Why Companies will decarbonise first

Last week I attended? the China International Supply Chain Expo in Beijing. On the flight over I read Material World: The Six Raw Materials That Shape Modern Civilization. The author, Ed Conway explains how salt, sand, iron, copper, oil and lithium are extracted, shipped and processed around the world.

At the opening ceremony I sat next to the head of one of the world’s largest pharmaceutical companies. While we waited for the prime minister, Li Qiang, to address us, this executive explained his company’s plans for carbon neutrality by 2050. They have halved business flights, entered into partnerships with local municipalities to extract bio-methane from municipal dumps, entered into power purchasing agreements for wind and solar for their factories, and are converting their fleet to full electric. He was clear that their motivation was not driven by the politics of the day but rather a deeper understanding of the costs of doing nothing and the benefits of a clean, reliable supply chain.

Li Qiang’s speech told the story of how the “made in China 2025” plan initiated 10 years ago is now a reality, with world-leading products on show at the expo. His speech was followed up by recorded interviews with politicians from around the world calling for collaboration in the fight to reduce carbon emissions.?

In the two days I spent walking the halls and speaking to exhibitors, what was abundantly clear is that China is rapidly decarbonising by integrating wind and solar with battery storage and EVs. As I wrote in this previous article China is on track to meet its 2030 national target of 1,200 GWs solar and wind capacity five years ahead of schedule.?

Meanwhile, Cop28 taking place at the same time in Dubai was rocked by controversy, with its president Sultan Al Jaber – whose day job is CE of the UAE’s state oil company – making a controversial claim. He told Mary Robinson, Ireland’s former president who is a UN special climate envoy, “There is no shared science or scenario out there that says that the phase out of fossil fuels is what is going to achieve 1.5 degrees”.?

Not only in the Middle East, but across the world there are growing state subsidies for fossil fuels. This recent IMF paper shows fossil fuel subsidies in 170 countries reached a staggering $1.3 trillion in 2022, double that of 2020. The IMF put the value of the external costs caused by emissions – implicit subsidies – at another $5 trillion. The combined subsidies are around 7% of global GDP. No oil producer wants to give that up.?

Coming back to China, they are the only country in the world that has enough decarbonisation hardware to make a dent on emissions. Their economy is slowing and their property bubble has burst, but clean energy technology – particularly solar, batteries and EVs – is turning out to be a great bet. China has high hopes to become a major exporter of this technology that they have invested in for the last 20 years. According to Bloomberg NEF, “China leads with energy transition investment, accounting for $546 billion, the US was a distant second at $141 billion, while the EU would have been second if treated as a single bloc, at $180 billion”.?

China’s greentech dominance should not simply be seen as a threat to local industry, it is also an opportunity for the world to reduce emissions. Biden’s Inflation Reduction Act and European tariffs and subsidies are designed to help the West stay competitive with China. However, with such an opportunity to decarbonise the last thing we need now is a trade war. When imposing tariffs, Europe and the US should consider the unintended consequences of driving up prices of greentech hardware made in China, the very hardware that can help Western manufacturers and businesses decarbonise their operations.??

The price of solar and battery storage has now reached a point where the payback period is well under 10 years; what’s more, solar and battery storage drive down the total ownership cost of EVs. Companies will start to decarbonise quickly and countries need to offer competitive pricing on the hardware irrespective of whether it is local or imported. As Ed Conway explains in Material World, we live in a hyper-connected world where politicians are unaware of how many countries are involved in the making of a single product. If China, the US and Europe enter a trade war now, the environment will be the biggest loser.

By Ross Douglas