Voice of the Experts | Zhu Min: Embracing carbon neutrality and embracing the future, you have no choice

On January 8th, Tsinghua Wudaokou Online Lecture Hall jointly launched the first lecture of 2022 in conjunction with the series of lectures on "The Future Has Come - Global Leaders on the World" and the Tsinghua Wudaokou Global Competency Lecture Series. Zhu Min, Dean of the National Institute of Financial Research of Tsinghua University, Vice Chairman of the China Center for International Economic Exchanges and former Vice President of the IMF, was invited to share his observations and thoughts on the grand narrative of global carbon neutrality with the theme of "'Paradigm Change': The Long Tide and Big Wave of Carbon Neutrality". This article is based on the transcript of this lecture, and is organized and edited without changing the original meaning.

The title of this lecture is "'Paradigm Shift': The Long Tides and Big Waves of Carbon Neutrality".

Carbon neutrality is the trend of the world, the biggest change in the way human development has been since the Industrial Revolution, it will profoundly affect the future, but also violently impact the present, so we call it "paradigm change". This is a long-term process that lasts until 2060, so it can be described as a "long tide", during which breakthroughs in science and technology, breakthroughs in policies, and global competition will surely set off endless waves, which will be an extremely wonderful and magnificent stage in the history of human development.

Carbon neutrality is the trend of the contemporary world

In September 2020, General Secretary Xi Jinping solemnly pledged at the United Nations General Assembly that China would become carbon neutral by 2060. In December of the same year, the general secretary promised at the Climate Ambition Summit that China's carbon dioxide emissions in 2030 would be more than 65% lower than in 2005, and that non-fossil energy would account for about 25% of primary energy consumption.

Why is China making these important commitments?

Since the 1950s, human carbon dioxide emissions have increased sharply, the global average temperature has also shown an equally violent rise, according to the current trend, by 2060 the global average temperature will rise by more than two degrees, will lead to adverse natural disasters continue to occur, greatly damaging human health and living environment. These have clear factual basis. Therefore, more and more countries have reached a consensus that carbon neutrality is the trend of the times, the traditional industrial era has come to an end, and a new era of development is about to begin. So far, more than 132 countries and territories have committed to carbon neutrality, covering 60% of the world's population, 75% of the total economy and 75% of carbon emissions.

It is important to understand that carbon neutrality is a fundamental disruption of human production and lifestyle since the Industrial Revolution. This is not just a process of changing the way energy is obtained and produced, it will change human utility preferences and value orientations, from the pursuit of material forms of production and consumption to the pursuit of human well-being - the harmonious and healthy development of people, society and nature.

Carbon neutrality is a comprehensive change in human development methods and governance rules since the Industrial Revolution, and it has become a new commanding height of global competition, one of the most important aspects of which is the competition of rule-making, because the highest level of competition is rule-making. Europe, the birthplace of the Industrial Revolution, is ahead of the curve, realizing that the set of rules established through the Industrial Revolution is no longer applicable, so the European Union has launched a "Green New Deal" to lay out from all aspects, including energy systems, production systems, transportation systems, building systems, etc., hoping to dominate the formulation of carbon neutral rules. The border adjustment tax now introduced in Europe is to use the concept of carbon emissions to change the competitive landscape of the entire market. The United States also returned to the Paris Agreement immediately after Biden took office, promoting carbon neutrality to a national security issue of the United States and allowing the United States to lead the world once again. Many countries around the world are now seeing that the transition of energy and economies to low carbon under the global carbon neutrality goal will reshape the world's competitive landscape.

As a responsible major country, China cannot stay out of the trend.

At present, China's total carbon emissions are already the first in the world, and its per capita carbon emissions exceed those of the European Union, second only to the United States. Our carbon emissions per unit of GDP are also very high – the emissions per US dollar of GDP created are 0.69 kg of carbon, which is about 1.5 times the global level, 2 times that of the United States, and 3 times that of Japan, so we still have a lot of room for improvement in development efficiency. Without China's active participation, global emission reductions cannot be achieved, which is not only a requirement of the international community, but also a very important aspect of our practice of the General Secretary's major initiative to build a community with a shared future for mankind.

For China, our carbon emissions are to peak in 2030 and achieve "zero carbon" (net emissions of zero) by 2060, and the decline curve is particularly steep, and it is a very difficult task to complete in just 30 years. The bigger challenge is that China is still a developing country, which is very different from the developed countries. Europe as early as the 90s of the last century has reached the peak of carbon, their service industry proportion is high, the proportion of industry is low, the economic growth rate is also very low; we are manufacturing, industry as the core of the economy, to maintain medium and high speed growth, primary energy consumption is basically flat, while emissions to reduce to almost zero, this "gap" must rely on the power of science and technology, the power of finance, the power of institutional arrangements to fill.

In today's global situation, the road to high carbon and high growth is no longer feasible, and we cannot follow Europe's low-carbon, low-growth model because we still need growth. We have only the third way - under the dual constraints, choose a low-carbon and zero-carbon green technology and industrial system to achieve a win-win situation of carbon reduction and growth.

This is the fundamental goal and challenge for us to start a new long march in the next 40 years, and there are also major opportunities in the challenges.

Our early transformation is conducive to reducing the replacement cost and sunk cost of the transformation. In contrast, the replacement cost of developed countries is very high, such as the United States is 845 cars per thousand people, Japan is 575, China is only 173, this gap is huge, the future will be filled by new energy vehicles, which is why new energy vehicles are so popular in the Chinese market. China's higher economic growth rate can provide more market demand for the innovation and promotion of green products, and our green technology and industry have thus formed a certain accumulation, and some aspects are even in a parallel and leading position, especially our advantages in digital technology can help research and development. We also have institutional and policy advantages, and the construction of ecological civilization and the proposal and practice of new development concepts will help form a unified social consensus. Taking advantage of these advantages can enhance the competitive advantage of mainland technology and industries and promote a systematic low-carbon transformation.

In the 40 years of reform and opening up, China is taking the traditional industrialization model, we are catching up; in the next 40 years, China can take the model of green development, we can lead the world, so that the world can share green prosperity. At this point in time, we see the glory of the past 40 years that we are extremely proud of, and looking to the future, we will usher in an even more brilliant 40 years, that is, carbon neutrality.

The energy revolution

The two grippers of carbon neutrality are the energy revolution and the financial first.

According to 2019 data, our annual carbon emissions are about 10 billion tons, accounting for 28.9% of the world, of which electricity accounts for 40%, industry 30%, construction 15%, transportation 15%; fossil energy accounts for 84% of our energy structure, of which coal accounts for 57.7%, oil accounts for 18%, natural gas accounts for 8.2%, compared with non-fossil energy accounted for only about 15.3%, this ratio continues to expand.

China's four-step carbon neutrality route.

The first step is "two alternatives": one is clean energy to replace fossil energy, and the other is energy electrification.

The second step is "two decoupling": first, electricity decoupling from carbon emissions, and then decoupling economic development from carbon emissions.

The third step is to reach the peak: the carbon emissions of electricity will peak in 2025 ahead of schedule, and the carbon emissions of energy consumption and the whole society will peak in 2028.

The fourth step is neutralization: achieving net zero emissions by 2055-2060.

With this path, an important part is to subtract coal and remove coal.

China has abundant coal resources and sufficient production capacity, so it has formed a partial coal energy structure, our annual coal consumption reaches 4 billion tons, accounting for more than 50% of the world, of which energy consumption accounts for nearly 60%; on this basis, we have formed a unique industrial structure, coal-fired power generation and steel, cement production accounted for about 50% of the world. That's why our energy use is inefficient – in 2020 China will account for 18% of global GDP, 25% of energy consumption, and 30% of carbon dioxide emissions.

According to the plan, the technical path of coal reduction is also divided into four steps, in 2025, 2030, 2035, 2050, the proportion of non-fossil energy will reach 20%, 25%, 35%, 65%, respectively, and the corresponding proportion of coal will be reduced to 50%, 45%, 30%, and 15% respectively. During the "14th Five-Year Plan" period, the construction of coal-fired power will gradually slow down; the construction of coal-fired power during the "15th Five-Year Plan" period will be completely stopped; the replacement of coal-fired power will begin in 2030, and the non-fossil energy power generation will be increased to 50%; in 2035, the power system based on new energy will be basically completed, and the non-fossil energy power generation will be further increased to 65%; and the net zero emissions of the power system will be basically achieved in 2050。

What replaces coal?

The first is optoelectronics. The continent has 1.28 million square kilometers of desert and Gobi, and as long as photovoltaic power generation equipment is installed on one-tenth of the land, the annual power generation can reach 20 trillion kWh. In addition, if we install photovoltaic power generation systems on the roofs of residential buildings and office buildings, the annual power generation can reach 3-4 trillion degrees, which is basically equivalent to half of our national electricity consumption in 2020, which shows that China has rich solar energy resources. Now the cost of photovoltaic power generation has been lower than coal power, the UAE's photovoltaic power generation feed-in tariff, once the lowest electricity as long as 1.35 cents, Qinghai photovoltaic power generation feed-in tariff has dropped to 0.24 yuan once, Qinghai photovoltaic power transmission to Henan Zhumadian Landing cost has been lower than zhumadian local coal power price. The feed-in tariff of photovoltaic power generation in Ganzi Prefecture, Sichuan Province, has reached less than 0.15 yuan last year.

We also have huge wind energy resources, from Tibet to the northeast to the southeast coast, the mainland's wind energy resources are widely distributed, with total land reserves of up to 3400 GW (note: 1 GW equals 1 million kilowatts), and there are 500 GW of offshore wind energy resources.

In the next few years, China's photovoltaic and wind power will usher in great development. The average annual installed capacity of photovoltaic power generation during the "14th Five-Year Plan" period is expected to reach 70 to 90 GW, with an average annual increase of 73 GW before 2030 and an average annual increase of 83 GW from 2030 to 2050. Wind power will add an average of 76 GW per year until 2030, with an average of 65 GW added between 2030 and 2050.

At the same time, the demand for hydrogen energy will also rise rapidly. Although the energy density of hydrogen is lower than that of gasoline, it is much higher than that of lithium batteries, and hydrogen is an important chemical material and will also become an important fossil fuel substitute in steel, cement, heavy transportation and other fields, and the annual consumption in the future can reach 81 million tons. At present, the production of hydrogen mainly comes from industrial by-products and coal gasification, and with the maturity of large-scale electrolysis of water to hydrogen production technology, its production structure will undergo huge changes in the future and become a particularly important energy source.

Another area of the energy revolution that cannot be ignored is energy storage, which can greatly help to improve the flexibility of the energy system. The continent currently has an installed capacity of 30 GW of pumped storage, ranking first in the world. In addition, there are other means of energy storage, and the cost problem still needs to be overcome. The development of new energy, energy storage and distribution are two fundamental issues, we call it the "second stage challenge of new energy substitution" - the production cost of photovoltaics and wind power has dropped rapidly, and the rest is to overcome the problems of energy storage and transportation and deployment, so that the consumption cost of landing is reduced.

Reshape the Chinese economy in an all-round way

Under the great green changes, the economic system and spatial pattern formed in the traditional industrial era will be reconstructed, and under the constraint of comprehensive decarbonization, energy, transportation, construction and agriculture will usher in fundamental changes.

The structure and path of China's comprehensive decarbonization can be summarized as the comprehensive application of six different means of electricity, hydrogen, ammonia, biomass, synthetic fuels, and carbon capture, and according to their adaptability in different industries, different technologies and applications will be formed.

For example, the key to decarbonizing transportation is electrification, supplemented by hydrogen, ammonia, and biomass fuels. Specifically, in the transportation energy consumption structure in 2050, light vehicles will be mainly driven by electric drives, supplemented by hydrogen fuel cells; heavy trucks will be dominated by hydrogen energy, and a small part will be electric drives; railways will be fully electrified; aviation will mainly rely on biofuels because of energy density and stability requirements; and the main fuel for shipping is ammonia. The entire energy mix will change dramatically compared to today. In 2021, the national automobile sales are 28 million, of which the sales of new energy vehicles have reached 3 million. By 2030, our new energy sales are expected to exceed 16 million units, accounting for 40% of total car sales, which is a remarkable development.

Heavy industry uses electrification, hydrogen, carbon capture and storage, and bioenergy to achieve complete decarbonization. For example, with the improvement of steelmaking technology, the use of zero-carbon electricity to directly reduce iron, the intensity of total emissions will drop rapidly. Another example is the chemical industry, at present, our production of synthetic ammonia and methanol is based on coal as the main raw material, and North America and Europe are mainly natural gas and oil. In the future, hydrogen will not only become the main production raw material in the chemical industry, but also the main energy source in the production process, achieving a fundamental transformation of "from coal to hydrogen".

In the construction sector, the average residential area Chinese is expected to be higher than in Europe by 2050, which is a remarkable achievement. At present, the energy consumption structure of the construction industry, heating and cooling account for the majority (heating 34%, refrigeration 5%), domestic hot water accounted for 23%, cooking accounted for 21%; the energy structure of the construction industry is still dominated by fossil fuels - 20% coal, 11% oil, 9% natural gas, plus 28% electricity. In the future, the energy structure of the building sector will be basically fully electrified, and the proportion of electricity will reach 75%, and the rest will be industrial waste heat, solar heat, biomass, etc.

The long-term low-carbon transition will promote China's development paradigm shift and scientific and technological development.

We are changing the way we produce through deep decarbonization, while developing technological innovation, the essence of which is to promote decarbonization through digitalization and electrification. Use a clean and low-carbon new energy production and consumption system to form a new zero-carbon energy system, and then use a new energy system to support the new industrial system. This requires the reform of the entire institutional mechanism, the establishment and improvement of the carbon price mechanism and the carbon market, to create a good policy environment, institutional environment and market environment for the long-term low-carbon transformation. This is a layered process, from coal reduction to coal gradually promote the change of the entire production system, and then promote the change of the consumption system, and then promote the change of the entire technology system, and finally form the global competitiveness of China's zero-carbon economy.

Scientific and technological innovation is the most fundamental force

Looking back at the history of technological development in recent decades, from the computer host in the 90s of the last century, to the later PC Internet, to the mobile Internet, and then to digital technology, artificial intelligence, big data, representative companies have also changed from IBM, Microsoft, Apple, Google to Amazon and a number of chip companies. The technology representatives who lead at every stage of this process have been recognized and supported by the capital market.

Today, the development of science and technology has entered the carbon-neutral and technological stage, who is the leading company? It is the Tesla and Ningde era. Because the market realizes that the tide of carbon neutrality has become unstoppable, only by following carbon neutrality and technology can it keep up with the trend, which is why the capital market is pursuing Tesla and ningde era. Carbon neutrality will be a process of de-technology centralization, and many new technologies and new large enterprises will emerge. If the conversion efficiency of solar photovoltaics can be increased from 20% to 30%; if the initial investment cost of electrolyzing water to hydrogen can be reduced from $850 per kilowatt to $200; if the cost of hydrogen fuel cells can be further reduced, the efficiency can be further improved; if we finally conquer the controlled nuclear fusion technology; if the performance of heat pumps can be improved by another 4 to 8 times. There is a huge space for scientific and technological development and innovation.

As technology disrupts and changes the world again and again, the entire production process, traced upwards from the final product, will be reshaped. For example, the "zero carbon" of the car is not as simple as the energy from fuel to electric drive, but the common carbon reduction of the entire industry chain - 6% of the carbon is circulated in the industrial chain, improving the processing efficiency of raw materials accounts for 16%, energy substitution accounts for 39%, the use of renewable heating systems accounts for 19%, production efficiency increases account for 7%, through the whole industry chain of each production process and link of scientific and technological innovation and efficiency improvement, in order to finally produce a car with zero carbon emissions.

The future carbon-free energy system will rely entirely on digital systems to operate, place, transport and regulate, and use digitalization and intelligence to improve efficiency and reduce costs. During the "14th Five-Year Plan" period, the state put forward a series of green technology promotion suggestions, such as microgrid technology, industrial waste heat concentration, medium and deep geothermal utilization, hydrogen energy vehicles, intelligent charging, and three-dimensional greening of buildings.

China's technological development has come ahead in many aspects, especially the research and innovation of new energy. In the field of solar energy, China ranks first in the world in terms of both the number of papers published and the number of high-quality papers, twice that of the United States. Our paper publications in the field of wind energy and geothermal energy are also the first in the world, and the number of papers published in biomass energy is second only to the United States and the second in the world. It can be seen that our basic scientific research is also moving forward.

Finance first, invest in the future

The two grippers of carbon neutrality – energy and finance – are interrelated, and even finance moves faster. With the start of the carbon neutrality process, investment in oil and coal has begun to decline globally. For example, the amount of bonds issued by the coal industry fell by 60% in 2021. We say that finance comes first, investing in the future, which is actually a big challenge for the financial industry, because carbon neutrality involves a lot of technological innovation and application.

China's green finance is at the forefront of the world.

As of the first half of 2021, our green loan scale reached 13.92 trillion yuan, ranking first in the world; the stock size of green bonds was 813.2 billion yuan, the second in the world; our green enterprise equity financing and refinancing totaled more than 20 billion yuan; in addition to financial innovations such as green development funds and green PPP industry investment funds. And we've built a set of green guidelines, statistics, incentives, and regulatory mechanisms, which are all ahead of the curve.

However, compared with the important position of carbon neutrality, the proportion of green financing is still relatively low, accounting for only 4.6% of the total social financing by the end of 2020, and more than 90% of it is from bank loans, and the role of the capital market is far from enough. Because banks have natural shortcomings in supporting green financing: one is the term mismatch; the second is the mismatch of risk preferences; and the third is the lack of a perfect incentive mechanism, and the return on green investment is unstable and the return cycle is long. From green finance to zero carbon finance, the financial industry is facing great challenges, because "zero carbon" is a broader, deeper and larger concept than "green".

The key role of finance in carbon neutrality is first and foremost the large, long-term and risky investments needed to be carbon neutral.

Regarding the overall investment size, there are different forecasts in various aspects. According to the analysis done by Tsinghua, it is estimated that by 2050, it will need about 100 trillion to 135 trillion yuan of energy infrastructure investment, depending on whether it is 2 degrees or 1.5 degrees. There is a forecast in Europe that says it will take 238 trillion yuan of investment. There are also higher projections that say 500 trillion is needed.

In the 14th Five-Year Plan, the state put forward a series of investment plans, with a total of 44.6 trillion yuan, covering information infrastructure, renewable energy-friendly energy/power systems, green and low-carbon urbanization and modern cities, digital upgrading and green transformation of traditional industries, expansion and reshaping of green consumption, and innovative infrastructure, especially in the field of digital upgrading and green transformation, with an investment of up to 16.5 trillion yuan. It can be seen that in the first five years of the 40-year phase, we attach great importance to investment.

While doing a good job in incremental investment, the financial industry must also manage the existing financial stock.

According to data released by the National Balance Sheet Research Center, the total assets of China's finance have reached 900 trillion yuan in 2019; the scale of financial assets of Chinese residents, deposits, bonds, insurance, stock investment, and fund investment, together, has reached 325 trillion yuan. In the process of carbon neutrality, there will be changes in asset prices, the price of high-carbon assets will fall, the price of low-carbon assets will rise, and even bubbles will appear, and the entire stock of financial assets will change fundamentally, which is a bigger challenge.

Such trends can already be seen. One study shows that if the global temperature rise in 2050 is aimed at controlling within 2 degrees, 35% of the world's oil reserves, 52% of natural gas reserves, and 88% of coal reserves will become stranded capital. Research by the Green Finance Development Research Center of Tsinghua University shows that under the impact of rising carbon prices and falling new energy prices, the bank loan default rate of domestic coal power companies will climb from 3% to more than 20% in 10 years.

Price changes in the decarbonization process will have the most direct impact on the financial stock. From the perspective of heavy industry, cement prices will rise by 30%, steel prices will rise by 20%, plastics will rise by 50%, shipping prices will rise by 110%, and the operating profits of enterprises will be squeezed, which in turn will affect the valuation of enterprises and force enterprises to carry out technological transformation of decarbonization.

In 2020, the total assets of enterprises in high-carbon industries such as coal, petroleum, smelting and electricity, heat, gas, water production and supply on the mainland reached 40.35 trillion yuan, and the loans of the four state-owned commercial banks to the "five major categories" were 34.86 trillion yuan, accounting for about 53% of the company's total loans. Decarbonization will affect the valuation of these financial assets, and the non-performing and default rates will also change, so the task of financial institutions to manage the stock is very important.

The lending orientation of financial institutions will promote structural changes in the economy.

Over the next 30 years, China's electricity demand will rise sharply, from 6 trillion kWh in 2016 to 14-15 trillion kWh in 2050; the power generation structure will also change dramatically, mainly coal and water in 2016, and no coal in 2050, mainly wind, hydropower and solar energy. This process is inseparable from the support of bank loans - coal power equipment, coal-fired generators are gone, into a variety of hydropower, photovoltaic, nuclear power equipment.

Carbon neutrality can also cause changes in the demand structure of commodities.

The cumulative value of global commodity price increases in 2021 will reach 2% of global GDP, a huge cost increase and a huge transfer of wealth – from the producing and consuming countries of manufactured goods to the producers of resources. By 2040, the demand for copper will increase by 1 times compared with today, the demand for nickel will increase by more than 3 times, the demand for lithium will rise by 20 times, and the demand for cobalt will also rise by 3-4 times. As demand for rare metals rises sharply, the market prices of commodities and their financial derivatives will undergo structural changes. 20 years ago, different varieties of commodity markets are independent of each other, such as wheat prices and palm oil prices, oil prices and ore prices are not related to each other, and 10 years ago the pan-financialization of commodities, including grain, the prices of all commodities began to follow the price of oil, and now we find that all commodity prices follow the price of rare metals, the future carbon neutrality will greatly drive the demand and price of rare metals, which requires financial stabilization and support.

The financial industry also needs to help find a highly uncertain price for carbon.

When Trump was in power, the United States set the carbon price at $7/ton, and when Obama was at $42, Nicolas Stern, a well-known global climate expert in the United Kingdom, said that the carbon price would not be as high as $266 to achieve carbon neutrality in the context of a 1.5-degree global warming. Now there are also some carbon trading markets looking for a reasonable carbon price, Europe is recently 54 US dollars / ton, our country is still seven or eight US dollars a ton, the pricing difference is so huge, the financial industry needs to step in to help find an uncertain carbon price. In the process of promoting carbon neutrality, the key is to harness the power of the market economy, in which the financial industry will play an important role.

Construct a structural monetary policy with Chinese characteristics that is consistent with carbon neutrality.

Traditional monetary policy is focused on stabilizing prices and promoting economic growth, with the goal of carbon neutrality, we need to introduce window policies, the introduction of carbon neutral pillars that support carbon neutrality and balance carbon neutrality risks, from the past two pillars to a three-pillar monetary policy. The People's Bank of China has rich experience in inclusive finance, and we are expected to achieve breakthroughs in this regard and build a world-leading structural monetary policy.

At the same time, it is necessary to reshape the risk management system that is consistent with carbon neutrality, turn the three pillars of the Basel Agreement III into the Basel Sustainable Development ESG, and adjust the consideration of minimum capital, the stress test of external constraints and the disclosure of information. The EU has a test showing that the capital adequacy ratio of the European banking sector will be reduced by 0.3-0.8 percentage points per year because of climate change, and bank loans issued to businesses will also be reduced by 1.6%-5% per year, which of course will adversely affect the economy, so all risk models will change.

International competition has begun, especially in the financial sector.

Where is the green bond market, where are the green standards, and what are the standards for disclosure? These questions need to be answered. The Financial Stability Board's Task Force on Climate-Related Financial Disclosures (TCFD) released the Climate Disclosure Framework five years ago, and more than 2,600 financial institutions now support it. International banks have also set up a net emissions alliance, requiring operations, loans, and portfolios to meet net emissions standards by 2050, and no banking institution in China has participated.

I am currently a member of the IASB's Celebrity Panel, and our mission is to build a new accounting standard for sustainable development, in which companies will not only have to use existing IAS for auditing, but also use sustainable development standards for accounting audits, which means that corporate accounting will usher in a huge change.

The future is here

Never before in the history of mankind has there been such a huge scale, so encompassing, so penetrating, so perfect self-revolution and self-subversion. When science and technology change, when the mode of production changes, when the mode of consumption changes, when social organization changes, when value changes, when man, production, society, and nature are integrated, this is a "paradigm change" of human development since the Industrial Revolution.

The long tide of carbon neutrality will continue continuously, and on top of this long tide, the development of technology and global competition will certainly set off huge waves from time to time.

So, embracing carbon neutrality, embracing the future, you have no choice.

Content source: Tsinghua Wudaokou Executive Education

Editor: Wang Yuanyuan