In September 2020, China declared its intention to peak its carbon emissions by 2030 and reach carbon neutrality by 2060 – the “dual carbon” goals. Key to hitting these targets is transforming the iron and steel sector, which emits the most carbon of China’s manufacturing sectors – and approximately 15% of national carbon emissions.

Iron and steel are also behind about 20% of China’s entire coal consumption, which is partially due to coking. Coke is produced by baking coal until it becomes carbon. When consumed, coke generates intense heat but little smoke, making it ideal for smelting iron and steel. As such, Chinese industrial policy usually brackets coking with steel.

Shanxi, in north-central China, is the country’s top coke-producing province and fifth largest steel producer. In 2020, the coking industry accounted for 8.2% of Shanxi’s carbon emissions and 35.6% of its coal use. This makes Shanxi a microcosm of the challenges that high-carbon industries face in becoming low-carbon.

These challenges are more than simply a matter of technology – the low-carbon transition demands economic and industrial restructuring. As such, Shanxi’s efforts to drive decarbonisation, while sustaining areas economically reliant on coking and steelmaking, make it a representative case study for the industry.

Policies for a steady transformation

Long-process steelmaking predominates in China, accounting for 90% of output. Globally, this coal-intensive process accounts for 73% of output. According to a 2021 Rocky Mountain Institute report, only around 30% of US steel is made this way. Europe also predominantly employs short-process steelmaking, which is less coal-intensive. China’s steel-generated CO2 emissions are, therefore, far higher.

The coking industry has an inbuilt advantage in Shanxi because the province is also a major coal producer. As such, long-process steel accounts for more than 95% of its output. Shanxi’s coal output exceeded 1.3 billion tonnes in 2022 and this capacity is expanding. Shanxi is also China’s leading coke producer and domestic supplier, with an output of nearly 98 million tonnes in 2022 – 20.7% of the national total.

Chinese steel is still expanding and consumes more coke than any other sector in the country. As such, the industry’s emissions continue to rise.

At the policy level, Shanxi is steadily bolstering its low-carbon agenda in line with the national dual-carbon goals. The province’s 14th Five-Year Plan (2021-25), for example, emphasises “strengthening, optimising and greening the traditional 100-billion-yuan [US$13.9 billion] industries of coking and steel.”

A provincial action plan for transforming and upgrading the most polluting elements of Shanxi’s steel industry, presented in 2022, pledged investment worth 76.1 billion yuan (US$10.6 billion). Four months later, the provincial government issued its opinions regarding the “high-quality development of the coking industry”; the document includes the goal of pushing both the industry’s total energy consumption and energy intensity (the amount of energy required to produce a unit of coke) into decline by 2025, compared to 2020 figures. By late 2023, coking furnaces under 4.3 metres in height had been phased out in Shanxi, as taller furnaces are more energy-efficient and less polluting.

In addition, Shanxi released its own carbon-peaking action plan in early 2023. Its strategy is to optimise or replace relevant assets and enhance the province’s capacity for resource security. Measures include encouraging coproduction in steelmaking and coking, which repurposes by-product gasses (such as carbon monoxide and hydrogen) to minimise pollution and increase steelmaking efficiency; it also covers the exploration of hydrogen metallurgy, which replaces coke with hydrogen to reduce CO2 emissions.

Shanxi has, in fact, been exploring the potential of hydrogen since 2019. The gas that is produced while baking coal to make coke is rich in hydrogen, which means high-purity hydrogen can be sourced from within the coking industry. It is important to note, however, that this counts as “grey hydrogen”, rather than the green hydrogen favoured internationally.

Transitional development needs to advance one step at a time – having some progress is better than none. These industries need to be allowed to transition, step by step, from grey to blue to green hydrogen. If they are required to be green from the outset, the associated costs and capacity limitations would render the transition impossible.

On this basis, in 2022, the province released its “Medium- and long-term plan for the Shanxi hydrogen energy industry”. It sets out Shanxi’s intention to become a national supply base for hydrogen energy by 2035. Over that time, space for transformation could be realised in several areas.

Industry explorations: Combining coal, coke, hydrogen and iron

Aside from Taiyuan Iron and Steel in the middle of the province, Shanxi’s main steel firms are in the southern cities of Changzhi, Linfen and Yuncheng. All three are located on the Fenwei Plain, where air circulation is poor and atmospheric pollution clusters during autumn and winter. As a result, firms in the area must often halt operations due to high pollution. The local economy is dominated by coal-related heavy industry. What is therefore needed is a balanced transition that considers the environment and the economy.

The usual approaches to decarbonising steel focus on energy-efficiency improvements and deploying low-carbon technologies in the production process. But other approaches eliminate carbon altogether. “De-coaling at source”, for example, refers to the use of renewable energy to electrify hydrogen-based production methods that don’t require coke.

Jinnan Steel, the largest private steel firm in the Linfen area, has effectively transformed into a joint operator spanning coal, coke, hydrogen and iron, and has come up with some promising approaches in the process. Jinnan’s main initiative involves separating and purifying hydrogen in coking plants. This can then be used as a raw material for chemical products.

Jinnan’s purified hydrogen can also be used to fulfil various energy demands. One such use is hydrogen metallurgy, which in Jinnan’s case is hydrogen-rich blast-furnace injection. This method for heating a blast furnace uses hydrogen-rich gas rather than coke, thereby reducing carbon emissions. Jinnan calculates that, per year, this method could reduce its coke consumption by 77,000 tonnes and CO2 emissions by 240,000 tonnes.

Another use for hydrogen involves setting up zero-carbon, closed-loop logistics platforms in industrial zones: in-house fleets of hydrogen-fuelled heavy trucks using a hydrogen refuelling network. Jinnan Steel now operates more than 300 such trucks, which currently run on blue hydrogen. The company says this fuel costs it less than diesel would.

As Jinnan plans out its transition from grey to green hydrogen energy, it has also embarked upon the next phase of its solar energy push. This includes the single largest photovoltaic (PV) power generation project approved in Shanxi – a 1.3 gigawatt (GW) “new energy and energy storage” project. Its first phase is a 0.3 GW installation that went live in January 2023.

Transition takes time

China’s steel output has exceeded one billion tonnes in each of the past three years, although overall output dipped in 2021 and 2022. In support of the national dual-carbon goals, the industry is planning for overall production to come down by 8.1% in 2030 and by a further 38.3% in 2050, against the 2020 and (projected) 2030 figures, respectively.

One impediment to these aims is the relatively young age of China’s steelmaking blast furnaces. The average age of the country’s fleet is 13 years, but the typical operational lifetime of such furnaces is more than triple that. Forcefully imposing a transition would risk the widespread stranding of these assets.

Technological transition itself may be tricky but achieving it while maintaining socio-economic stability and simultaneously creating favourable developmental conditions on the ground is a hugely complex balancing act.

The steel and coking industries have been handling increasingly stringent environmental requirements for a while – they were already working to reduce air pollution and carbon emissions before the dual-carbon goals were announced. Multiple large-scale, low-carbon initiatives have since been rolled out but, the energy transition cannot happen overnight and it is not a revolution.

In a classic resource-based region like Shanxi, purified hydrogen can help to balance transitional and economic priorities. It must be emphasised, however, that the time and space required for such developments are necessary in areas where the pressure for energy transition is greatest. If that capacity is found, it can facilitate further efforts towards a carbon-neutral world.

This article was originally published on China Dialogue with the title “Analysis: China’s Steel Industry Needs Time to Transition” and has been reproduced under the Creative Commons BY NC ND licence.

Photo by Ant Rozetsky on Unsplash

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The news that the UK saw its warmest year on record in 2022 – and the prediction that this year could be even hotter – is yet another reminder of the need to enable a low-carbon future. A global response to climate change is urgently needed, especially since some recent studies have suggested that the planet could warm by 2°C by 2050 even if emissions are reduced in line with the recommendations of the Sixth Assessment Report by the UN Intergovernmental Panel on Climate Change (IPCC). This will have catastrophic consequences for the world as we know it.

It is clear that the entire global community must pull together and every nation must stretch itself to make the biggest contribution it can. That being the case, what potential is there for the UK and Chinese business communities to support and invest in each other as part of this effort?

The two countries are in quite different positions as they each face up to the challenges ahead. KPMG’s Net Zero Readiness Index – published in October 2021 and comparing the likelihood of 32 major economies reaching Net Zero by 2050 – places the UK at number two, while China is further back at number 20. This is because the two economies are at different stages of development, with China having to accelerate its industrialisation phase and at huge scale.

The UK, which accounts for under 1% of global emissions, has already enshrined in law its commitment to achieving Net Zero by 2050. To enable this, it has further set what the government describes as “the world’s most ambitious climate change target” of cutting emissions by 78% by 2035 compared to levels in 1990. This would take the UK more than three-quarters of the way towards hitting Net Zero by 2050. The UK’s major achievement to date is the decarbonisation of its power sector and the simultaneous shift to renewables. The carbon intensity of the power sector has fallen from 481g of CO2 per kWh in 2010, to 181g of CO2 per kWh in 2020; while renewables’ share of power generation has risen from around 7% to over 40% in the same period.

China, meanwhile, has a population about 25 times the size of the UK and accounts for around 30% of global carbon emissions. However, its carbon usage per head of population is around half that of the United States and is also considerably lower than that of some other Western economies. While its fossil fuel usage is still growing, China has pledged that this will peak in 2030 and then decline, with a Net Zero target of 2060. It is backing this up with real action – already being the world’s largest producer of renewable energy. In 2020, it had solar power capacity of 254,355 megawatts, far ahead of the US in second at 75,572, and it had triple the wind power installations of any other country too. China hopes that a quarter of its energy will be produced from non-fossil fuel sources by 2030 – and many analysts believe it may hit that target early.

It is clear that the UK and China have made considerable progress towards their net zero commitments. Below, we review some of the key progress that has been made by both countries in several areas of the fight against climate change.

China’s transition towards a zero-carbon future is critical for the global climate effort. And it is a transition which offers an immense opportunity for UK business — Andrew Seaton, CBBC Chief Executive

The urban energy transition

Climate change is forcing cities and regions around the world to face up to an inevitable energy transition. Nowhere is the need for this more evident than in what might be described as ‘Energy Cities’, whose economic fabric has for decades relied heavily upon growth in conventional thermal energy sources such as coal and oil. They are often among the most carbon-intensive regions of the world, and where the greatest savings and reductions can be made. The UK and China have several regions of this nature, and the ability to facilitate their transition to more sustainable models of economic activity is a priority for both local and central governments.

An April 2021 report by global renewable energy community REN21 found that 106 cities in the UK had set renewable energy targets or policies, and many have begun taking concrete measures. For example, in August 2021, Oxford launched its first Zero Emission Zone, which applies a variable daily charge to vehicles within the zone between the hours of 7am-7pm, depending on the emissions the vehicle produces.

In China, 25 cities had renewable energy targets or policies, covering an impressive 38% of the urban population in China. Notable policies include specific targets for hydrogen use in transport and fuel cells in Foshan, and bans on the use of fossil fuels in buildings in Handan and Taiyuan.

The role of tech

Technology is emerging as a key enabler in the path to net zero, with the tech sector playing a critical role both in CO2 emissions and in mitigating the long-term impact of climate change. The internet of things, 5G networks, big data, AI and quantum computing all have a critical role to play in addressing the global climate emergency.

It is not only the algorithms and devices of tech giants that are crucial to achieving net zero, but also the companies themselves. The data centres needed to power cloud storage and apps like Facebook and WeChat consume 1% of global electricity demand, according to the International Energy Agency, accounting for 0.3% of all global CO2 emissions. In January 2021, Tencent announced that it would work towards achieving carbon neutrality by 2060 in line with the Chinese government, emphasising measures such as using liquid cooling technology to bring power usage effectiveness down to 1.06 (the closer to one, the higher the efficiency) at one of its data centres in Guangdong.

Electric vehicles and clean transportation

As the world moves towards cleaner transport, the pressure is on for manufacturers to come up with solutions, and this is perhaps most obvious in the automotive market. The challenges that will need to be overcome to meet ambitious government targets are numerous. These are not just limited to how to harness new energy sources affordably and practically, but also include requirements for new materials, adaptation of the supply chain, product life cycle and even new ownership models.

China is well-positioned to meet these challenges. It is already home to nearly 50% of the world’s electric passenger vehicles, driven by subsidies of around RMB 14,400 (£1,600) for buyers (although those subsidies are now being phased out). Sales of new energy vehicles from homegrown Chinese brands such as Nio, XPeng and BYD have rebounded quickly following a dip during the pandemic in 2020.

Green finance

The UK’s finance sector has been well-positioned to grasp the multiple opportunities that China’s dynamic financial services sector has thrown open in recent years, where there has been a surge in activity around models of green finance and its use as an enabler of green growth.

This year saw China become the global leader in the issuance of green bonds as it rolled out funding to support clean and renewable infrastructure projects. In the first three months of 2021, Chinese issuers sold $15.7 billion (£11.3 billion) of bonds, almost four times higher than a year earlier, and exceeding the approximately $15 billion of bonds sold in the US.

The UK financial sector, for its part, has played a world-leading role in developing such instruments from their inception and is well-placed to work together with Chinese partners in pursuing common goals. Budget 2021 laid out ambitious commitments, including two Green Gilt issuances in 2021 totalling a minimum of £15 billion, which will be used to finance clean transportation, renewable energy, energy efficiency, pollution prevention and control, living and natural resources, and climate change adaptation.

Nature-based solutions

The world is facing the twin threats of climate change and biodiversity loss, and one cannot be solved without addressing the other. Agriculture, forestry, and other land use account for nearly a quarter of global greenhouse gas emissions. They also support global food security and millions of jobs. As such, it’s crucial that countries include nature-based solutions in their climate plans, and for businesses to do the same.

Recent solutions have ranged from the adoption of the latest Chinese technologies in the protection of native species, sustainable cities that incorporate agriculture into their infrastructure, and climate-positive spirits distilled using green hydrogen power.

Click here to read CBBC’s report, Targeting Net Zero: The Role of UK-China Business

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In April, China released its draft energy law that aims to regulate, control and reform the energy sector.

“The aim of this law is to reform a sector that is very traditional but is going through a lot of change,” explains Jessica Henry, First secretary for energy policy for the FCO, based in the Embassy in Beijing. “That involves working with some of the large, state-owned enterprises, some of which are keen to stick to their traditional models and are quite reluctant to change. So it needs a gentle and nuanced approach to moving forward that reform effort.

“The lead drafting party on this law is the Ministry of Justice, which shows how seriously they are taking it and how they are convening and managing the different ministries and the input from lots of different interest groups. The Ministry of Justice should be more objective in setting the legal basis for this law which would include ministries not only in charge of energy, but also in charge of everything from the environment to forestry, to the oceans.”

Adds Henry: “It’s very complicated to provide a legal basis for the world’s largest energy consumer and producer.” It is, after all, “quite a big job.”

Indeed it is. Henry, who is responsible for government-to-government relations on energy policy, explains that the bill has been 15 years in the making, with the first draft being published around the same time the National Energy Administration (NEA) was created as a separate energy ministry.

“At that time, it was very short and was more of a declaration than a comprehensive energy law, but has had many revisions since then. In 2017 there was a major revision that took into account technological and market developments over the period. It included context from the Paris 2015 Climate Conference, but also reflections on Xi Jinping’s speech on the four major energy revolutions from 2014, so you could see it become broader and reflect some of the wider political and economic features of the time.”

This latest revision continues to reflect current themes, including energy security and low carbon development as key parts of China’s energy strategy.

One of the reasons it has taken such a long time is because it is trying to keep up with fast-paced technological developments. The cost of renewables has fallen dramatically, and China has become a world leader in renewables and low carbon transport in recent years, so it’s a challenge to update laws as fast as technological developments.

This version is the latest in a draft law that has been open for comments. As of now, there has been no specific timeline laid out for when the draft will actually be turned into law.

As of now, there has been no specific timeline for when the draft will actually be turned into law.

The drafting process is done by officials from various different ministries who work with research institutes and academic experts. Having drafted the law, there was a period until May 9^th during which people could comment on this law either directly, informally or through trade and lobbying organisations.

What does the law include?

The law focuses heavily on plans to open up, reform and liberalise the energy sector in China. Foreign investment will be welcomed into the sector, which has traditionally been dominated by state-owned enterprises. Allowing foreign investment into the market will not only allow foreign companies to compete, but will also force Chinese companies to become more competitive.

“It is welcome that the draft law is to reform the energy sector and lower investment barriers,” says Dr Zhi Shengke, director of strategy and development at energy company Wood Plc. “British companies such as BP, Shell and Wood can take advantage of China’s energy market reform and introduce various technologies and engineering solutions to the sector. Meanwhile, this draft law delivers a clear message that the Chinese energy sector won’t just focus on energy security and energy transition, but also invest more on decarbonisation and digital solution. The government is sending a clear signal to domestic companies that they need to be more competitive in terms of technology and digital.”

“There is a welcome focus on low carbon development,” adds Henry. “There are new measures to monitor emissions and limit environmental damage and to promote low carbon technologies, including renewables. There is also a welcome focus on continuing market reform making markets more open and more competitive,” she says.

“However I think there are still a few areas that need more detail. At the moment the draft is still quite high-level and we’d like to see a bit more detail on how markets will be regulated, and the enforcement mechanisms for those,” she says.

But overall the law, “is about creating a more open, transparent, competitive market so that (both Chinese and international) private companies are able to compete with state-owned enterprises on more of a fair basis. State owned enterprises are going to have to make improvements if they are going to keep competing with private companies.”

What does it mean for British business and intergovernmental collaboration?

“This could be the start of the transformation,” says Dr Zhi. “A rapid energy transition is happening due to the impact of COVID-19, environmental pressure and the development of digital and decarbonisation technology. China is positioning to be a dynamic energy market, which is attractive to foreign investment.

“Over the last decade, many international oil companies, chemical companies and engineering companies have invested in the China market. Lower trading barriers means that cost benefits from using the latest technologies and supply chain are less constrained.  Hence, more low carbon technologies could be brought into the Chinese energy industry.

“In China, the overall energy demand is still growing but the energy production predominantly relies on coal for power generation, as it’s low cost and plentiful. It is delightful to notice that the energy law is to spearhead and develop decarbonisation technology and digital technology to reduce the greenhouse gas emissions while meeting developing nation’s growing needs for energy. I look forward to the transformation led by Chinese SOEs,” says Zhi.

Matt Ashworth, commercial counsellor for energy and infrastructure at the Department for International Trade (DIT) explains that new marketisation opportunities will arise for competitive businesses who are able to bring in international expertise and find collaborative projects.

“We have a lot of strong relationships in the energy sector between UK and China from large multinationals to SMEs,” he says. Companies like BP and Shell have been taking advantage of some of the opening up and the relaxation in terms of foreign investment into retail oil and gas markets,” he explains. “Both BP and Shell will be opening petrol stations in parts of China and both are actively looking at expanding their operations.

“Then you have new energy opportunities. Offshore wind is a key area of strength in the UK.” There are many major offshore wind programmes planned in China, Ashworth points out, and the UK has world-beating technology in this area. There have been some great examples of collaboration already.

For example a UK-China joint centre on offshore renewable energy has been established in Yantai, Shandong province in a collaboration between the UK’s Renewable Energy Catapult and TusPark, anchoring the relationship in science, innovation and trade as well.

“There are lots of opportunities on energy transition, not just from offshore wind, but other aspects of renewables, including energy storage and how that is transmitted and connected to the grid. Areas we have a lot of experience and expertise in, which we can share with China,” says Ashworth.

“Our strategy has a high alignment focusing on decarbonisation, energy transition and digitisation, including connected design, connected work and connected operation into China,” says Dr Zhi. “We are in discussion with one of our clients about how to digitise their large scale complex asset. We also believe there is a huge potential for offshore wind and floating wind in China. Therefore, the transformation for the Chinese energy industry is a welcome change as it is highly aligned with our expertise.”

Ashworth goes on to explain that there are many other interesting areas of innovation that the DIT are keen to watch develop, including a collaboration between BP and Chinese ride-sharing company Didi on electric vehicle charging stations in Guangdong.

Britain is a global leader in renewable and wind farm technologies

Another key UK strength is building a strong regulatory environment that creates certainty for investors and also being very open to international investment, explains Henry. “It goes both ways – it’s not just about the UK exporting to China but about the role that China can play in the UK’s own energy infrastructure. So whether that’s major projects like Hinkley Point C and the nuclear sector or investment into North Sea oil and gas, into offshore wind – there is a very healthy two-way relationship there on trade and investment, which underlines how much collaboration there is between the two countries that plays to our mutual strengths.”

“We have a lot of different types of collaboration, whether that’s science and innovation, or early-stage research; on policies and regulation and providing the right framework for investment into clean technologies; or on the DIT commercial side. It’s a broad range of collaborations, not just in Beijing but in all consulates (Shanghai, Guangzhou, Chongqing and Wuhan). Given that the UK has so many strengths on low carbon energy and China is also a global leader on low carbon energy, it’s a natural area for practical collaboration.”

International collaboration

The law also included a plan to set up a ‘cross-nation energy information service system,’ which will hopefully see China becoming more involved in international cooperation platforms and committing to open markets and foreign competition:

“Article 89 says that the energy department will establish an information platform for international energy cooperation,” says Henry. Our first response is to say that this seems to be a positive step and we would love to have more data transparency around how China engages internationally. It looks like a great initiative and if they are open to working with others on the platform then we would be interested to work with the Chinese government.”

However, according to Dr Zhi from Wood, there are still obstacles that could make collaboration difficult. “Cybersecurity is one of the hot topics in the energy industry in China. More and more, clients are required to keep their project data and engineering data in China, which is a challenge to international companies like Wood. A mega project normally requires global assistance, meaning project data often flies through systems that are located in multiple countries. If the data must remain within the Chinese border, it will take more time and push a higher budget.”

Dr Zhi also says that it is vital for China to think about how to retain the total values that can benefit social and economic development, contribute to the national capability, and stimulate productivity of local economy when more inbound investments come: “In-country values could help China to further develop its supply chain and benefit local communities.”

Britain has stringent long-term targets such as the legal commitment to reach net-zero emissions by 2050. Although China doesn’t have a net-zero target, it does have Nationally Determined Contributions under the UN climate change agreement, which fulfil medium-term contributions.

“The value of a long term net-zero target is something we are talking to China about as part of our wider climate change collaboration,” says Henry. “There’s some very positive activity at the sub-national level, with some cities and regions adopting very ambitious targets and plans for low carbon development. This draft law doesn’t include a net-zero target, but the focus on low carbon development and measures to integrate renewables integration and greater use of clean technology does lay the foundation for moving towards this in the future, so that’s really positive.”

Finally, Ashworth is keen to point out that this law is just a draft, and that ultimately, we will have to see how it is implemented and how it might work in practice:

“There’s a lot of interest in what it might mean for the next stage in terms of goods and services that we might be able to provide, and business environment or market access issues. And that’s what we (DIT) are here to help with,” he says.

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