Asian economics catch up on climate change

This week South Korea became the third large Asian economy to pledge carbon neutrality, marking a major milestone for the fight against climate change. All three countries, China, Japan and South Korea, are in the top 10 country emitters of carbon dioxide in the world due to a continued reliance on coal-powered energy, and together represent over a third of annual global emissions.

The most important announcement was from China last month, committing to become carbon neutral before 2060, and to begin cutting its emissions within the next 10 years. President Xi Jinping made this pledge to a virtual audience of leaders at the United Nations General Assembly, surprising many researchers who had not imagined such a bold target; many since have called this “game-changing”. This is the first long-term climate goal for China and shines a light on the lack of any commitment from the US.

In order to reach this goal it is forecast that China would need to more than double electricity production, adding over 7,000 terawatt hours by 2060 and mostly from clean sources. A proposal developed by a team at Tsinghua University in Beijing in partnership with the Massachusetts Institute of Technology, estimate this growth could include a 16-fold increase in solar energy and a 9-fold increase in wind. To replace coal-fired power generation, nuclear power would need to increase 6-fold and hydroelectricity to double.

Other researchers propose a greater dependence on nuclear power for China. Something consistent across all proposals, however, is that substantial deployment of carbon capture and storage (CCS) would be required to offset the omissions from the remaining fossil-fuel power still expected to be operating in 2050. China currently has only one CCS facility in operation, on an oil field. The costs are still a problem, so the need for investment and scale of these projects is significant.

The enormity, and cost, of this transition should not be underestimated. China currently depends on coal for 65% of its electricity generation, and more than 200 new coal-fired power stations are either planned or under construction. The political and business opposition will therefore be significant, with many operators with much to lose.

The market in China for renewable energy nonetheless represents a vast opportunity for companies in the value chain. As the largest global market and producer for many elements in the clean energy value chain, continued growth in scale of operations is likely to result in continued cost reductions, to the benefit of growth worldwide.

Earlier this month, a month after China’s announcement, came a pledge from Japan’s new prime minister Yoshihide Suga for carbon neutrality by 2050, raising the prior target of an 80% reduction by 2050 in a move that will require a big shift in energy policy. Japan currently sources 81% of its energy from fossil-fuel powered sources and continues to build coal-fired power stations. In his first policy speech in office Mr Suga announced “aggressive measures to tackle climate change can transform our industry structure and economic society”.

Two days later came the pledge from South Korea to be carbon neutral by 2050, pledging an additional $7bn to be spent on green-focused growth on top of the $37bn Green New Deal announced in July. President Moon Jae-in promised “We will replace coal power with renewable energy and create a new market, industry and jobs”. South Korea derives just 5% of electricity from renewable resources, the lowest proportion of any OECD country, and 40% from coal powered plants. The government published a climate manifesto earlier this year, which included the introduction of a carbon tax and the phase out of domestic and overseas coal financing by public institutions. Neither of these has yet come to fruition and the current plan commits to reduce emission intensity only by 37% by 2030, so the increase in ambition has been welcomed.

The three countries, alongside all other signatories of the Paris Agreement, are required to submit revised 2030 Nationally Determined Contributions in time for COP 26 which are consistent with these new commitments. The devil is in the detail, long-term targets are important but the pressure on all signatories is to demonstrate clear and meaningful action in the coming decade. We will learn more in the coming months.

Alongside the commitments already made by Europe, and the campaign commitments from president-elect Joe Biden, these announcements tell us what we already know; that the world will need to undertake an enormous transition in energy generation, use and efficiency, in order to limit global warming to 2 degrees. This will affect almost every industry, and the investment required to get us there represents a vast opportunity for the many well-placed companies and investors alike.


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