A Guide to the Tug-of-War in China’s Energy Sector | ETF Trends

China, despite recent increases in coal consumption, is currently on a trajectory that will see it overachieve its internationally stated emissions targets for 2030, with emissions peaking by 2025. While it’s unknown what the recent growth in energy demand in China and the doubling down of coal reliance and fossil fuels in the short-term will do, on the renewable side of things, China is surpassing expectations.

China’s stated international climate pledge set a goal of peak emissions before 2030 and a reduction in its carbon intensity by more than 65% by 2030, based on 2005 levels. According to Swithin Lui, China’s lead at Climate Action Tracker and climate policy analyst at NewClimate Institute, China is estimated to experience peak emissions by 2025 according to a recent assessment by Climate Action Tracker, as described in a paper on Carbon Brief. Carbon intensity is also expected to be reduced by 67% by 2030 according to the recent assessment and calculations.

“Both of these pledges depend on the consumption of fossil fuels, which is projected to peak and start declining, rather than on China’s production capacity, which is due to expand,” Lui wrote.

The Energy Crisis and Recommitment to Coal

COVID-19 recovery has driven up energy demand drastically, with a 16.5% increase in electricity demand in the first six months of 2021, falling to flat for the remainder of the year. China’s government met this increased demand with the introduction of government policies that were favorable for coal use, including raising the coal cap price, opening new coal mines, and an increase to production targets, Lui explained. Russia’s invasion of Ukraine has also had a huge adverse impact on China’s energy sector.

The year ended with the China Electricity Council estimating that another 180 gigawatts of coal-fired power would be added to the energy grid by 2030. China has said of these new coal plants that they will decrease in use over time as renewable energy output increases to take on the load, and has also raised output targets for crude oil and gas to accommodate the energy increase.

“In our projections, fossil gas use is due to rise almost 70% from today’s levels by 2030 – to up to 12% of the energy mix  as a core strategy to partially displace coal. Accordingly, we expect coal consumption to peak and start declining after 2025, while oil plateaus before 2030,” Lui wrote.

On the flipside, non-fossil fuel derived energy is expected to grow by approximately 80% between 2020-2030 in China. China has made remarkable progress on the growth of its renewables, with the renewables capacity passing 1,000 gigawatts in 2021, quadruple the amount it had in 2013. Wind and solar both supply over 300GW of energy apiece, with another 150GW being added this year.

At the current rate of renewable energy growth alongside increasing coal use and fossil fuel reliance and taking into account China’s planned climate developments, the emissions trajectory for 2030, applied on a global scale, would lead to 3C of global warming.

Investing in Companies Reducing Emissions

The KraneShares MSCI China ESG Leaders ETF (KESG) invests in the leading ESG companies within China, including many that are transitioning to lower emissions practices. The fund seeks to track the MSCI China ESG Leaders 10/40 Index, an index that is free float-adjusted and market cap-weighted. It includes companies with high ESG ratings compared to their peers within their industries.

The index is comprised of securities from the following sectors: consumer discretionary, industrials, financials, communication services, healthcare, real estate, utilities, consumer staples, information technology, materials, and energy. Securities included make up the top 50% market cap of their sector, and no single security can make up more than 10% of the underlying index, while no sector accounts for more than 40% of the index.

KESG has an expense ratio of 0.58%.

For more news, information, and strategy, visit the Climate Insights Channel.