Impact of the Goal of Carbon Neutrality on China’s Energy Sector

“Peaking carbon dioxide emissions and achieving carbon neutrality” are China’s solemn commitments in the process of global greenhouse gas emission reduction. By reviewing the background of “peaking carbon dioxide emissions and achieving carbon neutrality”, this paper analyzes the impacts of the goal on China’s energy sector, which are mainly reflected in four aspects: (1) accelerating the adjustment of China’s energy structure; (2) pushing further improvement of the energy technology innovation system; (3) accelerating the institutional reform in the energy sector; (4) accelerating the high-quality development of China’s traditional energy sector. This paper then analyzes a series of actions of domestic central energy enterprises on “peaking carbon dioxide emissions and achieving carbon neutrality”, which can be summarized into three aspects: First, Central enterprises have carried out comprehensive researches on “peaking carbon dioxide emissions and achieving carbon neutrality” to drive the energy transition of the entire industry; Second, central enterprises have actively practised their main businesses and developed new businesses according to the principle of “adaptation to local conditions”; Third, central enterprises have been actively involved in work related to “green finance” to stimulate their innovation and vitality and help them achieve the goal of carbon neutrality.

“Peaking carbon dioxide emissions and achieving carbon neutrality” are important commitments made by China to tackle climate change and fulfil its responsibility of emission reduction, which play important guiding roles in advancing the process of global climate governance. The energy sector contributes more than 80% of carbon emissions and will play an important role in the goals of “peaking carbon dioxide emissions and achieving carbon neutrality”. Since 2020, large central state-owned energy enterprises have actively implemented the thought of “Four Reforms and One Cooperation” proposed by General Secretary Xi Jinping, earnestly implemented the strategic deployment of “peaking carbon dioxide emissions and achieving carbon neutrality”, take the initiative on the energy consumption side and the energy supply side, and substantially promoted the clean and low-carbon development of the energy system.

Background of “peaking carbon dioxide emissions and achieving carbon neutrality”

A review of “peaking carbon dioxide emissions and achieving carbon neutrality”

CO2 emissions have continuously rocketed since the industrial era, causing many environmental problems, such as global temperature rise, glacier melting and sea level rise. The ecological environment is faced with unprecedented threats and challenges. Reducing global greenhouse emissions, including CO2 emissions, and limiting global temperature rise has become the common goals of mankind. In December 2015, the Paris Agreement was adopted at the 21 st Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC). Its goal is to limit global warming to well below 2 °C, preferably to 1.5 °C,  compared to pre-industrial levels; In November 2016, the Paris Agreement formally entered into force, marking the start of the global low-carbon transition process; In October 2018, the Intergovernmental Panel on Climate Change (IPCC) issued the Special Report on Global Warming of 1.5 ºC, which proposes that limiting global warming to 1.5 °C would require “rapid and far-reaching” transitions in land, energy, industry, buildings, transport, and urban areas. In this case, CO2 emissions would need to fall by about 45% by 2030 from 2010 levels and reach “net zero” around 2050, namely “carbon neutrality”. Since then, an increasing number of countries around the world have carried out researches on “peaking carbon dioxide emissions and achieving carbon neutrality”, and the process of global low carbon transition has gradually accelerated.

Current situation of “peaking carbon dioxide emissions and achieving carbon neutrality” worldwide

“Peaking carbon dioxide emissions” refers to a process in which the annual CO2 emissions in a region or an industry reach a historical high and then plateau into a continuous decline. Peaking goals include the year and value of peaking. According to statistics, nearly 50 countries around the world have peaked their carbon dioxide emissions, accounting for about 40% of the world’s total emissions. Most developed countries in Europe and America have peaked between 1990 to 2010, and some developed countries in Asia, such as Japan and South Korea, have peaked between 2010 to 2020. It is expected that 57 countries around the world will have peaked carbon emissions by 2030, accounting for 60% of global carbon emissions.

“Carbon neutrality” means that in a certain period of time, the CO2 directly and indirectly emitted by human activities in an area is offset with the CO2 absorbed through afforestation so as to achieve “net zero emissions” of CO2. As of early May 2021, more than 130 countries and regions around the world had proposed the goal of “carbon neutrality”, but there were differences in policy implementation. Among them, two countries have achieved carbon neutrality, six countries have legislated for carbon neutrality, and the European Union (as a whole) and five other countries are in the process of legislation; twenty countries (including EU countries) have issued formal policy statements; and nearly 100 countries and regions have set goals but are still in the process of discussing them.

At present, many developed countries and regions, including the United Kingdom and France, have achieved the legislation for the goals of “carbon neutrality”. Some countries and regions have clarified their carbon reduction road map and medium- and short-term phased targets. The UK and the EU have respectively committed to reducing their emissions by 68% and 55% from 1990 levels by 2030, and have introduced supporting policies to promote low-carbon transition, such as the EU emissions trading system and Carbon Border Adjustment.

In February 2021, the United States officially rejoined the Paris Agreement with commitments to “achieve 100% carbon-free electricity by 2035 and carbon neutrality by 2050”. The Biden administration plans to spend USD 2 trillion on investments in such major fields as infrastructure and clean energy, aiming to reduce the US greenhouse gas emissions by 50%-52% from 2005 levels by the year 2030. Japan has proposed to achieve the goal of “carbon neutrality” by 2050 and has set different development timetables for 14 sectors, including offshore wind power and electric vehicles, in an effort to accelerate the transition to a low-carbon society through technological innovation and green investment.

A review and the significance of China’s policies for “peaking carbon dioxide emissions and achieving carbon neutrality”

A review of the policies for “peaking carbon dioxide-emissions and achieving carbon neutrality”

China made a commitment to peak carbon dioxide emissions by 2030 when signing the Paris Agreement in 2015, but did not propose any goal of carbon neutrality. In 2019, China’s carbon dioxide emissions surpassed the total carbon dioxide emissions of the US, the EU and Japan, making China the world’s largest carbon emitter. At the General Debate of the 75th Session of the United Nations General Assembly on 22 September 2020, General Secretary Xi Jinping pledged for the first time that China would scale up its intended nationally determined contributions and aims to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060. At the Third Paris Peace Forum on 12 November 2020, Xi Jinping stressed again that China aims to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060, and would formulate implementation plans for these goals. As of the end of March 2021, “peaking carbon dioxide emissions and achieving carbon neutrality” has been mentioned nine times by state leaders at major conferences at home and abroad. The Outline of the 14th Five-Year Plan (2021-2025) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035 stipulates that “China plans to reduce energy consumption per unit of GDP by 13.5% and carbon dioxide emissions per unit of GDP by 18% during the 14th Five-Year Plan (2021-2025) period”. In addition, the Ministry of Ecology and Environment issued the Guiding Opinion on Coordinating and Strengthening the Work Related to Climate Change and Environmental Protection, which stipulated that local governments should make every effort to achieve peak carbon dioxide emissions, put forward positive and clear goals and formulate implementation plans and supporting measures in light of actual conditions. China will encourage such key sectors as energy, industry, transportation and construction to formulate special plans for achieving peak carbon dioxide emissions, and relevant provinces will implement “dual control” on the intensity and total volume of carbon dioxide emissions.

The meaning of the visions of “peaking carbon dioxide-emissions and achieving carbon neutrality”

Tackling climate change bears on both domestic and international interests, as well as overall and long-term development. It is an important action point for China to promote high-quality economic development and ecological civilization construction, and an important area for China to participate in global governance and uphold multilateralism.

Domestically, the proposal of the goals of “peaking carbon dioxide emissions and achieving carbon neutrality” has positive significance for China’s long-term development, mainly in four aspects. First, it is conducive to promoting the green transformation of the economic structure, accelerating the adoption of green modes of production and life, and boosting high-quality development. Second, it is conducive to promoting the management of pollution sources. With carbon reduction, pollutant emissions will be reduced, showing a significant synergistic effect with the improvement of environmental quality. Third, it is conducive to improving ecosystem services and protecting biodiversity. Fourth, it is conducive to mitigating the adverse effects of climate change and minimizing economic and social losses.

Internationally, the proposal of the goals of “peaking carbon dioxide emissions and achieving carbon neutrality” demonstrates China’s new efforts and contributions to tackling global climate change, reflects China’s firm support for multilateralism, its important political and market momentum for promoting the sustainable and resilient recovery of the global economy after the pandemic, and important guiding role in promoting global climate governance, and fully demonstrates China’s commitment to building a community of shared future for mankind as a responsible great power. It has enhanced China’s international influence and leadership and made China widely recognized and highly praised by the international community.

Analysis of the impacts of “peaking carbon dioxide emissions and achieving carbon neutrality” on China’s energy sector

Energy is the basis and driving force to achieve high quality and sustainable development of the national economy. Energy supply and security have a bearing on the overall modernization of China. Under the “dual circulation” development pattern and the vision of “peaking carbon dioxide emissions and achieving carbon neutrality”, the main impacts on China’s energy sector include the following four aspects:

First, “peaking carbon dioxide emissions and achieving carbon neutrality” will accelerate the adjustment of China’s energy structure, which requires the energy system to operate more safely and smoothly. Owing to the resource endowment and demands for economic development, China has formed an energy development pattern dominated by coal, with oil and natural gas developing steadily and the new energy industry developing rapidly. During the “13th Five-Year Plan” period, the proportion of coal consumption in primary energy decreased to 56.8% from 62% in 2016, while the incremental proportion of non-fossil energy was 50.2%, higher than that of fossil energy. The incremental proportion of non-fossil energy is expected to continue rising in the future. The increase of renewable energy, such as photovoltaic power and wind power, will bring challenges to the current energy system dominated by fossil energy. The energy system needs to adapt to the strong randomness and high volatility of new energy as soon as possible.

Second, “peaking carbon dioxide emissions and achieving carbon neutrality” will push further improvement of the energy technology innovation system. The transition to a clean and low-carbon energy system cannot be separated from technological innovation. On the one hand, with the gradual increase of the proportion of new energy, traditional technological means and production modes will not be able to adapt to the operational requirements of the new energy grid with a high proportion. Therefore, it has become one of the main directions for future energy and power system technological breakthroughs to build a new power system dominated by new energy so as to accelerate the development of digitization, cloud computing, Internet of Things, artificial intelligence, and to promote the coupling of the existing energy system with emerging industries. On the other, it is extremely urgent to develop such low-carbon and carbon-negative technologies as large-scale carbon capture, utilization and storage (CCUS), green hydrogen economy, forest carbon sink, micro algae biological carbon sequestration, and bio-energy with carbon capture and storage (BECCS).

Third, “peaking carbon dioxide emissions and achieving carbon neutrality” will accelerate the institutional reform in the energy sector. Institutional reform is the key to the rapid upgrading of the energy system. Regarding the reform of the electricity system, we will focus on building a unified national electricity market system, speed up the establishment and improvement of an electricity market system with coordinated medium and long-term future goods, spot goods and auxiliary services, further expand the scale of electricity trading, and constantly release the dividends of reform; Regarding the reform of the oil and gas system, we will actively build the “X + 1 + X” oil and gas market system, comprehensively relax the market access to the upstream exploration and exploitation, improve the operation and investment mechanisms for oil and gas pipeline networks, encourage all market entities to invest in the construction of pipeline infrastructure and storage facilities, perfect the mechanism for fair access to infrastructure, speed up the natural gas price reform, improve policies for the gas franchise, and  reduce the levels of gas supply and gas consumption cost.1

Fourth, “peaking carbon dioxide emissions and achieving carbon neutrality” will accelerate the high quality development of China’s traditional energy sector. According to the International Energy Agency (IEA), improvements in energy efficiency may effectively reduce energy-related greenhouse gas emissions by more than 40% over the next 20 years, and occupy an important position in achieving the goal of “carbon neutrality”. According to Energy Efficiency 2020 report issued by the IEA, energy intensity is expected to improve by only 0.8% in 2020, which may make it more difficult to achieve the Sustainable Development Scenario (SDS). China should enhance the efficiency of energy utilization by carrying out clean and efficient use of coal, promoting the development of coal power generation with high parameters, large capacity and intelligence, advancing the development of modern coal chemical industry represented by coal to- liquids and coal-to-ole fin, strengthen technological innovation, and gradually promote the development of high-end and high-value coal chemical products.2

The “14th Five-Year Plan” period is a critical period for China to “peak carbon dioxide emissions and achieve carbon neutrality”. The energy industry needs to maintain a dynamic balance between supply security and clean and low-carbon transition. On the one hand, we should continuously implement the important thought of “Four Reforms and One Cooperation”. On the other, we should provide constant support for the supply side, demand side, technological innovation and institutional reform so as to lay a solid foundation for achieving carbon neutrality in the future.

Active actions taken by Chinese energy companies for “peaking carbon dioxide emissions and achieving carbon neutrality”

Energy combustion is the main source of carbon dioxide emissions in China, accounting for about 88% of the total carbon dioxide emissions. The emissions from the power sector account for about 41% of the emissions from the energy sector.3 Central enterprises play vital roles in national economy and energy security. Actively conserving energy and reducing emissions, accelerating the optimization of the industrial structure and energy structure and implementing the strategic deployment of “peaking carbon dioxide emissions and achieving carbon neutrality” has become one of the key tasks for these enterprises during the “14th Five-Year Plan” period.

Energy and central power enterprises

At present, the five major central power central enterprises (China Datang Corporation, China Huaneng Group, State Power Investment Corporation, China Huadian Corporation and CHN Energy) have announced their installed capacity goals of new energy or clean energy during the “14th Five-Year Plan” period. Except Huaneng, the other four central power enterprises have proposed the time of “peaking carbon dioxide emissions”. State Power Investment Corporation announced to achieve peak by 2023, and Datang, CHN Energy and Huadian announced to achieve peak by 2025. Although Huaneng has not announced a specific time point, it proposed in February 2021 to take “accelerating the construction of a world-class modern, clean energy enterprise” as a strategic goal to enhance prospective study and strategic layout of carbon peak and neutrality. It is expected that it can achieve a peak before the national time point of “peaking carbon dioxide emissions by 2030”.

In addition, China Three Gorges Corporation and China Resources Power Holdings Co., Ltd. have also set the goal of achieving “peaking carbon dioxide emissions” in 2023 and 2025, respectively. It is estimated that the newly-added installed capacity of the two companies during the “14th Five-Year Plan” period will be 70-80 million kW and 40 million kW, respectively, and that the installed capacity of the new energy of the two companies will account for 40%-50% respectively in the future. China Three Gorges Corporation also announced that it would achieve “carbon neutrality” by 2040, becoming the first central power enterprise in China to achieve “carbon neutrality” 20 years ahead of the national goal. As the world’s largest hydroelectric power company, in recent years, China Three Gorges Corporation has been expanding its new energy power generation business, including wind power generation and photovoltaic power generation, striving to build the new energy business into the second main business of the Group, and committed to becoming the leader of offshore wind power. In 2020, the installed capacity of wind power (57%), photovoltaic power (42%) and medium and small hydro-power (1%) of China Three Gorges Renewable (Group) Co., Ltd. subordinated to China Three Gorges Corporation exceeded 15 million kW, ranking seventh in China after the five largest power generation enterprises and CGN.

Table 1 Plans for “peaking carbon dioxide emissions and achieving carbon neutrality” announced by major central power generation enterprises in China

Source: Public information.

Central oil and gas enterprises

Unlike the above-mentioned central power enterprises, domestic central oil and gas enterprises did not specify the installed capacity of new energy in their published action plans, but studied the paths of “peaking carbon dioxide emissions and achieving carbon neutrality” from the aspects of energy substitution, methane recovery, carbon dioxide utilization and energy efficiency improvement on the basis of their main business in oil and gas. For example, Sinopec proposed the transformation goal of being “the largest hydrogen energy company in China”. Taking advantage of its hydrogen production capacity of more than 3 million tons and its over 30,000 gas station facilities, Sinopec has carried out the integrated development of the entire industrial chain of hydrogen energy integrating “production, storage, transportation and processing”. Moreover, it carried out cooperative research with leading enterprises, including Sino Hytec, an enterprise focusing on the R&D of hydrogen fuel cells, REFIRE, Air Liquid, one of the world’s largest suppliers of industrial gases, and Cummins, a world-class power equipment manufacturer, etc.

The three oil companies still prioritize “increase in reserves and production” and “energy security”, and plan to further increase the proportion of natural gas in oil and gas production. In 2020, the natural gas production of CNPC, Sinopec Limited and CNOOC Ltd. accounted for 43%, 39% and 21%, respectively. According to their production and operation plans in 2021, their natural gas production is expected to account for 44%, 42% and 20%, respectively. During the “13th Five-Year Plan” period, the cumulative production of natural gas of CNOOC increased by 13% from the “12th Five-Year Plan” period, and CNOOC has become the second largest natural gas supplier in China. It is expected that the proportion of natural gas production of CNOOC will increase to about 35% during the “14th Five- Year Plan” period .

Furthermore, oil companies are actively exploring new growth poles. CNOOC will speed up electrification utilization and transition with a strategic orientation, actively develop offshore wind power business, pay close attention to the development opportunities of the photovoltaic industry, and build a new green energy system of CNOOC. In addition, CNPC and Sinopec continued to develop new energy and new materials. In May 2021, CNPC Research Institute of Petrochemical Technology officially established the research institutes of hydrogen energy, biochemistry and new materials; In the meantime, Sinopec invested more than RMB 60 billion to build a project cluster of high-end new materials, including 11 key projects, such as ethylene and downstream high-end new materials, and photovoltaic new energy, so as to boost the high-quality development of the petrochemical industry in Tianjin.

Table 2 Plans for “peaking carbon dioxide emissions and achieving carbon neutrality” announced by major central oil and gas enterprises in China

Large utility companies

In addition to energy producers, large utility companies also play important roles in the energy transition. In March 2021, the State Grid Corporation of China released its action plan for “peaking carbon dioxide emissions and achieving carbon neutrality”, and stated that in the future, it would focus on building a platform for optimal allocation of clean energy, integrating clean energy into the grid, and striving to promote the electrification of terminal consumption, so as to pool the synergy for the energy transition.

China Southern Power Grid successively released its research results, such as its action plan for “peaking carbon dioxide emissions and achieving carbon neutrality”, the White Paper on Digital Grid Promoting the Power Network Based on New Energy, and the White Paper on China Southern Power Grid Corporation’s Action Plan for Building a Power Network Based on New Energy (2021-2030), etc. It is expected that by 2025, China Southern Power Grid will have the basic characteristics of a new power system of “green and efficient, flexible and open, and digital”, which will support the increase in installed capacity of the new energy of more than 100 million kW in five provinces and autonomous regions in South China. Non-fossil energy will account for more than 60%. It is estimated that more than 24 million kW of onshore wind power, 20 million kW of offshore wind power and 56 million kW of photovoltaic power will be added. By 2030, a new power system will be basically established, which will support an additional installed capacity of the new energy of over 100 million kW, and non-fossil energy will account for more than 65%. With the installed capacity of new energy up to more than 250 million kW, it will become the largest power source in five provinces and autonomous regions in South China.

Table 3 Work plan for future “peaking carbon dioxide emissions and achieving carbon neutrality” announced by grid companies in China

Source: Public information.

From the work plans of the two power grid companies, the main challenges of the energy transition in the future lie in the integration of clean energy into the grid and the safe and stable operation of the grid. The State Grid Corporation of China and China Southern Power Grid, covering the power supply in most regions of China, are important supports for the smooth energy transition. Both companies have proposed to promote the transformation and upgrading of the power grid from the power supply side and the consumption side in various regions in the future. In addition, the State Grid Corporation of China also proposed plans for energy conservation and emission reduction for its own business to further reduce its carbon emissions.

Conclusion

In summary, since 2020, domestic energy companies have continued to implement the new strategy of “Four Reforms and One Cooperation” for energy security, and actively formulated action plans centred on “peaking carbon dioxide emissions and achieving carbon neutrality” and explored new businesses, which featured following characteristics:

First, energy enterprises carried out researches related to “peaking carbon dioxide emissions and achieving carbon neutrality” to facilitate the energy transition of the entire industry. In terms of energy and power, the Think Tank of CHN Energy cooperated with t h e Energy Research Institute of National Development and Reform Commission, the Laboratory of Low Carbon Energy, Tsinghua University, the Academy of Mathematics and Systems Science (Center for Forecasting Science), CAS, and the Institute of Industrial Economics of Chinese Academy of Social Sciences to jointly launch researches on the strategic path for achieving peak carbon dioxide emissions and carbon neutrality in the energy, coal and power sectors led by CHN Energy; China Huaneng Group established the Research Institute of Carbon Neutrality to jointly carry out related technology and industrial research with the Energy Research Institute, its directly affiliated unit.

In terms of oil enterprises, Sinopec cooperated with the Energy Research Institute of National Development and Reform Commission, the National Center for Climate Change Strategy and International Cooperation and the Laboratory of Low Carbon Energy, Tsinghua University, t o j o i n t l y launch research on the strategic path for “peaking carbon dioxide emissions and achieving carbon neutrality” in the energy and chemical sectors; CNOOC signed a comprehensive strategic cooperation agreement with China University of Petroleum (Beijing), established the Research Institute of Carbon Neutrality, and strengthened cooperation with China Huaneng Group and China Datang Corporation in gas, power and new energy, etc.

Second, energy enterprises actively practised the main businesses of central enterprises , and developed new businesses in accordance with the principles of “ adjusting measures to local conditions”. Energy transition includes the transition on the supply side and the consumption side , which correspond to energy production and energy consumption, respectively. Central power enterprises mainly focus on the energy supply side, and have set clear installation goals for the 14th Five-Year Plan, and might aim to be clean energy providers in the future, while central oil and gas enterprises mainly focus on both the supply side and the consumption side. On the supply side, oil and gas companies can enter the power market as renewable power developers, and conduct centralized or decentralized development for grid connection or their own oil and gas production. On the consumption side, they actively can lay out new growth businesses, including high-end chemical engineering, lubricating oil , hydrogen energy and power by making use of the industrial chains of oil refining, chemical engineering and sales. Based on the future competition, central power enterprises will continue to play important roles in the transition of the energy supply side and will provide project development services for oil and gas consumers and other energy consumers. Integrated oil companies will play important roles on the end energy consumption side and gradually extend their business chains.

Third, energy companies actively participated in the work related to “green finance” to stimulate enterprise innovation and help achieve the goal of carbon neutrality. Based on the vision of carbon neutrality, the innovation of financial products for tackling climate change will be an important development direction of green finance and industrial development in the future and will be conducive to the integration of industry and finance and business collaboration of financial licenses. As of April 2021, seven central energy enterprises, including Sinopec, China Three Gorges Corporation, The State Grid Corporation of China, CHN Energy, China Huaneng Group, China National Nuclear Corporation and State Power Investment Corporation, had issued carbon neutrality bonds worth RMB 18.2 billion, and the total amount of carbon neutrality bonds nationwide reached RMB 63 billion, accounting for 87% of the total amount. It is expected that the scale of domestic carbon neutrality bonds will be further expanded in the future, which is conducive to large-scale investment in green business in China and will further improve the domestic ESG (environmental, social and governance) system.(Reproduced from China Oil & Gas)