China’s 40-year carbon plan [NGW Magazine]

China’s surprise commitment to become carbon neutral by 2060 may be good news for gas in the near term. But it also raises questions about the fuel’s outlook as the energy system is overhauled over the next four decades.

The historic pledge made by the Chinese president Xi Jinping at the United Nations in September was the first time that China set a carbon emissions target in absolute terms. It will require the world’s leading carbon emitter to kick its addiction to fossil fuels – particularly coal – while taking the construction of wind and solar capacity up to an entirely new gear.

The declaration was light on details and the caveats are considerable – carbon neutrality is ambiguous and may only refer to carbon emissions rather than all greenhouse gases, including highly potent methane. But the headline announcement effectively commits China to executing a nationwide transformation of its coal-dominated energy system over the next 40 years – one that will perhaps even more dramatic than over the past four decades.

Achieving carbon neutrality by 2060 suggests a faster than previously planned decarbonisation will take occur in China over the next decade. The Chinese government already looks on course to achieve two climate change-linked targets ahead of schedule. First, non-fossil fuels are anticipated to contribute half of China’s power generation by 2028 – two years ahead of the official target set by the state economic planner.

And second, greater use of renewables to produce electricity will drive out coal, helping to ensure that China’s carbon emissions peak by 2025. That is five years earlier than the country committed to when it signed the Paris Agreement.

Low-carbon gas is likely to be the only fossil fuel that will continue to grow in absolute and proportionate terms within China’s energy structure, but its long-term runway for growth will be to some extent squeezed by growing renewables and nuclear power. Ultimately, even the cleanest fossil fuel will need to be minimised over time.

For now the Chinese government remains keen on gas, which occupies a relatively small share of the primary energy mix – 8.1% last year according to an official industry report released last month. The government plans for this to reach 15% by 2030. There is the potential for gas to consolidate and build upon its fledgling role in the country’s energy transition – particularly in power generation as a back-up for renewables.

China is the world’s largest consumer of primary energy today and it accounted for 29% of global greenhouse gas emissions in 2019 – more than the US and EU combined. Fossil fuels also dominate the Chinese energy mix, taking an 85% share last year compared with 83% for the US and 74% for the EU. Renewable energy met the remaining 15% of China’s energy needs last year, but these proportions will need to flip by 2060 in order for Beijing to deliver net zero carbon emissions.

Xi’s commitment sends a signal about the sobering reality of climate change. Under the International Energy Agency’s Stated Policies Scenario, which only considers existing policy initiatives, the world has until 2030 to limit the rise in global temperatures to 1.5 °C under the Paris Agreement and until 2050 to keep the increase to within 2.0 °C to avoid the worst impacts of climate change.

China stands to suffer more than other countries from global heating. Rising sea levels will have a direct impact on China’s coastal areas, where the country’s economic output is concentrated. Melting glaciers in the Himalayas could worsen flooding along the upper reaches of the Yangtze River while reducing water volumes along the lower stretches. And increased heat waves and warmer conditions year-round will increase the prevalence of stagnant air, worsening the already toxic smog shrouding Chinese cities.

China is taking on the unprecedented challenge of decarbonising when energy demand is still growing. Unlike many other regions that have committed to similar targets, such as the EU and Canada, China’s energy consumption per capita remains relatively low – nearly 40% lower than Germany’s and two-thirds that of the US. But unlike Europe or Canada, where energy demand has either peaked or reached a plateau, China’s energy demand is still growing. New investment in carbon-free energy will need to not only replace existing fossil resources but also meet incremental demand.

Some room for gas growth

Xi’s policy pledge will need to be backed up with details but the broad strokes suggest gas will be the last fossil fuel left standing as Beijing works to curb consumption of more carbon-intensive coal and oil while deploying more renewable capacity. PetroChina produced 11% more gas domestically in the first half of 2020 than a year ago, robust growth that was in line with a pledge earlier this year to prioritise gas production.

The NOC’s parent, China National Petroleum Corp (CNPC), has said before that it plans to extend the proportion of gas in its domestic energy output to 55% by 2030 – up from 48% in 2019 and 46% in 2018.

Chinese industry officials forecast gas demand this year to grow at the slowest pace in five years to reach 320bn m³. This would mean though missing a goal: China had planned to raise gas to 10% of total national energy demand by the end of 2020 – which analysts have estimated would amount to roughly 360bn m³.

While China’s energy transition gives room for gas to grow, the scope for major consumption growth towards the midpoint of this century is limited. BP’s latest Energy Outlook released in October says that Chinese gas demand could reach 460bn m³ by 2025 and 520bn m³ by 2030 under a “net zero” scenario, but then to top out at 551bn m³ in 2045 and thereafter begin to decline.

China’s gas importers are still signing supply contracts, as evidenced by Sinopec’s reported tender award to Qatargas for delivery of 1.0mn metric tons (mt)/yr over 10 years starting in 2023. Neither have they shied away from long-term deals – at the end of September, Shanghai-based Shenergy Group agreed a 15-year deal to buy 0.5mn mt/yr from the UK’s Centrica from 2024. This came after Zhejiang Energy Group signed a 20-year contract with the US major ExxonMobil for 1.0mn mt/yr in April 2019.

Chinese importers are unlikely to hesitate to procure more volumes on a long-term basis as a new 20-year contract signed sometime in the next decade would expire well before the 2060 deadline for carbon neutrality.

However, delivering on net zero emissions will require China to accelerate its already prodigious clean energy investments to an unimaginable pace. This bodes well for gas, particularly as a fuel for producing electricity. The biggest growth in gas demand in the coming decades will come from the power sector, as the fuel will be able to play a complementary role in providing peak-shaving power for solar and wind capacity.

Gas-fired power generation accounted for roughly one-quarter of China’s gas demand in 2019, putting it in third place after city gas and industry. By 2050, power will be the biggest destination for gas, accounting for over a third of the total demand.

Stalling energy transition

China’s push for net-zero carbon emissions by 2060 came as a surprise given the context: its transition to a low energy-intensity, service-based economy, fuelled increasingly by renewables, has stalled this year. To promote economic growth and job creation, Chinese planners have fallen back on the tried and tested stimulus of building more debt-financed infrastructure and property.

Energy-intensive industries such as steel and concrete have boomed on the back of the infrastructure push, which has meant greater energy use – especially from fossil fuels.

There have also been disappointing signs of a drift back towards coal in China, which became home to half of the world’s operating coal-fired power capacity for the first time earlier this year. Provincial authorities, looking to support the local economy, have championed the development of more plants with 19.7 GW of new capacity permitted in the first half of 2020 – the most since 2016.

The country also completed 11.4 GW of new capacity in the first six months – 62% of the global total – and proposed an additional 53.2 GW of capacity over the same period, which was equivalent to 90% of the world’s total. China now has enough coal-fired plants in the development pipeline to power Europe’s biggest economy, Germany.

The coal power construction boom underlines the competing pressures that lie behind China’s economic and climate policies, and the challenge of reining in the powerful domestic coal lobby.

China’s state-owned oil and gas groups stand to play a major role in the transition towards a carbon-neutral economy. While a significant portion of future energy investments will be funded by renewable and power companies, CNPC, Sinopec and China National Offshore Oil Corp will also be leaned upon given the significant capital expenditure requirements for renewable energy.

PetroChina – which made up 52% of Chinese crude oil output and 60% of gas production in the first six months of 2020 – said in August that it planned to spend between RMB 3bn and 5bn ($442-736mn)/yr on solar and wind power, geothermal, and pilot hydrogen projects over the next five years. But if it made sufficient progress then expenditure could rise to as much as RMB 10bn.