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China's decarbonization agenda poses emerging business risks

The evolving Chinese national response to climate change represents complicated new opportunities and challenges for thousands of U.S. companies with operations or supply chains in the country.

China steel, manufacturing
Workers busy on a strip production line in a factory in Luannan County, Hebei Province, China.

In a much-anticipated announcement at the United Nations General Assembly in September, President Xi Jinping declared that China would peak carbon emissions by 2030 and aim to achieve carbon neutrality by 2060.

The Chinese and American joint statement on the climate crisis in April and the Leaders Summit that followed several weeks later marked potentially important steps towards coordinated climate action. Regardless of ongoing trade tension between the two countries, these meetings also positively affirmed U.S. and Chinese cooperation in bolstering the implementation of the Paris Agreement and underscored the importance of ambitious climate action by the world’s largest greenhouse gas (GHG) emitters.

For thousands of U.S. companies that have supply chains or operations in China, particularly companies that have not yet developed sufficiently rigorous greenhouse gas emission reduction goals, the Chinese national response to climate change represents complicated new opportunities and challenges.

Since Xi’s announcement was made, multiple industries and municipal and regional governments have begun increasing action related to decarbonization. Further elaboration regarding how China will achieve its 2030 and 2060 carbon reduction goals — and the specific regional and sector-specific plans that will drive this effort — is expected in the coming months.

In some cases, companies have not been transparent about the scope of targets, which can lead to problems as national targets become more clearly defined.

These actions, along with past precedents in pollution control in China, provide guidance for how companies might consider preparing for business risks and disruption related to China’s quest for decarbonization.

Hitting reduction targets: China’s next Five Year Plan

The 14th Five Year Plan (FYP) published in March establishes binding targets for reducing both carbon and energy intensity. It aims to reduce carbon intensity (the amount of CO2 emitted per unit of GDP) by 18 percent and energy intensity (the amount of energy consumed per unit of GDP) by 13.5 percent by 2025. Also, it promises to increase non-fossil fuel primary energy resources to 20 percent, a critical step in decreasing China’s reliance on coal.

Given China’s record of meeting or exceeding carbon and energy intensity targets over the past decade, the 14th FYP energy and carbon goals look highly achievable. In the 13th FYP, China met its carbon intensity target. Both carbon and energy intensity targets were exceeded in the 12th FYP.

Yet, lack of details about how significant near- and long-term reductions will be achieved underscore that further ambitious action will be required to achieve the "dual carbon" reduction goals by 2030 and 2060. Similar to other FYPs, China’s provincial governments and industrial sectors will be announcing their own plans for implementing reduction measures aligned with the national 14th FYP. These plans are expected to further clarify how near- and long-term reductions will be achieved at the local and regional levels.

Several environmental health and safety managers based in China interviewed for this article by Greenment point to the important role local governments and suppliers play in driving emission reduction measures within supply chains. One manager stated:

The key to achieving zero-carbon products in the future is the reduction of carbon emissions throughout the supply chain (specifically, scope 3 emissions). Our company has been working on emission reduction in manufacturing and design processes for the last eight years, and suppliers have begun to participate fully in these plans in recent years. Our suppliers have also obtained the government’s support (through the use of direct credit and tax incentives). We require suppliers to follow local government requirements and to strive to complete targets ahead of the government’s plan.

Another EHS manager said:

Our suppliers have already started to count their carbon emissions as required by the local government. (Local government started to collect carbon emissions data from factories three years ago.) So far, however, no notice of mandatory emission reductions was released by the local government. [But] key suppliers are already working on and measuring carbon reduction.

In addition to steps taken by companies to reduce emissions, several major cities in China are striving to peak carbon emissions before 2030, including Beijing, Shanghai, Guangzhou and Shenzhen (many of which beganpiloting low-carbon projects over a decade ago). Shanghai aims to peak emissions by 2025. Baowu Steel, the largest state-owned steel enterprise in China, plans to peak carbon emissions by 2023 and achieve carbon neutrality by 2050.

Enterprise and municipal declarations are critical, but so, too, is standardizing the scope of goals and metrics used. In some cases, companies have not been transparent about the scope of targets, which can lead to problems as national targets become more clearly defined.

Synergizing carbon emission and pollution controls

One theme that has emerged in official policy documents by the Ministry of Environment and Ecology (MEE) is the coordination of governance between carbon reduction and other forms of pollution reduction. MEE describes this approach as "synergizing" carbon and pollution reduction: reducing both carbon emissions and the atmospheric, water and soil pollutants produced by fossil fuels, including volatile organic compounds, particulate matter, and heavy metals that have often been regulated separately.

Integrating emissions and pollution controls were first introduced in a 2015 revision of the Prevention and Control of Atmospheric Pollution Law, contributing to significant improvements in air quality in China.

New and revised policies will require the inclusion of carbon emission controls within regulatory tools (or strengthening controls where they already exist). This applies to environmental impact assessments, pollution discharge permits and regulator supervision. Piloting and scaling up of these processes is a feature of the Chinese regulatory system, frequently prompting recalibration and revision of national standards.

An official push has already been made among the so-called "two highs" industries (the highest emitters and highest-consumers of fossil fuels), including coal, petrochemical, chemical, iron, steel, non-ferrous metal smelting and cement. MEE has begun to require that regional and provincial regulators increase energy efficiency within these key industries, reporting on progress by October and at regular intervals after that.

Climate change — and the policies being enacted to mitigate its impacts — is expected to force companies to evolve their compliance and efficiency strategies more rapidly than ever before.

Two cases where the Chinese government is cracking down on excessive energy consumption are aluminum plants and cryptocurrency speculators. In the city of Baotou, some industrial aluminum plants were forced to close due to quarterly emission reduction targets not being met. Cryptocurrency facilities are experiencing severe crackdowns in part due to their massive energy demands.

These measures echo actions taken during China’s "war on pollution," which started in 2014. Companies witnessed an unprecedented wave of environmental enforcement that led to the closure of thousands of factories. The lack of transparency around Chinese regulatory processes can cause additional challenges for companies as they navigate the new protocols and timelines for emissions reduction.

Business impact on companies 

Challenges remain in understanding China’s national strategy to peak carbon emissions by 2030 and achieve carbon neutrality by 2060. Meeting these objectives is expected to  require structural changes to industry, infrastructure and the way cities operate, pulling for decarbonization in unprecedented ways. 

The launch of China’s national carbon emissions trading scheme (ETS) in January is another important milestone for pricing carbon in the Chinese marketplace, with the current aim of incentivizing greater efficiency in operations. At least initially, the ETS launch is limited to trading within the power generation sector, but it accounts for almost 40 percent of CO2 emissions in China or 15 percent of global emissions.

These measures, supported by a growing interest in environmental, social and governance (ESG) indicators in the Chinese financial market, are market drivers that can be leveraged by multinational brands when seeking to influence supply chain behavior.

As the number and scope of binding regulations for reducing carbon emissions increase in the coming months and years, it remains essential for companies with supply chains or operations in China to stay abreast of emerging business risks driven by the country’s timelines for emission reductions. 

Emerging business risks and opportunities will include:

  • Sourcing (through the need to qualify lower-carbon raw materials)
  • Process (upgrading production processes and equipment)
  • Emission controls (carbon emission reductions and capture)
  • Reporting requirements, both to regulators and to the finance sector
  • Access to capital, particularly domestic Chinese capital
  • Adverse reputational impact in China arising from ineffective or incomplete response to Chinese requirements
  • Industrial structure adjustments including replacing industrial processes and equipment and the elimination of outdated industries; and economic adjustments, such as a carbon tax

Multinational companies have managed supply chain compliance and efficiencies in China for decades. Yet, climate change — and the policies being enacted to mitigate its impacts — is expected to force companies to evolve their compliance and efficiency strategies more rapidly than ever before.

The integration of carbon reduction measures into existing regulatory protocols aims to further enhance coordination and effectiveness between environmental protection and carbon reduction in China. Understanding how these carbon emission reduction efforts are executed at the local, provincial, and national levels will be a critical step for any company managing supply chains or operations in China.

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