The conclusion of the National People’s Congress was met with frustration by international climate commentators. Expectations were high that China might use its 14th Five Year Plan to outline ambitious actions on climate, following its recent surprise announcement that it would achieve carbon net-zero by 2060. However, while these hopes largely failed to materialize, we believe that President Xi may be biding his time to unveil more detail ahead of COP26 in November. We believe this is an inflection point in China’s green development, ushered in by significant structural shifts toward a market-based approach and increased delegation away from the center.

The road to the National People’s Congress

China initially committed to reach peak carbon emission around 2030 in its nationally determined contributions (NDC) submitted under the 2015 Paris Agreement. In September 2020, alongside the landmark announcement that it would achieve carbon neutrality by 2060, China stated that it would strengthen its NDC and peak emissions before 2030. 

In December 2020, on the fifth anniversary of the Paris summit, China updated this commitment with more details, including pledges to 1) reduce carbon emissions per unit of GDP by more than 65% from the 2005 level; 2) increase non-fossil fuels in primary energy consumption to around 25%; 3) increase the forest stock volume by six billion cubic meters from the 2005 level; and 4) increase wind and solar power generation capacity to at least 1,200 GW. 

Given these developments, international commentators had expected a further ratcheting up of China’s climate targets within the Five-Year Plan, for example, bringing forward the peak emissions target ahead of 2030. However, we believe that President Xi may well be holding back further statements of ambition in order to maximize their impact in the run up to COP26. Triggers for any further measures could include an updated US pledge (expected in April at the Biden-hosted Major Economies Meeting) or as the outcome of bilateral talks with the new US administration. This was the pattern of target escalation between leading emitters in the run up to the conference in Paris in 2015.

Delegation away from the center 

While we were also disappointed that there is no clear target to restrict new coal capacity in the Five Year Plan, we think this, to a large extent, reflects a change of approach at the central government level. We are observing a shift away from detailed central planning to the setting of high-level goals, such as renewable energy consumption mix for each province, which are then delegated to provincial and local officials to work out how they will be achieved. This approach aligns the achievement of the high-level goals with the career development of local officials. In our view this is likely to be more effective than the previous approach whereby local governments had an embedded interest in building out more coal capacity. 

Under the new approach, local governments will need to either build out enough local renewable capacity or purchase renewable energy from other provinces. This latter option is, obviously, more expensive and more negative for local investment, employment and economic growth, so building renewable energy locally (rather than coal capacity) will be the obvious choice. 

Carbon trading scheme

In addition to the “delegation” to local governments of the means to meet centrally set goals, China is indicating a medium- to long-term intention to shift away from top-down “command-and-control” administrative directives toward market-based policies such as carbon pricing, which could help wean China off coal as a fuel for both electricity generation and industry.

While the national carbon trading scheme launched last month will only have an immediate impact on smaller coal-fired generators due to its narrow sector coverage, generous allocation of quotas and likely low prices, its reach and impact should ratchet up over time.

It is worth bearing mind that EU carbon markets were initially ineffective at sufficiently pricing carbon and encouraging fuel switching, with the price remaining below €5 per tonne between 2005 and 2018. However, once the regulations were tweaked and refined (and an effective carbon central bank introduced), the EU emissions trading system is now finally doing what it set out to do and facilitating the transition away from coal.

An inflection point for green development

Following the approval of the 14th Five Year Plan by the National People’s Congress, the relevant ministries and local governments will form and finalize their more detailed plans during the second half of the year. This will focus on how to achieve high-level goals, including those related to renewable energy and carbon peaking, and some provinces and cities have already announced earlier peak years. 

We remain convinced that we are at an inflection point of the green development in China. This is being borne out by: 1) clean solutions such as solar, wind and electric vehicles becoming increasingly cost competitive; 2) a continued emphasis on energy efficiency (the Five Year Plan targets 14% reduction in energy consumption per unit GDP and 18% reduction of CO2 intensity of GDP); and 3) a transition from a quantity-driven to a quality-driven approach in infrastructure investment and pollution control effort as a whole.

This is reinforced by recent announcements around plans for new low-carbon technologies, such as state-owned Sinopec’s plans to build the largest hydrogen refueling network in the world, with 1,000 refueling stations by 2025. 

Overall, we remain very optimistic that environmental equities in our key opportunity set, including renewables, energy efficiency, pollution control, water and waste, will continue to benefit from the policy support and investment needed to achieve the goals of peaking emissions before 2030 and reaching carbon neutrality by 2060. 

Oscar Yang

Senior Portfolio Manager

Oscar is Senior Portfolio Manager and co-manages the Asian Environmental Markets Strategy and Asian Opportunities Strategy. He has broad expertise in the environmental markets sub-sectors and research responsibility covering the entire universe with a focus on the Asia-Pacific region.

Oscar joined Impax in 2011 as an analyst focusing on Asia-Pacific research. He began his career in the financial industry and environmental markets in 2007, previously working at Origo Partners as an investment associate and assistant fund manager, and prior to that at Midas Holdings.

Oscar has an MSc from the London School of Economics.

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David Li

Senior Portfolio Manager

David co-manages both the Asian Environmental Markets Strategy and Asian Opportunities Strategy with Oscar Yang. He has broad expertise of environmental markets sub-sectors and researches stocks globally with a focus on the Asia-Pacific region.

David joined Impax in 2007, initially on secondment from Ajia Partners, before becoming a full-time employee in 2011. He began his career in the investment industry in 1997. He was the Head of Small and Mid-Cap Research for Asia ex-Japan at Deutsche Bank Securities, and Head of Regional Media Research at ING Securities.

David graduated from the University of New South Wales in Australia with majors in Accounting and Finance. David also has experience in auditing and is a qualified CPA and CFA.

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Chris Dodwell

Head of Policy & Advocacy

Chris is a climate change and environmental policy expert with over 25 years’ public and private sector experience. He is responsible for managing Impax’s engagement in the development of policy issues and providing insights on policy to the firm’s investment teams.

Before joining Impax in 2019 Chris worked at Ricardo Energy & Environment for eight years as Director of Climate Change, Clean Growth and Strategic Partnerships. Here he was responsible for overseeing key projects in the aforementioned areas as well as building relationships with clients in the public and financial services sectors. Prior to this he worked for 10 years at the heart of the UK Government’s work on climate change, including leading the UK’s implementation of the EU Emissions Trading System and heading the UK Delegation to the United Nations Framework Convention on Climate Change (UNFCCC). Chris began his career as a solicitor at Freshfields Bruckhaus Deringer where he worked on a variety of civil, criminal and public law litigation relating to the impact of pollution on the environment and human health.

Chris graduated with a BA Hons in Classics from the University of Cambridge in 1990 and later went on to achieve a Master of Laws in Environmental Law from University College London in 2002.

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