China has history when it comes to embracing market solutions, starting with Deng Xiaoping’s sweeping reforms in the 1980s, which laid the groundwork for the economic miracle that is China today.

That miracle was heavily driven by coal, powering industry and helping to pull nearly a billion people out of poverty.

Now, market forces could once again be at the forefront of central government efforts in China’s revolutionary move to achieve carbon neutrality by 2060, a target that will require not only dramatic improvements in energy efficiency but also moving away from coal as a fuel for both electricity generation and heavy industry.

The target stunned the world when it was announced by President Xi Jinping in September last year because it was the first time China had committed to reducing emissions, rather than just reducing the carbon intensity of its economic growth.  Achieving it will require a massive shift in the world’s largest carbon emitter’s energy mix, while making big strides in advancing the technology behind a host of renewable energy drivers.

All eyes are now on the unveiling of Beijing’s next Five-Year Plan, which covers 2021 to 2025, at the National People’s Congress in March. This is likely to boost spending on national defence, technological self-sufficiency and public welfare, in pursuit of the Communist Party’s goal of building a “great modern socialist nation”.

But environmental objectives will also feature prominently, with the Congress likely to reveal what policy buttons China will push to achieve its net-zero target.

It’s a target freighted with huge promise for the planet. The non-profit research group Climate Action Tracker (CAT) says that if China achieves its net-zero target this would lower global warming projections by 0.2 – 0.3 degrees centigrade. With the new US administration of President Joe Biden rolling back its predecessor’s climate change approach, the prospect of reaching the Paris Agreement’s 1.5 degrees Celsius warming limit target has further increased given that China, the US and EU account for 45% of all greenhouse gas emissions.

Emissions trading

The plan’s centrepiece is a national carbon emissions trading scheme (ETS) — which officially launched for the power sector on February 1 — that will be the largest in the world, overtaking that operated by the European Union, according to the International Energy Agency (IEA). The scheme will move from the power sector, then to petrochemicals, chemicals, construction materials, steel and non-ferrous metals, paper, and domestic aviation.

Thermal generation accounts for about 40% of carbon dioxide emissions in China, but that sector alone is responsible for twice the emissions of the EU carbon market.

Yet there is a tension between Beijing’s ambition and the reality of coal’s continued role in powering China. Most analysts project a continued increase in coal-fired power generation over the next five years. That’s because power demand will be sufficiently high — thanks to continued economic growth — that renewables and other power generation sources will not be anywhere near enough to satisfy demand. Coal accounted for almost 58% of China’s energy use in 2019, and capacity actually increased from 2017 to 2019.

The country’s power sector, as represented by the China Electricity Council, is calling for the aggressive expansion of coal-fired generation — and finding a receptive audience among local governments eager to deliver economic growth in a country where meeting official growth targets is an important part of regional and local officials’ jobs.

Moreover, shutting down or phasing out coal-fired power plants could lead to awkward unemployment and social impacts in provinces heavily reliant on coal, such as Shanxi, where coal accounts for about 20% of the workforce. Retraining and redeploying workers will not be an easy task as it takes time to retrain workers let go from coal plants to qualify them for jobs in the fast-growing renewables sector. 

Nonetheless, we think policy is the greater force pushing in the opposite direction, with power sector reforms, pollution-related curbs on industry production and the introduction of carbon pricing all likely to weigh on the economics of fossil generation. While it is never wise to generalise about policy signals in China, it was notable in January when government inspectors came down hard on the country’s National Energy Administration for failing to control coal-fired power in China’s polluted eastern provinces.

This growing focus on China’s green economy has made headlines globally — and many bellwether stocks expensive.  However, the depth and breadth of the country’s long-term decarbonisation means that considerable opportunities will continue to present themselves.


Let’s look at renewables, where the challenge and the upside are both significant. UBS believes that non-fossil fuel energy consumption (mostly renewables such as wind and solar) would need to account for 85% of the primary energy mix by 2060 to meet China’s net-zero target. 

The tailwinds are encouraging. Declaring in January that renewables were “immune from COVID-19” the IEA’s head, Fatih Birol, added that such energy sources were set to become the largest source of generation by 2025, overtaking coal.

For its part, the Chinese government has committed to investing $15 trillion in renewables over the next 40 years. Goldman Sachs believes that China’s net zero ambitions could translate into a $16 trillion “clean tech” infrastructure opportunity by 2060, creating about 40 million jobs.

In order to deliver China’s 2060 goal, the annual rate of installation of renewables infrastructure would need to increase by 2.5 times to 220 gigawatts (GW), compared with the current run rate of 75 GW.  Helpfully, China’s green financing framework is encouraging the banking system to shift lending in that direction.

Encouragingly, economies of scale have recently started to kick in for renewables as subsidies have run off, and there is now a thriving domestic market for solar.  Wind-powered projects are not yet enjoying grid-parity and there is a “cost curve” for some parts of the sector, such as electric vehicles (EVs), which still rely on a degree of subsidy. But that cost curve is likely to come down as technologies become more commercially applicable and are increasingly in demand as affordability improves.

Some estimates say that if battery costs keep falling at their current rate, the cost gap with conventional vehicles could be closed by 2024. Notably, sales of EVs and hybrid vehicles have been rising since July last year, reversing a year-long slowdown that had been sparked by a reduction in subsidies. UBS expects EV sales as a share of the overall auto market to rise from the current five percent to 50% in 2030, thanks to cost parity having been reached. Beijing has said it aims for EVs to make up one quarter of the entire market by 2025.

Another positive factor is how China will drive utilisation of manufacturing capacity to reduce the cost curve — while moving up the technology curve — across not just batteries but also carbon capture technologies, which will be crucial in reducing emissions from China’s energy intensive industries.

Hydrogen potentially has a key role to play in helping China meet its net-zero goal.  China already leads the world in hydrogen production but it will need to switch from ‘grey hydrogen’, produced using fossil fuels, to ‘green hydrogen’, powered by renewable energy,   as well as supporting the development technologies to exploit this supply in a range of sectors.

It will also need to develop hydrogen-powered technologies in at least three major sectors: as storage to balance seasonal variations between power demand and renewables output, as a fuel for long-haul heavy transport, and as a fuel for industry which is currently highly reliant on coal. The market for fuel cell electric vehicles (FCEVs) in China has been growing rapidly recently from a low base on the back of encouraging policies, with the number of refuelling stations increasing threefold in 2019, giving China the fourth-largest number of stations, after Japan, Germany and the United States, according to the IEA.

We see opportunities in the new technologies needed to make much of this work, across the entire value chain of renewables. For example, solar power is not only about the panels; it is the circuits, inverters and batteries. The same applies to wind turbines. One technology we think particularly interesting is components such as variable speed motor drives and sensors in air conditioning systems and industrial applications as policymakers’ focus on energy efficiency and pollution control intensifies.

Ultimately, the key factor in much of this will be how the national carbon emission trading scheme will work. While most commentators have concluded that the ETS will not lead to high prices or much liquidity in the short term,  many will be watching to see whether increasing the stringency of targets and the number of sectors covered by the ETS will result in carbon prices which catalyse China’s green push for the whole ecosystem. Before the scheme came into existence China relied on a bottom-up approach to promoting certain technologies and there was little calculation around what they would achieve, and how. Now, with this scheme, we are seeing a top-down approach that equips policymakers with the market-based tools to calculate what emitters need to do to achieve the target.

Policy buttons

The National People’s Congress will open on 4 March. But already, ahead of the national 14th Five-Year Plan pronouncement we have seen the major cities of Beijing and Shanghai, the industrial provinces of Guangdong and Jiangsu, and the island of Hainan include emissions peaks in their own proposed five-year plans.

We should expect to see further incentivisation for local and provincial governments to adopt green policies, and the directing of major state-owned enterprises (SOEs) to announce their own carbon reduction plans. The state-owned banks and other financial intermediaries and regulators are also likely to push harder on green finance and green bonds.

The next few months will be critical in revealing exactly how China will combine environmental stewardship with the transformative potential of the market to set the stage for its next economic miracle. The world will be watching.

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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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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