Global climate fight hinges on China’s $6.5tn green investments challenge

China needs to unleash $6.5tn in green investments and radically reorganise its economy if the planet is to win the fight against climate change.

The warning comes in the wake of COP26 where hopes that governments would commit to bolder decarbonisation targets were dashed by India and China watering down pledges to end coal-fired power.

And hours after the Glasgow summit closed on Sunday, environmentalists and economists questioned whether Beijing was committed to such fundamental change.

“It’s just very difficult to break this relationship between energy consumption and GDP growth,” said Neil Beveridge, a senior analyst at Bernstein in Hong Kong.

The battle against global warming mostly hinges on the efforts of a legion of policymakers in Beijing who have been tasked with weaning the world’s biggest polluter off coal.

China, the world’s factory, accounts for about 30 per cent of global greenhouse gases with fossil fuels comprising 85 per cent of the country’s energy mix.

“The bottom line is that . . . China is now taking decarbonisation seriously. But it remains to be seen how much stomach the government will have for the likely economic costs,” Arthur Kroeber and Rosealea Yao, Beijing-based analysts from Gavekal Dragonomics, a consultancy, wrote during COP26.

China’s success, they added, would depend on “very stringent curbs on sectors that have been critical to sustaining China’s economic growth over the past decade”.

According to Bernstein calculations, to achieve the 2060 carbon neutrality pledge made by President Xi Jinping, China faces a “Herculean challenge”: $163bn will have to be spent annually on renewable energy and other decarbonisation technologies.

That figure is close to double the $91bn invested in 2019 and amounts to $6.5tn over four decades. But, Beveridge noted, the estimate might be conservative because it excludes related spending on areas such as electricity grid upgrades.

Xi’s absence from Glasgow, coupled with Beijing’s decision not to upgrade significantly its commitments from the 2015 Paris accord, rankled many, including Joe Biden, the US president.

While a rare US-China joint declaration to co-operate on climate change marked a thaw in ties between Beijing and Washington, it immediately drew sharp criticism from environmental groups because it lacked concrete commitments to detailed plans.

Li Shuo, a Beijing-based Greenpeace energy expert, said the US-China statement helped settle the mood in the COP conference hall but “pales before our daunting climate challenge”.

China’s U-turn on coal mining and coal-fired production cuts in recent months has stoked criticism of the country. Beijing’s reversion to the fossil fuel to counter energy shortages that had crippled factories across the country were a warning of how the Chinese government might respond to the competing interests of economic growth and decarbonisation.

China’s climate challenge would be complicated by mass urbanisation, said Priscilla Lu, who leads sustainable investments in Asia for DWS, Deutsche Bank’s asset management arm. More than 100m people are forecast to move from rural areas to cities over the next 10 years, adding huge demand to the country’s strained energy system.

Two unanswered questions, experts said, were whether China’s state lenders could funnel an unparalleled and sustained torrent of cash towards renewable energy, and how Beijing would manage the decline of the sprawling fossil fuels industry.

Despite the scale of the challenge, Lu stressed that the “consistency of the financing” being directed by Beijing’s state-backed lenders and oil and gas groups towards renewable energy industries was one of the most “meaningful” changes taking place.

“We should give credit to China for its continued commitment to the original [climate] targets and, as importantly, by its implementation and actions which helped fund the massive deployments that have happened in solar and wind over the last seven to 10 years,” she said.

Helping this cause, the People’s Bank of China last week unveiled a long-awaited monetary facility to support decarbonisation projects. The facility provides low-cost funds to financial institutions by offering loan support at an interest rate of 1.75 per cent.

Boosting spending on renewables is only one piece of the puzzle in kicking the country’s coal dependency and for Beijing to meet its target for emissions to peak before 2030. And analysts said the Chinese government had not explained how it would deal with legacy coal and gas companies, as well as their investors.

“Over the next 40 years, China’s power sector faces refinancing and stranded asset risks, higher costs of emissions and falling coal power profitability, but such impacts will be more significant in latter years,” said Boris Kan, a senior credit officer at Moody’s.

For its part, China has bristled at pressure from the US and other western governments over its responsibilities in responding to the climate crisis, frequently emphasising its status as a developing country.

China’s environment ministry said on Sunday that addressing climate change “should be implemented by all parties with different levels of responsibilities”.

Despite the acute financing and economic challenges, some analysts believe Xi’s course has been set. In the days leading into COP26, the State Council, China’s cabinet, outlined its plan to hit peak greenhouse gas emissions by the end of the decade.

Yun Jiang, a China expert at the Australian National University, noted that the policy document also linked China’s carbon policy to “national rejuvenation”, one of Xi’s favourite themes.

“It would be inconceivable for people in China, including local officials, to go against the major strategic decision that affects the sustainability of the Chinese nation,” she said.

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