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COP26: How UK-China businesses can combat climate change

by James Brodie
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In the second of our COP26 series, KPMG examines the increasing need for international cooperation to support Chinese companies’ business transformation to fit the future low-carbon economy and achieve sustainable growth. There are opportunities for China and the UK to work together across aspects of policy, infrastructure, technology, financing and best practice sharing

As the 26th Conference of the Parties (COP26) approaches, the signs of climate change are ever more visible around us. July 2021 was the hottest single month the world has ever experienced; while record heatwaves hit Canada and North West America in June, wildfires have raged as far apart as California, the Mediterranean and Siberia, and severe flooding has hit many parts of the world.

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Amidst a gathering sense of emergency, the report in August from the United Nation’s Intergovernmental Panel on Climate Change (IPCC) warned starkly that the situation has become “code red for humanity”. Its assessment concluded that some effects of climate change such as continued sea level rise are irreversible at least for centuries – but that, if the world can reach Net Zero by the middle of the century, it is not too late to avoid the worst impacts of climate breakdown.

It is clear that the entire global community must pull together and every nation must stretch itself to make the biggest contribution it can. That being the case, what are the particular challenges and opportunities in front of the UK and China – and what potential is there for the two nations’ business communities to support and invest in each other as part of the effort?

The two countries are in quite different positions as they each face up to the challenges ahead. KPMG’s Net Zero Readiness Index, published in October and comparing the likelihood of 32 major economies reaching Net Zero by 2050, places the UK at number two while China is further back at number 20. This is because the two economies are at different stages of development, with China having to accelerate its industrialisation phase and at huge scale. See our separate box-out section for a fuller analysis of the Index findings.

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The UK, which accounts for under 1% of global emissions, has already enshrined in law its commitment to achieve Net Zero by 2050. To enable this, it has further set what the government describes as “the world’s most ambitious climate change target” of cutting emissions by 78% by 2035 compared to levels in 1990. This would take the UK more than three quarters of the way towards hitting Net Zero by 2050. The UK’s major achievement to date is the decarbonisation of its power sector and the simultaneous shift to renewables. The carbon intensity of the power sector has fallen from 481gCO2/kWh in 2010 to 181gCO2/kWh in 2020; while renewables’ share of power generation has risen from around 7% to over 40% in the same period.

The government has also announced some significant plans and aspirations for the coming years, such as the creation of four major industrial clusters for carbon capture usage and storage (CCUS) and hydrogen production by 2030; a ban on the sale of new internal combustion engine (ICE) vehicles from 2030 as the nation moves to electric; the full rollout of smart meters to help households more efficiently manage their energy usage and support the transition to a more flexible energy market by the end of 2025; and a potential ban on the sale of new gas-fired boilers by the mid-2030s in favour of hydrogen and heat pumps.

With a 10 Point Plan for a green industrial revolution setting the over-arching framework and an Industrial Decarbonisation Strategy in place, together with a recently published Hydrogen Strategy, the UK has many of the building blocks in place – but still has a long way to go if it is to deliver on its ambitions, as the Climate Change Committee warned in its latest progress report to UK parliament.

The next phase of decarbonization in the UK will involve changes in almost everything we do: the cars we drive, the way we heat our homes, our travel patterns, how we use our land, what we eat. — Simon Virley, Vice Chair and Head of Energy & Natural Resources, KPMG

One challenge is the need – in common with all developed economies – to bring citizens with them on the journey and bring about changes in how people live, as Simon Virley, Vice Chair and Head of Energy & Natural Resources at KPMG in the UK observes: “The next phase of decarbonization in the UK is going to be much more intrusive than what has come before. It will involve changes in almost everything we do: the cars we drive, the way we heat our homes, our travel patterns, how we use our land, what we eat. There needs to be much greater engagement with the public on the choices ahead and what we can all do as individuals and in our communities if we are to get to Net Zero at least cost and ensure a Just Transition.”

China, meanwhile, has a population about 25 times the size of the UK and accounts for around 30% of global carbon emissions. However, its carbon usage per head of population is around half that of the United States and is also considerably lower than that of some other Western economies. While its fossil fuel usage is still growing, China has pledged that this will peak in 2030 and then decline, with a Net Zero target of 2060. It is backing this up with real action – already being the world’s largest producer of renewable energy. In 2020, it had solar power capacity of 254,355 megawatts, far ahead of the US in second at 75,572, and it had triple the wind power installations of any other country too. China hopes that a quarter of its energy will be produced from non-fossil fuel sources by 2030 – and many analysts believe it may hit that target early.

China’s commitment to reducing carbon is becoming clearer. Xie Zhenhua, China’s special envoy on climate change, has spoken publicly of the imminent release of a top-level design of China’s so-called “1+N” policy framework for reaching peak carbon and carbon neutrality targets together with specific action plans for key emitting sectors. China also opened a national carbon emissions trading scheme in July 2021 covering more than 2,000 power plants, with plans to add other industrial sectors.

With China producing a significant proportion of the world’s carbon emissions, its progress in reducing carbon is clearly of huge importance in itself. China has also taken steps to embed sustainability practices into its international Belt and Road infrastructure initiatives – with the Ministry of Commerce and the Ministry of Ecology and Environment jointly releasing in July an updated set of green development guidelines for overseas development and investment. With an emphasis on compliance with international practices, the guidelines reflect encouraging aspirations for higher environmental and green investment standards. More recently, China’s President Xi Jinping made the surprise, but most welcome, pledge at the UN General Assembly in September that China would stop financing coal-fired projects abroad.

Since President Xi’s announcement of China’s top-level commitments in September 2020, Chinese companies have started committing to or setting science-based targets to reduce greenhouse gas emissions through the application of innovative energy saving initiatives and technologies, increased use of renewable energy, etc. — Daisy Shen, Partner, Climate Change and Sustainable Development, KPMG in China

China indeed has a crucial role to play in enabling the global community to drive down carbon, as Simon Virley explains:
“China can leverage immense economies of scale and
reach price points that other countries simply can’t match. We have seen that with solar, and the same can be true of other low carbon technologies, like electric vehicles and hydrogen. The lower the cost of these green technologies, the easier it will be to maintain public buy-in around the world for the energy transition.” By extension, this means there is significant potential for UK and Chinese businesses and investors to work together in the coming years in the pursuit of a common goal.

On the UK side, there is an opportunity for London to build on its pre-eminent position as a financial services centre and become the global centre for carbon trading. The various carbon trading schemes in existence around the world will need to be linked up at some point – and London could fit the bill. There is clear potential for the UK to become the standard setter for green finance – how to define it, verify it and audit it. Alongside this, the UK could become the leading pioneer for climate risk disclosures and reporting. There will be significant opportunities for UK professional services organisations in providing consulting, legal, assurance and accounting advice around these and related areas to businesses in China, and opportunities for testing, inspection and certification organisations too.

Other export opportunities for the UK to China include offshore wind where the UK has built up considerable expertise around the integration of wind into national energy systems and the skills and services needed to support that. Smart energy systems are another fertile potential area, with UK businesses like Octopus Energy developing leading-edge systems that utilize smart technology and AI to optimize energy usage and efficiency across different needs. The UK could also lead the way – and make some in-roads in China – around carbon capture technology as well as the shift to low carbon heating.

On the Chinese side, there has been some significant investment already into UK renewable energy, particularly offshore wind, and in the UK’s nuclear industry and smart grid networks. There are likely to be increasing opportunities to invest in UK infrastructure projects such as the construction of its planned Carbon capture, utilisation and storage (CCUS) clusters. China already has a strong track record of investment into major UK energy and infrastructure projects and this can continue in Net Zero related endeavours, bringing mutual benefit – generating a return for Chinese investors and bringing down the cost of capital for the UK.

UK-Chinese links should include collaboration over the scaling of new green technologies. It will not be possible to meet Net Zero targets by solely relying on the technologies available today. Britain has a strong track record in ground-breaking scientific R&D; China has the ability to scale new technologies to market. Finding synergies through co- operation could unlock success.

Then there is energy transition. Major oil and gas businesses have become leaders in decarbonising their business models and diversifying away from hydrocarbons towards renewable energy sources, although they themselves recognise there is a long way to go. The UK’s oil and gas industry can export its knowledge and experience around this, including to the Chinese super-majors. There are win-wins to be gained here on both sides.

The UK and China have a strong trading history with each other. UK financial institutions and businesses in other sectors are benefitting from reforms and license approvals designed to increase foreign investment into China; while Chinese businesses have historically found the UK to be a welcoming and cosmopolitan place to do business.

There should be a focus on continuing and indeed increasing this where climate action is concerned, as Simon Virley says: “For the first time ever, we have China, the EU, the UK and the US all committed to Net Zero. Chinese companies are already investing heavily in the low carbon sector in the UK as the UK seeks to meet its Net Zero target, whilst a growing number of UK companies are investing in China. So, we have a great platform on which to build collaborative partnerships between the UK and China on the low carbon technologies and financing solutions needed to meet the global challenge of climate change.”

Daisy Shen, Partner, Climate Change and Sustainable Development, KPMG in China, echoes this sentiment: “Since President Xi’s announcement of China’s top-level commitments in September 2020, the momentum has accelerated. Chinese companies have started committing to or setting science-based targets to reduce greenhouse gas emissions through the application of innovative energy saving initiatives and technologies, increased use of renewable energy, etc. There is an increasing need for international cooperation to support Chinese companies’ business transformation to fit the future low-carbon economy and achieve sustainable growth. There are opportunities for China and the UK to work together across aspects of policy, infrastructure, technology, financing and best practice sharing.”

Now, through COP26 and beyond, we need to use the opportunity to deepen collaboration between the UK and China on the Energy Transition in key areas such as:

  • Offshore wind
  • Hydrogen
  • Carbon capture
  • 
Electric vehicles
  • Smart energy platforms
  • Carbon trading
  • Climate risk reporting
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Focus on hydrogen/decarbonisation

The UK government’s Hydrogen Strategy envisages a “world-leading hydrogen economy” supporting over 9,000 UK jobs and unlocking £4bn investment by 2030. The government predicts that 20-35% of the UK’s energy consumption by 2050 could be hydrogen-based. A twin-track approach is planned – bolstering blue hydrogen and CCUS production through four industrial clusters whilst also supporting the development of green electrolytic hydrogen. Companies such as ITM Power are already leading the way in green hydrogen using Proton Exchange Membrane (PEM) technology – such technological innovation could become a significant export for the UK.

China is one of the biggest manufacturers of green hydrogen technology with a particular emphasis on alkaline technology. However, alkaline technology is suited to large-scale baseload industrial electrolysers, whereas PEM technology works better with intermittent renewable technologies such as solar and wind which will give it an increasingly prominent role in global deployment. China is also a leader in hydrogen fuel cell technology – hydrogen being potentially a key power source for heavy transportation, where electric batteries are less viable. There are already some 7,000 hydrogen fuel cell buses in operation in China.

With the UK’s clear hydrogen focus, and China’s 14th Five Year Plan labelling hydrogen a “frontier” area that the country pledges to advance, there could be scope for the two nations to cooperate and cross-invest.

Focus on renewable energy

Several of China’s generation companies (gencos) have already made investments into renewables in the UK, such as:

  • SDIC which acquired Edinburgh-based Red Rock Power in 2016
  • CGN has extended its nuclear partnership with EDF to onshore wind assets
  • China Resources Power, subsidiary of the Hong Kong-based conglomerate China Resources Group, has invested in a major operating offshore wind project alongside the Norwegian energy giant Equinor

More broadly across Europe:

  • CGN has been highly active since 2015
  • China Three Gorges has built significant stakes in a wide range of Renewables assets including offshore wind, both through its participation in EDP and relationship with Energias de Portugais Renewables (EDPR); and also on a stand-alone basis
  • We have observed several further major gencos actively seek to enter the European Renewables market as they look to achieve their own international growth KPIs in Renewables

Looking in the other direction, a few western strategic energy companies are active in China:

  • EDF has a partnership with China Energy Investment Corporation (CEI), focused on 502 MW of offshore wind projects in China.
  • Other major western oil & gas companies are already well established in China and may well be considering extending operations to offshore wind, in line with their strategic growth ambitions

The focus for many of the major European (in particular) offshore wind developers is in neighbouring markets in the region – Japan, South Korea, Taiwan. Given the exciting growth potential of the Chinese offshore wind market, requiring an enormous scale of capital and strategic capability, it would be really positive to continue this trend of partnering across the major offshore wind activities.

Supply chains, meanwhile, are relatively settled. China already manufactures the great majority of the world’s solar panels. Of the world’s ten major wind turbine manufacturers, three are Chinese and these mainly supply their own national market. Of the other seven, some have factories in China.

Focus on clean transportation

With both countries already embracing progressive plans for EV adoption, but with battery life and range still potentially limiting factors, there may be scope for the nations to cooperate on R&D development in order to explore new battery technologies and chemistries, as well as to establish an effective circular economy in the battery value chain. As well as extending battery life, more cost-effective methods of recycling batteries – and/or extracting the valuable metals from them for re-use – are needed. There are also opportunities to drive cooperation across many areas of the mobility ecosystem.

Then there is hydrogen, which may have a key role to play as the powertrain for heavy and industrial vehicles. China leads the way in hydrogen buses. The UK has a leading hydrogen and low/zero-emission bus maker in Alexander Dennis (that uses hydrogen fuel cells from Chinese manufacturer BYD), while operators like First Bus have launched hydrogen fleets in some locations. There will be scope for closer ties between China and the UK in this growing area.

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KPMG Net Zero Readiness Index 2021

KPMG’s Net Zero Readiness Index (NZRI) considers 103 indicators that are key drivers to achieving Net Zero in each of the 32 countries studied.

The UK ranked second in the NZRI, and China 20th. The top five countries were Norway, UK, Denmark, Sweden and Germany. Other major jurisdictions include the US (13th), Australia (14th) and Russia (25th).

China

China’s target of peak carbon emissions before 2030 and Net Zero by 2060 may be later than the dates pledged by many other countries in the NZRI, but they mean the country would move from peak carbon to Net Zero in three decades – about half the time of other countries.

China already has the world’s highest level of renewable energy capacity of 925GW in 2020, around three times as much as the US. It added 72GW of wind and 48GW of solar in 2020, both big increases on 2019. Despite this effort only 33 percent of its electricity came from low carbon sources in 2018, highlighting the need for the country to continue its rapid expansion of renewable generation.

Some key companies in high-emission sectors have announced timetables and goals to achieve carbon neutrality through measures covering energy consumption, energy efficiency and increasing use of renewables.

China is rated second among the 32 countries in the research on agriculture and land use, due to factors including relatively low consumption of dairy per person, and strong performance on limiting food losses and waste.

The country is ranked fourth in the transport sector, partly due to the high availability and use of public transport, having developed the world’s longest high-speed rail network over recent decades. China also has the world’s largest electric vehicle market, with 5.4 million in use in 2020 – nearly half of the global fleet. China’s national target is to have ‘new energy’ vehicles making up 20 percent of new car sales by 2025.

UK

Cross-party political support and clear legally-backed targets have enabled the comparatively swift decarbonisation of the power sector in the UK, with the country ranking second in the electricity and heat sector. The last coal-fired power station is due to close by 2024 and the proportion of renewable energy used in electricity production rose from 7 percent in 2008 to above 40 percent in 2020.

Progress is also being made on converting industrial processes to using hydrogen and carbon capture, with the UK ranking third in the industry sector. On transport, overall adoption may be low at present, but electric cars and small vans are increasing in popularity; their lifetime costs may now be comparatively lower than fossil fuel alternatives, which the government has banned the sale of after 2030 (with new heavy good vehicles banned from 2040 at the latest).

However, regarding public engagement, most of the work which will directly affect citizens is yet to come. Despite mandatory building energy certification and high levels of household energy security which contribute to the country’s fourth-placed rating in the buildings sector, many Britons live in poorly-insulated houses which were built many decades ago and around nine in ten are heated by natural gas. The government says that 600,000 homes a year will need to install a heat pump by 2028, while its Climate Change Committee puts the figure at 1 million annually by 2030. However, last year only around 30,000 heat pumps, which usually require the retrofitting of better insulation to be effective, were installed.

Click here to read CBBC’s Targeting Net Zero: The Role of UK-China Business Report

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