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Global finance is mobilising to meet East Asia’s net-zero ambition

May 11, 2021
Tim Buckley

Chinese President Xi Jinping’s surprise announcement at the UN General Assembly in September 2020 that the world’s biggest emitter would become carbon neutral by 2060 has proved pivotal.

This has sparked a ratcheting up of greenhouse gas emissions reduction pledges and a global technology race to curb fossil fuels and boost renewable energy, as world political, corporate and financial leaders belatedly unite to deliver on the Paris Agreement.

The seismic changes to China’s energy mix needed to reach peak emissions by 2030 and net zero carbon emissions by 2060 have profound implications for Australia, particularly when viewed in conjunction with the Japanese and Korean pledges. These are Australia’s three largest export destinations for thermal coal and liquified natural gas (LNG) for power generation, as well as coking coal for steel manufacturing.

Ratcheting up of climate ambition

At last month’s climate summit, President Joe Biden upped the ante with his commitment to reduce U.S. emissions by 50-52% by 2030 compared to 2005 levels. Then Japan unveiled its own massively ratcheted up target of 46% emissions reduction from 2013 levels and South Korea said it would stop all public financing of new coal-fired power plants.

The financial markets are watching closely as China makes increasingly ambitious policy statements

Meanwhile, the Biden administration’s efforts to drive net-zero momentum in financial markets is gathering pace. All six of the largest U.S. banks have signed on to align with the goals of the Paris Agreement. JPMorgan Chase alone committed $2.5 trillion over the next decade to advance long-term climate solutions and sustainable development. We await the formal end to U.S. government export credit agency (ECA) financial support of fossil fuel projects offshore.

The financial markets are now watching closely as China makes increasingly ambitious policy statements.

China manufactures half the world’s steel so its new draft action plan for ‘carbon peak and reduction in the iron and steel industry’ which targets peak emissions by 2025 and a 30% cut in emissions by 2030 will be hugely significant for the world.

This plan poses a massive challenge for the Australian iron ore and coking coal industries which account for over half of the global export market, whilst opening up enormous direct reduced iron (DRI) and green ammonia export opportunities.

China is already by far the largest installer of renewable energy infrastructure (535GW of wind and solar as at December 2020). China has long been deploying renewable energy capacity at breakneck pace, installing a record 136GW of renewable energy in 2020 – more than half the total added globally. Four of the five largest renewable energy investors in 2020 were Chinese (NextEra Energy is the sole global top 5 non-Chinese firm).

China is already by far the largest installer of renewable energy infrastructure

China’s 14th Five-Year Plan (FYP-14) says around 20% of energy use should come from non-fossil fuel energy sources by 2025. And variable renewable energy’s (VRE) share of China’s total electricity generation should increase to 26% by 2030 (40% including hydro), up from 10% in 2020. Total VRE capacity is forecast to treble to a truly staggering 1,650GW by 2030.

China’s power utilities are shaking up their generation portfolios to respond to President Xi’s net-zero commitment with four of the top five generators releasing plans to peak their emissions.

China Huadian, the country’s third largest thermal power generator by capacity, announced it will shut more than 3GW of coal-fired capacity, add 75GW of VRE capacity (half their total) as part of its pledge to peak carbon emissions by 2025.

China’s total variable renewable energy capacity is forecast to treble to a staggering 1,650GW by 2030

China is exploring the potential to use hydrogen to store renewable energy that would otherwise be curtailed. Coal chemical major Baofeng Energy has started construction of the world’s largest solar-powered hydrogen plant of 90MW capacity, to be operational next year.

China is also leading the world on construction of ultra-high voltage grid transmission cables with 30 operational already, and another 10 approved in 2020.

Top Japanese lenders target coal exits

The signal from Prime Minister Yoshihide Suga’s 2050 net-zero emissions pledge in October 2020 and strengthening of Japan’s 2030 emissions reduction target at the recent climate summit looks to be far more than just talk, given the behind-the-scenes consensus building with leading Japanese financial institutions and energy companies.

Sumitomo is the latest giant Japanese trading house to target an exit from coal projects. According to media reports the firm is aiming to withdraw from thermal coal mining by 2030 and domestic and overseas coal-fired power projects by the latter half of 2040.

Marubeni Corp and Kansai Electric Power recently cancelled a plan to build the last proposed new 1.3GW coal-fired power plant in Japan. Trading house Sojitz has also revealed plans to divest all its stakes in thermal coal and oil projects by 2030 and coking coal projects by 2050.

At the end of last month, Japan’s largest bank Mitsubishi UFJ Financial Group (MUFG) tightened its coal policy and energy major Mitsubishi Corp announced a pivot from coal and fossil gas towards renewable energy.

Pressure on export finance for new overseas coal projects

China, Japan and South Korea are the world’s largest providers of public finance for overseas coal power projects through their ECAs.

South Korea’s President Moon Jae-in promised at the climate summit to end all new financing for overseas coal projects by the three major government-owned ECAs. President Biden is urging Japan to beat this and announce a total fossil fuel ECA exit policy at the upcoming G7 Summit next month.

President Biden is urging Japan to announce a total fossil fuel exit policy for export credit agencies

Finance is moving swiftly to respond to the new decarbonisation commitments and the push for renewable energy. In the past nine months, IEEFA has tracked 10 financial institutions from South Korea with new or improved coal policies, building on a raft of new coal exit policies across Japan, Taiwan, Malaysia and Philippines – too many to list here!

Australian investment bank Macquarie and Malaysia’s Maybank have just announced coal exits, while the Asian Development Bank’s new draft energy policy is a positive step in the right direction.

South Korea is set to launch 4GW of solar PV tenders this year, building on the 4GW installed in 2020, putting the country well ahead of its 31GW of solar by 2030 target. And a South Korean company is well on its journey leading heavy industry decarbonisation in Australia. Sun Metals, a subsidiary of Korea Zinc Company, is investing in wind and solar to power its zinc refinery so it can meet its target of 100% renewable energy by 2040 and RE100 commitments.

China, Japan and South Korea are Australia’s biggest fossil fuel buyers, and in business, the customer is always right. It’s time to start listening to our customers and follow their lead, and invest in the massive new value-added DRI, green ammonia, rare earth and lithium export opportunities this creates.

This article first appeared in the Asia Times.

Tim Buckley is IEEFA’s Director Energy Finance Studies, Australasia

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Tim Buckley

Tim Buckley, Director, Climate Energy Finance (CEF) has 30 years of financial market experience covering the Australian, Asian and global equity markets from both a buy and sell side perspective.

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