Environmental targets are now as much a priority for the Chinese government as economic growth. “China is taking environmental policy objectives very seriously, but there is still a long way to go,” says Dijana Bogdanovic, a sustainability analyst at Union Investment. In 2017, she travelled to China to take stock of how many of the country’s planned measures had already been implemented.
Setting the future course of environmental policy
At the 19th Congress of the Communist Party in October 2017, president and party secretary Xi Jinping not only consolidated his position of power – he also addressed urgent environmental issues in detail. In his three-hour speech, the president used the word ‘environ ment’ 89 times, compared with only 70 instances of ‘economy’. When forced to choose between growth and environmental protection, China had often prioritised growth in the past. “Now, a change in attitude has taken place at the top level of Chinese politics. But the new policy line is not a response to political pressure from the international community. It has been triggered by growing discontent among the Chinese population,” says Bogdanovic. Environmental problems have reached a scale where people’s health and quality of life is drastically affected. The government’s ‘war on pollution’ aims to improve the quality of life in an effort to ensure social stability.
Priorities in the fight against air pollution
Smog is currently still part of everyday life in most Chinese cities. Since 2013, China has been using increased environmental checks combined with more ambitious targets to get the problem under control. The country’s 13th five-year plan (2016–2020) includes a target to reduce the concentration of particle pollution (PM 2.5) by 18 per cent. In order to meet the plan’s strict requirements, the production of commodities such as aluminium, steel and iron ore – one of the main causes of pollution in China – needs to be restricted during the winter heating season. In addition, the country intends to switch the heating systems of several provinces over from coal to gas.
These measures seem promising, but living conditions remain unhealthy, especially in large cities and industrial areas. Particle pollution is often several times above the recommended upper limit published by the World Health Organization (WHO). China’s high air pollution levels are attributable in roughly equal measure to coal-powered electricity generation, heavy industries and street and freight traffic. Traffic in particular is proving increasingly problematic in China’s megacities. Up to 50 per cent of particulate emissions in cities are caused by vehicles and especially by trucks. A combination of growing traffic volumes and low emission standards for diesel and petrol vehicles in China is responsible for this predicament. But if the country manages to turn its plans for an electric-powered transport revolution into a reality, everything could change within a few years.
High particulate concentration levels (PM 2.5) in Beijing
High hopes pinned on electric-powered transport
The Communist Party leadership has ambitious plans to get five million new energy vehicles (NEVs) on the country’s roads by 2020. The target is to sell two million electric and plug-in vehicles per year to ensure that by 2025, 20 per cent of all vehicles in the country will be NEVs. China has held the biggest share of the global NEV market since 2015 (see chart).
In addition, there are plans to require international car manufacturers who sell more than 30,000 cars per year in the Chinese market to commit to an electric vehicles quota of 10 per cent from 2019. From 2020, this quota will be increased to 12 per cent. “China’s electromobility industry has enormous growth potential,” says Dijana Bogdanovic. “Being a global leader in the field of electric-powered transport will also offer China the opportunity to make up for the technological disadvantages that its domestically produced conventional vehicles have compared with imported products. And China is the world’s largest car market, so its pioneering spirit will pave the way for a global change in the dynamic of electric-powered transport.” But Bogdanovic also points out that there are still a few challenges to overcome on the path to more electricity-based transport. The electric vehicles quota that will be introduced in 2019 will be based on the number of electric vehicles built, not sold. It is therefore possible that the majority of the electric vehicles produced will not actually be used.
#Enforcement of the electric vehicles quota
The Chinese government intends to ensure compliance with its electric vehicles quota by means of a credit points system. An electric vehicle with a longer travel range could be worth up to five credit points, while hybrid vehicles with an electric drive system and a combustion engine would only earn two credit points.
Companies who do not meet the quota can either offset their shortfall with increased production in 2020 or will have to buy credit points from companies that outperform the quota requirements.
Range and charging points infrastructure
Another problem is that mainstream e-vehicle models currently only offer a relatively limited range of less than 200 kilometres and many areas of China do not have any scalable infrastructure for charging points. In terms of range, the Chinese government has made it a target that vehicles powered purely by electricity should be able to cover around 300 kilometres on one battery charge by 2020 and as much as 500 kilometres on one charge by 2030. To achieve this goal, manufacturers will need to optimise the energy density of the batteries and create more lightweight designs. The cost of the battery, which currently accounts for up to 45 per cent of the total cost, will be crucial for the economic viability of electric-powered vehicles. It is anticipated that battery costs will be reduced to 100 US dollars per kilowatt hour by 2020. Once this stage has been reached, further cost reductions can only be achieved through technological innovation. Electric-powered cars have not helped to improve China’s CO2 footprint yet. This is mainly due to the energy mix that goes into the production and charging of the batteries. At present, most of China’s electricity is still generated using inefficient coal-fired power plants. An average electric vehicle in China therefore causes about 167 grams of CO2 emissions per kilometre, which is higher than the emission level of a fuel-efficient combustion engine. The key to achieving a positive effect from electric vehicles on the country’s climate footprint lies in a high degree of battery usage. In other words: If used infrequently, an electric vehicle will be responsible for more CO2 emissions than a diesel engine when the entire manufacturing process is taken into account.
Market leader for new energy vehicles (NEVs)
Impact on prices and metal mining
It can be expected that the boom in the electric-powered transport segment will also have an impact on demand for various metals required in the manufacturing process. Lithium, cobalt, nickel and copper, for example, are all primarily required for the production of electric vehicle batteries and will therefore become highly sought after. The price of cobalt has already more than tripled since the summer of 2016. Cobalt is the most expensive commodity that can be used to increase the energy density of batteries and thereby extend the range of electric vehicles. But its extraction (60 per cent is extracted in DR Congo) is also associated with a number of environmental and social concerns such as child labour, human rights violations, significant health risks for workers and the financing of war lords and armed conflicts.
Air pollution is not the only challenge that China is facing. Water and soil quality are also key areas of environmental concern. According to estimates by the Chinese Ministry of Land and Resources, 60 per cent of the country’s groundwater is not fit for human consumption. 25 per cent of China’s rivers are so heavily polluted by discharge of industrial waste water that mere skin contact with the water poses a health hazard.
Growing demand for valuable commodities
Water quality to be improved to a minimum standard by 2020
Here, too, the Chinese government has set itself ambitious targets. It wants 70 per cent of all water in the country’s seven main water catchment areas and 93 per cent of all sources of drinking water in Chinese cities to meet a minimum water quality standard by 2020. In November 2017, Dijana Bogdanovic met a number of representatives of Chinese water companies in China and visited several waste water facilities (including China Everbright Water, Beijing Enterprises Water, Beijing Origin Water Technology and Sound Environmental Resources). “My discussions with these representatives showed that China has initiated the right kind of measures and that increasing numbers of solutions are being offered to address water pollution in an appropriate manner,” says Bogdanovic. But there are still aspects that require further improvement in terms of sustainability. For example, most Chinese water companies have not yet committed to the water standard defined by the Carbon Disclosure Project (CDP) and thus do not publish any figures in relation to their water consumption. “We will maintain our dialogue with these companies and insist on our demand for them to commit to the CDP water standard,” Bogdanovic emphasises.
60 per cent of China’s groundwater is not fit for human consumption. 25 per cent of its rivers are so heavily polluted by the discharge of industrial waste water that mere skin contact with the water poses a health hazard.
Contaminated soil – an underestimated risk
One of the greatest, but also least transparent environmental issues in China is soil pollution. Despite its wide range of adverse impacts, the problem of contaminated soil remains underestimated by the Chinese people. Around 20 per cent of all arable land in China is highly contaminated with heavy metals. This casts doubt on long-term food security. Every year, twelve million tonnes of cereal crops, which could provide food for 24 million people, are contaminated by polluted soil. Decontaminating the soil is not an easy undertaking – it would require substantial investments and measures that would take decades to complete. Dijana Bogdanovic found that the company representatives and experts she met for talks mostly could not contribute much to discussions on this issue. “There is currently a very strong focus on fighting air and water pollution. So far, the Chinese government has done relatively little in terms of decontaminating polluted soil.” But Bogdanovic expects that more action plans in relation to this issue will be launched in the coming years.
In conversation with Sonja Müller, Director of the China Competence Center at the Chamber of Industry and Commerce for Darmstadt and Frankfurt
Do you think that China’s new environmental policy could become a model for other emerging economies?
China’s ‘war on pollution’ is certainly a very serious and genuine effort. But I would not consider China a role model for other emerging economies for two main reasons: Firstly, China has successfully lifted around 700 million people out of poverty in the last 30 years and has enabled them to enjoy a modestly prosperous lifestyle. This is an achievement that we have not seen in other emerging economies (yet). And secondly, I think that simply imposing measures as drastic as China’s new action plans is an approach that can only really work in an authoritarian state.
What role does electric-powered transport play in this context and how do you rate China’s chances of achieving its ambitions in this sector?
Electric-powered transport plays a very important role in the government’s plans and I think they have a realistic chance of being successful in this respect. The government is setting out the legal framework and is also investing large sums into development activities. At the same time, there are many Chinese investors looking for opportunities to invest in the electric transport industry. So it is no surprise that China has around 120 electric vehicle start-ups. One of them is called Nio. It was founded in 2014 and managed to develop its first production vehicle within just 35 months. The fact that many electric vehicle companies have a background in e-commerce is an added bonus. It can be assumed that these companies have a very good idea of what Chinese market participants like and need.
What should sustainability-oriented investors look out for when they consider investments in China?
In my honest opinion, it is still quite difficult to make sustainable investments in China. It depends on how broadly the underlying sustainability criteria are defined, but corruption alone is a major concern. In the 2017 Corruption Perceptions Index published by Transparency International, China was ranked in 41st place. That is a significant improvement, but there is still widespread corruption. A lack of transparency also makes it very difficult to verify data published in sustainability reports and other publications. My recommendation to those who still want to give it a go would be to try and obtain as much independent information as possible.
#China Competence Center
Since 2007, the China Competence Center has been offering advice to companies from its region with an interest in the Chinese market. It also supports Chinese member companies in the Frankfurt area.
Green revolution in full spate
China has made the fight against pollution its stated aim and has thereby gained a significant edge over other emerging economies. The government knows that a genuine, tangible improvement of the country’s environmental situation is needed to protect social peace and economic growth. It has recognised the signs of a change in public sentiment and also the opportunities that come with a global leadership role on environmental issues. The impact of Chinese environmental policies on industrial and energy commodity prices is already becoming apparent. The Chinese market is both the biggest producer and the biggest buyer of commodities such as coal, steel, iron ore and aluminium. “Environmental requirements have influenced demand in a way that should lead to a growing price gap between high-quality and low-quality commodities,” Dijana Bogdanovic says with confidence. “We can already see an upward trend in premiums on commodities that are more environmentally harmful and of poorer quality.” It will take decades to undo past damage to the environment, but first signs of success give cause for optimism. As a global, sustainabilityoriented asset manager, Union Investment is supportive of China’s new environmental policy line and also supports investors and companies in a constructive dialogue. Patience and delicate diplomacy will remain key tools in our continued efforts to promote sustainability-related issues in China in the future.
Sustainability analyst at Union Investment