Jupiter Asset Management
China’s Quest to Balance Climate Concerns with Economic Growth
China’s Quest to Balance Climate Concerns with Economic Growth
China’s Quest to Balance Climate Concerns with Economic Growth
Charles Sunnucks, the former fund manager of the Jupiter Emerging & Frontier Income Trust and the author of The Company Valuation Playbook, speaks with Energy.Media about China’s approach to the energy transition. Charles describes the challenges facing China as it seeks to achieve net zero by 2060 – and talks about how the world’s second largest economy may approach decarbonization.
In this episode, Sunnucks notes that China’s approach to economic growth is shifting and explains what this development is likely to mean for the country’s energy policy:
- Over the last few decades, China’s government has succeeded in achieving its goal of fostering and sustaining strong economic growth. But its success has hinged on energy-intensive industrial projects and coal-fired power-generation. As a result, the country has become the world’s largest single source of carbon dioxide emissions and now accounts for more than a quarter of the global total.
- Chinese economic growth is now being driven increasingly by domestic consumers, and not just by export markets. In turn, domestic consumers are aware of the risks that energy-intensive industries pose to their health, and they are pushing for a more balanced approach to economic growth.
- The government has responded to these concerns by imposing new environmental standards. It has also thrown its support behind renewable energy projects – as evidenced by the fact that the country added 100 GW of wind generation capacity in 2020 alone.
- Beijing has also committed to bringing the country’s net CO2 emissions down to zero by 2060. This pledge is likely to affect the allocation of capital for energy projects serving the domestic market and put more regulatory pressure on high-emissions industries.
Thanks, Peter. I think this is an incredibly interesting topic, very relevant for the moment and very real across a number of asset classes. And whether you invest in China or not, betting against Chinese progress when it comes to commitments on climate change sometimes has been a losing strategy may not think of China as a green country. But often low base is making remarkable advancements in this field and hitting the gas so to speak and accelerating efforts forward. This has been most recently demonstrated by China’s premiers radical commitment for the country to be net carbon neutral by 2060. This is important as China is the world’s world’s largest carbon emitter, if we could have the next slide. It’s a country that’s fast growing in scale and size in 2021. As you can see from this chart here, China accounted for about 27% of all greenhouse gases globally. Incidentally, this is a chart by the rhodium group. And as you can see from it, that’s more than the greenhouse gas emissions across the EU, us and all other developed markets combined. So for all the big vegan burger eating, Tesla driving, soy latte drinking, it really is China that at the end of the day, is where the key is the key cog in terms of change in regard to sustainable energy commitments and transition to a more carbon, carbon free global economy. I’m going to focus on four areas now. And we could go to the next slide, we can just see what these are. The first area is progress at a price. So just go talking about China’s why China is where it is, in terms of environmental issues. The rubber hits the road what China has already done in terms of progressing forward with green commitments, evolution to revolution, what recently their commitments mean. So that comment by President Xi at the UN, saying that committing to being carbon neutral by 2060, what they’ll actually have to do to get there. And finally, importantly, of course, impact both for companies, investors and kind of energy markets in general. What does this ultimately mean? So, over the past handful of decades, due to ambitious economic reforms, China has achieved a miraculous boom in economic activity, pulling millions out of poverty, from coal mines and Chile supplying infrastructure projects to high end European fashion, catering to prosper, prospering Chinese middle class, the effects of China’s ascent rippled across the global economy. And that’s very clear. However, these CIB achievements have come at a cost. China’s progress has relied heavily on energy intensive industry. This is in part inherited from China’s pre reform period, in part due to China’s investment growth model. For example, keep up with an ambitious infrastructure development plan in the period 2012 to 2015. Alone, China used more cement than the US did in the whole of the 20th century. That was subsequent to the global financial crisis package that they put in place to stimulate the economy. As a consequence of this, China leads in many of the global resource markets. So for sources like copper, aluminium and cement, China has over or around half of global demand. China’s rising appetite for energy has largely been met with a carbon intensive supply. plentiful cold resources in China led to coal based power generation becoming the primary means of energy generation. Even now, compared to the US in 1950. The portion of coal in China’s energy mix is around one and a half times greater. The consequences being that particles from coal powered electricity generation in China have created serious health concerns across some of China’s most densely populated cities. And Beijing, for instance, and I spent about five years in Beijing, I love the city. But there is a very clear issue. One example which was cited to me recently was that despite the significant decline in smoking rates in China, lung cancer has nonetheless increased by 60%. Over the past decade, even for electric cars, when fueled on electricity generated by by fossil fuels such a such as coal, the environmental outcome is actually worse than that had it been powered by petrol. So this is a very real issue in China. And as people’s wealth in China increases, increasing Lee they are keen not to simply grow at any price but have a more balanced approach to growth going forward.
This combination of an energy intensive growth model, and a carbon intensive energy supply has created a considerable carbon footprint. In the past 20 years, co2 emissions in China grew six times as fast as the rest of the world, and China accounted for almost two thirds of the growth in global co2 emissions. By the time COVID-19 had struck China had higher Well, it had roughly the same well higher per capita co2 emissions than European Union’s, albeit still below the US, of course, China’s or on to the next point in terms of the agenda, where the rubber hits the road. China has of course already been no shirking wallflower when it comes to energy transition. The country has already been implementing policies to manufacture the environment to manage the environmental impact of its economic development. Heavy Industry, for instance, has been forced to reclaim relocate far from city sentences, and required to meet higher and better environmental standards. In addition, many coal fired power plants have been ordered to shut down entirely. So in Beijing, for example, where I used to live, the city used to have four coal powered power stations, those have now all closed. China also has pressing is also pressing ahead with more sustainable means of energy production. In 2020, for instance, China built almost 100 gigawatts of wind farm capacity, the 60% rise on the year before that made it the greatest increase ever achieved by country and more than the whole world combined in 2019. I’m, of course British and to put 100 gigawatts into perspective myself, that is almost three times the power required for homes across the UK. The UK, of course, having a population of around 60 million. I think we actually got a slide on that if we can move forward to the next slide. Yes, so I mean, this is just 2020. I know it will vary year by year. But but that chart there, that that pie diagram gives you an idea about how important China is the wind and wind den is energy industry alone, followed by by the US. Also, while China is therefore starting off in low base, the country is already demonstrating that as a leading player in sustainable energy. Therefore, to understand the direction and pace of change in sustainable energy markets, the policy from Beijing is important to understand. Another energy market, of course that China is particularly large participant in is solar. If we can move to the next slide. Solar of course, has also been a key pillar to China’s sustainable expansion plans. Despite frankly, large parts of the country not being particularly Sunny, Sunny, the country almost already boasts the world’s largest solar power capacity, nearing almost double the installed capacity of the entire European Union. Moreover, China is a key supplier of solar equipment, dominating production across the supply chain. And in most of the vertical, for example, more than two thirds of poly silicon solar cells and solar modules are now produced in China.
So we’ll just move on to the to the to the next part of the talk evolution to revolution. What is China looking to do? Going forwards now, as well, tremendous progress has already been made. Far more needs to be done. Policymakers based in Beijing, however, are it seems rising to the occasion. And then a speech and by the President Xi, late 2020. Noted he did commit or at least say chart China with target to be carbon neutral by 2060. And actually, Chinese policymakers, by and large, have a pretty good track record of meeting or beating their own targets. And this is radical undertaking for China, considering China’s existing carbon footprint and also very important in considering its existing legacy assets. To meet this China, Target, China will likely need to take a two pronged approach that is reduce energy intensity, and further improve the energy mix. In the first instance, energy intensity reduction gains will primarily be driven by China’s rebalancing of the economy. Less than a decade ago, China is known as the factory of the world dominating production in terms of cheap goods. There’s an export powerhouse. Increasingly however, it is domestic consumption, which is driving growth, rising disposable income, an increasingly educated workforce in the country has, for instance, opened up service sector opportunities, and these are frequently a far less carbon intensive source of growth and In addition, the kind of the kind of services that it’s exporting now, for instance, what it is doing in it in healthcare, again, even if even if it’s even its exports, the global economy will likely be increasingly less carbon intensive going forward. mandating carbon intensity can also be achieved by more stringent standards and regulations on energy efficiency. The scope of such policy can range from factories and industrial equipment through to appliances and buildings. Fortunately, development in this space has also encouraged the type of higher skilled jobs that policymakers are keen to promote in China. The alternative intensity initiatives overhauling China’s energy infrastructure mix is another key undertaking required to meet China’s targets. There’s quite an interesting paper actually on this by the the Oxford Institute on on what China’s commitments would likely meet mean in terms of energy intensity. I think in a lot of these papers, I often take with a pinch of salt so and I thought this one was quite radical. But just to give you an idea of what it was citing, it said just for China to meet its China their targets. Currently around each center of China’s energy still comes from fossil fuels. But for China’s plan to work, it is envisaged that by 2016, only 14% will come from coal, oil and gas by that year. So this has a significant implications in the allocation of capital for domestic energy markets will likely lead to further regulatory pressures on emitters.
The impact of China’s policy implementation, combined with the efforts of other nations will likely become increasingly evident in capital market pricing actions over time. corporates and investors like have been achingly slow to respond to this shift in my view, and indeed, there are still those that there have their head dug firmly into the sand. However, change does not require a belief in manmade climate change. And I fully appreciate that there’s many skeptics over the science and indeed questions over the science. But all it does need as an appreciation that policymakers do believe in it, and are taking considerable actions to combat it. And many companies, of course, are already an mis risk mitigation mode. Although numerous cases the effort is frankly more of a PR push than a strategic operational overhaul, there still remains an outstanding level of cognitive dissonance in this respect. And for some companies, the it’s proven easier to outsource the less savory parts of a production process down the supply chain. I know this because I spent years and almost a decade looking at emerging markets, many, many of these supply chain companies. And I guess one important aspect I learned is is out of sight, however, will not be out of mind. Increasingly as changes required and cost pressures mount and do get passed back up the supply chain. To to those companies as equity investors. The majority of institutional asset managers have in recent years produced extensive investments, investments, they sustainable investments statements, particularly here in the UK, these house very often proved very hard to square with a company’s underlying holdings. Some investors Of course, argue that changes in the price and for an ad for some companies that it likely is, however, in many cases, and I’ll always say in most cases, it is evident that financial markets are far more interested in the next two years than the next 20 years. valuation process. approaches, for example, frequently remain very much anchored in historical book values or recent dividends rather than looking beyond the horizon and understanding what changing companies like in countries like China means to a company’s long term prospects. And as a result, it remains the case that in my view, there’s considerable value at risk, especially for those companies that are exposed to China when it is transitioning and combating some of the kind of higher, higher carbon intensive industries. So in summary, what Warren Buffett famously quipped when only when the tide goes out, do you discover who has been swimming naked? There’s unfortunately, it’s likely to be true for many companies and investors as pressure from regulators and consumers exposes those unwilling to adapt. This will most evident be most evident for holdings exposed to China, where the old model of economic development has been overhauled, and business is no longer as usual. I’m happy to take any questions if there are any.