Carbonomics China Net Zero the Clean Tech Revolution

EQUITY RESEARCH | January 20, 2021 | 8:43 PM GMT

The following is a redacted version of the original report. See inside for details.

Carbonomics China Net Zero: The clean tech revolution

China’s pledge to achieve net zero carbon by 2060 represents two-thirds of the c.48% of global emissions from countries that have pledged net zero, and could transform China's economy, starting with the 14th Five-Year Plan. We model the country's potential path to net zero by sector and technology, laying out US$16 tn of clean tech infrastructure investments by 2060 that could create 40 mn net new jobs and drive economic growth. Our China Carbonomics cost curve highlights three key interconnected scalable technologies for net zero: 1) Electriﬁcation through renewable power dominates the lower part of the cost curve and has potential to de-carbonize around half of Chinese CO2 emissions, with power generation tripling by 2060 – dominated by wind and solar, driving increased demand for base metals such as copper (+15%) and a complete overhaul of the country’s power networks; 2) Clean Hydrogen is the second most important technology, potentially driving 20% of the de-carbonization, mostly in industry and heating; and 3) Carbon Capture could address 15% of China’s emissions, mostly in industrial processes. Exports contribute c.20% of Chinese CO2 emissions (gross): growing global consumer awareness of the carbon footprint of goods and the prospect of a border adjustment on carbon prices add urgency to China's net zero policy and highlight the importance of carbon markets.

Michele Della Vigna, CFA Zoe Stavrinou Chao Ji Trina Chen Shuo Yang, Ph.D. Sharmini Chetwode, Ph.D. +44 20 7552-9383 +44 20 7051-2816 +86 21 2401-8936 +852 2978-2678 +86 10 6627-3054 +852 2978-1123 [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] Goldman Sachs Goldman Sachs Beijing Gao Hua Securities Goldman Sachs Beijing Gao Hua Securities Goldman Sachs International International Company Limited (Asia) L.L.C. Company Limited (Asia) L.L.C.

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. For the full list of authors, see inside. AUTHORS ENERGY - OIL & GAS, CARBONOMICS

Michele Della Vigna, CFA Zoe Stavrinou +44 20 7552-9383 +44 20 7051-2816 [email protected] [email protected] Goldman Sachs International Goldman Sachs International

ENERGY - UTILITIES BASIC MATERIALS

Chao Ji Chelsea Zhai Trina Chen Joy Zhang +86 21 2401-8936 +86 21 2401-8679 +852 2978-2678 +852 2978-6545 [email protected] [email protected] [email protected] [email protected] Beijing Gao Hua Securities Beijing Gao Hua Securities Goldman Sachs (Asia) L.L.C. Goldman Sachs (Asia) L.L.C. Company Limited Company Limited

FINANCIALS ENERGY - OIL & GAS, REFINING & CHEMICALS

Shuo Yang, Ph.D. Nikhil Bhandari Amber Cai +86 10 6627-3054 +65 6889-2867 +852 2978-6602 [email protected] [email protected] [email protected] Beijing Gao Hua Securities Goldman Sachs Goldman Sachs (Asia) L.L.C. Company Limited (Singapore) Pte

AUTO AND AUTO PARTS REAL ESTATE

Yi Wang, CFA Bill Wei Fei Fang Olivia Xu +86 21 2401-8930 +852 2978-1383 +852 2978-1521 +86 21 2401-8946 [email protected] [email protected] [email protected] [email protected] Beijing Gao Hua Securities Goldman Sachs (Asia) L.L.C. Goldman Sachs (Asia) L.L.C. Beijing Gao Hua Securities Company Limited Company Limited

Sharmini Chetwode, Ph.D. Polly Tao Keebum Kim +852 2978-1123 +852 2978-6349 +852 2978-6686 [email protected] [email protected] [email protected] Goldman Sachs (Asia) L.L.C. Goldman Sachs (Asia) L.L.C. Goldman Sachs (Asia) L.L.C. Goldman Sachs Carbonomics Table of Contents

China net zero: Thesis in charts 4

China net zero: Corporate Ecosystem 7

PM Summary: China net zero 2060 8

China net zero ambition: The most critical piece of the puzzle for global carbon neutrality 18

Differentiated and distinct emissions scale, sectoral mix and path for China 21

The cost curve of de-carbonization for China is very steep yet highlights a wide range of low-cost opportunities 26

Laying out the path to net zero China 30

China net zero and investments: US$16 tn investment opportunity on China’s path to carbon neutrality 31

China net zero and job creation: Potential for the creation of c.40 mn jobs by 2060 33

Laying out the path to a net zero China: A sectoral deep dive 34

China net zero: The role of carbon sequestration 61

China net zero: The potential implications for natural resources demand 64

China net zero: Addressing China’s export competitiveness in the era of climate change 66

China net zero: What have banks done to address China’s goal for carbon neutrality? 70

China ETS: Getting closer to the implementation of the world’s largest national emissions trading scheme 73

Appendix: China de-carbonization cost curve details 79

Disclosure Appendix 81

20 January 2021 2 China Net Zero Story in numbers

China’s pledge to achieve net zero carbon by 2060 represents two-thirds of the c.48% of global emissions from countries that have pledged net zero…

...as the country accounts for c.30% of global CO2 emissions (2019), and c.64% of the increase in global CO2 emissions since 2000...

...despite a substantial reduction of c.40% in the CO2 intensity of its economic output (CO2 emissions per GDP) since 2000.

China's net zero path leads, on our estimates, to a US$16 tn clean tech infrastructure investment opportunity by 2060 and c.40 mn net new jobs.

Renewable power is the most important technology, potentially aiding the de-

carbonization of c.50% of Chinese CO2 emissions...

…and we expect China’s power generation to triple to 2060, driven mostly by solar, wind, nuclear and hydro generation.

Electrification transforms road transportation, with almost 100% penetration of new energy vehicles (NEVs) by 2060 requiring a > US$1 tn investment opportunity in charging infrastructure...

...and a c.15% rise in annual copper demand, with notable increases in aluminium, lithium and nickel too.

Clean hydrogen drives c. 20% of the de-carbonization, mostly in industry, heating and long-haul transport…

…and we estimate that the market for hydrogen could increase 7x by 2060, from c.25 Mtpa to c.170 Mtpa.

Carbon capture is another critical technology with a wide range of industrial applications, critical to decarbonize c.15% of the country’s emissions.

Net international trade contributes c.13% of China’s CO2 emissions through net exports (and c.20% for gross exports)…

…whose competitiveness could be affected by a border adjustment of carbon taxes that could cost China up to US$240 bn pa for a carbon tax of US$100/tnCO2 applied to the entire carbon footprint of gross exported emissions...

...highlighting the importance of a clear de-carbonization strategy and the implementation of carbon pricing schemes, with China’s upcoming national ETS expected to be the largest globally and bring the total share of global GHG emissions covered by carbon schemes to c.23%. Goldman Sachs Carbonomics China net zero: Thesis in charts

Exhibit 1: China accounts for the majority of the c.48% of global Exhibit 2: ...and for 30% of global CO2 emissions, and c.64% of the emissions from countries that have pledged net zero carbon... increase in global CO2 emissions since 2000... Countries that have pledged net zero (in law, in proposed legislation and CO2 emissions (GtCO2, LHS) and share of global CO2 emissions by in proposed policies) region (%, RHS)

100.0 35% 14 CO2 emissions (GtCO2) 35% 30% 30.3% Share of global CO2 emissions (%) 10.0 12 30% 25% 10 25% 1.0 20% 8 20% 0.1 15% 13% 10% 6 13% 15% 0.0 11% 5% 4 10% 7% 6% 6% 0.0 0% 2 4% 3% 3%5%

Chile 0 0% Brazil China Latvia Iceland Norway Ukraine Canada France* Ethiopia Portugal Germany 2000 2006 2012 2018 2002 2008 2014 2019 2004 2010 2016 2000 2006 2012 2018 2002 2008 2014 2019 2004 2010 2016 2000 2006 2012 2018 2002 2008 2014 2019 2004 2010 2016 2000 2006 2012 2018 Denmark* Singapore Switzerland CO2 emissions by (GtCO2) region by CO2 emissions Luxembourg Share of global CO2 emissions (%) emissions CO2 of global Share Share of global CO2 emissions (%) CO2 emissions of global Share China United Other Asia Europe India CIS Middle Africa South & North New Zealand* New Log CO2 emissions (GtCO2) in 2019 (GtCO2) CO2 emissions Log States & Asia East Central America Marshall Islands Marshall Europeam Union Europeam Pacific America (ex. US) Net zero in law or Net zero proposed Under (excl. in proposed net zero legisation in policy document discussion China, India) CO2 emissions (GtCO2) in 2019 - LHS Global share of CO2 emissions (%) in 2019 - RHS

Source: Energy & Climate Intelligence Unit, Goldman Sachs Global Investment Research Source: European Commission Joint Research Centre (JRC). Emission Database for Global Atmospheric Research (EDGAR) release version 5.0, Goldman Sachs Global Investment Research

Exhibit 3: ...despite a substantial reduction in the CO2 intensity of Exhibit 4: CO2 emissions in China are skewed towards industry and its economic output. power generation (c.80% of total)... Reduction in annual CO2 emissions per unit of annual GDP (%) Sectoral split of CO2 emissions by region (%)

40% 100% 30% 20% 80% 10% 0% 60% -10% -20% -30% 40%(%) -40% -50% in tnCO2/k$/yr) in 20% -60% Reduction in annual CO2 CO2 annual in Reduction

Iran 0% India Sectoral split of CO2 emissions CO2 of split Sectoral Brazil China Japan

Global North US South & India China Asia Europe Middle CIS Africa Russia emissions per GDP (% GDP reduction (% per emissions Mexico Canada

Australia America Central Pacific East Indonesia EU27+UK (ex. US) America (excl. South Africa South South Korea South Saudi Arabia Saudi China, United States United India) % Reduction Kingdom United since 2010 % Reduction since 2005 % Reduction since 2000 Buildings Other industrial & waste, agriculture Industrial combustion Power generation Transport

Source: European Commission Joint Research Centre (JRC). Emission Database for Global Source: European Commission Joint Research Centre (JRC). Emission Database for Global Atmospheric Research (EDGAR) release version 5.0, Goldman Sachs Global Investment Research Atmospheric Research (EDGAR) release version 5.0, Goldman Sachs Global Investment Research

Exhibit 5: ...which make up the vast majority of the carbon Exhibit 6: At current technologies, we estimate that 75% abatement cost curve. de-carbonization would cost China US$720 bn pa De-carbonization cost curve for China’s anthropogenic GHG emissions, De-carbonization cost curve for China’s anthropogenic GHG emissions, based on current technologies and current costs based on current technologies and current costs

1,200 1,100 1,300 >90% China 2020 China Carbonomics 1,000 1,200 900 dede-carrbbonizzaation cost curve 800 1,100 700 1,000 Annual Cost: $1.8 tn pa 600 900 500 800 75% China 400 700 300 dede-carrbbonizazation 200 600 500 Annual Cost: $720 bn pa

100 (US$/tnCO2eq) 50% China (US$/tnCO2eq) 0 400 dede-carrbbonizazation

-100 cost abatement Carbon 300 -200 200 Annual cost : $220 bn pa China carbon abatement cost abatement carbon China 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0 14.0 100 China GHG emissions abatement potential (Gt CO2eq) 0 Power generation (coal switch to gas & renewables) Transport (road, aviation, shipping) -100 Industry (industrial combustion, process emissions, waste) -200 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Buildings (residential & commercial) Agriculture, forestry & other land uses (AFOLU) China GHG emissions abatement potential (GtCO2eq) Non-abatable at current conservation technologies

Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

20 January 2021 4 Goldman Sachs Carbonomics

Exhibit 7: China’s net zero path implies a US$16 tn clean tech Exhibit 8: ...creating c.40 mn net new jobs. infrastructure investment opportunity by 2060... Net job creation bridge on the path to net zero China by 2060 (mn) Cumulative investment opportunity across sectors for China net zero by 2060 (US$ tn)

60 18 0.5 16.0 0.8 50 39.7 16 1.4 2.1 0.1 2.7 (1.4) 1.7 40 10.1 14 5.1 0.4 30 (2.5) 12 2.7 6.9 (2.7) 0.3 1.2 0.3 20 10 0.5 Operation & maintenance (O&M) 10 17.3 8 0.5 (mn) Construction, installation & 2.1 0 manufacturing (CMI)

6 0.9 net zeroChina Hydro & other RES 0.7 China by (US$ tn) by 2060 China Offshore wind Power 4 networks dressing

2.0 Onshore wind generation Coal mining & 2 Nuclear power Cumulative investments to net zero to investments Cumulative 1.9 Solar Net job creation to 2060 on the path to the path on 2060 to creation Net job

0 Netjob creation in Crudeoil extraction, processing & refining maintenance,…

Renewable Nuclear Power Energy Transport Biofuels Hydrogen Industrial Hydrogen CCUS Natural China Renewable electricity Coal-fired electricity China to 2060 (mn jobs) Biofuels and bioenergy copper and other metals generation (CMI & O&M) power power networks storage EV + plants processes pipeline sinks net zero Mining and processing of production & supply chain equipment manufacturing installation,operation, Batteries and electrification (batteries) FCEV (SMR+ infrastructure 2060 generation and heat supply infrastructure electrolyzer) Total EV charging infra.construction, Clean hydrogen manufacturing

investments jobs (electrolyzer manufacturing)

Source: Company data, Goldman Sachs Global Investment Research Source: UNEP - ILO - IOE - ITUC, EuropeOn, IRENA, NBSC, Goldman Sachs Global Investment Research

Exhibit 9: Renewable power is the most important technology, Exhibit 10: ...as we expect China’s power generation to triple by potentially aiding the de-carbonization of c.50% of Chinese CO2 2060... emissions... China electricity generation bridge to 2060 (thousand TWh) De-carbonization cost curve for China’s anthropogenic GHG emissions, with orange indicating the technologies relying on access to RES electricity

1,200 CO2 abatement (GtCO2) 30.0 1,100 24.9 1,000 4.4 25.0 900 1.4 800 2.8 700 20.0 600 5.2 15.0 500 3.6 400 300 10.0 (US$/tnCO2eq) 7.5 200 ( thousand TWh) ( thousand

Carbon abatement cost abatement Carbon 100 5.0 0 -100 China electricity generation electricity China 0.0 -200 China 2019 Base Green Elecrtic vehicles Buildings Industry China 2060 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 electricity electricity hydrogen (passenger, (30% electrification Net zero China GHG emissions abatement potential (Gt CO2eq) generation incorporating trucks) penetration) of heat electricity efficiency De-carbonization technologies relying on access to renewable energy improvements Other de-carbonization technologies

Source: Goldman Sachs Global Investment Research Source: BP Statistical Review, Goldman Sachs Global Investment Research

Exhibit 11: ...driven by solar, wind, nuclear and hydro power Exhibit 12: ...which dominate the low-cost part of the carbon generation... abatement curve. China electricity generation (thousand TWh) China power generation de-carbonization cost curve

250 30 GS Projections

25 200

20 150

15 100

10 50 (thousand TWh) (thousand 5 0 China power generation powerChina 0 -50 0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 4.0 4.4 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 China GHG emissions abatement in power generation (GtCO2eq) Coal +CCUS H2CGGT Other (biomass, geothermal) (US$/tnCO2eq) cost abatement Carbon Offshore wind Onshore wind Solar Solar Onshore wind Offshore wind Hydro Nuclear Oil Solar + battery Wind + battery Nuclear Natural gas Coal Solar + hydrogen storage Wind + hydrogen storage Hydro H2 GCCT CCUS

Source: BP Statistical Review, Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

20 January 2021 5 Goldman Sachs Carbonomics

Exhibit 13: Clean Hydrogen is the second most important Exhibit 14: ...followed by Carbon Capture, which is key to technology, potentially driving c.20% de-carbonization... de-carbonizing China’s industrial process emissions. De-carbonization cost curve for China’s anthropogenic GHG emissions, Merged conservation and sequestration cost curve including CCUS and with blue indicating the technologies relying on clean hydrogen natural sinks

1,200 1,100 1200 1,000 900 1000 800 700 600 800 500

(US$/tnCO2eq) 400 600 300 Carbon abatement cost abatement Carbon 200 DACCS - $400/tnCO2eq 100 400

0 (US$/tnCO2eq) -100 200 DACCS - $200/tnCO2eq -200 DACCS - $100/tnCO2eq

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 cost abatement carbon China 0 China GHG emissions abatement potential (Gt CO2eq) 0.0 1.0 2.0 3.0 4.0 5.0 6.0 6.9 7.9 8.9 9.9 10.9 11.9 12.9 De-carbonization technologies relying on clean hydrogen -200 Other de-carbonization technologies China anthropogenic GHG emissions abatement potential (GtCO2eq)

Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

Exhibit 15: Electriﬁcation will lead to a substantial rise in the Exhibit 16: 13% of Chinese CO2 emissions (and 16% of the increase demand for base metals, such as copper since 2000) is embedded in net exports... Average annual incremental copper demand for China net zero (MtCu) China CO2 emissions produced, consumed and exported (MtCO2)

2.0 12,000 100% 1.8 10,000 1.6 80% 1.4 8,000 1.2 60% 1.0 6,000 0.8 40% (MtCu) 0.6 4,000 0.4 2,000 13% 20% 0.2 0.0 0 0% demand for China net zero for China demand Incremental annual copper annual Incremental NEVs Charging Power Solar PV Onshore Offshore Energy China

(passenger points networks wind wind storage incremental (MtCO2) emissionsCO2 China EVs, EV annual 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 trucks, copper Annual production-based CO2 emissions FCEVs) demand Annual consumption-based CO2 emissions by 2060 for net zero Net exported CO2 emissions Net exported CO2 emissions (%) - RHS

Source: IRENA, International Copper Association, Goldman Sachs Global Investment Research Source: Our World in Data

Exhibit 17: ...whose competitiveness could be affected by a border Exhibit 18: ...hence the importance of a clear de-carbonization adjustment of carbon taxes... strategy and implementation of domestic carbon pricing schemes. Cost of China’s annual gross exported emissions (US$bn) Carbon pricing initiatives’ share of global GHG emissions covered (%)

250 30%

200 20%

150 gross global gross 10% 100 covered emissions

50 0% by (%) pricing carbon by

0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 exported emissions (US$ bn) emissions exported 2021E China national ETS EU ETS Japan carbon tax

Cost of China's total of China's Cost 0% 20% 40% 60% 80% 100% Carbon intensity difference of China's exports with other country's local South Africa carbon tax Korea ETS Germany ETS Share of global GHG global of Share Mexico carbon tax California CaT Guangdong pilot ETS products (%) Australia ERF Safeguard Mechanism Mexico pilot ETS Ukraine carbon tax Carbon price - $25/tnCO2 Carbon price - $50/tnCO2 Hubei pilot ETS Fujian pilot ETS Kazakhstan ETS Carbon price - $75/tnCO2 Carbon price - $100/tnCO2 France carbon tax Shanghai pilot ETS Canada federal fuel charge Alberta TIER Others

Source: Goldman Sachs Global Investment Research Source: World Bank Group

20 January 2021 6 CHINA NET ZERO Corporate Ecosystem

POWER INDUSTRY & TRANSPORT BUILDINGS & GENERATION WASTE AGRICULTURE Electric vehicle Heat pumps, Renewable power utilities & nuclear Metal miners manufacturers Renewable (lithium, nickel, copper) boilers & efficiency NIO Inc. [NIO] Longyuan power [0916.HK] Ganfeng Lithium Sanhua Intelligent Li Auto Inc. [LI] Datang Renewable [1798.HK] [1772.HK/002460.SZ] Control [002050.SZ] BYD CO. [002594.SZ, Xinyi Energy [3868.HK] MMG [1208.HK] Wasion Group 1211.HK] Zhejiang Chint [601877.SS] Jiangxi Copper [3393.HK] Guangzhou Auto Group Nuclear [0358.HK/600362.SS] Sinocera Functional [2238.HK, 601238.SS] CGN power [003816.SZ] Zijin Material [300285.SZ] Great Wall Motor Co. China National Nuclear Power [2899.HK/601899.SS] [601633.SS, 2333.HK] Agriculture & natural [601985.SS] Hydrogen production BAIC Motor Co. [1958.HK] sinks Utility-scale batteries and distribution & electrolyzer manufacturers transmission EV battery manufacturers Xinghuan Forestry Development Company Yunnan Energy [002812.SZ] Sinopec [0386.HK, CATL [300750.SZ] (private) Putailai [603659.SS] 600028.SS, SNP] BYD CO. [002594.SZ, 1211.HK] Guangxi Longlin Senior Tech [300568.SZ] PetroChina [0857.HK, EVE Energy Co [300014.SZ] Shanghai Putailai New Forestry Development Sungrow [300274.SZ] 601857.SS, PTR] Company (private) Zhejiang Narada Power CNOOC [0883.HK, Energy Co Ltd [603659.SZ] Hesheng Forest Source Co Ltd [300068.SZ] CEO] Lead Intelligent [300450.SZ] Fuel cell manufacturers Silviculture (private) Wind turbines and supply chain Weichai Power [300750.SZ] Wind turbines SinoHytec Co [688339.SZ] Goldwind [002202.SZ; 2208.HK] Mingyang Smart Energy [601615.SS] Biofuel producers Turbine parts Cofco Biotechnology Co Ltd Sinoma Science&Tech [002080.SZ], [000930.SZ] Titan Wind Energy [002531.SZ] Shandong Longlive Bio- Jinlei Wind [300443.SZ] technology [002604.SZ] Riyue Heavy Industry [603218.SS] Sinopec [0386.HK, 600028.SS;,SNP] Solar panels and supply chain PetroChina [0857.HK, Solar panels: Equipment: 601857.SS, PTR] Longi [601012.SS] Shenzhen SC Longyan Zhuoyue [688196.SS] Jinko Solar [JKS] [300724.SZ] JA Solar [002459.SZ] Maxwell [300751.SZ] Charging/refueling Trina Solar [688599.SS] Zhejiang Jingsheng infrastructure Qingdao Teld New Energy Solar poly/wafer/cell [300316.SZ] [300001.SZ] Daqo [DQ] Solar glass/inverter SAIC AnYo Charging Tongwei [600438.SS] Xinyi Solar [0968.HK] [600104.SS] GCL-poly [3800.HK] Flat Glass Shanghai Potevio Xinte [1799.HK] [6865.HK/601865.SS] [600680.SS] Longi [601012.SS] Sungrow [300274.SZ] State Grid [600131.SS] Aiko Solar Ginlong [300763.SZ] Star Charge [600732.SS] Goodwe [688390.SS] EV Power Zhonghuan Jiangsu YKC New Energy [002129.SZ] Technology

*We note that the corporate ecosystem presented above is not exhaustive Goldman Sachs Carbonomics PM Summary: China net zero 2060

China’s commitment to net zero will reshape its economy, starting with the 14th Five-Year Plan, and the global de-carbonization effort On September 22, the President of the People’s Republic of China, Xi Jinping, addressing the general debate of the 75th session of the United Nations General Assembly, stated that China aims to scale up its Intended Nationally Determined Contributions, reaching a peak in its carbon dioxide emissions before 2030 and achieving net zero carbon emissions by 2060. Li Gao, head of climate change at the Ministry of Ecology and Environment, reiterated the targets in October while stating that the 14th Five-Year Plan (2021-25) period will be key for China’s climate efforts as the country eyes its new targets. The finalized proposal of the 14th Five-Year Plan from the Party, the first five years of China’s move towards its second centenary goal, was released in the Fifth Plenum of the 19th Party Congress in late October, and the detailed plan draft will likely be submitted to the National People’s Congress (NPC) for final approval during the “Two Sessions” in March 2021. Net zero will serve as a guiding principle for policymaking that is comprehensively embedded into structural reforms, investment policies and innovation priorities.

China’s net zero emissions ambition joins the rapidly increasing number of national net zero pledges worldwide that encompass c.48% of global emissions (61% if we include the US net zero pledge in Joe Biden’s programme). Yet the scale of China in the context

of climate change and global emissions (China accounted for 30% of total global CO2 emissions in 2019) and its ongoing economic expansion (accounting for c.64% of the

rise in global CO2 emissions since 2000) makes the stated ambition unique and a critical milestone for global de-carbonization efforts. While China is currently the world’s largest emissions producer, over the past two decades, the country has been able to reduce its emissions intensity per unit of GDP by c.40%, one of the largest reductions among key economic regions globally (the second-largest reduction after the United Kingdom), meeting the national targets set out in key climate change agreements, including its commitments laid out in the Copenhagen Accord and under its 13th Five-Year Plan (FYP) within the set timeline (by 2020).

Net zero will require China to embark on an ambitious multi-decade effort to transform its economy and energy ecosystems. China’s emissions are distinct not only in terms of scale but also sectoral mix. In 2019, >80% of the country’s emissions were attributed to two key emitting sectors: power generation and industry & industrial waste (compared with just c.55% for the EU, the other major economic area committed to net zero). This highlights the critical role of energy for China (responsible for power generation, transport, buildings and a large share of industrial emissions), making the evolution of the country’s energy mix one of the most important determinants of the de-carbonization path in the near and medium term. We expect this mix to include renewable power, clean hydrogen and carbon capture.

20 January 2021 8 Goldman Sachs Carbonomics

Exhibit 19: China accounts for 30% of global CO2 emissions and Exhibit 20: ...despite reducing its GDP carbon intensity more than 64% of the global increase in CO2 emissions since 2000... any other major economy, except the UK CO2 emissions (GtCO2, LHS) and share of global CO2 emissions by Reduction in annual CO2 emissions per unit of annual GDP (%) region (%, RHS)

14 CO2 emissions (GtCO2) 35% 30.3% Share of global CO2 emissions (%) 12 30% 40% 30% 10 25% 20% 10% 8 20% 0% 13% -10% 6 13% 15% -20% 11% -30% 4 10% 7% 6% 6% -40%

in tnCO2/k$/yr) in -50% 2 4% 3% 3%5% -60%

0 0% CO2 annual in Reduction Iran India Brazil China Japan emissions per GDP (% reduction GDP (% per emissions 2000 2006 2012 2018 2002 2008 2014 2019 2004 2010 2016 2000 2006 2012 2018 2002 2008 2014 2019 2004 2010 2016 2000 2006 2012 2018 2002 2008 2014 2019 2004 2010 2016 2000 2006 2012 2018 Global Russia Mexico Canada CO2 emissions by (GtCO2) region by CO2 emissions Australia China United Other Asia Europe India CIS Middle Africa South & North (%) emissions CO2 of global Share Indonesia States & Asia East Central America EU27+UK South Africa South South Korea South Pacific America (ex. US) Arabia Saudi United States United (excl. China, % Reduction Kingdom United since 2010 % Reduction since 2005 % Reduction since 2000 India)

The China Carbonomics cost curve is dominated by power and industry, hence the importance of renewables, clean hydrogen and Carbon Capture technologies In our deep-dive de-carbonization report, Carbonomics: Innovation, Deflation and Affordable De-carbonization, we laid out our global carbon abatement cost curve. In this report, we introduce a China-specific de-carbonization cost curve, including >100 different applications of GHG abatement technologies across all key emitting sectors in China. The Carbonomics cost curve comprises de-carbonization technologies that are currently available at commercial scale, at the current costs associated with each technology’s adoption in large scale. We expect this cost curve to be dynamic and evolve over time, as these technologies become more widely adopted and economies of scale and technological innovation lead to cost deflation. We include conservation technologies (technologies resulting in the avoidance of emissions) and process-specific sequestration technologies (technologies that sequester emissions back from an emitting plant at point source) across all key emission-contributing industries: power generation, industry (which includes industrial energy and process emissions) and industrial waste, transport, buildings and agriculture. We estimate that the initial 50% of China’s anthropogenic GHG emissions can be abated at an annual cost of US$220 bn and an average carbon cost of US$32/ton. However, the cost curve steepens rapidly, especially as we move beyond 75% de-carbonization, requiring US$1.8 tn pa for full de-carbonization at today’s costs and available technologies. The steepness of the cost curve highlights the importance of technological innovation, natural sinks, direct air carbon capture (DACC) and efficient financing, in order to flatten the cost curve over time and achieve affordable net zero.

As we move towards net zero, the de-carbonization process evolves from being one-dimensional (renewable power, dominating half of the lower-cost part of the cost curve) to a multi-dimensional clean tech ecosystem encompassing four key interconnected technologies on the path to net zero emissions: (a) Renewable power: The technology that dominates the ‘low-cost de-carbonization’ spectrum today and has the potential to support the de-carbonization of >45% of China’s anthropogenic GHG

20 January 2021 9 Goldman Sachs Carbonomics

emissions, as well as being critical for the production of clean hydrogen longer term (‘green’ hydrogen). (b) Clean hydrogen: A transformational technology for long-term energy storage enabling increasing uptake of renewables in power generation, as well as aiding the de-carbonization of some of the harder-to-abate sectors, with a critical role in several industrial processes (iron & steel, petrochemicals), long-haul transport, and heating of buildings. (c) Battery energy storage: Critical in the electriﬁcation of transport and industrial-scale short-term power storage. (d) Carbon capture technologies: Vital for the production of clean (‘blue’) hydrogen, while also aiding the de-carbonization of industrial sub-segments with emissions that are currently non-abatable under alternative technologies (such as cement).

Exhibit 21: The cost curve of de-carbonization for China is very steep yet highlights a wide range of low-cost investment opportunities De-carbonization cost curve for China’s anthropogenic GHG emissions, based on current technologies and current costs, assuming economies of scale for technologies in the pilot phase

1,200 1,100 1,000 900 800 700 600 cost (US$/tnCO2eq) 500 400 300 200 100 0 -100 China carbon abatement -200 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0 14.0

China GHG emissions abatement potential (Gt CO2eq) Power generation (coal switch to gas & renewables) Transport (road, aviation, shipping)

Industry (industrial combustion, process emissions, waste) Buildings (residential & commercial)

Agriculture, forestry & other land uses (AFOLU) Emissions reliant on other carbon sequestration (natural sinks, DACCS)

Source: Goldman Sachs Global Investment Research

Laying out a potential path to net zero China: US$16 tn infrastructure investments and 40 mn net new jobs Leveraging the Carbonomics cost curve, we lay out a possible path to carbon neutrality for China by 2060 (with peak emissions before 2030), in line with the country’s stated long-term ambitions. We note that this simply outlines one of the many possible pathways that China could follow in its de-carbonization. The path is, similar to China’s de-carbonization cost curve, reliant on currently existing de-carbonization technologies (assuming economies of scale for technologies in the pilot phase) and will evolve with clean tech innovation. Our path to net zero China addresses each of the country’s emitting sectors: power generation, transport, industry, buildings and agriculture – utilizing the lower-cost de-carbonization technologies available. For power generation, this implies a non-fossil fuel energy share of >95% achieved by 2060; for road transport, we model new energy vehicle penetration (including BEVs,

20 January 2021 10 Goldman Sachs Carbonomics

PHEVs and FCEVs) of close to 100% by 2060; for industry, we factor in transformational improvements in efficiency and increasing penetration of clean hydrogen, electrification and carbon capture, as well as a critical role for the circular economy; in buildings, we assume a switch from fossil fuel-sourced heating to clean hydrogen, electrification and deep efficiency improvements; and finally, for agriculture, we assume strong improvements in land management practices.

In aggregate, we estimate a total ‘green’ infrastructure investment opportunity of US$16 tn by 2060 – we estimate US$9 tn will be dedicated to power generation: renewable power, but also a major upgrade of power networks and power storage; US$1.2 tn to transport infrastructure for EVs; c.US$1.2 tn to carbon sequestration (Carbon Capture and natural sinks); and US$2.6 tn to hydrogen infrastructure for transport, industry and heating. As we highlight in our report Carbonomics: The green engine of economic recovery, clean infrastructure can foster material net job creation as it tends to be more capital- and labor-intensive compared with traditional fossil fuel energy developments, while benefiting from a lower cost of capital, making it an example of a successful pro-growth, pro-environment initiative. We estimate that China’s path towards its net zero ambition could facilitate the creation of c.40 mn jobs by 2060 across sectors. We primarily focus on the impact of direct employment across the supply chain (we do not address indirect and induced employment in this analysis). The majority of the employment creation that we expect is in sustainable energy ecosystems, dominated by renewable power generation, followed by power networks and electrification infrastructure. Net job losses arise in coal mining and processing, as well as coal power generation and crude oil extraction, processing and refining. We note that in this analysis, we use the available literature regarding employment factors, which may not account for future labor efficiency improvements and increased automation across these processes.

Exhibit 22: We estimate a US$16 tn infrastructure investment Exhibit 23: ...with the potential to create c.40 mn jobs by 2060 opportunity on the path to a net zero China by 2060... across all sectors Cumulative investment opportunity across sectors for China net zero by Net job creation bridge on the path to net zero China by 2060 (mn jobs) 2060 (US$ tn)

6 0.9 net zeroChina Hydro & other RES 0.7 China by (US$ tn) by 2060 China Offshore wind Power 4 networks dressing

0 Netjob creation in Crudeoil extraction, processing & refining maintenance,…

investments jobs (electrolyzer manufacturing)

Source: Company data, Goldman Sachs Global Investment Research Source: UNEP - ILO - IOE - ITUC, EuropeOn, IRENA, NBSC, Goldman Sachs Global Investment Research

20 January 2021 11 Goldman Sachs Carbonomics

China net zero: Addressing China’s export competitiveness in the era of climate change

Net trade contributes c.13% of Chinese CO2 emissions (c.20% for gross exports), and export competitiveness could be an important consideration in the urgency of China’s push for net zero at a time of rising consumer awareness of the carbon content of goods and services and the potential for the EU to request a border adjustment on carbon taxes that could hurt the competitiveness of China’s high-carbon exports. In this report, we aim to address the potential implications of a border carbon tax adjustment applied on China’s exports and the resulting impact on its competitiveness. Using 2019 data, assuming c.20% of emissions are embedded in gross exports, the total cost associated with China’s global gross exported emissions

could be as high as US$240 bn pa for a carbon tax of US$100/tnCO2 in the extreme case of a global application of border adjustments and higher carbon taxes. This analysis is especially relevant when we consider China’s exports to the European Union, given the current proposal for a carbon border tax adjustment by the EU. We estimate that the annual cost of a carbon border tax adjustment in the EU for China’s gross

exports to the EU could be as high as US$35 bn if a carbon tax of US$100/tnCO2 were applied on the entire carbon footprint. If the adjustment were applied only to the difference in carbon intensity with locally produced products, this would result in a lower cost estimate of c.US$15 bn pa.

To illustrate the potential impact of a carbon border tax adjustment implemented by the EU, we consider the example of China’s steel exports into the region. Depending on the difference in the carbon intensity of producing steel in the EU compared with China, a carbon tax will have differing impacts on steel export prices. Using the current carbon intensity of steel produced in China under a coal blast furnace BF-BOF process (2.1

tnCO2eq/tn steel) and comparing it to the average carbon intensity of steel

produced in the EU using a natural gas-based DRI-EAF process (1.1 tnCO2eq/tn steel with grid electricity), we can determine the incremental cost for steel exports based on

the difference in carbon intensity. The results indicate that a US$100/tnCO2 tax could result in an increase in the cost of China’s steel exports of c.US$100/tn steel – based on the difference in emissions intensity. Alternatively, if the average tonne of steel produced in the EU relied on net zero electricity, then a natural gas DRI-EAF

process would have a carbon intensity of 0.6tnCO2/tn steel, resulting in an increase in the price of exported steel from China of US$150/tn steel. Assuming a steel price of US$500/tn, such a price increase would be equivalent to an increase of c.30% in China steel export cost.

20 January 2021 12 Goldman Sachs Carbonomics

Exhibit 24: China’s net exported emissions amount to c.13% of its Exhibit 25: ...and the annual cost of a globally applied carbon total annual produced CO2 emissions... border adjustment tax on China’s gross exported emissions could China CO2 emissions produced, consumed and net exported (MtCO2) be as high as US$240 bn at US$100/tnCO2, depending on the difference in carbon intensity between China’s exports and the importing country’s local products Potential carbon border adjustment tax cost for China’s annual gross globally exported emissions (US$ bn)

250 12,000 100% 200 10,000 80% 8,000 60% 150 6,000 40% 4,000 100

2,000 13% 20% 50 0 0% exported emissions (US$ bn) emissions exported China CO2 emissions (MtCO2) emissionsCO2 China 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Cost of China's total gross global grosstotal of China's Cost 0% 20% 40% 60% 80% 100% Annual production-based CO2 emissions Carbon intensity difference of China's exports with other country's local Annual consumption-based CO2 emissions products (%) Net exported CO2 emissions Net exported CO2 emissions (%) - RHS Carbon price - $25/tnCO2 Carbon price - $50/tnCO2 Carbon price - $75/tnCO2 Carbon price - $100/tnCO2

Source: Our World in Data Source: Goldman Sachs Global Investment Research

Transforming (and growing) power generation could de-carbonize around half of China’s emissions Electrification is a critical driver of the path to net zero. We estimate that c.50% of the de-carbonization of China’s current anthropogenic GHG emissions relies on access to clean power generation, including electrification of transport, production of green hydrogen and electrification of various industrial processes. We expect that the total demand for electricity in a net zero China in 2060 could be c.3x that of 2019, further stressing the importance of de-carbonizing power generation as quickly as possible. Renewable energy (solar, wind, hydropower, bioenergy) is the key driver of power generation de-carbonization and has the potential to revolutionize the current energy system in China, complemented by an important, but secondary role for nuclear power. Carbon capture could be used to aid the transition for relatively young life coal and gas power plants, but its vital role in other parts of the de-carbonization path such as industry (given a lack of low-cost alternatives) makes us believe that it is likely to have a limited role in de-carbonizing China’s power generation. Overall, the path to net zero will require a radical change in the country’s energy mix and current energy ecosystems: we estimate that non-fossil-sourced power generation penetration will be required to surpass 50% by 2030, reach c.70% by 2040 and exceed 85%/95% by 2050 and 2060 respectively from c.32% currently – it is difficult to overstate the revolutionary impact this would have on a power generation system that currently relies

on coal for 65% of its electricity and generates 40% of the country’s CO2 emissions. De-carbonizing power generation while tripling electricity generation will require an attractive regulatory and ﬁnancing framework for power generation; it will also require a complete rebuild of the power network and energy storage system (industrial-scale batteries and green hydrogen), which will be required to connect renewable power production and consumption that sits in very distant geographical regions and is hampered by signiﬁcant timing and seasonal mismatches.

20 January 2021 13 Goldman Sachs Carbonomics

Exhibit 26: c.50% of the de-carbonization of China’s anthropogenic Exhibit 27: ...with renewable power growth needed to support this GHG emissions is reliant on access to clean power generation... increase in electricity demand in a net zero path De-carbonization cost curve for China’s anthropogenic GHG emissions, China net zero by 2060 electricity generation bridge 2019-60 (TWh) with orange indicating the technologies relying on access to RES electricity

1,200 30,000 1,100 1,000 900 25,000 800 700 20,000 600 500 15,000 400 300 10,000 200 (TWh) generation 100 0 5,000

-100 electricity zero to net bridge China -200 0 01234567891011121314 China Coal, Solar Wind Hydro Other Nuclear H2CCGT Coal + China net Carbon abatement cost (US$/tnCO2eq) cost abatement Carbon electricity natural (onshore + RES CCUS zero China GHG emissions abatement potential (Gt CO2eq) generation gas & offshore) electricity De-carbonization technologies relying on access to renewable energy (2019) oil generation retirements (2060) Other de-carbonization technologies

Source: Goldman Sachs Global Investment Research Source: BP Statistical Review, Goldman Sachs Global Investment Research

Industry: Clean hydrogen, CCUS, efficiency, circular economy and electrification set the scene for a clean tech industrial revolution Industry is currently the sector responsible for the largest share of GHG emissions produced in China (c.48%), with >50% coming from its heavy industries (ferrous and non-ferrous metals manufacturing, non-metallic minerals such as cement and petrochemicals). We believe four key technologies will drive emissions abatement in China’s industry beyond a step-up in efficiency improvements: clean hydrogen, carbon capture (CCUS), electrification, and the circular economy. In particular, hydrogen has a critical role to play in a number of industrial processes, including replacing coal in steel mills, serving as a building block for some primary chemicals and providing an additional clean fuel option for high temperature heat. We estimate that clean hydrogen could contribute to c.20% of China’s de-carbonization, with its addressable market growing sevenfold from c.25 Mt in 2019 to c.170 Mtpa in our net zero scenario. Carbon capture (CCUS) also plays a critical role in the de-carbonization of China’s industry. Industrial CCUS applications in China can be cost-efficient, and have the potential to unlock deep emission reductions in China’s modern industrial facilities and across some of the most difficult to abate emissions, such as those produced in the manufacturing and processing of cement. We estimate that c.15% of China’s anthropogenic GHG emissions could be abated through carbon capture. A key advantage of carbon capture is that it avoids the rise of stranded industrial assets; many of the industrial plants in China are still relatively young and require only modest retrofits to existing plants and processes.

20 January 2021 14 Goldman Sachs Carbonomics

Exhibit 28: >50% of China’s industrial emissions stem from its heavy Exhibit 29: ...requiring clean hydrogen, carbon capture (CCUS), industries... electriﬁcation, efﬁciency and circular economy Approximate split of China’s industrial GHG emissions, 2019 (%) China GHG emissions associated with industry, industrial processes and waste (MtCO2eq)

8,000 7,000 32% 32% 6,000

s associated 5,000 4,000 6% 9% 3,000 MtCO2eq 21% 2,000 1,000 0 with industry withindustry & industrial waste - Ferrous metals (iron & steel alloys) China GHG emission 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 Non-ferrous metals (ie. aluminium, copper, zinc) GS path to net zero for industry CCUS Non-metallic minerals (cement, clay, lime) Bioenergy Hydrogen process Chemicals (ammonia, methanol, HVCs plastics) Electrification of heat Efficiency & circular economy Other unclassified (includes manufacturing and waste) Other (alternative process materials)

Source: Energy Transitions Commission, FAO, IEA, Goldman Sachs Global Investment Research Source: European Commission Joint Research Centre (JRC). Emission Database for Global Atmospheric Research (EDGAR) release version 5.0, FAO, Goldman Sachs Global Investment Research

Transportation: The rise of new energy vehicles (NEVs) and the new charging infrastructure investment opportunity Transportation, in contrast to power generation, mostly sits in the ‘high-cost’ spectrum of the de-carbonization cost curve and forms a comparatively low share of the country’s

CO2 emissions relative to other key economic regions, at 9%. However, as the country’s middle class continues to grow, we expect demand for transportation to also continue to grow, especially for passenger road vehicles and aviation; we estimate that China’s total road fleet will triple by 2060. As part of our analysis, we lay out the potential path to net zero emissions for transportation for China, addressing all of short- and medium-haul road transport, heavy long-haul transport, rail, domestic aviation and domestic shipping. For light, short- and medium-haul transport (primarily constituting passenger vehicles and short/medium-haul trucks), we consider electrification as the dominant de-carbonization technology; we estimate that charging infrastructure is a >US$1 tn investment opportunity for full electrification of road transport. For long-haul heavy trucks, we consider clean hydrogen the preferred option, owing to its faster refueling time, lower weight and high energy content. Our China net zero path would require NEV penetration in the road transport fleet to reach 20% by 2030, close to 70% by 2040, 90% by 2050 and almost 100% by 2060. We look at fleet penetration in this analysis as opposed to vehicle sales, as ultimately the penetration of the fleet is what directly translates into transport emissions. Aviation is one of the toughest sectors to de-carbonize, and we believe that biofuels (sustainable aviation fuels – SAFs), synthetic fuels and improved aircraft efficiency are currently the key parts of the solution. Fleet renewal is likely to be a near-term solution, with new gen aircrafts burning c.15% less fuel than their predecessors. Longer term, we see bioenergy, and in particular SAFs, as the key solution for aviation emissions abatement. On our path to net zero China, we estimate close to 2.5 mn bls/d of biofuels will be required in transport in 2060.

20 January 2021 15 Goldman Sachs Carbonomics

Exhibit 30: We expect new energy vehicles (including EVs and Exhibit 31: ...with electric vehicles the preferred solution for FCEVs) to reach almost 100% penetration in the road transport passenger vehicles and short/medium-haul light trucks and with fleet... clean hydrogen the preferred solution for long-haul heavy trucks NEVs penetration in China’s road transport fleet for net zero (%) China road vehicles fleet bridge (2019-60) for a net zero emissions path

100% 700 By 2030: By 2040: 90% NEVs NEVs 600 penetration penetration 80% in fleet in fleet 70% 20% 70% By 2050: By 2060: 500 NEVs NEVs 60% penetration penetration 400 in fleet 50% in fleet 90% c. 100% 300 40%

transport fleet (%) fleet transport 30% 200 20% 100 China road fleet (mn vehicles) vehicles) (mn road fleet China

NEVs penetration in China's road China's in NEVs penetration 10% 0% 0 China road ICE net vehicle EV passenger EV FCEV heavy China road transport fleet retirements vehicles short,medium, long-haul trucks passenger fleet

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059 (2019) light trucks (2060)

Source: Goldman Sachs Global Investment Research Source: NBSC, Goldman Sachs Global Investment Research

China net zero: A material uplift in base metals demand (Copper +15%) At the heart of the path to net zero China by 2060 lies the need for access to clean energy and an accelerated pace of electrification for transport and several segments of industry, as we outline in the previous section of this report. Electrification and clean energy is likely to have an impact on the total Chinese demand for natural resources, and in particular metals such as aluminium, copper, lithium and nickel, demand for which relies heavily on an acceleration in technologies such as renewables (solar panel, wind turbines manufacturing), power network infrastructure, charging infrastructure, electric vehicles and battery manufacturing. We attempt to quantify the potential impact that the path to net zero China by 2060, as laid out in the previous sections, will have on demand for each of these metals. The results of this analysis are calculated on the basis of incremental demand for each clean technology relative to the conventional technology (such as incremental copper demand per electric vehicle compared with conventional gasoline vehicles). We find that annual copper demand in a net zero China will rise by 2.0 Mt, a c.15% increase on China’s 2019 copper demand, and require a cumulative c.77 Mt copper in 2020-60 on a path consistent with net zero.

Exhibit 32: We estimate c.2.0 Mt incremental annual copper Exhibit 33: ...as well as a material increase in demand for electric demand for China net zero, a c.15% increase from 2019 vehicle battery metal constituents such as lithium and nickel consumption... Incremental demand by 2060 for China net zero (Mt) Incremental copper demand in 2060 for China net zero

2.0 1.8 0.80 1.6 1.4 0.70 1.2 0.60 1.0 0.8 0.50 (MtCu) 0.6 0.4 0.40 0.2 0.30 0.0 demand for China net zero for China demand Incremental annual copper annual Incremental NEVs Charging Power Solar PV Onshore Offshore Energy China

by 2060 net zero (Mt) zero net 2060 by 0.20 (passenger points networks wind wind storage incremental EVs, EV annual

Incremental demand in China in demand Incremental 0.10 trucks, copper FCEVs) demand 0.00 by 2060 Lithium Nickel Cobalt for net zero

Source: IRENA, International Copper Association, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research

20 January 2021 16 Goldman Sachs Carbonomics

China ETS: Getting closer to the implementation of the world’s largest national emissions trading scheme We believe that carbon pricing will be a critical part of any effort to move to net zero emissions, while incentivizing technological innovation and progress in de-carbonization technologies. At present, 64 carbon pricing initiatives have been implemented or are scheduled for implementation, covering 46 national jurisdictions worldwide, according to the World Bank Group, mostly through cap-and-trade systems. These initiatives are gaining momentum, with the People’s Republic of China announcing the implementation of a national emissions trading scheme. This would be the world’s largest national emissions trading scheme, bringing a total of 12GtCO2eq of emissions (c.23% of the world’s total GHG emissions) under some form of carbon pricing.

The Ministry of Ecology and Environment (MEE) hosted a media conference on January 5, 2021, confirming that the first compliance cycle of China’s national ETS was effectively rolled out on January 1, 2021. The ETS will initially cover power generation plants. It will allocate allowances (also known as permits), based on the plant’s generation output, with emission benchmarks for each fuel and technology. China’s ETS, set to expand to seven other sectors (aviation, non-ferrous metals, steel, construction materials, chemicals, petrochemicals and paper manufacturing) will be the world’s largest globally. Ultimately, benefits from China’s national ETS will come from either surplus allowance for companies operating below the baseline threshold (e.g. “clean” coal utilities) or companies that are able to issue CCERs (e.g. renewable operators). The latter could also drive demand for renewable projects, which could lead to growth in demand for renewable equipment, benefiting upstream players. Among coal operators, the suggested benchmark is likely to drive asymmetric risk exposure, with some potentially benefiting from the ETS. We base this view on the proposed thresholds and where industry intensity currently stands. The current proposed carbon emission allowance baseline is 0.877-0.979 kg/kWh for conventional coal units, depending on their installed capacity, which will likely affect subcritical coal plants as they have a lower thermal efficiency and a higher emission intensity.

Exhibit 34: China’s national ETS would be the world’s largest, Exhibit 35: The China ETS’ proposed carbon emission allowance bringing total global emissions covered by carbon pricing baseline could, in the near term, potentially beneﬁt lower-carbon, initiatives to 23% more efﬁcient coal power plant operators Carbon pricing initiatives’ share of global GHG emissions covered (%) Emissions from different power generation plants (gCO2/kWh)

30% 1200

1000 20% Emission allowance baseline: 877-979 g/kWh 800 10% 600

0% 400

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 200 2021E generation (gCO2/kWh) generation

China(%) pricing by carbon covered national ETS EU ETS Japan carbon tax Share of global GHG globalemissionsof Share South Africa carbon tax Korea ETS Germany ETS powerfrom CO2 emissions 0 Mexico carbon tax California CaT Guangdong pilot ETS Subcritical Supercritical Ultra- Advanced Integrated Natural Coal plants Biomass- Australia ERF Safeguard Mechanism Mexico pilot ETS Ukraine carbon tax supercritical ultra- gasification gas retrofited CCUS Hubei pilot ETS Fujian pilot ETS Kazakhstan ETS supercritical combined CGGT with CCUS France carbon tax Shanghai pilot ETS Canada federal fuel charge cycle (IGCC) Alberta TIER Others

Source: World Bank Group Source: IEA, Company data, Goldman Sachs Global Investment Research

20 January 2021 17 Goldman Sachs Carbonomics China net zero ambition: The most critical piece of the puzzle for global carbon neutrality

On September 22, the President of the People’s Republic of China, Xi Jinping, addressing the general debate of the 75th session of the United Nations General Assembly, stated that China aims to scale up its Intended Nationally Determined Contributions, or the post-2020 climate action commitments submitted by countries before reaching the 2015 Paris Agreement, by adopting more vigorous policies and measures. President Xi Jinping announced that China eyes new targets: reaching a peak in its carbon dioxide emissions before 2030 and achieving net zero carbon emissions by 2060. Li Gao, head of climate change at the Ministry of Ecology and Environment, reiterated the targets in October while stating that the 14th Five-Year Plan (2021-25) period will be key for China’s climate efforts as the country eyes its new targets.

The Five-Year Plans, as outlined in our Asia strategists’ report, are a series of social and economic development initiatives issued since 1953 in the PRC in which strategies for economic development, growth and reform targets are mapped out by the Party for the next five years. While each Five-Year Plan is important in its own right, the strategic importance of the 14th Five-Year Plan period (2021-25) lies with the fact that it will mark the first five years of China’s moves towards its second centenary goal (2049, the 100th-year anniversary of the establishment of the PRC in 1949) to build a “modern socialist country” after achievement of the first centenary (2021, the 100th-year anniversary of the establishment of the CCP in 1921) goal of building a “moderately prosperous society”. The finalized proposal of the 14th Five-Year Plan from the Party was released in the Fifth Plenum of the 19th Party Congress in late October, and the detailed plan draft will likely be submitted to the National People’s Congress (NPC) for final approval during the “Two Sessions” in March 2021.

China’s net zero emissions ambition by 2060 adds to the rapidly increasing number of national net zero pledges worldwide (as shown in Exhibit 36). However, China’s importance in the context of climate change and global emissions (it accounted for

c.30% of total global CO2 emissions in 2019) and its strategic position in the global economy (as one of the fastest growing economies) makes the stated ambition unique and a critical milestone for global de-carbonization efforts. Up until this point, the nation had yet to commit to a long-term de-carbonization goal, although it has met its national targets set out in key climate change agreements outlined in Exhibit 38, including its commitments laid out in the Copenhagen Accord and under its 13th Five-Year Plan (FYP), within the set timeline (by 2020).

Achieving this goal of net zero emissions would represent a milestone in modern Chinese history, but we believe that to be achieved it will require China to embark on an ambitious multi-decade effort to transform its economy and energy ecosystems. Net zero would have to serve as a guiding principle for policymaking that is comprehensively embedded into structural reforms, investment policies and innovation priorities.

20 January 2021 18 Goldman Sachs Carbonomics

Exhibit 36: China’s net zero emissions ambition adds to the rapidly increasing number of national net zero pledges worldwide, which now cover c.48% of global CO2 emissions. A potential addition of the United States to the net zero pledges, as suggested by Joe Biden, would bring this coverage to c.61% of global CO2 emissions Countries that have pledged net zero (in law, in proposed legislation and in proposed policies)

100.0 35%

30% 10.0 25%

1.0 20%

15% 0.1

10% 0.0 5% Log CO2 emissions (GtCO2) in 2019 (GtCO2) emissions CO2 Log

0.0 0% (%) emissions CO2 of global Share Fiji Chile Brazil Spain China Latvia Liberia Austria Japan* Mexico Iceland Finland Norway Ukraine Ireland* Canada France* Ethiopia Portugal Others** Slovakia Uruguay Slovenia Sweden* Germany Hungary* Colombia Denmark* Singapore Costa Rica Costa Switzerland South Africa South Luxembourg South Korea South New Zealand* Marshall Islands Marshall Europeam Union Europeam Kingdom* United Net zero in law or Net zero proposed Under in proposed net zero legisation in policy document discussion CO2 emissions (GtCO2) in 2019 - LHS Global share of CO2 emissions (%) in 2019 - RHS

* Denotes net zero pledge is in law, ** Others under consideration includes many countries and regions (list not exhaustive)

Source: Energy & Climate Intelligence Unit, Goldman Sachs Global Investment Research

Exhibit 37: Key emission ﬁgures for China

c.11.5 c. 30% GtCO2 CO2 emissions 38% of global in 2019 increase in CO2 CO2 emissions emissions in 2019 over the past 10 years

8.12 34% tons of CO2 per capita reduction in CO2 1.6x emissions per GDP pa, the over the past 10 global years average

c.80% % of GHG emissions from power generation and industry

Source: World Bank, European Commission Joint Research Centre (JRC). Emission Database for Global Atmospheric Research (EDGAR) release version 5.0, Goldman Sachs Global Investment Research

20 January 2021 19 Goldman Sachs Carbonomics

Exhibit 38: Summary of key climate change and de-carbonization related pledges and targets from China

Summary of key climate change and de-carbonization related national pledges and targets from China Pledge or Targets and pledges details Tracking progress agreement

While China has not yet submitted a long-term strategy to the UNFCCC, President Xi Jinping made China’s NDC announcement at the United Nations General Assembly, accompanied by the announcement of the intention to aim to achieve carbon neutrality before 2060 and peak emissions before 2030.

On Dec 12, at the Climate Ambition Summit, President Xi 100% made an important speech titled "Continuing the past and 90% opening the future to start a new journey in global response to 80% Long-term ambition climate change", announcing that China will raise national 70% (announced 2020) voluntary contributions to fight climate changes to achieve by 60% Paris 2030: Agreement 50% Copenhagen NDCs: 20% 40% Accord: non-fossil (1) Carbon dioxide emissions per unit of GDP will be reduced 15% non-fossil fuel share 30% fuel share by more than 65% compared to 2005 mixfuel (%) (2) Non-fossil energy will account for about 25% of primary 20% energy consumption 10% (3) Forest storage will increase by 6 billion cubic meters 0%

compared to 2005 consumption energy primary China (4) Total installed capacity of wind and solar power generation 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2030 will reach more than 1,200GW Non-fossil fuel share Fossil fuels share

In September 2016, China ratified the Paris Agreement and 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2030 0% submitted its Nationally Determined Contributions (NDCs) to the UNFCCC, including: -10%

(1) Peak CO2 emissions by 2030 at the latest -20% (2) Increase the share of non-fossil energy sources in the Copenhagen total primary energy supply to around 20% by 2030 -30% Accord: 40-45% reduction (3) Lower the carbon intensity of GDP by 60% to 65% Paris below 2005 levels by 2030 -40% Agreement Paris Agreement from 2005 (%) NDCs: 60- (4) Increase the forest stock volume by around 4.5 billion (2016, Unconditional targets to 2030) -50% 65% reduction cubic metres, compared to 2005 levels by 2030 -60% The following elements were also listed as measures for intensity carbon GDP in Change % China Global enhanced climate change action: -70% - Increase the share of natural gas in the total primary energy supply to around 10% by 2020 - Proposed reductions in the production of HCFC22 (35% 20 250 below 2010 levels by 2020 and 67.5% by 2025) and 18 Paris NDCs: 16 200 “controlling” HFC23 production by 2020. 4.5 bn cu. m 14 12 Copenhagen 150 Copenhagen 10 Accord: Accord: China’s 2020 pledges consists of the following elements: 1.3 bn cu. m 40 mn 8 100 hectares 6 (1) Reduction of CO2 emissions per unit of GDP by 4 Forest area (mn hectares) 40–45% below 2005 levels by 2020. 50 Copenhagen Accord 2

(2) Increase the share of non-fossil fuels in primary Forest stock volume (bn cubic m) (2009, Pledges to 2020) energy consumption to around 15% by 2020. 0 0 2005 2019 Change (3) Increase forest coverage by 40 million hectares and 2005 2019 Change forest stock volume by 1.3 billion cubic metres by 2020 from 2005 levels.

Summary of key energy and climate change policies and pledges from Five-Year Plans (FYP)

11th FYP Reduction of 20% in the energy intensity c. 19% reduction in the energy intensity by 2010 (2006-2010) (energy consumption per unit GDP)

1) Reduction of 17% in the carbon intensity (emissions per unit GDP) compared to 2010 1) 20% reduction in carbon intensity achieved by 2015 2) Reduction of 16% in the energy intensity 2) 18.2% reduction in energy intensity achieved by 2015 12th FYP (energy consumption per unit GDP) compared to 2010 3) 12% non-fossil energy share achieved by 2015 (2011-2015) 3) 11.4% of non-fossil energy share 4) 21.63% forest coverage and 15.1 bn cubic m of forest growing stock 4) Forest coverage of 21.7% and forest growing stock to 14.3 achieved by 2015 bn cubic meters

1) Reduction of 40-45% in the carbon intensity (compared to 2005 level) - consistent with the Copenhagen 1) >40% reduction in carbon intensity achieved in 2019 Accord. Therefore reduction of 18% compared to 2015 2) >14% reduction in energy intensity already achieved 13th FYP 2) Reduction of 15% in the energy intensity (energy 3) 15% of non-fossil energy share acheieved in 2019 (2016-2020) consumption per unit of GDP) from 2015 levels by 2020 4) Below coal capacity threshold in 2019 3) 15% of non-fossil energy share 5) 22.96% forest coverage in 2019 4) Coal power capacity limit at 1,100 GW 5) Forest coverage of 23.04%

14th FYP FYP outline and 'Vision 2035' expected to be released in (2021-25) March 2021.

Source: National Bureau of Statistics of China, UNFCCC, World Bank Group, NDC Registry, C2ES, NDRC, European Commission Joint Research Centre (JRC). Emission Database for Global Atmospheric Research (EDGAR) release version 5.0, Goldman Sachs Global Investment Research

20 January 2021 20 Goldman Sachs Carbonomics Differentiated and distinct emissions scale, sectoral mix and path for China

China’s emissions are differentiated in terms of scale, path and sectoral mix compared with other key geographical regions globally

China accounts for c.30% and 26% of total global CO2 and GHG emissions, respectively, the single country with the highest share of global emissions produced in 2019, as shown in Exhibit 39. Its emissions path is distinct from that of other key geographical and economic regions, showing the steepest acceleration in 2000-10, a period marked by the stellar rise in China’s economic activity, at a time when other key economies

were able to stabilize or even reduce CO2 emissions. Economic growth has been accompanied by large environmental negative externalities, as the combination of an energy-intensive growth model and carbon-intensive energy supply has led to the build-up of a comparatively large carbon footprint. China’s emissions acceleration is, on our estimates, the source of c.45% of the rise in global GHG emissions since the 1970s, as shown in Exhibit 40.

Exhibit 39: China currently accounts for c.30% and c.26% of global CO2 and GHG emissions, respectively, higher than any other country or key geographical region globally, having shown a persistent upward trend CO2 emissions (GtCO2, LHS) and share of global CO2 emissions by region (%, RHS)

13 35% CO2 emissions (GtCO2) Share of global CO2 emissions (%) 12 30% 11 30%

10 25% 9

8 20% 7

6 13% 15% 13% 5 11% 4 10% 3 7% 6% 6% CO2 emissions by (GtCO2) region by CO2 emissions Share of global CO2 emissions (%) emissions CO2 of global Share 2 4% 5% 3% 3% 1

0 0% 2000 2004 2008 2012 2016 2019 2002 2006 2010 2014 2018 2000 2004 2008 2012 2016 2019 2002 2006 2010 2014 2018 2000 2004 2008 2012 2016 2019 2002 2006 2010 2014 2018 2000 2004 2008 2012 2016 2019 2002 2006 2010 2014 2018 2000 2004 2008 2012 2016 2019 2002 2006 2010 2014 2018 China United States Other Asia & Europe India CIS Middle East Africa South & Central North America Asia Pacific America (ex. US) (excl. China, India)

Source: European Commission Joint Research Centre (JRC). Emission Database for Global Atmospheric Research (EDGAR) release version 5.0, Goldman Sachs Global Investment Research

20 January 2021 21 Goldman Sachs Carbonomics

China’s emissions are distinct not only in terms of scale but also in terms of sectoral mix compared with other regions globally. In 2019, c.80% of the country’s emissions were attributed to two key emitting sectors: power generation and industry (including industrial combustion, industrial processes and industrial waste). The share of power generation and industrial emissions is higher than in any other major region globally, as shown in Exhibit 42 and Exhibit 43, with transport and buildings emissions having a proportionately smaller share compared with other regions. This highlights the critical role of energy for China (responsible for power generation, transport, buildings and a large share of industrial emissions), making the evolution of the country’s energy mix one of the most important determinants of the de-carbonization path in the near and medium term.

Exhibit 40: Global GHG emissions have doubled since 1970, with Exhibit 41: The sharpest increase in emissions occurred in 2000-10, c.45% of the increase attributed to China which was marked by the stellar increase in China’s economic GHG emissions % increase relative to 1970 baseline and proportion of activity increase attributed to China China’s CO2 and GHG emissions (GtCO2eq, LHS) and its global share of CO2 emissions (%, RHS)

120% 14 35% 13 2019, 30% 100% 12 2010, 27% 30% 11 80% 10 25% 9 60% 8 20% 7 2000, 14% 40% 6 15% (GtC02eq) baseline) 5 1990, 11% 1980, 8% 20% 4 10% 3 2 5% (%) CO2 emissions total 0% GHG and CO2 emissions China 1 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 GHG emissions % increase (from 1970 (from increase % emissions GHG 0 0% China's CO2 emissions as a % global % of as a CO2 emissions China's

% increase of GHG emissions from 1970 baseline 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Share of GHG emissions increase attributed to China

Source: European Commission Joint Research Centre (JRC). Emission Database for Global Source: European Commission Joint Research Centre (JRC). Emission Database for Global Atmospheric Research (EDGAR) release version 5.0, FAO, Goldman Sachs Global Investment Atmospheric Research (EDGAR) release version 5.0, FAO, Goldman Sachs Global Investment Research Research

Exhibit 42: China’s sectoral emissions mix is differentiated, with Exhibit 43: ...which together make the largest contribution to >80% of the country’s CO2 emissions attributed to the power country level emissions than in any other key region globally generation and industry sectors... Sectoral split of CO2 emissions in 2019 (%) Sectoral split of CO2 emissions in 2019 (%)

50% 100% 45% 90% 40% 40% 80% 35% 70% 60% 30% 29% 25% 50%

(%) 40% 20% 16% 30% 15% 20% 10% 9% 10%

5% 7% (%) emissions CO2 of split Sectoral 0% 0% North US South & India China Asia Europe Middle CIS Africa

Sectoral split of China's CO2 emissions CO2 China's of split Sectoral America Central Pacific East (ex. US) America (excl.

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 China, Power Industry Industrial combustion India) Other industrial, waste and agriculture Buildings Buildings Other industrial & waste, agriculture Industrial combustion Power generation Transport Transport

20 January 2021 22 Goldman Sachs Carbonomics

Despite the rise in absolute emissions, China has successfully reduced the emissions intensity of its GDP over the past 20 years, facilitating more sustainable economic growth... While China is currently the world’s largest emissions producer, over the past two decades (since 2000), the country has been able to reduce its emissions intensity

per unit of GDP (CO2 emissions per thousand US$ GDP) by c.40%, one of the largest reductions among key economic regions globally (the second-largest reduction after the United Kingdom, as shown in Exhibit 46) and has achieved in the same timeframe the largest absolute reduction in emissions intensity (Exhibit 45), accounting for the large downward shift in the global GDP emissions intensity curve shown in Exhibit 44. Therefore, while the country’s absolute emissions have been trending upwards, when adjusting for economic growth, China has been able to consistently achieve more sustainable growth over the past two decades.

Exhibit 44: While China’s current emissions intensity per unit of GDP exceeds the global average, the country has achieved one of the largest reductions in GDP emissions intensity over the past 20 years, accounting for the large downward shift in the global GDP emissions intensity curve GDP CO2 emissions intensity curve (tnCO2/k$ by region vs. global total CO2 anthropogenic emissions)

1.5 2000 2005 2010 2015 1.3 2019

1.1

0.9 China China China 0.7 China

2000 0.5 (tnCO2/k$ GDP) (tnCO2/k$ Russia China 2005 Australia 2010 0.3 Global average 2015 CO2 emissions per GDP curve United States 2019 EU 27 average 0.1 UK

-0.1 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 Total global anthropogenic CO2 emissions (GtCO2)

Source: European Commission Joint Research Centre (JRC). Emission Database for Global Atmospheric Research (EDGAR) release version 5.0, Goldman Sachs Global Investment Research

Exhibit 45: China has over the past 20 years achieved the largest Exhibit 46: ...and one of the highest in % terms, following the United absolute reduction in CO2 emissions per unit of GDP... Kingdom, among key emitting regions globally Reduction in annual CO2 emissions per unit GDP (tnCO2/k$ pa) Reduction in annual CO2 emissions per unit GDP (%)

0.20 40% 30% 0.10 20% 0.00 10% -0.10 0% -10% -0.20 -20% -0.30 -30% -40% -0.40 -50%

-0.50 tnCO2/kUSD/yr) -60% per GDP (tnCO2/k$/yr) per GDP (tnCO2/k$/yr) Iran Iran per GDP (% in reduction per GDP (% India India Brazil Brazil China China Japan Japan Global Global Russia Russia Mexico Mexico Canada Canada Australia Australia Indonesia Indonesia EU27+UK EU27+UK Reduction in annual CO2 emissions annual in Reduction Reduction in annual CO2 emissions annual in Reduction South Africa South South Africa South South Korea South South Korea South Saudi Arabia Saudi Saudi Arabia Saudi United States United United States United United Kingdom United United Kingdom United Reduction since 2010 Reduction since 2005 Reduction since 2000 % Reduction since 2010 % Reduction since 2005 % Reduction since 2000

20 January 2021 23 Goldman Sachs Carbonomics

...and maintains an average emissions intensity per capita that is below many of the key economic regions globally and close to the global average

China’s 2019 CO2 emissions (produced at a country level) per capita screen broadly in line with the global average and are still well below those of other key regions globally

(as shown in Exhibit 47). Countries with higher GDP/capita also tend to have higher CO2

emissions/capita. This is consistent with the upward trend observed in China’s CO2 emissions per capita over the past two decades, as shown in Exhibit 48.

Exhibit 47: China’s produced CO2 emissions per capita (2019) screen broadly in line with the global average and below those of other key economic regions globally CO2 emissions produced in each country per capita (tnCO2/cap) and GDP per capita (k$/cap) for 2019

26 Europe 24 North America Kuwait UAE Africa 22 South & Central America (tnCO2/cap) 20 Asia & Asia Pacific Middle East Saudi Arabia 18 Australia 16 Canada United States 14 Russia South Korea 12 China 10 Poland Germany CO2 emissions produced per capita per produced CO2 emissions Japan 8 Iran Italy 6 Turkey Spain United Kingdom

4 France India 2 Brazil 0 1.0 2.0 4.0 8.0 16.0 32.0 64.0 128.0 Log GDP per capita (k$/cap)

*Note: Bubble size represents the relative size of CO2 emissions produced in each country n 2019

Source: European Commission Joint Research Centre (JRC). Emission Database for Global Atmospheric Research (EDGAR) release version 5.0, Goldman Sachs Global Investment Research

Exhibit 48: While China’s CO2 emissions per capita are below the Exhibit 49: ...moving higher on the CO2 intensity per capita curve level of many other key economic regions globally, they have CO2 emissions intensity per capita curve (tnCO2/cap by region vs. global increased notably over the past two decades... total CO2 anthropogenic emissions) CO2 emissions per capita pa (tnCO2/cap/yr)

40 25 2000 2005 2010 35 2015 20 30 2019

15 25

10 20 Australia 15 United States (tnCO2/capita/pa) (tnCO2/capita/yr) 5 Russia 2000 10 China 2005

CO2 emissions per capita curve curve capita per CO2 emissions 2010 0 EU 27 average 5 UK 2015 CO2 emissions per capita per annum per capita per emissions CO2 2019 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 0 EU27+UK Global Russia United States China 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 Total global anthropogenic CO2 emissions (GtCO2)

Source: European Commission Joint Research Centre (JRC). Emission Database for Global Source: European Commission Joint Research Centre (JRC). Emission Database for Global Atmospheric Research (EDGAR) release version 5.0 Atmospheric Research (EDGAR) release version 5.0, Goldman Sachs Global Investment Research

20 January 2021 24 Goldman Sachs Carbonomics

The ongoing urbanization trend in China may see emissions per capita rise towards levels of other developed economies in the absence of a net zero emissions trajectory China’s urban population has increased sharply from c.100 million (1960) to more than 800 million in 2019, with c.60% of China’s population currently living in urban areas. As a result, the population density in urban areas in China has increased by almost three times over the past three decades (since 1990), as shown in Exhibit 51, and the country currently shows among the largest population density discrepancies between urban and rural areas globally, as shown in Exhibit 52. Large-scale urbanization in China has led to unprecedented urban expansion and infrastructure development. The urbanization trend and the migration from rural and urban areas is typically associated with higher disposable incomes and subsequently higher consumption expenditure, as shown in Exhibit 53, resulting in higher emissions from this source.

Exhibit 50: The urbanization trend in China continues, with c.60% of Exhibit 51: ...and the population density in urban areas has the country’s population currently living in urban areas vs. <30% increased almost threefold during this timeframe... three decades ago (1990)... China population density (ppl/km3) Urban and rural share of China’s population (%)

90% 2,500 80% 2,000 70% 60% 1,500 50% 's population in 40% 1,000 30%

20% (population/km2) urban/rural areas 500 10% China's population density China's population density 0% 0 % of% total China 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Urban % of total population Rural % of total population Urban Rural China total

Source: World Bank Group Source: World Bank Group, Goldman Sachs Global Investment Research

Exhibit 52: ...resulting in the largest population density discrepancy Exhibit 53: Urban households’ average disposable income and between urban and rural areas among key regions globally consumption expenditure are >2x higher than rural households’, Population density for rural and urban regions, and national average for resulting in higher consumption emissions key regions globally (ppl/km2) Chinese household disposable income, consumption expenditure (yuan, 2018)

Rural Urban National 100,000 2500 average 80,000 2000 60,000

1500 40,000

(population/km2) 20,000 1000 0

500 Low income Low High income High Household disposable income, disposable Household Middle income Middle 0 income Middle China European United Russia Middle Australia India UK Population density density Population consumption expenditure (yuan, 2018) (yuan, expenditure consumption Union States East income middle Low Upper middle income middle Upper Household disposable income Household Urban population density Rural population density Overall population density per capita consumption expenditure per capita

Source: World Bank Group, Goldman Sachs Global Investment Research Source: National Bureau of Statistics of China, Goldman Sachs Global Investment Research

20 January 2021 25 Goldman Sachs Carbonomics The cost curve of de-carbonization for China is very steep yet highlights a wide range of low-cost opportunities

In our deep-dive de-carbonization report, Carbonomics: Innovation, Deflation and Affordable De-carbonization, we introduced our global carbon abatement cost curve. We now introduce our first regional, China-specific de-carbonization cost curve. The Carbonomics de-carbonization cost curve shows the reduction potential for anthropogenic GHG emissions produced in China relative to the latest reported China anthropogenic GHG emissions. It primarily comprises de-carbonization technologies that are currently available at commercial scale (commercial operation & development), presenting the findings at the current costs associated with each technology’s adoption. We include conservation technologies (technologies resulting in the avoidance of emissions) and process-specific sequestration technologies (technologies that sequester emissions back from the atmosphere, such as industrial carbon capture) across all key emission-contributing industries: power generation, industry (which includes industrial energy and process emissions) and industrial waste, transport, buildings and agriculture. Our China de-carbonization cost curve addresses >100 different applications of GHG conservation technologies across all key emitting sectors in China, as shown in Exhibit 54. We note that this curve is constructed on the basis of current costs associated with each technology and as such is likely to be a dynamic cost curve that evolves over time, as these technologies become more widely adopted and as economies of scale and technological innovation lead to cost deflation.

Exhibit 54: China’s de-carbonization cost curve shows an abundance of low-cost de-carbonization opportunities (mostly technologies associated with energy emissions abatement) yet becomes very steep beyond 75% de-carbonization on the path to net zero De-carbonization cost curve for China’s anthropogenic GHG emissions, based on current technologies and current costs, assuming economies of scale for technologies in the pilot phase

1,200 1,100 1,000 900 800 700 600 cost (US$/tnCO2eq) 500 400 300 200 100 0 -100 China carbon abatement -200 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0 14.0

China GHG emissions abatement potential (Gt CO2eq) Power generation (coal switch to gas & renewables) Transport (road, aviation, shipping)

Industry (industrial combustion, process emissions, waste) Buildings (residential & commercial)

Agriculture, forestry & other land uses (AFOLU) Emissions reliant on other carbon sequestration (natural sinks, DACCS)

Source: Goldman Sachs Global Investment Research

20 January 2021 26 Goldman Sachs Carbonomics

Exhibit 55: Summary of key technologies considered in the construction of the de-carbonization cost curve for China along with the sectoral split of its GHG emissions

1,200 1,100 1,000 900 800 700

cost (US$/tnCO2eq) 600 500 400 300 200 100 0

China carbon abatement -100 -200 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0 14.0

China GHG emissions abatement potential (Gt CO2eq) Power generation (coal switch to gas & renewables) Transport (road, aviation, shipping) Industry (industrial combustion, process emissions, waste) Buildings (residential & commercial) Agriculture, forestry & other land uses (AFOLU) Emissions reliant on other carbon sequestration (natural sinks, DACCS)

China GHG emissions split 7% 33% 5% 6% 48%

TRANSPORTATION POWER GENERATION AGRICULTURE BUILDINGS INDUSTRY & WASTE

De-carbonization De-carbonization De-carbonization De-carbonization De-carbonization technologies technologies technologies technologies technologies • Industrial combustion: • Domestic Aviation: The Switch from coal to • Energy & heating: • • Efficiency measures such Across major emitting switch to a more efficient renewables: Switch from coal Hydrogen and renewable as Improved land industrial sectors, >50% of aircraft model is considered a power plants to renewable electricity-run heat pumps management and livestock emissions are associated with viable option for partial de- energy sources including are the two key management practices: the use of energy, primarily carbonization in the near term. solar, onshore wind, offshore technologies currently Improved cropland, grazing through industrial combustion Sustainable aviation fuels wind, bioenergy, hydropower commercially available for land and livestock (heat) processes. Switch from (SAFs, biojet) remain the sole is considered the ultimate dede-carbonization of management practices can coal, natural gas to biomass, commercially available de- carbonization solution which buildings longer-term. help to optimize resource use biogas, electricity or clean carbonization route longer term. can achieve full emissions Natural gas can act as a for the agriculture sector. hydrogen are the key abatement for power transtion fuel with infratsructure potentially technologies in de-carbonizing • DomesticShipping/marine: generation systems in the • Precision agriculture: the utilized for clean hydrogen energy-related emissions in LNG ships a technological presence of storage solutions. use of technology to optimize longer-term. We consider industry. option for ships meeting a We considered the switch to crop yields, minimize excess threshold size, marine biofuels all of these renewable energy both in our cost curve. use of nutrients and • Cement: Process emissions another viable technology, with sources in the presence of pesticides could all potentially Efficiency: Efficiency associated with the materials clean ammonia run ships the batteries (for intraday storage) contribute to reduced raw • improvements can reduce involved such as clinker. key de-carbonization and clean hydrogen (for material and energy needs the energy needs for Reducing the ratio of clinker to technology longer term. seasonal storage). for the sector. heating and electricity and cement a key technology, along with CCUS. • Road short-haul transport: • Switch from gas to are thus viable options for EVs the key technology for road hydrogen CGGTs: Whilst de-carbonization. Switch to • Iron & Steel: The switch from passenger transport, with a gas can act as a transition LED lighting, addition of BF-BOF process to natural small proportion of de- fuel, we consider the switch of cavity wall insulation, use gas or hydrogen based DIR- carbonization achieved through existing natural gas CGGTS of thermostats and highest EAF a possible near term de- road biofuels for places with to hydrogen CGGTs in the efficiency HVAC systems carbonization option. The role constrained electrification long-run. can all contribute to of scrap and circular economy infrastructure. efficiency improvements. is also critical. • Energy storage: Batteries a • Road heavy long-haul key technology for intraday • Petrochemicals: Clean transport: Electrification of storage with clean hydrogen hydrogen (either blue or short and medium haul trucks the preferred solution for green) and bioenergy could and buses a viable option. seasonal storage enabling the aid the de-carbonization of Hydrogen FCEVs the most full uptake of renewables in process/raw material-related promising de-carbonization the power generation system. emissions.Recycling and option for long-haul heavy truck circular economy also critical. routes and forklifts. • Switch to nuclear: China maintains a robust nuclear • Efficiency: Across all • Rail: Rail electrification and energy expansion program industrial processes, hydrogen run trains the two de- and we therefore consider its improvements in efficiency & carbonization solutions role is supporting the above recycling have the potential to considered. de-carbonization solutions. aid de-carbonization.

Source: European Commission Joint Research Centre (JRC). Emission Database for Global Atmospheric Research (EDGAR) release version 5.0, FAO, Goldman Sachs Global Investment Research

20 January 2021 27 Goldman Sachs Carbonomics

The Carbonomics cost curve results, on our estimates, in a c.US$1.8 tn pa total cost for China’s path to net zero emissions The construction of our de-carbonization cost curve for China enables us to estimate the total annual cost of GHG emissions abatement achieved through the existing, large-scale commercially available de-carbonization technologies addressed in our cost curve (Exhibit 55). As shown in Exhibit 56, the initial c.50% of China’s anthropogenic GHG emissions, what we classify as ‘low-cost de-carbonization’, can be abated at an estimated annual cost of c.US$220 bn. However, given the steepness of the cost curve, as we move beyond 75% de-carbonization, we enter the territory of ‘high-cost de-carbonization’, which requires up to c.US$1.8 tn pa for 90% de-carbonization achievable in the absence of non-process specific sequestration (natural sinks and direct air carbon capture). Overall, this implies up to c.US$1.8 tn of annual cost as China approaches net zero by 2060. We note that the remaining 10% of China’s anthropogenic emissions, in the absence of new technologies, will have to rely on non-process specific carbon sequestration for abatement – natural sinks and direct air carbon capture (DACCS), which we address separately in a later section in this report. We also note that this curve is constructed on the basis of current costs associated with each technology and as such is likely to be a dynamic cost curve that evolves over time, as these technologies become more widely adopted and as economies of scale and technological innovation lead to cost deflation.

Exhibit 56: The Carbonomics cost curve for China implies an annual cost of c.US$1.8 tn on the path to net zero, yet with plenty of low cost de-carbonization opportunities; c.50% de-carbonization is potentially achievable with an annual cost of US$220 bn China carbon abatement cost curve for China’s anthropogenic GHG emissions with cumulative area under the curve, based on current technologies and assuming economies of scale for technologies in pilot phase

1,300 >90% China 2020 China Carbonomics cost curve 1,200 dede-carrbbonizazation

1,100 Annual Cost: $1.8 tn pa 1,000

900

800

st (US$/tnCO2eq) 700 75% China 600 dede-carrbobonizazation 500 50% China Annual Cost: $720 bn pa dede-carbbononizzaation 400

300 Annual cost : $220 bn pa 200 Carbon Carbon abatement co 100

-100 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 -200 China GHG emissions abatement potential (GtCO2eq)

Source: Goldman Sachs Global Investment Research

20 January 2021 28 Goldman Sachs Carbonomics

The four key transformational technologies with the potential to reshape the cost dynamics of China’s de-carbonization cost curve Looking at China’s de-carbonization cost curve, we note that as we move towards net zero, the evolution of the energy mix is likely to be one of the most critical determinants of the country’s de-carbonization path. As we highlight in our Carbonomics reports, we expect the de-carbonization process to evolve from being one-dimensional (renewable power) to a multi-dimensional ecosystem. Four technologies are emerging as transformational, potentially having a leading role in the future evolution of China’s cost curve and the path to net zero emissions. Notably, all of these technologies are interconnected:

(a) Renewable power: The technology that dominates the ‘low-cost de-carbonization’ spectrum today and has the potential to facilitate the de-carbonization of c.50% of China’s anthropogenic GHG emissions, supporting a number of sectors including power generation and sectors that require electriﬁcation, as well as being critical for the production of clean hydrogen longer term (‘green’ hydrogen).

(b) Clean hydrogen: A transformational technology for long-term energy storage enabling increasing uptake of renewables in power generation, as well as aiding the de-carbonization of some of the harder-to-abate sectors, with a critical role in several industrial processes (iron & steel, petrochemicals), long-haul transport, and heating of buildings.

(c) Battery energy storage: Extends energy storage capabilities, and is critical in the de-carbonization of short-haul transport through electriﬁcation and utility intraday storage.

(d) Carbon capture technologies: Vital for the production of clean (‘blue’) hydrogen in the near term, while also aiding the de-carbonization of industrial sub segments with emissions that are currently non-abatable under alternative technologies (such as cement).

Low carbon Clean Hydrogen electricity

De-carbonization cost curve Transformational Carbon sequestration Batteries technologies (CCUS, natural sinks)

Source: Goldman Sachs Global Investment Research

20 January 2021 29 Goldman Sachs Carbonomics Laying out the path to net zero China

We lay out the possible path to net zero and carbon neutrality for China to 2060, in line with the country’s stated long-term ambition As part of this report, we lay out a possible path to net zero and carbon neutrality for China to 2060 (with peak emissions before 2030), in line with the country’s stated long-term ambition. We note that this path simply outlines one of the many possible routes that China could follow in its de-carbonization, and is, similar to China’s de-carbonization cost curve (Exhibit 54), reliant on currently existing de-carbonization technologies (assuming economies of scale for technologies in pilot phase).

Our path to net zero China is developed using both bottom-up (analysis of each sector separately) and top-down approaches (a hybrid approach), and addresses each of the country’s emitting sectors: power generation, transport, industry (including industrial combustion, industrial processes and waste), buildings and agriculture. Overall, we expect all of the key technologies addressed in our de-carbonization cost curve to play a role in facilitating the path to net zero China, each in their respective sector. For power generation, this implies a non-fossil fuel energy share of >95% achieved by 2060; for road transport, this implies new energy vehicles penetration (including BEVs, PHEVs and FCEVs) of close to 100% by 2060; for industry, an imperative improvement in efficiency and increasing penetration of clean hydrogen, electrification and carbon capture, as well as the critical role of circular economy; in buildings, it implies a switch from fossil fuel-sourced heating to clean hydrogen, electrification and the relevant efficiency improvements; and for agriculture, it assumes the required improvement in land management practices. The resulting emissions path for China carbon neutrality by 2060 is presented in Exhibit 57 and Exhibit 58 below.

Exhibit 57: As part of this report, we lay out a possible path for Exhibit 58: ...with a contribution from all key emitting sectors and China to reach net zero emissions by 2060, in line with the country’s carbon sequestration stated ambition... China anthropogenic GHG emissions path to net zero (excl. natural China anthropogenic GHG emissions (GtCO2eq) path to net zero (incl. sinks) (GtCO2eq) natural sinks)

16.0 16.0 14.0 14.0 12.0 12.0 10.0 8.0 10.0 6.0 8.0 4.0 2.0 6.0 0.0 4.0 -2.0 2.0

-4.0 GHG (GtCO2eq) emissionsChina China (GtCO2eq) emissions China GHG 0.0 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060

Natural sinks CCUS 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 China GS path to net zero CCUS Agriculture Buildings Power generation Industry, industrial waste & other fugitive Transport Industry, industrial waste & other fugitive Transport Agriculture, forestry and other land use Power generation Net emissions Buildings Current potential path (stated policies)

Source: Goldman Sachs Global Investment Research Source: European Commission Joint Research Centre (JRC). Emission Database for Global Atmospheric Research (EDGAR) release version 5.0, FAO, Goldman Sachs Global Investment Research

20 January 2021 30 Goldman Sachs Carbonomics China net zero and investments: US$16 tn investment opportunity on China’s path to carbon neutrality

The path to net zero China presents a c.US$16 tn investment opportunity to 2060, on our estimates A path to a net zero China by 2060 has the potential to transform not only China’s energy ecosystems but also its industry and society’s standard of living. Exhibit 59 shows the wide range of investment opportunities associated with what we believe are the key technologies required to achieve net zero emissions in China by 2060. These include, among others, the increasing uptake of renewable energy and bioenergy, an increasing focus on infrastructure investments for networks and charging stations that will enable a new era of electriﬁcation (as we highlight in our report From Pump to Plug), an upgrade of industrial plants (the cleanest available alternative technology), an upgrade of existing heating infrastructure enabling greater uptake of cleaner fuels such as natural gas and eventually clean hydrogen, and ﬁnally a greater focus on carbon sequestration (natural sinks and carbon capture).

In aggregate, we estimate a total investment opportunity of c.US$16 tn by 2060 in a scenario consistent with the path to net zero China that we have outlined above, and in line with the country’s stated de-carbonization ambition.

Exhibit 59: We estimate that there exists in aggregate a c.US$16 tn investment opportunity across sectors on the path to net zero China by 2060 Cumulative investment opportunity across sectors for China net zero by 2060 (US$ tn)

18.0

0.5 16.0 16.0 0.8

14.0 1.4

12.0 2.7 0.4 0.3 1.2 10.0 0.5

(US$ tn) (US$ 8.0 2.1 0.5 6.0 0.9 Hydro & other RES 4.0 0.7 Offshore wind 2.0 Onshore wind 2.0

Cumulative investments to net zero China by 2060 by China zero net to investments Cumulative 1.9 Solar 0.0 Renewable Nuclear Power Energy Transport Biofuels Hydrogen Industrial Hydrogen CCUS Natural China power power networks storage EV + plants processes pipeline sinks net zero (batteries) FCEV (SMR+ infrastructure 2060 infrastructure electrolyzer) Total investments

Source: Company data, Goldman Sachs Global Investment Research

20 January 2021 31 Goldman Sachs Carbonomics

As highlighted in Exhibit 59, we estimate a total investment opportunity of c.US$16 tn by 2060 in a scenario consistent with the path to net zero China, but we would not expect this to be evenly distributed annually to 2060. Instead, we anticipate an annual de-carbonization investment proﬁle similar to that shown in Exhibit 60, with an acceleration of investments to 2040, the year when we expect investments to peak, driven largely by the initial infrastructure expansion required for power networks, charging infrastructure and heating pipeline infrastructure to accelerate the penetration of electriﬁcation and clean fuel substitution in transport, buildings heating and industry. Overall, the average annual investments in de-carbonization that we estimate over 2021-60 are c.US$400 bn (compared with c.US$100 bn spent on renewable power generation in 2019), with the peak in 2040 (c.US$650 bn) representing up to 2% of the country’s GDP (based on our economists’ projections).

Exhibit 60: We expect an annual investment proﬁle similar to the one presented in this exhibit for a path consistent with net zero China by 2060, with investments peaking in 2040, representing up to c.2% of the country’s GDP Annual de-carbonization investments in US$ bn (LHS) and as a % of China’s GDP

700 2.2%

2.0% 600 1.8%

500 1.6% 1.4% 400 1.2%

(US$bn) 1.0% 300 0.8% as a % as GDP a % of 200 0.6%

0.4% 100

Annual Annual de-carbonization investments 0.2% Annual investments Annual de-carbonization 0 0.0% 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060

Renewable power Nuclear power Power networks Energy storage (batteries) Transport EV + FCEV Biofuels Hydrogen plants Industrial processes infrastructure Hydorgen pipeline CCUS Natural sinks As a % of GDP - RHS infrastructure

Source: Goldman Sachs Global Investment Research

20 January 2021 32 Goldman Sachs Carbonomics China net zero and job creation: Potential for the creation of c.40 mn jobs by 2060

As we highlight in our report Carbonomics: The green engine of economic recovery, clean infrastructure could play a major role in facilitating a cleaner economy while fostering net job creation as it tends to be more capital- and labor compared with traditional fossil fuel energy developments, while benefiting from a lower cost of capital, making it an example of a successful pro-growth, pro-environment initiative. We estimate that China’s path towards its net zero ambition could facilitate the creation of c.40 mn jobs by 2060 across sectors. We primarily focus on the impact of direct employment across the supply chain (we do not address indirect and induced employment in this analysis). The majority of employment creation that we expect is in sustainable energy ecosystems, dominated by renewable power generation, followed by power networks and electrification infrastructure. Net job losses arise in coal mining and processing, as well as coal power generation and crude oil extraction, processing and refining. We note that in this analysis, we use the available literature regarding employment factors, which may not account for future labor efficiency improvements and increased automation across these processes.

Exhibit 61: China’s path to net zero emissions has the potential to create c.40 mn jobs by 2060 across sectors, on our estimates Net job creation bridge on the path to net zero China by 2060 (mn jobs)

45 (1.4) 1.7 39.7 40 2.7 2.1 0.1 35

30 10.1 (2.5) 5.1 25 (2.7) 0.3 20 6.9 (mn) Operation & maintenance 15 (O&M)

10 17.3 Construction, installation & manufacturing (CMI) 5

0 Net job creation to 2060 on the path to China net zero net to China the path on 2060 to creation job Net Power networks dressing generation Coal mining & mining Coal Nuclear power Nuclear Net job creation in creation Net job Crude oil extraction, oil Crude processing & refining & processing Renewable electricity Renewable Coal-fired electricity Coal-fired maintenance, China to 2060 (mn jobs) (mn 2060 to China Biofuels and bioenergy and Biofuels copper and other metals other and copper generation (CMI & O&M) (CMI & generation Mining and processing of processing and Mining production & supply chain & supply production equipment manufacturing equipment Batteries and electrification and Batteries generation and heat supply heat and generation installation, operation, installation, Clean hydrogen manufacturing hydrogen Clean jobs (electrolyzer manufacturing) (electrolyzer jobs EV charging infra. construction, infra. EV charging grid connections, civil & road work & road civil connections, grid

Source: UNEP - ILO - IOE - ITUC, EuropeOn, IRENA, NBSC, Goldman Sachs Global Investment Research

20 January 2021 33 Goldman Sachs Carbonomics Laying out the path to a net zero China: A sectoral deep dive

1) Power generation: The crucial role of clean electricity for a net zero China and the transformational energy mix changes required Power generation is (along with general industry), one of the most vital components of

China’s path to carbon neutrality, contributing c.40%/33% of the country’s CO2 and GHG emissions respectively, and making it a key area for efforts to tackle the net zero challenge. In recent decades, China has moved to the center of global economic growth, a result of economic reforms which resulted in an unprecedented level of urbanization and economic activity. Given the country’s abundant coal supplies, its coal-powered power generation ramped up to meet rapidly growing electricity demand, and it now accounts for c.65% of the country’s electricity mix (c.68% fossil fuel sources when including natural gas and oil).

As part of this report, we attempt to lay out the path that China’s power generation industry could take to reach net zero emissions by 2060 (and peak emissions by 2030), as we show in Exhibit 62. We also lay out a potential evolution of the electricity mix that could allow net zero emissions from the sector (Exhibit 63). Overall, we believe the path to net zero will require a radical change in the country’s energy mix and current energy ecosystems: we estimate that non-fossil-sourced power generation will need to surpass 50% of total generation by 2030, reach c.70% by 2040, and exceed 85%/95% by 2050/60, from c.32% currently.

Exhibit 62: We lay out a path for China’s power generation industry Exhibit 63: ...which will require transformational changes in the to reach net zero emissions by 2060, and peak emissions by 2030 as country’s current power generation mix, with the non-fossil fuel part of this report... share rising from c.32% in 2019 to >95% by 2060 China power generation GHG emissions path to net zero (MtCO2eq) China’s power generation fuel mix (%)

6,000 In 2019: By 2030: By 2040: By 2050: By 2060: 100% Non-fossil Non-fossil Non-fossil Non-fossil Non-fossil 90% share: 32% share: >50% share: 70% share: >85% share: >95% 5,000 (incl. nuclear) (incl. nuclear) (incl. nuclear) (incl. nuclear) (incl. nuclear) 80% 4,000 70% 60% 3,000 50%

2,000 40% (MtCO2eq) 30% 1,000 20% 10% 0 Power generation fuel mix (%) mixfuel Powergeneration 0% China power generation GHG emissions emissionsGHG generation powerChina 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060

Power generation path to net zero Solar 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 Wind Hydro Coal Natural gas Oil Other RES Nuclear Nuclear Hydro Renewables (excl. hydro) H2CGGT CCUS H2CGGT Coal +CCUS

Source: European Commission Joint Research Centre (JRC). Emission Database for Global Source: BP Statistical Review, Goldman Sachs Global Investment Research. Atmospheric Research (EDGAR) release version 5.0, Goldman Sachs Global Investment Research.

We see electriﬁcation as a critical component of the path to net zero for the country, enabling de-carbonization across sectors such as road passenger transport, industrial heating, buildings and the production of green hydrogen required for several industrial applications, long-haul transport, heating and seasonal energy storage applications. Overall, we expect total demand for electricity in a net zero China in 2060 to be c.3x that of 2019, as we show in Exhibit 66. Renewable energy (solar,

20 January 2021 34 Goldman Sachs Carbonomics

wind, hydropower, bioenergy) is without a doubt the most critical component for power generation de-carbonization, and has the potential to revolutionize the current energy system in China (as highlighted by our Chinese Utilities team). Complemented by the already robust nuclear power expansion program in place (which we believe will likely have a less important role to play as renewables expansion accelerates and beneﬁts from further cost deﬂation, and as alternative energy storage solutions become more readily available (utility-scale batteries and clean hydrogen)), we believe China could achieve its ambitious net zero emissions goal. Carbon capture could be used to aid the transition for relatively young life coal and gas plants, avoiding stranded assets, but its vital role in other parts of the de-carbonization process (e.g. industry) leads us to believe it is likely to have a limited role to play in power generation by 2060.

Exhibit 64: We see the potential for electricity demand to increase Exhibit 65: ...as it is a vital part of the de-carbonization of other by c.3x, on a path consistent with China’s net zero emissions target sectors such as electriﬁcation of transport and buildings, the by 2060... production of green hydrogen, electriﬁcation of heat in industry and China electricity generation (TWh) more China electricity generation bridge to 2060E (thousand TWh)

30.0 25 GS Projections 24.9 4.4 25.0 20 1.4 20.0 2.8 15 5.2 15.0 10 3.6 ( thousand TWh) ( thousand

(thousand TWh) (thousand 10.0 7.5 5 China power generation powerChina China electricity generation electricity China 5.0 0

0.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 China 2019 Base Green Elecrtic vehicles Buildings Industry China 2060 Coal Natural gas Oil electricity electricity hydrogen (passenger, (30% electrification Net zero Nuclear Hydro Solar generation incorporating trucks) penetration) of heat electricity Onshore wind Offshore wind Other (biomass, geothermal) efficiency improvements H2CGGT Coal +CCUS

Source: BP Statistical Review, Goldman Sachs Global Investment Research. Source: BP Statistical Review, Goldman Sachs Global Investment Research.

Exhibit 66: The signiﬁcant increase in electricity demand on a net Exhibit 67: ...with the potential for >4,000 GW of solar and c.3,000 zero path will likely be mostly met by a transformational GW of wind power generation capacity additions to 2060 acceleration of renewable power... China net zero power generation capacity bridge (2019-60E, GW) China net zero electricity generation bridge (2019-60E, TWh)

30,000 12,000

25,000 10,000

20,000 8,000

15,000 6,000

10,000 4,000 generation (TWh) generation generation capacity (GW) capacity generation

5,000 powerzero to net bridge China 2,000 China bridge to net zero electricity electricity zero to net bridge China 0 0 China Coal, Solar Wind Hydro Other Nuclear H2CCGT Coal + China net China Coal, Solar Wind Hydro Other Nuclear H2CCGT Coal + China net electricity natural (onshore + RES CCUS zero power natural (onshore + RES CCUS zero generation gas & offshore) electricity generation gas & offshore) power (2019) oil generation capacity oil generation retirements (2060) (2019) retirements capacity (2060)

Source: BP Statistical Review, Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

20 January 2021 35 Goldman Sachs Carbonomics

Renewable power: The low-carbon technology dominating ‘low-cost de-carbonization’, benefiting from economies of scale and a bifurcation in the cost of capital for high- vs. low-carbon energy Renewable power has transformed the landscape of the energy industry and represents one of the most economically attractive opportunities on our de-carbonization cost curve (as shown in Exhibit 69), on the back of lower technology costs as the industry benefits from economies of scale and a lower cost of capital. We estimate that c.50% of the de-carbonization of China’s anthropogenic GHG emissions is reliant on access to clean power generation (as shown in Exhibit 68), including electrification of transport and various industrial processes, electricity used for heating and more.

Exhibit 68: Access to renewable power is the most critical Exhibit 69: Direct power generation de-carbonization through component, being more broadly vital for the de-carbonization of renewable energy is among the lowest-cost technologies on our c.50% of the current China anthropogenic GHG emissions China de-carbonization cost curve, even when energy storage is abatement across sectors required China anthropogenic GHG emissions de-carbonization cost curve with Power generation China de-carbonization cost curve orange indicating technologies reliant on access to renewable power

1,200 250 1,100 1,000 200 900 800 150 700 600 100 500 400 50 300 200 0 100 0 -50 -100 0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 4.0 4.4 -200 GHG emissions abatement in power generation (GtCO2eq) 01234567891011121314 (US$/tnCO2eq) cost abatement Carbon Carbon abatement cost (US$/tnCO2eq) cost abatement Carbon Solar Onshore wind Offshore wind China GHG emissions abatement potential (Gt CO2eq) Solar + battery Wind + battery Nuclear De-carbonization technologies relying on access to renewable energy Solar + hydrogen storage Wind + hydrogen storage Hydro Other de-carbonization technologies H2 GCCT CCUS

Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

Renewable power costs have fallen >70% in aggregate across technologies over the past decade, and current renewable power LCOEs in China are now close to conventional fossil fuel power such as coal, as shown in Exhibit 70 below. We note that along with the operational cost reduction that renewable energy has enjoyed over the past decade, owing to economies of scale, the ongoing downward trajectory in the cost of capital, as we highlight in our report Carbonomics: Innovation, Deﬂation and Affordable De-carbonization, for these low-carbon developments has also made a meaningful contribution to the overall affordability and competitiveness of clean energy. We show in Exhibit 72 how the reduction in the cost of capital has contributed to one-third of the reduction in LCOEs of renewable technologies since 2010. In contrast, ﬁnancial conditions keep tightening for long-term hydrocarbon developments, creating higher barriers to entry, lower activity, and ultimately lower oil & gas supply, in our view. This has created an unprecedented divergence in the cost of capital for the supply of energy, as we show in Exhibit 73, with the continuing shift in allocation away from hydrocarbon investments leading to hurdle rates of 10%-20% for long-cycle oil & gas developments compared with c.3%-5% for the regulated investments in Europe.

20 January 2021 36 Goldman Sachs Carbonomics

Exhibit 70: Renewable energy LCOEs in China are currently close to Exhibit 71: ...and we expect stellar growth in capacity for both that of conventional fossil fuel power generation such as coal, technologies, for a path consistent with net zero emissions by 2060 particularly for solar-utility and onshore wind... Solar and wind capacity additions in China for net zero (TW) LCOE (USD/kWh)

0.12 LCOE-2019 LCOE-2023E 0.12 (USD/kwh) (USD/kwh) 5.0 4.5 4.5 0.10 20% reduction potential for Utility-scale 0.10 4.1 Solar 4.0 15% reduction potential for On-shore 3.5 0.08 Wind 0.08 3.5 2.9 3.0 2.6 2.3 0.06 0.06 2.5 2.1 1.9 2.0 1.4 1.6 0.04 0.04 1.5 1.3 1.0 1.0 China for net zero (TW) 1.0 0.6 0.8 0.6 0.02 0.02 0.2 0.5 0.4 0.5 0.2 0.2 0.3 Solar & Wind installed capacity in 0.0 0.0 0.0 0.1 0.1 0.0 0.00 - 2019 2025E 2030E 2035E 2040E 2045E 2050E 2055E 2060E Gas Off-shore Solar-DG On-shore Solar-utility Coal Nuclear Hydro wind Wind Solar Onshore wind Offshore wind

Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

Exhibit 72: Renewable power LCOEs have decreased by >70% in Exhibit 73: The bifurcation in the cost of capital for hydrocarbons aggregate across technologies, beneﬁting from a reduction in the vs. renewable energy developments is widening, on the back on cost of capital for these clean energy developments, contributing investor pressure for de-carbonization c.1/3 of the cost reduction since 2010 Top Projects IRR for oil & gas and renewable projects by year of project LCOE for solar PV, wind onshore and wind offshore for select regions in sanction Europe (EUR/MWh)

20% 50% 10% 45% 0% 40% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E -10% 35% -20% 30% -32% -30% -33% 25% -40% -36% 20% -50% 15% -53% -60% 10% by year sanction of project year by -70% 5%

-80% -77% IRR renewablesIRR and Projects Top 0% Renewables LOCE % reduction (from 2010 (from2010 reduction % LOCE Renewables base) splitbetween operationaland financial -90%

Solar PV- operational reduction Solar PV - financial reduction 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Onshore wind - operational reduction Onshore wind - financial reduction 2020E Offshore wind - operational reduction Offshore wind - financial reduction Offshore oil LNG Solar Onshore wind Offshore wind

Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

20 January 2021 37 Goldman Sachs Carbonomics

Higher capital and labor intensity of renewable power to act as a major source of investment and employment creation in the path to net zero China Earlier in this report, we highlighted the substantial potential investment and job creation opportunity associated with a path consistent with net zero emissions in China by 2060. Renewable power generation acts as a major contributor to both investments (Exhibit 59) and job creation (Exhibit 61). This is mainly attributed to the higher capital and labor intensity of these technologies and their associated infrastructure, compared with traditional fossil fuel energy developments. In the exhibits that follow, we present the capital intensity (capex) per unit of output energy for each type of power generation technology. We present the results both in units of capex per ﬂowing unit of energy (US$/GJ of peak energy capacity) and per unit of energy over the life of the asset (US$/GJ). This shows higher capital intensity per unit of energy as we move to cleaner alternatives for power generation. However, this does not necessarily translate into higher costs for the consumer, thanks to the availability of very cheap ﬁnancing (under an attractive and stable long-term regulatory framework) and lower opex, compared with traditional hydrocarbon developments.

Exhibit 74: Renewable clean technologies in power generation Exhibit 75: ...and over the lifetime of the asset have higher capital intensity compared with traditional fossil fuel Capex per unit of energy over the life of the asset (US$/GJ) for each sources, based on per ﬂowing unit of energy... technology Capex per ﬂowing unit of energy (US$/GJ)

350 12

300 10 250 8 200 6 150

4 energy ($/GJ) energy 100

50 2 the lifetime of the asset ($/GJ) the asset of lifetime the

Capital intensity of unit flowingper intensity Capital 0 0 Coal-fired Natural Onshore Hydro Solar PV Biomass Offshore Geothermal over of energy per unit intensity Capital combustion gas wind wind Coal-fired Natural Onshore Hydro Solar PV Biomass Offshore Geothermal CGGT combustion gas wind wind CGGT Capex per flowing unit of energy Capex per unit of energy over asset life - range Capex per flowing unit of energy- GS base case for China Capex per unit of energy over asset life - GS base case for China

Source: Company data, IRENA, Goldman Sachs Global Investment Research. Source: Company data, IRENA, Goldman Sachs Global Investment Research.

Clean technologies have a higher average capital intensity than conventional fossil fuel power, based on both per unit of ﬂowing output energy and per unit of energy over the asset/technology lifetime. The low-carbon economy’s higher capital intensity is likely to foster employment creation, as indicated by the strong correlation between the capital intensity per unit of energy and its labor intensity (jobs per unit of average capacity over asset life) presented in the exhibits below. Solar PV is, according to the International Labour Organization (ILO) and the International Renewable Energy Agency (IRENA), the most labor-intensive clean technology in power generation (including construction, manufacturing, installation, operating & maintenance), albeit there exists a wide range of labor intensity factors depending on utility scale vs. rooftop PV.

20 January 2021 38 Goldman Sachs Carbonomics

Exhibit 76: The capital intensity of clean technologies in power Exhibit 77: Solar PV is the technology that deviates from the trend, generation shows a >80% correlation with labor intensity in the with a labor intensity that varies widely depending on the industry development (particularly in rooftop vs. large-scale utility) Capex per unit of energy over asset life vs. total labor intensity per MW Capex per ﬂowing unit of energy vs. total labor intensity per MW average capacity average capacity

8.0 8.0 7.0 7.0 6.0 6.0 CSP R² = 0.8115 CSP R² = 0.7231 Solar PV 5.0 5.0 Solar PV 4.0 Offshore wind 4.0 Offshore wind

capacity capacity 3.0 Hydro 3.0 Onshore wind Geothermal Hydro Geothermal average capacity Coal-fired Coal-fired 2.0 2.0 Biomass combustion combustion Biomass Onshore wind 1.0 1.0 Total labour intensity per MW Natural gas CGGT labour Totalintensity MWper Natural gas CGGT 0.0 0.0 0 50 100 150 200 250 300 350 400 0.0 2.0 4.0 6.0 8.0 10.0 12.0 Capex per flowing unit of energy ($/GJ) Capex per unit of energy over lifetime ($/GJ)

Source: Wet et al. as illustrated by IRENA, UNEP - ILO - IOE - ITUC, Goldman Sachs Global Source: Wet et al. as illustrated by IRENA, UNEP - ILO - IOE - ITUC, Goldman Sachs Global Investment Research. Investment Research.

20 January 2021 39 Goldman Sachs Carbonomics

The rising importance of energy storage and extensive network infrastructure As the growth in renewable power accelerates, intraday and seasonal variability has to be addressed through energy storage solutions. To reach full de-carbonization of power markets, we believe two key technologies will likely contribute to solving the energy storage challenge: utility-scale batteries and hydrogen, each having a complementary role. We incorporate both of these technologies in our path to net zero and expect utility scale batteries for energy storage to surpass 400 GW by 2060, while clean hydrogen-run CGGTs reach c.3% in the electricity generation mix in a similar timeframe. Energy storage and the need for extensive network infrastructure is a particularly important consideration for China, as the areas with the largest potential for solar and wind appear to be far from the main industrial hubs and city centers where most power demand arises, as shown in Exhibit 79. In light of China’s geographical complexity, a careful balance needs to be struck between the competitiveness of the wind and solar resources in sparsely populated regions, especially in the Northwest, and the difﬁculties of integration and network development.

While batteries are currently the most developed technology for intraday power generation storage, we consider hydrogen as a more relevant technology for seasonal storage, implying the need for innovation and development of both technologies. Batteries, for instance, are particularly suited to sunny climates, where solar PV production is largely stable throughout the year and can be stored for evening usage. Hydrogen on the other hand, and the process of storing energy in chemical form and reconverting it to power through fuel cells, could be used to offset the seasonal mismatch between power demand and renewable output. Yet, with fuel cells overall currently having efficiencies that vary between 50% and 65%, the overall efficiency of energy storage becomes a weak point for hydrogen, where we estimate the life-cycle of energy storage efficiency to be in the range of c.25%-40% overall, compared with c.70%-90% for batteries, as shown in Exhibit 78.

Exhibit 78: We see utility scale batteries and hydrogen as the two key complementary technologies to address the energy storage challenge

Energy storage Efficiency Comparison

Battery storage 1

Energy Transportation, Electric Battery Power generation generation distribution storage Overall efficiency 100% 85-95% 70-90% 70-90%

Hydrogen storage 2

Energy Electrolyzer Compression & Fuel cell Power generation generation H2 production distribution electricity Overall efficiency 100% 60-70% 45-65% 25-40% 25-40%

Source: Company data, Goldman Sachs Global Investment Research.

20 January 2021 40 Goldman Sachs Carbonomics

Exhibit 79: Photovoltaic power potential and mean wind power density in China appears to be higher in the west and north parts of the country, far from the most of the large urban centres with higher power needs, highlighting the key role of energy storage and extensive network infrastructure Photovoltaic power potential solar resource map (Global Solar Atlas) and mean wind power density map (Global Wind Atlas) for China

*The maps were obtained from the Global Solar Atlas 2.0, developed and operated by the company Solargis s.r.o. on behalf of the World Bank Group, utilizing Solargis data, with funding provided by the Energy Sector Management Assistance Program (ESMAP) and the Global Wind Atlas 3.0, developed, owned and operated by the Technical University of Denmark (DTU) and released in partnership with the World Bank Group, utilizing data provided by Vortex, using funding provided by the Energy Sector Management Assistance Program (ESMAP).

Source: Global Solar Atlas 2.0 - World Bank Group, Solargis, ESMAP, Global Wind Atlas 3.0 - World Bank Group, Technical University of Denmark (DTU), Vortex.

20 January 2021 41 Goldman Sachs Carbonomics

2) Transportation: The rise of new energy vehicles (NEVs) and the new charging infrastructure investment opportunity Transportation, in contrast to power generation, mostly sits in the ‘high-cost’ spectrum of the de-carbonization cost curve, yet when it comes to China, transport emissions

form a comparatively lower share of the country’s CO2 and GHG emissions, relative to other key economic regions, at c.9%/7% respectively (as shown in Exhibit 43). As part of our analysis, we lay out the path to net zero emissions for transportation for China, as shown in Exhibit 81, addressing short and medium-haul road transport, heavy long-haul transport, rail, domestic aviation and domestic shipping.

Exhibit 80: Transport sits at the higher end of the de-carbonization Exhibit 81: ...yet a combination of electriﬁcation, clean hydrogen cost curve for China... and bioenergy could successfully achieve a path consistent with De-carbonization cost curve for China’s anthropogenic GHG emissions, net zero emissions in China by 2060 based on current technologies and current costs, assuming economies China transport emissions (MtCO2eq) of scale for technologies in the pilot phase

1,200 1,400 1,100 1,000 1,200 900 800 1,000 700 600 800 500 400 300 600

200 (MtCO2eq) 100 400 (US$/tnCO2eq) 0 -100 200 -200 transportemissions China China carbon abatement cost abatement carbon China 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0 14.0 0 China GHG emissions abatement potential (Gt CO2eq) Power generation (coal switch to gas & renewables)

Transport (road, aviation, shipping) 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 Industry (industrial combustion, process emissions, waste) Buildings (residential & commercial) China transport path to net zero Electrification (Evs, PHEVs, HEVs) Agriculture, forestry & other land uses (AFOLU) Hydrogen - FCEVS, FCE trains Biofuels (aviation & marine) Non-abatable at current conservation technologies Ammonia & LNG shipping

Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

Road transport (passenger and short, medium-haul trucks): Electriﬁcation at the heart of the transport evolution

We believe road transport is at the start of its most significant technological change in a century, with electrification, autonomous driving and clean hydrogen at the core of the de-carbonization challenge. For light, short and medium-haul transport (primarily constituting passenger vehicles and short/medium-haul trucks), we consider electrification the key de-carbonization technology. For long-haul heavy trucks, we consider clean hydrogen a preferred option, owing to its faster refueling time, lower weight and high energy content. Overall, we estimate that China’s total road fleet (including passenger vehicles, short, medium and long-haul trucks) will increase three-fold to 2060 (from a 2019 base), with new energy vehicles – NEVs (including all of BEVs, PHEVs and FCEVs) reaching almost 100% penetration in the road transport fleet as shown in Exhibit 82, for a path consistent with net zero emissions in China by 2060 and peak emissions before 2030. This path would require NEV penetration in the road transport fleet to reach 20% by 2030, close to 70% by 2040, 90% by 2050 and almost 100% by 2060. We look at fleet penetration in this analysis, rather than vehicle sales, as it is ultimately the penetration of the fleet that directly translates into transport emissions.

20 January 2021 42 Goldman Sachs Carbonomics

While we project considerable growth in pure battery vehicles (essential for a net zero path), we expect multi-energy powertrain to account for the largest segment of industry demand over the next 15 years. Multi-energy is deﬁned as plug-in hybrid EV (green plate, mostly transmission-driven), range-extended EV (green plate, full motor-driven), and light emission hybrid cars (blue plate, full transmission-driven). On our current projections (current path), in line with the government’s volume target, we model these multi-energy vehicles accounting for 47% of China’s total car sales in 2025, versus pure battery cars at 13%, and pure non-battery cars (i.e. ICE-only) at 40%. We believe the ability to competitively integrate electric powertrain (control system supports autonomous technologies) with fuel system (compatible with infrastructure) will likely appeal to a majority of customers, especially outside the top municipalities (only six cities have ICE car plate restrictions, versus China’s >600 cities), thus providing structural advantages in terms of brand and data collection. We expect the trend to drive long-term expansion of Li Auto (all range extended) and GAC’s Japanese joint ventures (Honda’s i-MMD, Toyota’s hybrid synergy drive), owing to their advantageous hybrid IPs.

Exhibit 82: For a path consistent with net zero emissions in China Exhibit 83: ...with electric vehicles the preferred solution for by 2060, we expect new energy vehicles (including EVs and FCEVs) passenger vehicles and short, medium-haul light trucks and with to reach almost 100% penetration in the road transport fleet.... clean hydrogen the preferred solution for long-haul heavy trucks NEVs penetration in China’s road transport fleet for net zero (%) China road vehicles fleet bridge (2019-60E) for a net zero emissions path

transport fleet (%) fleet transport 30% 200 20% 100 China road fleet (mn vehicles) vehicles) (mn road fleet China

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059 (2019) light trucks (2060)

Source: Goldman Sachs Global Investment Research. Source: NBSC, Goldman Sachs Global Investment Research.

Exhibit 84: A path to net zero demands a drastic change in the Exhibit 85: Electrification benefits from the ongoing deflation of current input energy fuel mix in transport and efficiency, with battery technology, which we expect to continue, albeit at a slower electrification, clean hydrogen, bioenergy and ammonia pace post 2030E dominating the 2060 transport fuel mix Battery pack cost over time (US$/kWh) Transport input energy fuel mix (Exajoules)

20 USD 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E 2034E 2035E 18 300 2036E 2037E 2038E 2039E 2040E 16 NCM 250 Tesla 14 12 200 164 10 150 8 110 110

energy energy (EJ) 95 6 100 4 50 China transport input fuel input China transport 2 0 0 2019 2060 Gasoline Diesel Jet fuel Fuel oil 2015 2016 2017 2018 2019

Bioenergy Electricity Hydrogen Ammonia 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E 2034E 2035E 2036E 2037E 2038E 2039E 2040E

Source: Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

20 January 2021 43 Goldman Sachs Carbonomics

China has already put in place targets encouraging electriﬁcation efforts, as outlined by our Asia autos team here. On October 27, 2020, the China Society of Automotive Engineers (China-SAE) unveiled its Energy Saving and New Energy Vehicle Technology Roadmap 2.0, outlining its development plans for new energy vehicles (NEVs) through 2035. The roadmap includes a sales weighting target for internal combustion engine (ICE) vehicles of 0% in 2035, suggesting that efforts toward realizing a low-carbon society are being stepped up in China. The target of 0% ICE in 2035 breaks down as 50% hybrids and 50% NEVs (EVs and plug-in hybrids), and suggests that China-SAE has major expectations, not only for EV market expansion, but also for growth in hybrid sales. We believe that for the path to a net zero China by 2060 to materialize, these targets have scope for even further increases, with a greater focus on net zero vehicles and less focus on hybrid vehicles.

Exhibit 86: China-SAE targets 50% NEV and 0% pure-ICE in 2035 China NEV roadmap through 2035

~2025 ~2030 ~2035

- Fuel efficiency to be better than - Fuel efficiency to be better than - Fuel efficiency to be better than Passenger Vehicle (PV) 4.6L/100km (WLTC) for new PV (incl. 3.2L/100km (WLTC) for new PV (incl. 2.0L/100km (WLTC) for new PV (incl. NEV) NEV) NEV)

- Freight car: fuel efficiency to be more - Freight car: fuel efficiency to be more - Freight car: fuel efficiency to be more than 8% better than 2019 level than 10% better than 2019 level than 15% better than 2019 level Commercial Vehicle (CV) - Bus: fuel efficiency to be more than - Bus: fuel efficiency to be more than - Bus: fuel efficiency to be more than 10% better than 2019 level 15% better than 2019 level 20% better than 2019 level

- Fuel efficiency to be better than - Fuel efficiency to be better than - Fuel efficiency to be better than Internal Combustion Engine (ICE) 5.6L/100km (WLTC) for new ICE 4.8L/100km (WLTC) for new ICE 4.0L/100km (WLTC) for new ICE - HEV accounts more than 50% of ICE - HEV accounts more than 75% of ICE - HEV accounts 100% of ICE

- NEV accounts about 20% of total - NEV accounts about 40% of total - NEV accounts about 50% of total demand demand demand New Energy Vehicle (NEV) - FCV owned should be around 100k - FCV owned should be around 100k- - FCV owned should be around 1mn units 1mn units units

Source: China-SAE

Road transport (heavy long-haul trucks): The role of clean hydrogen

While we believe that electric vehicles screen as the most attractive de-carbonization solution for passenger vehicles and short and medium-haul transport, we believe that clean hydrogen could be the key technology when long-haul heavy transport is considered, given its high energy content per unit mass and faster refueling time. Although there are estimated to be only 6,180 FCEVs in China in 2019 (IEA), owing to a limited product offering, non-competitive price points and little infrastructure, we see the recent policy drive towards de-carbonization as a reason to reconsider the potential for FCEVs. Despite small absolute volumes, the growth of FCEVs accelerated notably in 2019, with the number of refueling stations increasing threefold in China in 2019 (from 20 to 61), giving China the fourth-largest number of stations. China has already announced a target to deploy one million FCEVs by 2030, and to have >1,000 stations, 50,000 FCEVs and >300 stations by 2025. Further regional initiatives explore the use of hydrogen for de-carbonization, with Wuhan announcing plans to become the ﬁrst Chinese Hydrogen City by 2025 and Shanghai launching its Fuel Cell Vehicle Development Plan. For a deep dive on the future of trucking, please see our global

20 January 2021 44 Goldman Sachs Carbonomics

team’s published report and presentation.

Hydrogen’s key attributes (low weight and high energy per unit mass, short refueling time, zero direct emissions when sourced from renewable energy sources) make it an attractive candidate as a transportation fuel. Hydrogen can be used in its pure form in fuel cell electric vehicles (FCEVs), but can also be converted into hydrogen-based fuels including synthetic methane, methanol and ammonia in a process commonly known as ‘power-to-liquid’, potentially applicable for aviation and shipping, where the use of direct hydrogen or electricity is particularly challenging. For all hydrogen applications, the volume requirement for on-board storage remains, along with the comparatively low overall well-to-wheel (or power generation to wheel) efﬁciency, the two key challenges for use of hydrogen.

The exhibits that follow present our comparative analysis for hydrogen fuel cell electric vehicles (FCEVs) and how these screen on a weight per unit of output energy and volume per unit of output energy basis, compared with other large-scale employed commercial vehicles – electric vehicles (EVs) and gasoline internal combustion engine vehicles (ICE). Exhibit 87 shows that for a fully loaded (or fully charged) average passenger vehicle, compressed hydrogen FCEVs screen attractively compared with Li-battery EVs on a weight per unit of output energy basis (tank-to-wheel). Similarly, hydrogen in its compressed form leads to FCEVs screening attractively on a volume per unit of energy output, compared with EVs. For the purpose of this analysis, we consider the weight and the volume of the system that stores and converts input energy to output energy across all three types of vehicles. This includes the internal combustion engine and gasoline tank components for ICE passenger vehicles, the Li-battery for EVs, and the fuel cell and compressed hydrogen storage tank for FCEVs.

Exhibit 87: FCEVs using compressed hydrogen screen attractively Exhibit 88: ...and considering the compressed form of hydrogen on a weight per unit of output energy basis when compared with used in FCEVs, they also screen attractively on a volume per unit of Li-battery EVs... output basis Weight per unit of output energy (tank-to-wheel basis, kg/MJ) for Volume per unit of output energy (tank-to-wheel basis) (litre/MJ) different average passenger vehicles and % increase in average vehicle weight

2.0 50% 1.6 1.8 45% 1.4 1.6 40%

1.4 35% 1.2

1.2 30% 1.0 1.0 25% 0.8 0.8 20% 0.6 wheel) (kg/MJ) wheel) 0.6 15%

0.4 10% (litre/MJ) wheel) 0.4

0.2 5% 0.2 % increase in average vehicle weight (%) (%) weight vehicle average in increase % Weight per unit of output energy (tankto energy output of unit per Weight 0.0 0% 0.0

Gasoline - ICE Compressed H2 Compressed H2 Li-battery to (tank energy output unit of per Volume Gasoline - ICE Compressed H2 Compressed H2 Li-battery (350 bar), fuel cell (700 bar), fuel cell (700 bar), fuel cell (350 bar), fuel cell

Source: EIA, Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

20 January 2021 45 Goldman Sachs Carbonomics

Exhibit 89: Hydrogen outperforms signiﬁcantly when we compare Exhibit 90: ...and also provides a range advantage for long-haul the refueling times of FCEVs versus BEVs at different kW charging transport applications ratings... ZEV Class 8 trucks and range (km) mins to refuel/recharge

160 1,000km 150 Max EU daily truck distacnce: c.800km 140 805km

120 483km 500km 100 400km 300km 80 200km 200km 210km

minutes) 60

40 30

Time to refuel (measured in refuel (measured to Time 20 33 0 ICE FCEV BEV - DC (100kW) BEV - AC (22kW)

Source: Company data, Goldman Sachs Global Investment Research. Source: Transport & Environment, EU, Company data, Goldman Sachs Global Investment Research.

However, FCEVs screen less attractively in terms of cost (US$). The cost per unit of energy output for FCEVs becomes more competitive when considering long-haul heavy transport, as their long range implies less frequent refueling required and as large capacity (>300kWh) batteries in EVs remain costly. This makes FCEVs attractive for long-haul transport applications such as buses and trucks and presents an area where economies of scale can bring further cost deﬂation beneﬁts.

Exhibit 91: Based on current prices, FCEV trucks are more expensive on a TCO basis, but with large cost reduction potential Total cost of ownership of a Class 8 truck (15 years)

Source: Company data, Goldman Sachs Global Investment Research.

20 January 2021 46 Goldman Sachs Carbonomics

Charging infrastructure: An US$ >1 tn investment opportunity

Achieving close to 100% NEVs penetration on the road fleet requires massive infrastructure investments, both for power networks and for charging stations. For the first time, the “Report of the Work of the Government” delivered by Premier Li during the 2020 Two Sessions meeting emphasized the government’s focus on accelerating New Infrastructure construction and development. “New Infrastructure” has been frequently mentioned by government authorities since the beginning of 2020. On March 4, 2020, the Politburo Standing Committee held a meeting to emphasize the investment focus in seven key areas of infrastructure: (1) 5G base stations and networks, (2) data centers, (3) Ultra High Voltage (UHV), (4) electric vehicle charging piles, (5) artificial intelligence, (6) Industrial IoT, and (7) intercity rail/urban transit network, where the charging piles for electric vehicles are classified as “New infrastructure”.

Consequently, local governments have made corresponding action plans to support the “New Infrastructure”:

Guangzhou: On May 8, 2020, Guangzhou approved 73 key projects in New Infrastructure involving Huawei, Baidu, JD, etc. (total investments at Rmb180bn across 2020-22E). This move is the first step in their three-year plan for accelerating the development of 5G, IIoT, EV charging piles, and artificial intelligence infrastructure. Specifically, it plans to build more than 70k EV charging facilities, 4k charging stations and 3GWh charging capacity by 2022E.

Beijing: On June 10, 2020, Beijing Municipal Commission of Development and Reform published “Beijing Action Plan to Accelerate New Infrastructure Construction (2020-2022)” which set goals for 5G base station, IDC, EV charging piles, IIoT, AI development as well as the digital infrastructure’s applications in various industries. Speciﬁcally, it targets to build 50k EV charging piles and c.100 battery swap stations in three years.

Shanghai: On June 19, 2020, Shanghai Municipal Government released the “Three-year Action Plan (2020-2022E)” to promote industrial internet innovation and upgrade and achieve the “Shanghai Industrial Capability Upgrade goal”, which outlined concrete action items for IoT construction and end-applications. Speciﬁcally, it targets building 100k EV charging stations, 45 taxi EV charging stations and 20 hydrogen refueling stations by 2022.

According to China Electric Vehicle Charging Infrastructure Promotion Alliance (EVCIPA), by September 2020, there were 1.4 mn charging facility units in China (including 606k public charging stall/station units and 812k private charging stall units). In terms of breakdown by provinces, Guangdong, Shanghai, Jiangsu, Beijing and Zhejiang are the top-5 provinces with the highest public charging piles/station ﬂeets as at September 2020.

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Exhibit 92: By September 2020, there were cumulatively 606k public Exhibit 93: ...consuming c.750GWh of electricity in China charging facilities in China...

Gwh in k units 800 700 736 752 592 606 700 675 566 600 542 547 551 558 604 516 531 531 596 496 600 573 500 478 535 490 505 500 442 400 400 300 289 300 200 200 172 100 100

0 0

Source: China Electric Vehicle Charging Infrastructure Promotion Alliance. Source: China Electric Vehicle Charging Infrastructure Promotion Alliance.

Exhibit 94: Top-10 provinces in terms of public charging piles ﬂeet Exhibit 95: Top-10 provinces in terms of public charging station (in units) ﬂeet (in units)

Guangdong 71,950 Guangdong 5,968

Shanghai 69,506 Shanghai 4,962

Jiangsu 62,934 Jiangsu 4,153

Beijing 61,017 Beijing 3,966

Zhejiang 38,776 Zhejiang 2,622

Shandong 36,058 Shandong 2,276

Anhui 29,325 Hebei 1,740

Hebei 24,857 Sichuan 1,542

Hubei 23,278 Hunan 1,531

Henan 21,174 Shaanxi 1,400

Source: China Electric Vehicle Charging Infrastructure Promotion Alliance. Source: China Electric Vehicle Charging Infrastructure Promotion Alliance.

20 January 2021 48 Goldman Sachs Carbonomics

Aviation: Aviation is one of the toughest sectors to de-carbonize, and we believe that biofuels (sustainable aviation fuels – SAFs), synthetic fuels and improved aircraft efﬁciency are currently key parts of the solution. Fleet renewal is likely to be a near-term solution, with new gen aircrafts burning c.15% less fuel than their predecessors. Longer term, we see bioenergy, and in particular SAFs, as the key solution for aviation emissions abatement. SAFs can be used interchangeably with jet fuel in current aircraft, and have the potential to cut emissions by up to 80% vs. kerosene. That said, SAF requires signiﬁcant investment before it can be considered an economically viable alternative, with the current production cost typically c.4x that of jet fuel. On our path to a net zero China, we estimate demand close to 2,500 kblpd of biofuels will be required in transport in 2060.

Exhibit 96: The switch to a more efﬁcient aircraft could be a Exhibit 97: ...with bioenergy ultimately the key currently available near-term complement to aviation de-carbonization... clean alternative, resulting in c.2,500 kbpd of biofuel (SAF) demand Fuel burn improvement vs. previous generation as per company data in our China net zero path by 2060 China transport biofuels demand (kbpd)

30% 2,500

25% 25% 25% 2,000

20% 20% 20% 1,500

15% 14% 1,000 10% 10% 500 5% China transport biofuel demand (kbpd) demand biofuel transport China 0 0%

A330neo A350 A320neo 787 737MAX 777X 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Source: Company data, Goldman Sachs Global Investment Research. Source: BP Statistical Review, Goldman Sachs Global Investment Research.

Rail: We view electriﬁcation and clean hydrogen as the two key technologies for the path of locomotives to net zero emissions, and we address both of these technologies in our path to net zero emissions. Hydrogen trains in particular could revolutionise current long-haul locomotive routes, leveraging the key advantages outlined above: high energy content per unit mass, short refueling time and zero emissions when produced via clean routes (‘blue’ and ‘green’ hydrogen). At the end of 2018, two fuel cell trains produced by Alstom became operational in Germany, and it has been announced that another 14 will be put into service in 2021. A fuel cell tram began operating in Foshan

(China) in 2019, with China exploring further possibilities for H2-fuelled rail.

Domestic shipping: Domestic shipping accounts for only a small amount of emissions, and we consider LNG bunkers (for the near term) and clean ammonia (longer term) as the two key de-carbonization solutions.

20 January 2021 49 Goldman Sachs Carbonomics

3) Industry: Clean hydrogen, CCUS, efficiency, circular economy and electrification setting the scene for a new industrial technology revolution Industry (including industrial combustion, industrial process and waste emissions) is currently the sector responsible for the largest share of GHG emissions produced in China (c.48%). Industrial emissions are typically split into three distinct categories; energy emissions associated with industrial combustion, industrial process emissions associated with the relevant process routes and feedstocks, and industrial waste emissions (including fugitive). While the exact split of industrial emissions is subject to uncertainty, with differences between sources, we estimate that >50% of China’s emissions from industry come from its heavy industries as shown in Exhibit 99 (ferrous and non-ferrous metals manufacturing, non-metallic minerals such as cement, petrochemicals). We believe four key technologies will form the primary pillars that will enable the emissions abatement of China’s industry: clean hydrogen, carbon capture (CCUS), electrification, efficiency improvements and circular economy.

Exhibit 98: We see clean hydrogen, carbon capture (CCUS), Exhibit 99: ...with >50% of the country’s industrial emissions electriﬁcation, efﬁciency and circular economy as the key pillars stemming from its heavy industries (ferrous and non-ferrous metals, for the abatement of China’s industrial emissions... non-metallic minerals such as cement) China GHG emissions associated with industry, industrial processes and China industry & waste GHG emissions split (2019) waste (MtCO2eq)

8,000 7,000 32% 32% 6,000

s associated 5,000 4,000 6% 3,000 9% MtCO2eq 2,000 21% 1,000 0 with industry withindustry & industrial waste - China GHG emission Ferrous metals (iron & steel alloys) 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 Non-ferrous metals (ie. aluminium, copper, zinc) GS path to net zero for industry CCUS Non-metallic minerals (cement, clay, lime) Bioenergy Hydrogen process Chemicals (ammonia, methanol, HVCs plastics) Electrification of heat Efficiency & circular economy Other (alternative process materials) Other unclassified (includes manufacturing and waste)

Source: European Commission Joint Research Centre (JRC). Emission Database for Global Source: Energy Transitions Commission, FAO, IEA, Goldman Sachs Global Investment Research. Atmospheric Research (EDGAR) release version 5.0, FAO, Goldman Sachs Global Investment Research.

The rise of clean hydrogen: The missing piece of the puzzle, connecting two critical components of the de-carbonization technological ecosystem, carbon sequestration and clean power generation Hydrogen offers an opportunity to indirectly extend electricity’s reach beyond power generation, and it can be produced by increasingly abundant renewables, including in Western China. Hydrogen has a critical role to play in a number of industrial processes in our view, including replacing coal in steel mills, serving as a building block for some primary chemicals and providing an additional clean fuel option for high temperature heat. While the basic scientiﬁc principles behind clean hydrogen are well understood, most of these technologies applied in their respective industrial sectors are still at the demonstration or pilot stage. We estimate that clean hydrogen can contribute to c.20% de-carbonization in China with its addressable market growing 7x from c.25 Mt in 2019 to c.170 Mtpa on the path to net zero.

20 January 2021 50 Goldman Sachs Carbonomics

Exhibit 100: Clean hydrogen has the potential to contribute to c.20% Exhibit 101: ...and we estimate a hydrogen addressable market of of China’s de-carbonization cost curve we believe... c.170 Mtpa by 2060 (a seven-fold increase) on a path consistent China anthropogenic GHG emissions de-carbonization cost curve with with China net zero emissions blue indicating technologies reliant on access to renewable power Potential clean hydrogen addressable market for China net zero (Mtpa)

200 1,200 41 168 1,100 150 1,000 50 900 800 100 30 700 600 50 28 500 c.25 400 0 300 200 Zero 2060 (Mtpa) 2060 Zero

(US$/tnCO2eq) 100

0 energy (heating) Potential clean hydrogen hydrogen clean Potential Buildings Power

Carbon abatementcostCarbon -100 generation

-200 Industry addressable market for China Net Net for China market addressable

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 shipping) petrochemicals) China GHG emissions abatement potential (Gt CO2eq) ammonia, (steel, consumption for consumption production 2019 production Potential hydrogen Potential ammonia domestic ammonia Long-haul transport Long-haul China Net zero 2060 zero Net China (heavy trucks, trains, trucks, (heavy De-carbonization technologies relying on clean hydrogen hydrogen total China Other de-carbonization technologies China China (2019) Net zero

Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

While hydrogen has gone through several waves of interest in the past 50 years, none has translated into sustainably rising investment and broader adoption in energy systems. Nonetheless, over the past few years, the intensified focus on de-carbonization and climate change solutions has led to renewed policy action aimed at the wider adoption of clean hydrogen. Policy support, and the acceleration of low-cost renewables and electrification infrastructure, seem to be converging to create unprecedented momentum in the use of hydrogen, paving the way for potentially more rapid deployment and investment. We believe there is a need for China to develop a national hydrogen strategy that would guide the sustainable development of the burgeoning hydrogen industry. The low-carbon intensity pathways for hydrogen production and the facets that make the fuel uniquely positioned to benefit from two key technologies in the clean tech ecosystem – carbon capture and renewable power generation – are ‘blue‘ and ‘green‘ hydrogen. ‘Blue’ hydrogen refers to the conventional natural gas-based hydrogen production process (SMR or ATR) coupled with carbon capture, while ‘green’ hydrogen refers to the production of hydrogen from water electrolysis whereby electricity is sourced from zero carbon (renewable) energies.

Exhibit 102: Blue and green hydrogen the two clean hydrogen Exhibit 103: ...beneﬁting from cost deﬂation in carbon capture, production routes... renewable electricity and electrolyzer costs LCOH for hydrogen by method of production (US$/kgH2) Hydrogen LCOH for different electricity and electrolyzer costs

10 1,400 9 8.0 8 7 Capex: $1,100/kWe 6 7.0 Capex: $900/kWe 5 0/MWh 4 6.0 Capex: $700/kWe 3 2 Capex: $500/kWe 1 5.0 0 ($/kgH2) 4.0

3.0 Blue H2: SMR +CCUS, $10/mcf Hydrogen cost of production SMR +CCUS SMR +CCUS SMR +CCUS SMR +CCUS Blue H2: SMR +CCUS, $6.25/mcf

Coal gasification Coal gasification Coal gasification 2.0 PEM electrolyzer PEM electrolyzer PEM electrolyzer PEM electrolyzer PEM electrolyzer Natural gas SMR Naturalgas SMR Naturalgas SMR Naturalgas SMR Blue H2: SMR +CCUS, $2.5/mcf Alkaline electrolyzer Alkaline electrolyzer Alkaline electrolyzer Alkaline electrolyzer Alkaline electrolyzer alkaline electrolyzer ($/kg H2) ($/kg electrolyzer alkaline Hydrogen cost of production - of production cost Hydrogen 1.0 Coal gasification +CCUS Coal gasification +CCUS Coal gasification +CCUS Coal price Coal price Coal price Gas price Gas price Gas price Gas price LCOE LCOE LCOE LCOE LCOE 15$/tn 35$/tn 55$/tn $2.5/mcf $5.0/mcf $7.5/mcf $10.0/mcf $20/MWh $35/MWh $50/MWh $65/MWh $80/MWh 0.0 Green hydrogen Opex ($/kg H2) Fuel (coal, NG) or electricity cost ($/kg H2) 0 153045607590105 Blue hydrogen LCOE ($/MWh) Grey hydrogen Capex ($/kg H2) GS base case cost of production

Source: Company data, Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

20 January 2021 51 Goldman Sachs Carbonomics

Clean hydrogen and its role in the de-carbonization of steel

As we highlight in the section above, one of the key industrial applications of clean hydrogen that has recently attracted industry interest is the production of net-zero carbon steel, to help meet the growing global steel demand with lower emissions. This is particularly important for China, with ferrous metals (iron & steel alloys) manufacturing contributing c.2GtCO2eq of GHG emissions (c.32% of China’s total industrial emissions).

Exhibit 104: Schematic summary of possible steel manufacturing routes and associated emissions intensity (tnCO2eq/tn steel)

Feedstock Forming, Iron Reduction Transformation Emissions intensity (extraction) downstream processing

Coal BF-BOF Downstream 1.9-2.1 Iron ore Blast Furnace- Blast Oxygen Furnace processing – cold 1.8-2.0 rolling and casting

DRI Electric Arc Natural gas Direct iron Furnace 0.6-1.2 Iron ore reduction (natural (EAF) gas) 0.6 Zero-carbon Zero-carbon electricity: electricity: DRI Clean hydrogen 0.0 0.0 Direct iron 0.0-0.6 Iron ore reduction (clean hydrogen) 0.0 Grid electricity Grid electricity 0.1-0.2 0.3-0.4 0.0-0.6 Scrap

* Figures in blue indicate the emissions per tonne steel produced – tnCO2/tn steel

Source: Energy Transitions Commission, Company data, Goldman Sachs Global Investment Research.

A number of projects are currently underway to develop these processes and move towards commercialization, as outlined below.

n HYBRIT: In 2016, SSAB, LKAB and Vattenfall formed a partnership for the de-carbonization of steel through a modiﬁed DRI-EAF process, aiming at producing the ﬁrst fossil-free steel making technology with a net zero carbon footprint. During 2018, a pilot plant for fossil-free steel production in Luleå, Sweden, started construction. The total cost for the pilot phase is estimated at Skr1.4 bn. The Swedish Energy Agency will contribute more than Skr500 mn towards the pilot phase and the three owners, SSAB, LKAB and Vattenfall, will each contribute one third of the remaining costs. The Swedish Energy Agency earlier contributed Skr60 mn to the pre-feasibility study and a four-year research project.

n SALCOS: An initiative undertaken by Salzgitter AG and the Fraunhofer Institute to develop a process for hydrogen-based reduction of iron ore using the DRI-EAF route. The process initially involves the reduction of iron ore to iron with the aid of natural gas and a higher volume of hydrogen in a direct reduction reactor. Based on this method, a reduction of iron of up to 85% can be achieved according to

the operators, with CO2 savings of initially up to 50% theoretically possible. n ΣIDERWIN: A research project by ArcelorMittal which is in the pilot phase. It utilizes an electrochemical process supplied by renewable sources to transform iron oxides into steel plate with a signiﬁcant reduction of energy use.

20 January 2021 52 Goldman Sachs Carbonomics

n COURSE 50: An initiative from the Japanese Iron and Steel Federation which aims to reduce the carbon footprint of steel production through the use of a higher proportion of hydrogen for iron ore

reduction, as well as capture the CO2 content of the process streams. n HIsarna: In 2004, a group of European steel companies (including Tata Steel) and research institutes formed ULCOS, which stands for Ultra-Low Carbon Dioxide Steel making. Its mission is to identify technologies that might help reduce carbon emissions of steel making by 50% per tonne by 2050. HIsarna is one of these technologies and is a process involving an upgraded smelt reduction that processes iron in a single step. The process does not require the manufacturing of iron ore agglomerates such as pellets and sinter, nor the production of coke, which are necessary for the blast furnace process.

20 January 2021 53 Goldman Sachs Carbonomics

Carbon Capture: Vital technology for some of the harder-to-abate industrial processes that remains nonetheless largely under-deployed In addition to its contribution to the electricity sector (which we anticipate to be relatively small in the face of the powerful renewables acceleration), carbon capture (CCUS) plays a much more critical role for Chinese industry. Industrial CCUS applications in China are often cost-efficient and have the potential to unlock deep emission reductions in China’s modern industrial facilities and across some of the most difficult-to-abate emissions, such as those produced in the manufacturing and processing of cement. As shown in Exhibit 58, we estimate that c.15% of China’s anthropogenic GHG emissions could be abated through carbon capture. A key advantage of carbon capture is that it avoids the rise of stranded industrial assets, with many of the industrial plants in China still relatively young (as shown in Exhibit 105), and requiring only modest retrofits to existing plants and processes. China more broadly sits at the lower end of the cost ranges across most carbon capture technological applications, given the lower raw material, labor costs and the higher carbon intensity of its industrial streams.

While China has by far the largest potential role for CCUS, given its large industrial sector and relatively young facilities, the current deployment policies require a material step-up to align with the country’s net zero ambition. On July 8, 2020, its central bank, along with the National Development and Reform Commission and the China Securities Regulatory Commission, published The Green Bond Endorsed Projects Catalogue: 2020 Edition 35, which for the ﬁrst time included CCS, expanding project ﬁnancing channels. Of the c.26 large-scale CCUS projects currently operating globally, only three are located in China, and of more than 40 CCUS projects in development around the world, only four are located in China. CCUS development is strongly policy dependent, and we believe China will need to put in place an appropriate investment framework, providing incentives that match those in other regions (such as the Q45 tax in the US).

Exhibit 105: Carbon capture can be a key de-carbonization solution Exhibit 106: ...and the global pipeline of large-scale CCS facilities for many hard-to-abate industrial emissions, particularly given is regaining momentum after a ‘lost decade’... China’s relatively young industrial plant base... Annual CO2 capture & storage capacity from large-scale CCS facilities Average age and typical life of industrial assets in China (years)

40 Average life: 40 years 160 35 140 Average life: 30 years 30 120

25 100 80 20

capacity (Mtpa) capacity 60 15 40 assets in China (yrs) in China assets

10 and storage capture annual CO2 20 5 0

Average age and typical industrial of life typical and age Average 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 HVCs Methanol Ammonia Iron & Steel: Iron & Steel: Cement kilns Operating Under construction Advanced development Early development DRIs BF-BOF

Source: IEA. Source: Global CCS Institute Status report 2020.

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Exhibit 107: ...as more projects in the development stage start to Exhibit 108: According to the latest status report by the Global CCS focus on industries with lower CO2 stream concentrations Institute, China’s current CO2 storage potential in oil & gas fields (industrial & power generation as opposed to natural gas alone (not including the large saline formations storage potential) processing) is sufficient to meets its de-carbonization needs Large-scale CCS projects by status and industry of capture (Mtpa, 2019) CO2 storage resource in majors oil & gas fields (MtCO2)

45 1,000,000 40 205,000 35 100,000 30 16,600 16,000 10,000 8,000 25 10,000 4,000 5,000 5,000 2,800 20 n major oil & gas oil n major 15 1,000 10 5 fields (MtCO2) fields 100 status and industry (Mtpa) industry and status 0 Operating Under construction Advanced Early development Large scale CCS projects capacity by by capacity CCS projects scale Large development 10 Natural gas processing Fertilizer production Hydrogen production Iron and steel production Ethanol production Power generation i resource storage CO2 1 Chemical production Oil refining Various United Russia Brazil UAE Saudi China Australia UK Norway Under evalutation DACCS States Arabia

Source: Global CCS Institute, Goldman Sachs Global Investment Research. Source: Global CCS Institute status report 2020.

Energy efficiency & circular economy We view energy efficiency as a critical component of China’s de-carbonization strategy. China has been one of the global leaders in energy efficiency improvements over the past decade, with most of its efficiency gains stemming from the industry sector. China’s policy has proven to be successful over the past decade and at present 60% of final energy use is covered by mandatory energy efficiency policies according to the IEA. The industry sector has higher policy coverage, at nearly 70%, because of the mandatory energy efficiency improvement targets introduced through the Top 1,000 and Top 10,000 Programmes. Energy intensity per unit of GDP reduction has been a policy focus for the country, with quantitative targets set during the previous 5-year plans (FYP) as shown in Exhibit 38. In addition to efficiency improvements, in our industrial emissions path to net zero we also incorporate technologies that encourage circularity within the industrial ecosystem. Examples of these include the use of scrap steel, aluminum and other metals, as well as plastics recycling.

Exhibit 109: Industry is one of the sectors with the highest policy Exhibit 110: ...and the country’s overall energy intensity of GDP has coverage with respect to energy use and efﬁciency... been trending downwards over the past three decades Energy use covered by mandatory energy efﬁciency policies in China China total energy supply per GDP PPP (toe/k$) (%)

80% 0.50 0.45 70% 0.40 60% 0.35 50% 0.30

(%) 0.25 40% 0.20 30% (toe/k$) 0.15 20% 0.10 Energy use covered by mandatory mandatory by covered use Energy energy efficiency policies in China in policies efficiency energy 0.05 10% 0.00 0% per GDP PPP supply energy total China's 1990 1995 2000 2005 2010 2015 2018 Industry Transportation Residential Non-residential Overall total buildings buildings

Source: IEA. Source: IEA, World Bank Group.

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Electrification of heat and other clean alternative fuels Industrial combustion for the production of heat contributes a significant portion (>60%) of emissions stemming from industry. These emissions can be abated through a fuel switch such as switching to furnaces, boilers, and heat pumps that run on bioenergy, clean hydrogen or zero-carbon electricity. In several cases, electrifying heat can involve a change in the production processes, such as in ethylene production, where the installation of both electric furnaces and electrically driven compressors is required. The biggest challenge associated with heat electrification stems from the incredibly high energy requirements of these processes (processes such as cement require temperatures exceeding 1,000 degrees Celsius). This highlights the critical importance of 100% carbon-free electricity availability to ensure emissions abatement is achieved. While heat electrification has been successfully achieved in low- and medium-heat manufacturing processes, it remains in research and at the pilot/demonstration stage for several high-temperature processes. In such high temperature processes, alternative fuels such as clean hydrogen could be more economic and technologically feasible sources of energy.

Exhibit 111: Summary of key de-carbonization technologies for the major industrial emitting sub-sectors

Industrial sub-sector Carbon capture, Hydrogen fuel Bioenergy fuel Electrification Other innovative utilization, or feedstock or feedstock of heat technologies storage Efficiency gains, Iron & Steel Circular economy - recycling, Electrical iron reduction

Clinker to cement ratio reduction Cement (alternative feedstocks), Efficiency gains, Circular economy - recycling

Efficiency gains, Ammonia Methane pyrolysis for hydrogen

Petrohemicals Efficiency gains, (incl. ethylene) Alternative process design

Other industrial Efficiency gains, (heat) Industrial heat pumps

Applied at large industrial sites Applied in pilot phase Applied in research phase

Source: Company data, Goldman Sachs Global Investment Research.

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4) Buildings and Agriculture: Fuel switch and efﬁciency to govern emissions reduction path Finally, we have constructed a potential path to net zero GHG emissions for China’s buildings and agriculture, the two sectors with the smallest relative contribution to the country’s total annual emissions (c.6% and 5% for buildings and agriculture respectively). We note that these paths are not the only potential de-carbonization routes available for China to achieve net zero emissions, yet reﬂect our views of the potentially winning technologies in the space.

Exhibit 112: We lay out a suggested path to net zero emissions in Exhibit 113: ...and an emissions reduction path for agriculture, the the buildings sector in China to 2060E, relying primarily on emissions of which are primarily non-CO2 and harder to abate in electriﬁcation, efﬁciency improvements and fuel switch (clean the absence of natural sinks sequestration hydrogen & bioenergy)... China agricultural emissions (MtCO2eq) China buildings GHG emissions and path to net zero (MtCO2eq)

1,200 1,000

900 1,000 800 800 700

600 600

500 400 400 (MtCO2eq) 200 300 China buildings GHG GHG emissions buildings China on the path to net zero (MtCO2eq) zero to net the path on - 200

China agriculture GHG emissions GHG agriculture China 100 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 GS path to net zero for buildings Natural gas - Hydrogen Electrification

Efficiency (BAT, insulation etc) Biomass 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060

Source: European Commission Joint Research Centre (JRC). Emission Database for Global Source: European Commission Joint Research Centre (JRC). Emission Database for Global Atmospheric Research (EDGAR) release version 5.0, FAO, Goldman Sachs Global Investment Atmospheric Research (EDGAR) release version 5.0, FAO, Goldman Sachs Global Investment Research. Research.

Regarding buildings, we expect a combination of efﬁciency measures (already implemented in the sector as shown in Exhibit 109 and with the country aiming for 70% of its new buildings to be green by 2022 as shown in Exhibit 116), increasing electriﬁcation (heat pumps) and other alternative clean fuels switch (such as clean hydrogen, biomass, solar thermal, waste heat) to facilitate the transition to a net zero emissions building ecosystem. We believe that while natural gas can form a key transition fuel in the near term, ultimately clean hydrogen is likely to be the preferred net zero fuel choice, and therefore argue for natural gas pipeline infrastructure to be designed and be built to be compatible with hydrogen from the onset of the transition and the infrastructure build.

With heating and cooling the major energy consumers in the building sector, China is typically divided into ﬁve major climate zones1 according to different thermal design requirements with different design codes applying to speciﬁc climate zones and rural and urban areas. North China requires space heating and this is met differently in rural and urban areas. The high density of urban areas (as we show earlier in the report in Exhibit 52) makes it suitable for district heating systems, while rural areas typically rely

1 Assessment of Energy Saving Potential by Replacing Conventional Materials by Cross Laminated Timber (CLT)—A Case Study of Ofﬁce Buildings in China, by Yu Dong ,Xue Cui, Xunzhi Yin, Yang Chen, Haibo Guo. Appl. Sci. 2019, 9(5), 858; https://doi.org/10.3390/app9050858

20 January 2021 57 Goldman Sachs Carbonomics

on individual household heating systems. Cooling requirements on the other hand are applicable to the whole country, with individual air conditioning units common in residential buildings and district cooling systems often used in commercial buildings.

Exhibit 114: China is typically divided into five major climate zones Exhibit 115: ...and we expect a path consistent with net zero China when it comes to heating and cooling requirements... by 2060 to require a radical change in households’ current fuel Map of China’s five key climate zones energy mix, with a higher reliance on electricity and efficiency improvements and the replacement of coal, oil, natural gas with clean hydrogen longer term China buildings’ energy use split by fuel (%, 2019)

Other RES 7% Bioenergy 15% Coal 12% Oil 12% Heat 7% Natural gas 12%

Electricity 35%

Source: MDPI. Source: IEA, Goldman Sachs Global Investment Research.

Exhibit 116: China aims for 70% of all new buildings to be ‘green’ by 2022

In Jul 2020, China's central policymakers announced that green buildings shall account for 70% of all Target new buildings by 2022

Additional requirements of Star-rated green buildings evaluation 1-Star 2-Star 3-Star (a) Decoration Basic decoration for all buildings (b) % of improvement from basic national standards Building envelope thermal performance 5% 10% 20% Air condition capacity 5% 10% 15% Heat transfer coefficient of exterior windows in cold and severe cold regions 5% 10% 20% Water efficiency of sanitary appliances Grade 3 Grade 2 Indoor air pollutant concentration 10% 20% Airtight performance of external windows Sealed attachement of the glass panel and window frame

Source: Goldman Sachs Global Investment Research.

Agriculture is, in our view, one of the toughest sectors to de-carbonize, with the vast

majority of emissions being non-CO2 and stemming from enteric fermentation by animals and cropland management. We believe that there is still scope, however, for improved efﬁciency and land management practices, which include among others, improvements in cropland, grazing land and livestock management, utilization of precision agriculture for optimization in crop yields and minimization of excess use of nutrients and pesticides, and reduced agricultural waste. Ultimately, for agriculture to reach net zero emissions, we believe forestry (reforestation, afforestation and agroforestry) needs to be addressed, collectively referred to as carbon sequestration through natural sinks, which we address in the following section of this report.

20 January 2021 58 Goldman Sachs Carbonomics

Natural gas: A transition fuel towards China net zero

As China moves towards the goal of electrifying and decarbonizing its economy, gas is among the preferred choices as a transition fuel. Compared with coal, gas emits 50%-60% less carbon when combusted for power generation, and can ramp up quickly when the intermittent renewable energy is unavailable. Further, the availability of gas infrastructure helps facilitate the potential switch from gas to green or blue hydrogen in the longer term. For example, low-pressure gas pipelines are typically made of PE and could transport hydrogen-natural gas mixtures without incurring additional investment.

Compared with 2017-19, when average gas demand growth was 14% yoy, we expect slower growth of China gas demand in 2022-24, a CAGR of 8%. Despite the market’s attention on China’s coal-to-gas substitution policies, we believe that economic growth has been a primary driver of China’s gas demand, given that the industrial sector accounts for 40% of total gas demand and is highly cyclical in nature. As such, we expect robust growth in China gas demand in 2021, driven by the low base of 2020 and continued economic recovery. Through 2022-24, however, China’s rebalancing towards the service sector, as expected by our economists, will likely lead to slower growth in the industrial sector, which in turn could drive slower gas demand growth for industrial use. Together with slower rural C2G substitution on the back of shrinking connectable households, we expect the growth of total gas demand to moderate over the next three years.

That said, China’s gas industry landscape is set to be substantially reshaped by ongoing reforms, which may introduce market-driven coal-to-gas substitution towards mid-decade (2025-26). PipeChina, the newly formed national pipeline company, has started to offer public access to its LNG terminals this winter and is set to build more pipelines and terminals for public use. This should gradually reduce the SOEs’ dominant market power in the domestic gas market, contributing to a gradual convergence of the onshore and offshore gas prices (Exhibit 117). By mid-decade, we expect the next global LNG oversupply to lead to low gas prices and market-driven coal-to-gas substitution in China, potentially driving meaningful gas demand acceleration (Exhibit 118).

Exhibit 117: The ongoing industry reforms are liberalizing China’s wholesale gas markets...

Source: CEIC, Company data, Goldman Sachs Global Investment Research.

20 January 2021 59 Goldman Sachs Carbonomics

Exhibit 118: ...and as a result, we expect China’s gas industry to go through two phases: from gas-on-gas competition to a potential gas-coal competition South China power generation cost (pre-carbon cost)

160 Insufficient competition in the wholesale market Increasing gas-on-gas competition Gas-coal competition 1

140 Onshore pipeline gas (South China) Potential Market-drvien C2G Competition and convergence betweeen substitution: 120 domestic & international gas after China gas  Global gas surplus (2025-26) reforms  More competitive on-shore 100 gas market  Carbon trading schemes in 80 International spot LNG place

20 Coal Assumed a gas price path similar to 2019 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Source: Wind, Reﬁnitiv, Goldman Sachs Global Investment Research.

This section on natural gas was contributed by Amber Cai (China Oil & Gas analyst).

20 January 2021 60 Goldman Sachs Carbonomics China net zero: The role of carbon sequestration

We envisage two complementary paths to enable China and the world to reach net zero emissions: conservation and sequestration. The former refers to all technologies enabling the reduction of gross greenhouse gases emitted and the latter refers to natural sinks and carbon capture, usage and storage technologies (CCUS) that reduce net emissions by subtracting carbon from the atmosphere. We have already incorporated and addressed conservation technologies, as well as process-speciﬁc carbon capture technologies, in our China de-carbonization cost curve in Exhibit 55. The need for technological breakthroughs to unlock the potential abatement of China’s current anthropogenic GHG emissions that cannot at present be abated through the conservation technologies makes sequestration a critical component in solving the climate change challenge and leading China to net zero carbon emissions at the lowest possible cost. As part of our global de-carbonization analysis, we have constructed a merged carbon abatement cost curve for sequestration and conservation that includes natural sinks, shown in Exhibit 119. Overall, we estimate that c.15-20% of emissions can abated through sequestration (a combination of carbon capture and natural sinks, as shown below).

Exhibit 119: The merged cost curve of de-carbonization for China combines conservation and sequestration (carbon capture and natural sinks) technologies and indicates that c.55% of emissions can be abated at a price

1200

1000

800

600

DACCS - $400/tnCO2eq 400

DACCS - $200/tnCO2eq 200 DACCS - $100/tnCO2eq

China carbon abatement cost (US$/tnCO2eq) cost abatement carbon China 0 012345678910111213

-200 China anthropogenic GHG emissions abatement potential (GtCO2eq)

Source: Goldman Sachs Global Investment Research

20 January 2021 61 Goldman Sachs Carbonomics

Carbon sequestration efforts can be broadly classiﬁed into three main categories:

1) Natural sinks, encompassing natural carbon reservoirs that can remove carbon dioxide. Efforts include reforestation, afforestation and agro-forestry practices.

2) Carbon capture, utilization and storage technologies (CCUS) covering the whole

spectrum of carbon capture technologies applicable to the concentrated CO2 stream coming out of industrial plants, carbon utilization and storage. We have already addressed the carbon capture potential in China for industrial applications in the previous section of this report (Laying out the path to a net zero China: A sectoral deep dive).

3) Direct air carbon capture (DACCS), the pilot carbon capture technology that could

recoup CO2 from the air, unlocking almost inﬁnite de-carbonization potential, irrespective

of the CO2 source.

Natural sinks: China already making substantial progress, with more to come While China has among the lowest forest area coverage as a percentage of total land area among key economic regions globally, it has achieved remarkable results over the past three decades in increasing its forest area. According to data from the World Bank Group, China has added >520,000 square km of forest land since 1990, a c.34% increase in its forest area; currently, c.23% of the country’s land area is considered forest area, up from only 17% in 1990. This is in contrast to the global average, which has exhibited a downward trend on the back of notable forest area reductions in Latin America and Sub-Saharan Africa, as shown in Exhibit 120 and Exhibit 122. This comes on the back of ongoing policy support, with China incorporating quantitative targets for forest area coverage and forest stock volumes in the Copenhagen Accord, the Paris Agreement and its ﬁve-year plans (FYP), as summarized in Exhibit 38. Given the low

cost of these natural solutions (we estimate it to lie mostly below US$50/tnCO2), we believe that natural sinks can help bridge the gap between total emissions remaining under a net zero scenario due to lack of available clean alternatives and absolute zero emissions. We incorporate natural sinks into our path to net zero by 2060.

20 January 2021 62 Goldman Sachs Carbonomics

Exhibit 120: While China has among the lowest forest area Exhibit 121: …over the past three decades, it has increased its coverage as a % of total land area among key economic regions forest coverage as a % of land area more than any other major globally… economic region globally Forest area as a % of total land area Change in forest area % of total land

70% 3%

60% 2%

50% 1% 40% 0%

30% area land area land -1% 20%

10% -2%

Change in forest areas as a % total % of as a forest areas in Change 0% -3%

China EU India United East Asia Russia North Middle Latin Sub- World land total % of area the forest in Change China EU India United East Asia Russia North Middle Latin Sub- World States & Pacific America East & America Saharan States & Pacific America East & America Saharan North & CaribbeanAfrica North & CaribbeanAfrica Africa 60% Africa 1990 2000 2010 2016 1990-2000 2000-2010 2010-2016 ea

Source: World Bank Group, Goldman Sachs Global Investment Research Source: World Bank Group, Goldman Sachs Global Investment Research

Exhibit 122: China has added >520,000 sq km of forest area since Exhibit 123: ...a c.34% increase in its forest area in sq km2 in total 1990... during the period Change in forest area in square km Change in forest area in square km (%)

400,000 15%

200,000 10%

0 5% -200,000 0% -400,000

-5% -600,000 Change in forest area in sq km in forest area in Change Change in forest area in sq km (%) sq km in forest area in Change -800,000 -10% China EU India United East Asia Russia North Middle Latin Sub- World China EU India United East Asia Russia North Middle Latin Sub- World States & Pacific America East & America Saharan States & Pacific America East & America Saharan North& CaribbeanAfrica North & CaribbeanAfrica Africa Africa 1990-2000 2000-2010 2010-2016 1990-2000 2000-2010 2010-2016

Source: World Bank Group, Goldman Sachs Global Investment Research Source: World Bank Group, Goldman Sachs Global Investment Research

20 January 2021 63 Goldman Sachs Carbonomics China net zero: The potential implications for natural resources demand

At the heart of the path to net zero China by 2060 lies the need for access to clean energy and an accelerated pace of electriﬁcation for transport and several segments of industry, as we outline in the previous section of this report. Electriﬁcation and clean energy is likely to have an impact on total Chinese demand for natural resources, and in particular metals such as aluminium, copper, lithium and nickel, demand for which relies heavily on an acceleration in technologies such as renewables (solar panel, wind turbines manufacturing), power network infrastructure, charging infrastructure, electric vehicles and battery manufacturing. We attempt to quantify the potential impact that the path to net zero China by 2060, as laid out in previous sections, will have on the demand for each of these metals, as shown in the exhibits that follow.

The results of this analysis are calculated on the basis of incremental demand for each clean technology relative to the conventional technology (such as incremental copper demand per electric vehicle compared with conventional gasoline vehicles). We ﬁnd that annual copper demand in net zero China will rise by 2.0 Mtpa, a c.15% increase from China’s copper demand in 2019, and require a cumulative c.77 Mt copper in 2020-60 on a path consistent with net zero.

Exhibit 124: We estimate c.2.0 Mt incremental average annual Exhibit 125: ...with c.77 Mt of cumulative incremental copper copper demand by 2060 for China net zero, representing a c.15% demand from China over 2020-60 for net zero increase from China’s annual copper consumption in 2019... Cumulative incremental copper demand for China, 2020-60 (MtCu) Incremental copper demand in 2060 for China net zero

2.00 100 1.80 90 1.60 80 1.40 70 1.20 60 1.00

e copper demand demand copper e 50 0.80 40 0.60 0.40 30 0.20 20 China net zero (MtCu) net zero China 0.00 10 NEVs Charging Power Solar PV Onshore Offshore Energy China 0 (passenger points networks wind wind storage incremental China copper NEVs Charging Power Solar PV Onshore Offshore Energy Cumulative for 2020-26 for China net zero (MtCu) zero net for China for 2020-26 Incremental annual copper demand for demand copper annual Incremental

EVs, EV trucks, annual cumulativ Incremental demand (pass.EVs, points networks wind wind storage China FCEVs) copper (2019) EV trucks, incremental demand FCEVs) copper by 2060 demand for net zero to 2060…

Source: IRENA, International Copper Association, Goldman Sachs Global Investment Research Source: IRENA, International Copper Association, Goldman Sachs Global Investment Research

Similarly, as shown in the exhibits that follow, we expect the electriﬁcation trend to lead to a material increase in demand for metals such as aluminium, lithium, nickel and cobalt. Overall, we estimate c.3.0 Mt average incremental aluminium demand to 2060, representing a c.8% increase on China’s annual aluminium consumption in 2019. We expect lithium demand from China to increase by c.0.76 Mt to 2060, ten times the global lithium production in 2019, and nickel demand to increase by 0.42 Mt, a c.32% increase from China’s 2019 consumption.

20 January 2021 64 Goldman Sachs Carbonomics

Exhibit 126: We estimate c.3.0 Mt incremental aluminium demand Exhibit 127: ...and 120Mt of cumulative incremental aluminium by 2060 for China net zero, representing a c.8% increase from demand to 2060 in a path consistent with net zero China’s annual aluminium consumption in 2019... Cumulative incremental aluminium demand 2020-60 for net zero China Incremental aluminium demand by 2060 for China net zero (Mt Al) (Mt Al)

3.5 140

3.0 120

2.5 100

2.0 80

1.5 60 mental aluminium mental Al)

(Mt Al) (Mt 1.0 40

for China net zero net for China 0.5 20

0.0 0

NEVs Solar PV Onshore China incre Cumulative NEVs Solar PV Onshore China

(passenger wind incremental (Mt zero net for China by 2060 demand (passenger wind incremental Incremental aluminium demand by 2060 by demand aluminium Incremental EVs, EV trucks, aluminium EVs, EV trucks, aluminium FCEVs) demand FCEVs) demand in 2060 in 2060 for net zero for net zero

Source: IRENA, World Bank, Goldman Sachs Global Investment Research Source: IRENA, World Bank, Goldman Sachs Global Investment Research

Exhibit 128: We estimate c.0.76, 0.42 and 0.13 Mt of incremental Exhibit 129: ...as EV battery production continues to increase lithium, nickel and cobalt demand in China in 2060, depending on Indexed China and EU production of lithium ion batteries the type of NCM battery used... Incremental nickel, lithium, cobalt demand in 2060 for China net zero (Mt)

Index 0.80 China production of lithium Ion batteries 2.6 EU production of batteries and accumulators 0.70 2.4

0.60 2.2

0.50 2

1.8

n China in 2060 net 2060 in n China 0.40 1.6

zero (Mt) zero 0.30 1.4 0.20 1.2 0.10 1

Incremental demand i demand Incremental 0.00 0.8 Lithium Nickel Cobalt Jan 17 Jul 17 Jan 18 Jul 18 Jan 19 Jul 19 Jan 20 Jul 20

Source: Company data, Goldman Sachs Global Investment Research Source: Haver Analytics, Goldman Sachs Global Investment Research

20 January 2021 65 Goldman Sachs Carbonomics China net zero: Addressing China’s export competitiveness in the era of climate change

Adjusting for international trade, c.13% of China’s emissions are exported to other countries globally on a net basis (c.20% when considering gross exports)... Ofﬁcial emission accounting data (used throughout this report) typically associate emissions with the country in which these emissions were produced, typically referred to as ‘territorial emissions’. However, this presents a key challenge, as countries contributing little to direct emissions may have net imported emissions associated with the products these regions consume. In contrast, countries such as China, which tend to be net emissions exporters (as highlighted by our Asia macro team), produce more emissions than they consume domestically. As a result, to be able to estimate the ‘consumption’-related emissions associated with each country, adjustments that account for international trade (emissions embedded in goods that are being traded internationally) are required. We reference two studies in this report which both attempt to quantify the impact of international trade on emissions (using an inter-country input-output table methodology, which tracks the international trade of goods). Those include a working paper published by OECD2 and the ‘Our World in Data’ database3. The results of both studies are broadly consistent, indicating that the share of China’s net exported emissions is c.13% (2018), a proportion that has remained broadly constant over the past few years as shown in Exhibit 130. China has one of the highest proportions of net exported emissions, following the Russian Federation. When looking at China’s emissions associated with gross exports (as opposed to net), this ﬁgure

becomes c.20% of China’s CO2 emissions.

Exhibit 130: China’s net exported emissions amount to c.13% of its Exhibit 131: ...one of the highest % of net exported emissions total annual produced CO2 emissions... following the Russian Federation China CO2 emissions produced, consumed and exported (MtCO2) CO2 emissions and % of CO2 emissions that is net exported

12,000 100% 25000 20% 13% 17% 10,000 10% 80% 20000 8% 7% 8,000 0% 60% 15000 6,000 -8% -10% -12% 40% 10000 4,000 -20% 20% 5000 2,000 13% -30% CO2 emissions (MtCO2) 0 0% 0 -40%

China CO2 emissions (MtCO2) emissions CO2 China -44%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 -5000 -50% China United United Russia India OECD Non- Annual production-based CO2 emissions Kingdom States OECD Annual consumption-based CO2 emissions Annual production-based CO2 emissions Annual consumption-based CO2 emissions Net exported CO2 emissions Net exported CO2 emissions (%) - RHS Net exported emissions CO2 Net exported emissions as a % of total CO2

Source: Our World in Data Source: Our World in Data, Goldman Sachs Global Investment Research

2 Wiebe, K. S. and N. Yamano (2016), “Estimating CO2 Emissions Embodied in Final Demand and Trade Using the OECD ICIO 2015: Methodology and Results”. OECD Science, Technology and Industry Working Papers, No. 2016/5, OECD Publishing, Paris. 3 H. Ritchie (2019) – “How do CO2 emissions compare when we adjust for trade ”. Published online at OurWorldInData.org. Retrieved from: ‘https://ourworldindata.org/consumption-based-co2’ [Online Resource] Based on Global Carbon Project; Carbon Dioxide Information Analysis Centre; BP; Maddison; UNWPP

20 January 2021 66 Goldman Sachs Carbonomics

Exhibit 132: The % of net exported emissions by China is broadly Exhibit 133: ...and when looking at gross exported emissions as consistent across studies and has remained relatively constant opposed to net, the ﬁgure is close to 20% of its total emissions over recent years at around c.13%... Share of CO2 emissions associated with gross exports and gross CO2 emissions embedded in gross exports/imports by region (2015, imports MtCO2) according to a working paper of the OECD

2500 40% 40% 2000 30% 1500 20% 20% 1000 10% 0% 500 0% 0 -20% edded in gross in edded 2015 (MtCO2) 2015 -500 -10% -1000 -20% -40% -1500 -30% -60% -2000 -40% (%) imports -80% UK US US UK China Europe China Share of CO2 emissions that is that emissions of CO2 Share Europe exports/imports - exports/imports Russian associated with gross exports and exports gross with associated Russian Federation CO2 emissions emb emissions CO2 Federation America America North America North North America South & Central South Total CO2 emissions embedded in gross imports Total CO2 emissions embedded in gross exports as a % of total South & Central Total CO2 emissions embedded in gross exports Total CO2 emissions embedded in net exports as a % of total Total CO2 emissions embedded in gross imports as a % of total

Source: OECD Stat, Goldman Sachs Global Investment Research Source: OECD Stat, Goldman Sachs Global Investment Research

...and a global carbon tax border adjustment of US$100/tnCO2 could cost the country as much as US$240 bn pa In this section, we aim to address the potential implication of a border carbon tax adjustment applied on China’s exports and the resulting impact on their competitiveness. For the purposes of this analysis, we consider gross exported emissions from China (as opposed to net) a more relevant metric, and we assume that

in 2019 they remained at c.20% of the country’s total CO2 emissions (in line with the level concluded from the OECD working paper mentioned above). This implies that in 2019, c.2.4 GtCO2eq of emissions were associated with China’s gross exports. Applying different carbon prices and assuming varying levels of carbon content difference with locally produced products, we can estimate the total cost associated with China’s global gross exported emissions. This is presented in Exhibit 134 and could be as high as

US$240 bn pa for a carbon tax of US$100/tnCO2, depending on the carbon intensity difference between China’s exports and the importing country’s local product. This methodology and analysis is particularly applicable when we consider China’s exports to the European Union, given the current proposal for a carbon border tax adjustment by the EU. We estimate that the annual cost of a carbon border tax adjustment in the EU for China’s gross exports in the area could be as high as US$35 bn if a carbon tax of

US$100/tnCO2 were applied and assuming net zero products in EU. We estimate the difference in carbon intensity of products produced locally in the EU vs. Chinese exports to be close to c.40-50% (driven entirely by differences in the energy intensity of the industrial manufacturing processes of the two regions and broadly matching the difference in carbon intensity between coal and natural gas). This would result in a lower cost estimate of c.US$15 bn pa.

20 January 2021 67 Goldman Sachs Carbonomics

Exhibit 134: The annual cost of a globally applied carbon border Exhibit 135: ...and when we look at the EU in particular, the cost adjustment tax on China’s gross exported emissions could be as could be as high as US$35 bn pa high as US$240 bn at US$100/tnCO2, depending on the difference in Cost of China’s annual gross exported emissions to the EU (US$ bn) carbon intensity of China’s exports and the importing country’s local products... Cost of China’s annual gross globally exported emissions (US$ bn)

250 40

35 200 30

150 EU28 gross 25 20

100 15

10 50 5 exported emissions (US$ bn) (US$ emissions exported exported emissions (US$ bn) emissions exported Cost of China's total of China's Cost Cost of China's total gross global gross total of China's Cost 0 0 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Carbon intensity difference of China's exports with EU28 local products Carbon intensity difference of China's exports with other country's local (%) products (%) Carbon price - $25/tnCO2 Carbon price - $50/tnCO2 Carbon price - $25/tnCO2 Carbon price - $50/tnCO2 Carbon price - $75/tnCO2 Carbon price - $100/tnCO2 Carbon price - $75/tnCO2 Carbon price - $100/tnCO2 Estimated difference in Carbon intensity

Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

Case study: Examining the impact of a carbon border adjustment tax on Chinese steel exports to the EU To illustrate the potential impact of a carbon border tax adjustment implemented by the EU, we consider the example of China’s steel exports into the region. Depending on the difference in the carbon intensity of producing steel in the EU compared with China, a carbon tax will have differing impacts on steel export prices. Using the current carbon intensity of producing steel in China under a coal blast furnace BF-BOF process (2.1

tnCO2eq/tn steel) and comparing it to the average carbon intensity of steel produced in

the EU using a natural gas-based DRI-EAF process (1.1 tnCO2eq/tn steel with grid electricity), we can determine the incremental cost for steel exports on the basis of the difference in carbon intensity. As illustrated in Exhibit 136, the results indicate that a

US$100/tnCO2 carbon price could result in an increase in China’s steel export cost of c.US$100/tn steel. Alternatively, if the average steel produced in the EU relies on net zero electricity, then a natural gas DRI-EAF process will have a carbon intensity of

0.6tnCO2/tn steel, meaning the case illustrated in Exhibit 137 would result in an increase in the price of steel exported from China of US$150/tn steel. Assuming a steel price of US$500/tn, such a price increase would be equivalent to c.30% inﬂation in China steel export costs.

20 January 2021 68 Goldman Sachs Carbonomics

Exhibit 136: Comparing the standard coal blast furnace process Exhibit 137: ...which could be as high as US$150/tn steel if net zero used in China for steel production with an average natural gas electricity is used in the steel manufacturing process in the EU, at a DRI-EAF process used in the EU, a carbon border adjusted tax carbon tax of US$100/tnCO2 could lead to a price increase of US$100/tn steel for Chinese Increase in China’s exported steel prices at different carbon border tax exports.... and carbon intensity levels Increase in China’s exported steel prices at different carbon border tax and carbon intensity levels

250 250 GS base ΔtnCO2/tn = ΔtnCO2/tn = 1.5 225 225 2251.5

200 ΔtnCO2/tn = 1.25 200 ΔtnCO2/tn = 1.25 188 175 175

e increase per per increase e ΔtnCO2/tn = 1.0 ΔtnCO2/tn = 1.0 150 150 150 GS base ΔtnCO2/tn price increase per increase price 125 121 125 113 ΔtnCO2/tn = 0.75 ΔtnCO2/tn = 0.75 100 97 100

75 73 ΔtnCO2/tn = 0.50 75 75 ΔtnCO2/tn = 0.50 tonne (US$/tn steel) (US$/tn tonne tonne (US$/tn steel) (US$/tn tonne 50 50 49 ΔtnCO2/tn = 0.50 ΔtnCO2/tn = 0.50 38 25 24 25 China steel exports exports steel China China steel exports pric exports steel China 0 0 0 0 0 25 50 75 100 125 150 0 25 50 75 100 125 150

Carbon border tax (US$/tnCO2) Carbon border tax (US$/tnCO2)

Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

20 January 2021 69 Goldman Sachs Carbonomics China net zero: What have banks done to address China’s goal for carbon neutrality?

Achieving the government’s long-term climate goals of a carbon peak by 2030 and carbon neutrality by 2060 will require a fundamental transformation of China’s entire social and economic systems, with the financial system playing a crucial role. As the key financial intermediary, banks are the primary financial institutions for the development of green finance in China. While there are opportunities for banks to actively respond to China’s national carbon neutral goal, there are challenges that will need to be taken into consideration.

On January 6, 2020, the PBOC proposed implementing major decisions it had taken about the carbon peak and carbon neutrality as a key mission in 2021, to improve China’s green financial policy framework and to act as an incentive mechanism. As far as we are aware, this was the first time the central bank has included carbon issues in its working pipeline together with monetary policies and financial stability. The PBOC will guide financial resources with a tilt towards green development, enhancing the financial system’s ability to manage climate change-related risks, and to promote the establishment of a carbon emissions trading market to set a reasonable price for carbon emissions. We believe that these policies could gradually improve the green finance standard system, clarify regulatory and information disclosure requirements, and improve green financial products and market systems.

Based on PBOC data, the balance of green loans was Rmb11.6 tn as of 3Q2020, an increase of 16% from the beginning of the year and up 17% yoy, four percentage points higher than the growth rate of total loans over the same period. The total balance of green bonds was Rmb1.1 tn as of end-2020, a 32% increase from a year ago, the growth rate of which slowed vs. 2019’s 77%.

In the meantime, the structure of the green bond market has undergone signiﬁcant changes: banks were previously the major issuers of green bonds for capital raising, but starting from 2019, banks have helped underwrite more green bonds issued by non-ﬁnancial corporates than they have issued themselves.

A Carrot and Stick approach: Policy plays an important role in carbon neutrality We believe that China moved much earlier than most market participants expected in adopting a market-driven carbon exchange market:

n 2011: two local carbon exchanges were established to test the water. This was supported by the NDRC, a government agency in China for economic planning.

n 2017: a national carbon exchange was announced as a further step to unify and integrate the nationwide carbon exchange market.

n Since then, the government has announced more policies and procedures regarding carbon trading, clearing and accounting, suggesting further progress towards a fully-ﬂedged carbon exchange.

20 January 2021 70 Goldman Sachs Carbonomics

In terms of the ﬁnancial sector, in 2018 the PBOC issued guidelines that established a framework to evaluate the performance of banks with respect to green ﬁnance, including:

n the growth of green ﬁnance

n non-performing loans (NPL)

n green ﬁnance evaluation to be part of banks’ macro-prudential assessment (MPA)

n green ﬁnance bonds to be regarded as qualiﬁed collateral for a medium liquidity facility (MLF) from the PBOC.

To achieve the goal of a carbon peak by 2030 and carbon neutrality by 2060, we would expect more changes to the regulatory indicators of green ﬁnance, with the potential to further increase the assessment of green ﬁnance in banks’ MPA in 2021.

What do banks say? NPLs matter most for healthy growth of green ﬁnance

On the one hand, more green bonds issued by non-ﬁnancial corporates than the banks themselves should drive new business growth. However, a number of factors need to be taken into consideration:

n the low margin of green bond underwriting, though this could be partially offset with the PBOC pledging green bonds to the central bank for cheaper liquidity

n the NPL cycle cannot be smoothed out in the green sector, given the ﬂuctuating nature of business cycles

n more green finance potentially means less non-green finance. Old economy sectors such as materials and other traditional industries could face more challenges in terms of new financing and cash flows.

Carbon exchanges can function to discipline carbon emissions as a price is charged, with obtaining a quota for carbon emissions posing additional costs to corporates, particularly those in the old economy. From the point of view of banks, to achieve carbon neutrality, NPLs will matter most: they will not only determine the sustainability and healthy growth of green ﬁnance, but also the orderly exit of non-green ﬁnance.

We believe this will pose challenges for China’s banks, but not necessarily threats, as the government’s “Carrot and Stick” policy stance, that aims to drive carbon neutrality, is consistent with the PBOC’s ﬁnancial deleverage campaign (started in 2017) to abate systemic risk and encourage an appropriate risk pricing mechanism.

20 January 2021 71 Goldman Sachs Carbonomics

Exhibit 138: China green loans balance was Rmb11.6 tn as of 3Q20, Exhibit 139: China green bond balance growth slowed in 2020 but a 17% increase vs. a year ago still at a 32% high growth rate China green loans balance China green bonds balance and issuance

China green loans balance China green bonds balance & issuance amount Green loans Green loans yoy (RHS) Total loans yoy (RHS) Balance Issuance amount Balance growth yoy 24% 30 25% 2.0 120% 1.8 101% 25 100% 20% 1.6 17% 16% 1.4 77% 20 80% 13% 15% 1.2 1.04 15 1.0 60% 11.6 0.78 Rmb tn Rmb Rmb tn Rmb 10.2 10.5 11.0 10% 0.8 9.2 9.5 9.9 10 8.2 32% 40% 0.6 0.44 0.39 5% 0.4 5 0.22 0.22 0.26 20% 0.2 0.11 0 0% 0.0 0% Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 2017 2018 2019 2020

Source: PBOC. Source: Wind.

Exhibit 140: After nearly a decade of pilot testing and discussion, China may ofﬁcially launch the nationwide emissions trading system in 2021-2025

2011 2013 2015 2017 2018 2020 2021-2025

The NDRC approved two Shenzhen was the The national trading China announced the The ecology and President Xi pledged The ecology and environment provinces and five cities as first pilot to launch system was pledged by launch of the national environment ministry carbon neutrality by ministry targets the launch of pilots of carbon emission carbon emission President Xi Jinping ETS, designed to include took over responsibility 2060; a nationwide emissions trading (CET) trading (CET) ahead of the Paris all major industrial for establishing the The ecology and trading scheme during the climate accord sectors, but there has national ETS from NDR environment ministry period from 2021 to 2025 been no trading yet, and said they were revising relevant regulations have the draft plan of not been issued emission allowance allocations

ThThe devevelopment of Chinhina’s ccaarbrbon eemimissision trraading ((CECET)

Source: Xinhua, Reuters.

* This chapter was contributed by Shuo Yang, Ph.D. (China Financials analyst).

20 January 2021 72 Goldman Sachs Carbonomics China ETS: Getting closer to the implementation of the world’s largest national emissions trading scheme

Carbon pricing a key ingredient for de-carbonization, with China’s proposed national ETS the largest globally... We believe that carbon pricing will be a critical part of any effort to move to net zero emissions, while incentivizing technological innovation and progress in de-carbonization technologies. The very steep carbon abatement cost curve for China calls for growing technological innovation, sequestration technologies deployment and effective carbon pricing. The two approaches to de-carbonization, conservation and sequestration, are both vital in achieving net zero carbon emissions, as emissions continue to overshoot the path associated with the more benign global warming paths. In the short term, we believe that carbon prices should be sufﬁciently high to incentivize innovation and healthy competition between conservation and sequestration technologies, while in the longer term, the equilibrium price of carbon is likely to decline on the back of technological innovation and economies of scale.

At present, 64 carbon pricing initiatives have been implemented (or are scheduled for implementation), covering 46 national jurisdictions worldwide, according to the World Bank Group, mostly through cap-and-trade systems. These initiatives are gaining momentum, with the People’s Republic of China in 2017 announcing the implementation of a national emissions trading scheme. This would be the world’s largest national emissions trading scheme and according to the World Bank Group, combining all of these initiatives (including China) will cover 12GtCO2eq, representing c.23% of the world’s total GHG emissions.

Exhibit 141: With the addition of China’s national ETS, the total Exhibit 142: ...with China currently operating several regional pilot global emissions covered by carbon pricing initiatives should ETS reach c.23%... Carbon price for several operating ETS ($/tnCO2eq) Carbon pricing initiatives’ share of global GHG emissions covered (%)

25% 2014 2015 2016 2017 2018 2019 2020 35 20% China's pilot ETS carbon markets 30 China's national ETS expected to launch in 2021 15% 25

10% 20

5% 15

carbon pricing (%) pricing carbon 0% 10 Carbon price ($/tnCO2e) price Carbon

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 5 China national ETS EU ETS Japan carbon tax 2020E 2021E South Africa carbon tax Korea ETS Germany ETS Share of global GHG emissions covered by by covered GHG emissions global of Share 0 Mexico carbon tax California CaT Guangdong pilot ETS Beijing Chongqing Fujian Guangdong Hubei Shanghai Shenzhen Tianjin EU California Australia ERF Safeguard Mechanism Mexico pilot ETS Ukraine carbon tax pilot pilot pilot pilot pilot pilot pilot pilot ETS CaT Hubei pilot ETS Fujian pilot ETS Kazakhstan ETS ETS ETS ETS ETS ETS ETS ETS ETS (2005) (2012) France carbon tax Shanghai pilot ETS Canada federal fuel charge (2013) (2013) (2016) (2013) (2013) (2013) (2013) (2013) Alberta TIER Others

EU includes the UK. EU includes the UK.

Source: World Bank Group. Source: World Bank Group.

20 January 2021 73 Goldman Sachs Carbonomics

Exhibit 143: Trading volumes have increased on China’s pilot ETS Exhibit 144: ...and so have the number of projects registered for and the national ETS could be a step function upward... CCER with 256 mn tonnes cumulative of CCER traded in primary & Trading volume of primary and secondary pilot ETS markets in China secondary markets (CNY mn) China Certiﬁed Emission Reduction (CCER) offsets volume (MtCO2)

2,500 70 2,189 60 2,000 1,846 50

1,500 1,411 1,294 40 1,112 1,037 940 30 1,000

20 500 Trading volume of primary and of primary volume Trading 10 China Certified Emission reductions Emission Certified China secondary markets in pilots (CNY mn) (CNY in pilots markets secondary (CCER offsets) trading volume (MtCO2) volume trading (CCER offsets)

- 0 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Source: 2020 China Carbon Pricing Survey. Source: 2020 China Carbon Pricing Survey.

Exhibit 145: Guangdong is currently the largest pilot regional ETS Exhibit 146: ...and trading value operating in China in terms of trading volume... Cumulative trading value of China’s pilot ETS (to October 30, 2020) Cumulative trading volume of China’s pilot ETS (to October 30, 2020)

180 3,500 160 3,000 140 2,500 120 100 2,000 80 1,500 60 1,000 40 20 500 -2020 30 Oct to -2020 30 Oct to 0 0 Hubei Hubei Fujian Fujian Tianjin Tianjin Beijing Beijing Cumulative trading value (mn CNY) (mn value trading Cumulative Cumulative trading volume (MtCO2) (MtCO2) volume trading Cumulative Shanghai Shanghai Shenzhen Shenzhen Chongqing Chongqing Guangdong Guangdong Cumulative Cumulative trading volume (Mt) trading value (mn CNY) Auction Over the counter (OTC) Spot trading Auction Over the counter (OTC) Spot trading

Source: 2020 China Carbon Pricing Survey. Source: 2020 China Carbon Pricing Survey.

...and getting closer to implementation with numerous recent announcements on its progress The Ministry of Ecology and Environment (MEE) hosted a media conference on January 5, 2021, conﬁrming that the ﬁrst compliance cycle of China’s national ETS was effectively rolled out on January 1, 2021. The ETS will initially cover power generation plants. It will allocate allowances (also known as permits), based on the plant’s generation output, with emission benchmarks for each fuel and technology. China’s ETS, set to expand to seven other sectors (aviation, non-ferrous metals, steel, construction materials, chemicals, petrochemicals, paper manufacturing) will be the world’s largest globally.

20 January 2021 74 Goldman Sachs Carbonomics

Ultimately, benefits from China’s national ETS will come from either surplus allowances for companies operating below the baseline threshold (e.g. “clean” coal utilities) or companies that are able to issue CCERs (e.g. renewable operators). The latter could also drive demand for renewable projects, which could lead to growth in demand for renewable equipment, benefiting upstream players. Among coal operators, the suggested benchmark is likely to drive asymmetric risk exposure, with some potentially benefiting from the ETS. We base this view on the proposed thresholds and where industry intensity currently stands. The current proposed carbon emission allowance baseline is 0.877-0.979 kg/kWh for conventional coal units, depending on their installed capacity, which will likely affect subcritical coal plants, which have a lower thermal efficiency and a higher emission intensity.

Exhibit 147: China’s ETS’ proposed carbon emission allowance Exhibit 148: ...as well as benefiting renewable energy producers baseline could potentially benefit in the near term, lower-carbon, (carbon credits might also render solar and wind more financially more efficient coal power plant operators, with subcritical plants attractive), with longer-term cost implications for fossil fuel power the least favoured... generation companies Range of CO2 emissions from different power generation plants Generation LCOE (Rmb/kWh) (gCO2/kWh)

2019 Levelized Cost of Electricity 1200 Generation cost (Rmb/kwh) 2023E Levelized Cost of Electricity 1 Potential carbon cost (Rmb 35) 1 1000 Potential carbon cost (Rmb 105) Emission allowance baseline: 877-979 g/kWh 0.9 0.9 Potential carbon cost (Rmb 350) 0.8 0.8 800 0.7 0.7 0.6 0.6 600 0.5 0.5 0.4 0.4 400 (gCO2/kWh) 0.3 0.3 0.2 0.2 200 0.1 0.1 0 0 0

CO2 emissions from power generation powerfrom CO2 emissions Subcritical Supercritical Ultra- Advanced Integrated Natural Coal plants Biomass- Gas supercritical ultra- gasification gas retrofited CCUS Coal Hydro

supercritical combined CGGT with CCUS Nuclear

cycle Solar-DG (IGCC) Solar-utility Offshore wind Offshore wind Onshore

Source: IEA, Company data, Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

The timeline laid out by the Ministry of Ecology and Environment (MEE) would imply that the ﬁrst batch of 2,225 entities in the power sector will have until December 31, 2021, to comply with the scheme for their 2019-2020 emissions. This follows two key legislative documents released by the MEE (i.e. the Measures for the Administration of National Carbon Emission Trading (Trial) and the 2019-2020 Implementation Plan for National Carbon Emission Trading Total Allowances Setting and Allocation (Power Generation Industry)). Following this announcement, the MEE plans to expedite building the registration and trading system for the ETS. Our China Clean Energy analyst believes Chinese upstream clean energy manufacturers are positioned well to beneﬁt from the new de-carbonization target (including 25% non-fossil energy by 2030, up from 20%) announced by President Xi on December 12, 2020, at the Climate Ambition Summit.

Our GS SUSTAIN team outlines the key details from these releases below, building on their previous work:

n The power generation sector has been identified as the first sector to be included in the first compliance cycle of China’s ETS, starting from January 1, 2021, and has until December 31, 2021, to meet its compliance obligations for their 2019 and 2020 emissions.

20 January 2021 75 Goldman Sachs Carbonomics

n In the December 30 Implementation Plan, the MEE confirmed that the first batch of 2,225 entities in the power sector, including those with coal-fired units, will be included in the first cycle. An initial look at the draft list of 2,267 companies released on November 20, suggests that while the majority of the assets are within the power sector, the list also extends to other industries such as chemicals and paper that have on-site installations.

n The December 30 Implementation Plan conﬁrmed a carbon emission allowance baseline between 0.877-0.979 tCO2/MWh for conventional coal units and 1.146 tCO2/MWh for unconventional coal units (e.g. plants using coal gangue or coal water slurry).

n The new baseline for conventional coal units is more stringent than the initial proposed baseline, but our view on the asymmetric risk exposure among coal operators remains unchanged. We see more efficient operators potentially benefiting from the ETS as they may have surplus allowances to monetize, while a smaller portion of less efficient players could see greater costs to comply.

n On January 5, 2021, the MEE announced that Measures for the Administration of National Carbon Emission Trading (Trial) will become effective on February 1, 2021 (link). As discussed in our previous note, this establishes stronger transparency and governance measures for emissions disclosures by introducing legal liabilities for corporates. Our China Clean Energy analyst continues to believe that Chinese upstream clean energy manufacturers are positioned well to beneﬁt from the scheme based on this announcement.

n The provincial departments of Ecology and Environment will decide on quotas to be allocated for each company by January 29, 2021.

Source: Goldman Sachs Global Investment Research.

20 January 2021 76 Goldman Sachs Carbonomics

We further note that there are a number of low-carbon pilot cities and provinces that have proposed peak emission target years:

n This initiative started in 2010, led by NCSC (National Center for Climate Change Strategy and International Cooperation).

n Following China’s commitment at COP25 to reach peak emissions by 2030, cities have announced their emission peak targets, most with a target year before 2025.

n As of 2020, NCSC reported that 82 pilot cities and provinces have proposed peak emission target years, with 18 targeting 2020 and 42 targeting pre-2025.

20 January 2021 77 Goldman Sachs Carbonomics Appendix: China de-carbonization cost curve details

Exhibit 150: China de-carbonization cost curve with the carbon abatement price range (US$/tnCO2eq) and abatement potential (GtCO2eq) split by industry

Carbon Carbon Carbon Carbon abatement abatement abatement Conservation carbon abatement routes Industry abatement price - base price - low price - high potential case case case Power generation (US$/tnCO2 eq) (US$/tnCO2 eq) (US$/tnCO2 eq) (GtCO2eq) Hydroelectric power, low cost scenario, high coal price Power generation -16 -19 -13 0.00 Nuclear power, low cost scenario, high coal price Power generation -14 -17 -11 0.03 Hydroelectric power, high cost scenario, high coal price Power generation -11 -13 -9 0.00 Hydroelectric power, low cost scenario, base coal price Power generation -10 -11 -8 0.00 Nuclear power, low cost scenario, base coal price Power generation -8 -9 -6 0.06 Hydroelectric power, high cost scenario, base coal price Power generation -4 -5 -3 0.00 Solar power, low cost scenario, high coal price Power generation -4 -5 -3 0.15 Hydroelectric power, low cost scenario, low coal price Power generation -2 -3 -2 0.00 Onshore wind power, low cost scenario, high coal price Power generation -2 -2 -2 0.08 Nuclear power, high cost scenario, high coal price Power generation -1 -1 -1 0.03 Nuclear power, low cost scenario, low coal price Power generation-10-10.03 Solar power, low cost scenario, base coal price Power generation 3 2 3 0.31 Hydroelectric power, high cost scenario, low coal price Power generation 3 2 4 0.00 Onshore wind power, low cost scenario, base coal price Power generation 5 4 6 0.16 Nuclear power, high cost scenario, base coal price Power generation 6 5 7 0.06 Solar power, medium cost scenario, high coal price Power generation 10 8 11 0.15 Solar power, low cost scenario, loq coal price Power generation 108120.15 Onshore wind power, low cost scenario, low coal price Power generation 12 10 14 0.08 Nuclear power, high cost scenario, low coal price Power generation 13 10 16 0.03 Onshore wind power, base cost scenario, high coal price Power generation 16 13 19 0.08 Solar power, medium cost scenario, base coal price Power generation 16 13 19 0.31 Solar power, high cost scenario, high coal price Power generation 21 17 25 0.15 Onshore wind power, base cost scenario, base coal price Power generation 23 18 27 0.16 Solar power, medium cost scenario, low coal price Power generation 23 19 28 0.15 Solar power with battery storage, low cost scenario, high coal price Power generation 26 21 31 0.03 Solar power, high cost scenario, base coal price Power generation 28 22 33 0.31 Wind power with battery storage, low cost scenario, high coal price Power generation 28 23 34 0.02 Offshore wind power, low cost scenario, high coal price Power generation 29 19 40 0.05 Onshore wind power, base cost scenario, low coal price Power generation 30 19 40 0.08 Solar power with battery storage, low cost scenario, base coal price Power generation 33 21 44 0.05 Onshore wind power, high cost scenario, high coal price Power generation 34 22 45 0.08 Wind power with battery storage, low cost scenario, base coal price Power generation 35 23 47 0.04 Solar power, high cost scenario, low coal price Power generation 35 23 47 0.15 Offshore wind power, low cost scenario, base coal price Power generation 36 23 48 0.11 Solar power with battery storage, low cost scenario, low coal price Power generation 40 26 54 0.03 Onshore wind power, high cost scenario, base coal price Power generation 40 26 54 0.16 Wind power with battery storage, low cost scenario, low coal price Power generation 42 27 57 0.02 Offshore wind power, low cost scenario, low coal price Power generation 43 28 58 0.05 Onshore wind power, high cost scenario, low coal price Power generation 47 31 64 0.08 Coal power CCUS Power generation 60 39 81 0.22 Offshore wind power, high cost scenario, high coal price Power generation 67 44 91 0.05 Offshore wind power, high cost scenario, base coal price Power generation 74 48 100 0.11 Offshore wind power, high cost scenario, low coal price Power generation 81 53 109 0.05 Solar power with battery storage, high cost scenario, high coal price Power generation 87 57 118 0.03 Hydrogen CGGT, switch from low gas price Power generation 92 60 125 0.03 Solar power with battery storage, high cost scenario, base coal price Power generation 94 61 127 0.05 Wind power with battery storage, high cost scenario, high coal price Power generation 100 65 135 0.02 Solar power with battery storage, high cost scenario, low coal price Power generation 101 66 137 0.03 Wind power with battery storage, high cost scenario, base coal price Power generation 106 69 144 0.04 Wind power with battery storage, high cost scenario, low coal price Power generation 114 74 153 0.02 Hydrogen CGGT, switch from base gas price Power generation 116 75 157 0.03 Solar power with hydrogen storage, low cost scenario, high coal price Power generation 117 76 157 0.03 Onshore wind power with hydrogen storage, low cost scenario, high coal price Power generation 119 77 160 0.02 Solar power with hydrogen storage, low cost scenario, base coal price Power generation 123 80 166 0.05 Onshore wind power with hydrogen storage, low cost scenario, base coal price Power generation 125 81 169 0.04 Solar power with hydrogen storage, low cost scenario, low coal price Power generation 130 85 176 0.03 Onshore wind power with hydrogen storage, low cost scenario, low coal price Power generation 132 86 179 0.02 Hydrogen CGGT, switch from high gas price Power generation 140 91 189 0.07 Solar power with hydrogen storage, high cost scenario, high coal price Power generation 202 131 272 0.03 Solar power with hydrogen storage, high cost scenario, base coal price Power generation 208 135 281 0.05 Onshore wind power with hydrogen storage, high cost scenario, high coal price Power generation 214 139 289 0.02 Solar power with hydrogen storage, high cost scenario, low coal price Power generation 216 140 291 0.03 Onshore wind power with hydrogen storage, high cost scenario, base coal price Power generation 221 144 298 0.04 Onshore wind power with hydrogen storage, high cost scenario, low coal price Power generation 228 148 308 0.02 Transport Switch aircraft to one of highest efficiency Transport 40 6 91 0.01 LNG in shipping Transport 68 21 115 0.01 Hydrogen FCEV truck, long-haul Transport 219 164 273 0.11 Marine biofuels Transport 235 215 254 0.00 Biofuels on road transport Transport 268 179 357 0.01 City Buses to electric buses Transport 299 260 324 0.07 Clean ammonia fuel-run ships Transport 319 250 393 0.02 Truck to electric, short-haul Transport 428 389 454 0.14 Truck to electric, medium-haul Transport 454 415 480 0.02 Switch to hydrogen FCE train Transport 474 232 717 0.03 Aviation biofuels Transport 564 498 630 0.06 Gasoline vehicle to EV, urban Transport 967 720 1,226 0.34 Gasoline vehicle to EV, rural Transport 1,170 776 1,721 0.14

Source: Goldman Sachs Global Investment Research

20 January 2021 78 Goldman Sachs Carbonomics

Carbon Carbon Carbon Carbon abatement abatement abatement Conservation carbon abatement routes Industry abatement price - base price - low price - high potential case case case Industry & industrial waste Non-ferrous metals secondary production through scrap/recycling Industry & waste -121 -146 -97 0.23 Efficiency gains and circular economy (plastics recycling) in chemicals Industry & waste -58 -70 -46 0.09 Switch from coal to natural gas+CCUS based process in ammonia Industry & waste 39 31 47 0.04 Textiles manufacturing efficiency gains Industry & waste 45 32 59 0.40 Swicth from coal to natural gas+CCUS processes in chemicals (HVCs, methanol) Industry & waste 52 41 62 0.03 Efficiency gains and waste reduction in manufacturing processes (low cost) Industry & waste 58 41 75 0.19 Inert anodes for non-ferrous metals processing Industry & waste 68 55 82 0.03 Switch from BF-BOF (coal) to natural gas DRI-EAF (with zero carbon electricity) in s Industry & waste 79 63 94 0.22 Fuel switch to biomass & waste in cement Industry & waste 81 65 97 0.35 Other industrial CCUS Industry & waste 90 60 130 0.32 Retrofit BF-BOF (coal) with charcoal/biomass furnace for fuel/feedstock in steel Industry & waste 91 73 110 0.06 Switch from BF-BOF (coal) to scrap-EAF process in steel Industry & waste 102 81 122 0.85 Swicth to electroysis hydrogen process in chemicals (HVCs, methanol) Industry & waste 127 102 153 0.13 CCUS in cement Industry & waste 130 104 156 0.70 Non-ferrous metals CCUS Industry & waste 140 98 182 0.12 Electrification of heat in industrial processes Industry & waste 145 75 345 0.39 Efficiency gains and waste reduction in manufacturing processes (medium cost) Industry & waste 170 119 221 0.19 Switch to electrolysis hydrogen process in ammonia Industry & waste 205 123 287 0.07 Switch from BF-BOF (coal) to hydrogen DRI-EAF process in steel Industry & waste 220 176 264 0.85 Efficiency gains and waste reduction in manufacturing processes (high cost) Industry & waste 350 245 455 0.19 Reducing clinker to cement in cement process Industry & waste 363 290 435 0.10 Switch to biogas/biomass fuel and feedstock in ammonia Industry & waste 427 341 512 0.03 Swicth to biogas/biomass for fuel and feedstock in chemicals (HVCs, methanol) Industry & waste 523 419 628 0.18 Buildings LED and increased efficiency, commercial buildings Buildings -77 -96 -58 0.03 LED and increased efficiency, residential Buildings -67 -83 -50 0.05 Insulation (cavity and wall), commercial buildings Buildings -58 -72 -43 0.02 Insulation (cavity and wall), new build Buildings -50 -63 -38 0.02 HVAC Systems/thermostat & smart meters efficiency gains, commercial buildings Buildings -48 -60 -36 0.01 HVAC Systems/thermostat & smart meters efficiency gains, new builds Buildings -42 -52 -31 0.01 HVAC Systems/thermostat & smart meters efficiency gains, retrofit Buildings -32 -40 -24 0.01 Insulation (cavity and wall), retrofit Buildings -20 -25 -15 0.02 Solar thermal renewable heat, commercial buildings Buildings 38 29 48 0.01 Solar thermal renewable heat Buildings 45 34 56 0.10 BACS systems/efficiency gains/BAT appliances residential Buildings 159 120 199 0.11 BACS systems/efficiency gains/BAT appliances commercial Buildings 183 138 229 0.02 Switch from coal boiler to natural gas boiler, retrofit Buildings 232 174 290 0.04 Switch from coal boiler to natural gas boiler, commercial buildings Buildings 239 179 299 0.02 Switch from coal boiler to natural gas boiler, new build Buildings 281 211 352 0.02 Heat pumps for water heating (ground source), commercial buildings Buildings 317 238 396 0.00 Heat pumps for water heating (ground source) Buildings 373 280 466 0.00 Switch from coal boiler to hydrogen boiler, commercial buildings Buildings 497 373 622 0.05 Switch from coal boiler to heat pump (renewabe electricity), commercial buildings Buildings 538 404 673 0.03 Switch from coal boiler to hydrogen boiler, new build Buildings 585 439 731 0.05 Switch from coal boiler to hydrogen boiler, retrofit Buildings 593 444 741 0.10 Switch from coal boiler to heat pump (renewabe electricity), new build Buildings 633 475 791 0.03 Switch from coal boiler to heat pump (renewabe electricity), retrofit Buildings 749 562 936 0.02 Agriculture, Forestry and Other Land uses (AFOLU) Fire & disaster improved mannagement practices Agriculture, forestry & other land uses 10 6 14 0.04 Reduced soil erosion, salinization and compaction Agriculture, forestry & other land uses 35 21 49 0.34 Improved cropland management practices Agriculture, forestry & other land uses 42 25 59 0.10 Improved grazing land management practices Agriculture, forestry & other land uses 58 35 81 0.02 Improved livestock management practices Agriculture, forestry & other land uses 120 72 168 0.25

Source: Goldman Sachs Global Investment Research

20 January 2021 79 Goldman Sachs Carbonomics Disclosure Appendix

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20 January 2021 80 Goldman Sachs Carbonomics

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