the scale of the Chinese energy system, a credible 2060 zero-carbon pathway involves a strong effort in the 2020s, which will need to become a decade of dedicated action and accelerated progress. The 14th Five-Year Plan under development should decisively steer the country’s economic structure, energy use and clean energy deployment towards the zero-carbon goal and should form the foundation of a much more ambitious Chinese NDC commitment for 2030.

China’s aim to reach net zero should also be integrated into its investment priorities for international economic and energy engagement. Given its manufacturing skills and financing capabilities, China can play a proactive role in helping clean energy transitions in partner countries. Put another way, China should avoid international investments that would be inconsistent with its own domestic clean-energy ambitions.

The transition to a zero-carbon society requires a consistent, all-of-government effort – and it offers major opportunities. It has the potential to generate growth and employment in China and accelerate clean energy progress in the rest of the world. These benefits will not materialize spontaneously. They will require a strong set of policies applied in a consistent fashion. In most cases, the measures already initiated point in the right direction, but they need to be followed through and implemented in a robust and comprehensive fashion.

Humanity stands at a crossroads in its efforts to tackle climate change. By putting clean energy investment into the heart of their economic recovery efforts, governments can ensure that 2020 is not just a temporary recession-driven dip in emissions, but the start of a rapid structural decline. An accelerated Chinese energy transition incorporated into the next Five-Year Plan can create a critical inflection point in China and help international efforts for a more robust global transition.

The IEA’s longstanding co-operation with the Chinese government on energy issues has progressed in recent years, with China becoming an Association country of the IEA in 2015 and the establishment of a joint work programme in 2017. In this context, the IEA stands ready to provide our independent, rigorous analysis to support China in the huge endeavour of its ambitious transition.