By Audrey Guo

In May， a new report titled the “Challenging Road to Decarbonization” released by Standard Chartered Banks global research team showed that to achieve the carbon neutrality target， China will need to invest as much as RMB 127-192 trillion in the decarbonization course by 2060， equivalent to an average annual investment of RMB 3.2-4.8 trillion.

Reducing carbon will require a major shift in Chinas economy， which means a higher share of GDP in services， low-carbon and high-tech manufacturing， and a shift in energy consumption from fossil fuels to renewables. This potential transformation process will create significant investment opportunities while reducing the cost of transformation in the short term， according to the report.

The report focuses on opportunities and challenges facing China in achieving the “30？60 Goals”， the possible paths to reaching the carbon peak and achieving carbon neutrality， the economic transformation required to reduce emissions， macroeconomic and sectoral opportunities and costs， the impact on foreign trade and investment， and the role of green investment and green finance.

The higher the carbon peak， the more difficult it is to be carbon neutral

In support of the Paris Agreements goal of jointly preventing global warming， the Chinese government has pledged to peak its carbon emissions by 2030 and become carbon neutral by 2060. China is the worlds largest source of carbon emissions， accounting for nearly 30% of the worlds total carbon dioxide emissions in 2019. From this perspective， this commitment by the Chinese government will play a crucial role in the global effort to prevent climate change from reaching an irreversible situation.

However， achieving net zero carbon emissions within the next 40 years will be an extremely challenging task for China. Chinas gross domestic product is expected to double in the next 15 years， and rapid economic growth usually leads to higher carbon emissions. Moreover， as the workshop of the world， China has long relied on a highly energy-intensive growth model. At the same time， Chinas current energy system has high carbon intensity， with coal accounting for 57% of primary energy consumption in 2020. In addition， China has only 30 years to go from carbon peak to carbon neutral， compared with about the 70 years this took the European Union， and more than 40 years for the United States.

Research shows that to face this challenge， China needs to peak its carbon emissions as soon as possible and try to curb the peak level. Assuming an average annual GDP growth rate of 5.5-6.0% in 2021-2025， about 5% in 2026-2030 and about 4% in 2031-2035， the report estimates that Chinas total carbon emissions will peak at 10.8-11.6 billion tons by 2030. The ceiling forecast calls for a 3.9% annual reduction in carbon intensity by 2030， basically in line with the requirements set out in the 14th Five-Year Plan. The lower-limit forecast calls for an even bigger reduction with 4.6% per year by 2030. In view of Chinas good record of meeting and exceeding the goals set in the five-year plan， the analysis suggests that achieving these goals is feasible. To achieve a lower peak in carbon emissions， the report said that the Chinese government needs to strictly stop approvals for new coal power plants of all types， expand clean energy capacity and improve energy efficiency.

After carbon emissions peak， by 2050 the government needs to support qualified localities and key industries and enterprises to take the lead in achieving carbon neutrality and accelerate the process of carbon reduction. To reduce the intensity of energy consumption， the government needs to steadily retreat from energyintensive industries， such as steel and petrochemicals， while shifting to modern services and low-carbon & high-tech manufacturing， the report said. China also needs to rapidly shift its energy sector to a low carbon footprint by phasing out coal plants and switching to low-carbon sources of electricity such as wind， solar， nuclear and hydro power. To achieve the carbon neutral goal by 2060， China needs to increase its carbon capture and storage （CCS） capacity， in addition to increasing forest coverage， so as to absorb emissions from the knotty carbon-reduction industries such as industrial production and transport.

To vigorously develop the new energy industry

Chinas move to carbon neutrality will involve structural shifts in the economy， which will have profound implications to a wide range of industries， particularly the power and heating， manufacturing， construction and transportation sectors. These sectors together account for nearly 90% of total carbon emissions in 2018. Standard Chartered Bank expects the government will gradually phase out coal plants to make wind and solar power more competitive， strengthen mandatory energy efficiency targets for industry to encourage low-carbon manufacturing， establish thermal efficiency enforcement standards for new buildings and retrofit existing buildings to improve energy efficiency， and raise vehicle emission standards and vigorously develop and promote new energy vehicles through extensive laying of charging piles.

In terms of the energy consumption system， the government aims to increase the share of non-fossil fuels in primary energy consumption to around 25% by 2030 from 15.3% at the end of 2019. To be carbon neutral by 2060， the study estimates that China needs to reduce its share of fossil energy consumption to about 15%， which can be basically absorbed by carbon capture and storage， with 75% of energy consumption coming from renewable sources and the remaining 10% from hydrogen.

The report argues that Chinas strong manufacturing capabilities and economies of scale put it in a good position to make the leap from renewable energy research and development to mass production and consumption at a profit. China has used its huge production capacity to turn solar panels from a costly energy option into the lowest-cost clean energy production device. China has the capacity to achieve similar results in the broader areas of renewable energy and industrial production. Once most of the worlds energy can be “made”（e.g.， from solar panels and wind turbines） rather than extracted from the ground （e.g.， fossil fuels）， China is poised to become a major exporter of clean energy and manufacturing equipment. Chinas shift to a “green economy” offers huge opportunities for infrastructure investment， including the construction of ultra-high voltage transmission grids， smart grids and electric vehicle charging stations.

According to research conducted by the International Monetary Fund， although long term decarbonization will reduce the damage brought by climate change and avoid economic loss to increase national income， the requirements of economic transformation may reduce economic growth during the transformation， especially for economies with rapid economic growth and heavy dependence on high carbon energy. The report says Chinas early transition to a low-carbon economy is likely to see slowing industrial production and rising producer prices， which could spill over to the rest of the world given Chinas key role in the global supply chain. Over time， increased investment in renewable energy， advanced manufacturing and new infrastructure will raise output， which will in turn push inflation back to normal. At the same time， China needs to find ways to reduce the negative impact of carbon tariffs and promote carbon reduction in its outbound investment activities.

The financial sector will play an important role

To achieve carbon neutrality， Standard Chartered Banks global research team estimates that China will need to invest up to RMB 127-192 trillion in decarbonization by 2060， equivalent to an average annual investment of RMB 3.2-4.8 trillion. Standard Chartered regards that the green financing channels such as green loans， green bond and green equity financing has great potential in financing for clean energy， and estimates that the Peoples Bank of China will support green financial development by means of refinancing tools， reducing the risk weighting for green bank assets and promoting green bonds as the eligible collaterals of central banks lending facilities.

Chinas financial institutions will play an important role in managing the risks associated with climate change and the transition to a low-carbon economy， including assessing existing portfolio exposures to such risks and seeking financial practices to reduce and diversify such risks. The Peoples Bank of China has stressed the impact of related risks on financial stability and plans to incorporate climate-changerelated risks into the policy framework of macro-prudential management.

Putting a reasonable price on carbon emissions for their environmental pollution and global warming impacts would raise the cost of fossil energy consumption and promote the use of low-carbon alternatives. One effective way to put a price on carbon emissions is through the emissions trading system， which requires companies to buy permits to offset their carbon emissions. The government plans to launch a nationwide carbon trading market by the end of this year.