A deep dive into China's 14th Five Year Plan for Sustainability



Background


As an important contributor to adopting the Paris Agreement and an active participator in its implementation, China is resolutely committed to tackling climate change. The country has vowed to peak carbon dioxide emissions by 2030 and achieve carbon neutrality by 2060 (The “30.60” Goals). Top-down regulation development is expected in China to reach “30.60” goals, as regulatory forces still are the main fuels for sustainable investment markets in China.


As fossil fuel accounts for 85% of energy consumption in China, to reach the “30.60” goals, renewable energy plays an essential role in the making. As a major player in global value chains, China is up for a huge challenge.


Last year, Liu Youbin, spokesperson for the Ministry of Ecology and Environment said China has achieved this year’s carbon dioxide emission target ahead of the schedule. By the end of 2019, the country's carbon emission intensity had decreased by 48.1 per cent compared with the level in 2005, with its non-fossil fuels in primary energy consumption reaching 15.3 per cent, Liu said in an interview. It is still a long road ahead.


What’s ‘green’ in 14th Five Year Plan


At the latest 14th FYP meetings, a scale of ¥3.65 trillion is assigned on a number of projects, and the ecological environmental protection project is one of them on the agendas this year. This year, the government is planning to further strengthen macro guidance and coordinate the industrial layout in focusing on energy conservation and environmental protection, new-generation information technology, biology, renewable energy and other fields.


A document issued by The State Council on Feb 22, 2021, outlined key measures to meet the “30.60” goals, including the development of green and low-carbon production, consumption and circulation systems. China also plans to speed up green infrastructure upgrading, green and low-carbon technology development, and improvements in laws, regulations and policies.


Ping An Securities estimated that the total investment required for China to promote the low-carbon to the zero-carbon path in the next three decades will range from 70 trillion to 140 trillion yuan, including renewable resource utilization, energy efficiency improvement, and consumption electrification, zero-carbon power generation technology, energy storage, hydrogen energy and digitalization, etc. Large-scale investment in green and low-carbon industries will be leveraged, and significant development in related fields are foreseeable.


Projects on clean energy lead by the nation are soaring in 14th FYP. There are plans to build more hydropower, clean energy bases and offshore wind power stations. The country is set to increase the share of non-fossil sources in the energy mix to around 20% in the next five years by multiple projects of renewable energy constructions, such as offshore wind farms and nuclear projects in coastal areas. Electrification with clean energy has also planned in yellow areas shown in the map below. ( map from Xinhuanet) Continuing transmission of electricity from the western to the eastern region will expand further for the next five years.


The 14th FYP is aiming for more electrification in energy consumption to replace fossil fuel consumption and expanding capacity in clean energy such as solar and wind to support emission reduction on the supply side. According to Goldman Sachs, around US$16tn clean tech infrastructure investment opportunity is estimated by 2060. China’s power generation is expecting to be triple by 2060, driven mostly by solar, wind, nuclear and hydro generation.


The Green Reform


Emissions Trading System


A set of interim rules for carbon emissions trading management in China came into effect on Feb 1, 2021, marking a key step in the establishment of a national emissions trading system (ETS). A total of 2,225 power firms across the country, assigned with carbon dioxide emission caps, can trade their emission quotas via the system whereby firms that exceed their caps can purchase unused quotas from those with low emissions. The historical ETS Trading Volume by provinces is as below. 2020 sees some slow down in some regions, but the ETS market is expecting to be expanding as the country’s top-down regulation agenda in promoting the ETS market during 14th Five-Year Plan. According to Refinitiv, a non-compliance fine range from 20k to 30k yuan is coming to effect with the new rules. As more industries are included in the market this year, the trading volume and activities of the carbon market are expecting to increase significantly.



The State Council issued a circular on Feb 22, urging efforts to build an economic system featuring green, low-carbon and circular development, and to promote an overall green transformation of the economy and society. One of this year’s key focuses is to speed up the construction of the national energy rights and the national carbon emission trading system (ETS), improve the dual control system of energy consumption, and improve the coordinated and orderly development of clean energy growth, consumption, and energy storage.


Looking Forward


As reported by Climate Action Tracker, China’s 14th FYP implies a reduction in the carbon intensity of GDP by 18 per cent and energy intensity of GDP by 13.5 per cent in the next five-year period is similar to the goals in the previous 13th FYP. Now with Beijing abstaining from setting a five-year GDP target, China’s emissions growth over the period is even more uncertain.


Yet China remains hesitant to force a rapid transition towards renewables. As announced by the National Energy Administration (NEA), A goal for non-fossil fuels energy consumption was set at 25 per cent by 2030, up from a 15 per cent goal for 2020 — a relatively conservative target given China almost doubled its wind and solar power installations last year. As reported by the Financial Times, among the more substantial changes from the previous Five-Year Plan was a pledge to “basically eliminate” bad air pollution days by 2025, and a decision to scrap a single GDP target for the five-year period, an indication that priorities are shifting away from growth above all else and towards environmental concerns, leaving more space for “quality growth”, as the National Development and Reform Commission (NDRC) explained. Corporates and investors are in need of developing a new set of standards in regards to “quality growth” to evaluate the sustainable value of the business and underlying assets.


On Feb 2, China Securities Regulatory Commission (CSRC) solicited public opinions on the “Guidelines for Investor Relations Management of Listed Companies (Exposure Draft)”. The proposed draft features one major change among others, which mentioned guidance on communication between listed companies and investors on ESG information (information regarding the environment, social and corporate governance). It also provides new channels of communication, including websites, new media and investor education bases. The tongue of this guidance is voluntary at the moment. However, assertion and active methods from corporations are important to set apart from their competitors.

On one hand, the risk of late movers disclosing or managing their ESG information is beyond regulatory risks. Pressures on ESG information from global value chains and peers are rising. Corporations are starting to fill their ESG information gap to attract more investors. Emerging markets like China are essential for foreign investors to seek global asset allocation, however, adjustment is needed if certain assets do not meet the criteria set by the global green finance regulations and frameworks. Building an ESG framework within and beyond the organization and its value chains offers opportunities to clarify and manage a sustainable business model as watchdogs are tracking closely with misconduct in ESG practices. Lack of disclosure or misinformation could lead to an undervaluation of the business.

On the other, voluntary disclosure at the moment does not imply for long. The “Common Ground” Taxonomy proposed by the International Platform on Sustainable Finance (IPSF, of which China is one of the leading members) is set to be announced by mid-2021, tighter rules with further details on the issue are expected to be released in a separate five-year plan for the energy sector later this year. Gradually aligning business goals with the nation’s “30.60” goals is crucial to relieve businesses’ risks on the issue.


Still, China is struggled to shift substantially from reliance on polluting industries. As reported by the Financial Times, steel, cement, and aluminium production soared during rapid recovery from COVID-19 pandemic lockdowns in 2020. While clean energy like wind and solar power plants have surged, local governments have approved the construction of polluting coal power plants at a rapid pace. According to Global Energy Monitor, a non-profit organization, China last year built three times as much coal power capacity as the rest of the world combined and initiated 73 gigawatts of new projects. Pushback from provinces and industries has seen when economic growth was prioritized among green growth.

During the latest 14th FYP meetings, Shanghai, Jiangsu, Guangdong, and Hainan have vowed their determination in achieving peak emissions before 2030 to align with the nation's pledge. Shanghai among all has pledged to achieve peak emissions by 2025. Most of these provinces are located on China’s east coast, where consumer-oriented economies are at the centre of their economic growth source. A balance to coordinate energy intensity and consumption targets across provinces will be the tougher part of achieving emission targets for the country ahead.


In order to fulfil the carbon reduction commitments to the world, China needs to make extremely arduous efforts. Low carbon industries like renewable energy, smart power grids and alternative energy vehicles are being widely developed across the country in pursuit of a greener future. Achieving the green development goal by a country with 1.4 billion people will be an inspirational precedent for the rest of the world.


As economic reform and adjustment for environmental concerns moving forward, the materiality for ESG is expected to be evolving into areas in climate change, biodiversity and issues in consumers’ rights and personal privacies, etc. The sustainable investment markets are growing to be more aggressive in terms of asset screening for ESG integration and strategies. It is important for businesses to tailor their ESG strategies to their unique path to sustainable development. Showing leadership and stewardship in building a sustainable business is a crucial message for alignment with the 14th FYP and building business resilience for future uncertainties.


A tighter policy release with more details in achieving the ’30.60’ goals is expecting to come in the country’s first-ever climate change five-year plan later this year. Businesses should be ready to build sustainable capacity for the challenges ahead.


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