Thinking about China's future development from the essence of carbon neutrality

Author:LI Haiyan

From:IFF

Time:2024-08-13

Currently, over 120 countries worldwide have publicly announced their own carbon neutrality targets. China has declared that it will achieve peak carbon emissions by 2030 and carbon neutrality by 2060. This author believes that for China, these dual carbon goals represent a challenge as well as a tremendous development opportunity. China’s carbon emissions now account for about 30% of the global total, making it the world’s biggest carbon emitter. One can therefore imagine the size of the challenge that China is facing. At the same time, the global carbon neutrality target is also a huge strategic opportunity for China.

 

How should one understand carbon neutrality?

This question can be turned into the following two questions: First, how does one define carbon neutrality? And second, how will carbon neutrality change human society? This author believes that carbon neutrality can be defined as follows: Carbon neutrality is an energy revolution and a restructuring of industry. It is a deep societal change.

First of all, carbon neutrality is an energy revolution. This so-called energy revolution refers to gradually reducing human society’s severe reliance on fossil fuels (coal, oil, and natural gas) as a proportion of the energy system, while conversely increasing the proportion of renewable energies (represented by photovoltaic and wind energy). Of course, in the future there may also be other new types of energy sources that do not emit greenhouse gasses, such as nuclear fusion.

As for the so-called industrial restructuring, this refers to the major changes in the development models and geographical layouts of various industries driven by low carbon emissions. For example, the automobile industry is transforming from traditional gasoline-powered internal combustion engines and diesel vehicles to electric vehicles and hydrogen energy vehicles. Ocean-going ships have also transitioned from using traditional fossil fuels to using green fuels such as methanol. The blast furnaces commonly seen in the steel industry are also changing from coke reduction to hydrogen reduction. Low-carbon emission requirements will also change the layout of the industry. For example, to achieve the low-carbon operation of data centers, many data centers around the world are now starting to be set up in areas with abundant wind and solar power.

In today's society, there are also many voices questioning carbon neutrality. The most important of these questions is the following: Is science at its current level really able to accurately prove that global warming is being caused by human greenhouse gas emissions? This author also believes that this is a reasonable question to ask. However, the carbon neutrality goal being promoted by human society is valuable regardless of whether or not climate warming is primarily being caused by the human use of fossil fuels and their associated emissions of carbon dioxide. The reason for this is simple: The traditional energy structure that relies on fossil fuels is not sustainable. Natural resources such as coal, oil, and natural gas are not infinite, and given current levels of energy consumption, these resources can only provide about 200 more years of use. Even if there were no global warming, it would still be only a matter of time before humanity would have to face an energy transformation.

 

Carbon neutrality is part of the fourth industrial revolution

This author believes that human society is just now entering the wave of the fourth industrial revolution. The main storyline of the fourth industrial revolution is the digital transformation (DX) of society, and the change up to the present that was brought about by the internet has completed the first half of this transformation. As for the second half of this digital development, artificial intelligence (AI) will play the main role, and the development of semiconductor technology is what forms the basic support of DX. There is also green transformation (GX), which refers to the low-carbon transformation of human society. The other parts of the fourth industrial revolution are aerospace and life sciences.

As mentioned earlier, carbon neutrality represents the restructuring of industry. In fact, in the next few decades all human industries will be reshaped by two things: AI and low carbon emissions. In the process of industrial restructuring, the current patterns of competition between countries and enterprises may undergo a huge change.

For example, ever since the 1980s, Japan's automobile industry has been more profitable than that of the United States. Toyota has been the world's largest automobile manufacturer for more than a decade. In 2023, the net profit of Toyota alone exceeded the total profits of all Chinese automobile companies combined. However, in July 2020, the market value of Tesla, a startup with an annual production of more than 1 million cars, had a total market value that exceeded Toyota’s.
As a late-developing country, the best way for China to catch up with developed countries like America, Japan, and various countries in Europe is to change lanes. Carbon neutrality provides China with a once-in-a-century opportunity. The previous three industrial revolutions had little to do with China, but in the fourth one, China, America, Japan, and developed countries in Europe are all standing more or less on the same starting line. Although China does not hold a world-leading position in all fields, on the whole it does not lag behind Europe or America in either AI or low-carbon technology. For example, in the past 100 years the US has been the world leader in oil and chemical technology, and the combination of oil and the US dollar is also one of the important reasons for America’s global hegemony. But in this new era, these past assets may actually become more of a burden. Of course, the US is also conducting plenty of research, development, and application of low-carbon technologies, and it is definitely not lagging behind.

 
Why China is the biggest winner of the first half of the carbon neutrality transformation?

Under the Paris Agreement - the global climate agreement that was reached at the COP21 conference, which was held in Paris in 2015 - each country announced their own carbon peak and carbon neutrality targets according to their own unique situations. As of 2022, about 120 countries worldwide had announced their own carbon neutrality targets. Since then, carbon neutrality-related technologies and industries have attracted a great deal of global attention. In fact, China may be the biggest winner in this round of low-carbon development. In recent years, China's photovoltaics, lithium batteries, and new energy vehicles have been called the ‘new three things’ and have attracted national and global attention.

What many people don’t realize is that in this wave of carbon neutrality of these last few years, many low-carbon related technologies and products have already been attracting global attention. Some examples of these are photovoltaics, wind power, geothermal energy, various forms of energy storage - such as pumped storage, flywheel energy storage, sodium sulfur battery storage, and liquid vanadium flow storage - ultra-high voltage power grids, hydrogen energy, electric vehicles, heat pumps, and more. Many people simply attribute some of China’s achievements in recent years to industrial policies or local government support. Of course, this author has no intention of denying the important value of industrial policies and local government support, but one must also think about other factors as well if one is to gain a more comprehensive understanding of the relationship between carbon neutrality and development.

Carbon neutrality is a huge challenge for China, but also a huge opportunity. Why is it a huge opportunity? As mentioned earlier, carbon neutrality is an energy revolution, one which is the process of renewable energy - and other energy sources that do not have carbon emissions, such as hydropower and nuclear power - replacing fossil fuels. In the past, fossil fuels were dug out of the ground; modern oil refining and chemical industries are extensions of the oil industry. However, current and future forms of renewable energy (mainly photovoltaic and wind power) and clean energy (mainly hydropower and nuclear power) are essentially about manufacturing. These power generation products are all produced in factories, and China is currently the world's largest producer of industrial products. This is the first reason why China has become a winner in this wave of carbon neutrality.

The second reason is China's latecomer advantage. China's dual-carbon related industrial products - which currently occupy an important position globally - are relatively mature products. Many of the industrial products that we are vigorously promoting have already been out of the laboratory or reached the experimental commercial operation stage as early as 30 years ago. For example, the basic scientific principles of heat pumps were established more than 100 years ago, and heat pump-related technologies have also been used in society for a long time. As for photovoltaic and wind energy, they entered the commercial operation stage with the support of government subsidies in the 1990s.

We also always say that electric cars are new energy vehicles. In fact, as early as the 19th century humans had already invented electric cars - but they failed to take off because they were unable to compete with fossil fuel-powered vehicles. As another example, pumped storage is the most widely used form of energy storage worldwide, and the world's first pumped storage power station was built around 1979.

The Kyoto Protocol was adopted at the COP3 meeting held in Kyoto in 1997. After that, developed countries began to face the problem of how to reduce their carbon emissions. At the time, however, developing countries like China did not need to reduce their carbon emissions. From 1997 until now, developed countries have also accumulated many carbon reduction technologies and products, which can also be used by late-developing countries.

The third reason is China's institutional advantages. China's large energy companies are all state-controlled enterprises, and with clear national goals, the transformation of these state-owned energy companies has been very fast. In recent years, the deployment of these traditional state-owned energy companies in the field of new energy has been very rapid.


      
The promotion of carbon neutrality goes hand-in-hand with financial support

Carbon neutrality is a goal that the world must work hard to achieve, and it will likely take at least 50 years to do so (many developing countries have set a carbon neutrality goal of 2070). The essence of carbon neutrality remains the transformation of energy technology and industrial technology. Looking back at all the industrial revolutions of the past 100 years, each of them has been supported by both different and similar financial forces. During this ongoing process of carbon neutrality development, many new startups will also inevitably be born. Venture capital funds are also paying close attention to investments in this field. These decades of carbon neutrality development are also a process in which financial institutions' investments and financing will continue to gradually shift from traditional high-carbon emission industries to new energy and new industries. Whether or not this opportunity can be seized is also one of the key factors that will distinguish whether and how much further financial institutions can develop.

 

LI Haiyan: The International Finance Forum Special Researcher

 

This article was first published at https://www.yicaiglobal.com/news/thinking-about-chinas-future-development-from-the-essence-of-carbon-neutrality.

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