Clearing the air

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This article was written by Impax Asset Management, a specialist asset manager investing in the opportunities arising from the transition to a more sustainable global economy.

China and India are making progress in tackling CO2 emissions and air pollution, creating opportunities for companies offering clean-air products and services.

Demand from India and China for cleaner and more efficient factory equipment, public transport infrastructure and electric vehicle components is an opportunity for exporters in the region. Taiwanese, South Korean and Japanese companies have historically been early innovators in environmental markets and represent an opportunity to build regional partnerships insulated from potential global trade disputes.

How China is winning the war on air pollution

The government has repeatedly demonstrated that the ‘war on pollution’ goes far beyond rhetoric. For example, a pledge to cut CO2 emissions per unit of GDP by 46% from 2005 levels by 2020 has been met three years ahead of schedule[1]. In addition, air quality has markedly improved in Beijing and 27 surrounding cities, with levels of toxic small particulates (PM2.5), dropping by 33.1% YoY in the last quarter of 2017[2].

This progress has been achieved partly through the government taking drastic action to reduce coal use in 2017, which included switching off power stations and heavy industry fuelled by coal. Alongside this, the transition to natural gas for heating, building public transport infrastructure and encouraging electric vehicle uptake represent longer-term solutions and investment opportunities.

With many factories in China’s Northeast shut down in 2017, industry output in other provinces increased, intensifying local pollution rather than reducing it. As well as ensuring that cutting emissions in the Northeast is executed in a sustainable manner, the next challenge for the government is to extend the growth of solutions to air pollution across other parts of the country.

Exhibit 1: Premature deaths from exposure to particulate matter and ozone – number of deaths caused by outdoor air pollution per year per million people

Source: The Economic Consequences of Outdoor Air Pollution – OECD, as of 25/05/2016

An even bigger role for India in fighting air pollution

China’s growing role in world affairs and its economic clout draw a lot of attention. However, the importance of India’s role in the transition to a more sustainable economy is difficult to overstate. Its population is set to exceed China’s by 2025[3], with energy demand predicted to double by 2040[4]. Whatever policy decisions and consumer actions are made in India will have greater impact on worldwide emissions in the long term.

Currently, India’s power generation is dominated by coal, which generates around 75% of the country’s electricity. It is therefore unsurprising that 14 out of the 20 world’s most polluted cities are in India[5]. As in China, an ongoing transition to using natural gas for heating and power generation is a positive step towards a cleaner energy mix.

Opportunities in India’s energy transition

The transition in India may take longer as the country faces significant, and very different, challenges. For example, China has an extremely centralised power structure, and the government has demonstrated that it is prepared to make dramatic policy changes quickly.

In comparison, India is made up of a number of states and unions, each with its own agenda and concerns; compromises must be forged and the subsidy of coal is popular in many areas due to the number of jobs provided by the coal industry[6].

The government is aiming to increase the proportion of natural gas in the India’s energy mix from 6.5% to 15% by 2030[7]. The huge deficits in energy infrastructure and the volume of gas that will need to be supplied to meet demand indicate a compelling investment opportunity if this target is to be met.

Furthermore, it is estimated that 240 million people in India have no reliable access to electricity, and so rely on polluting biomass stoves for indoor cooking and heating[8]. A successful transition to distributed electricity systems based on renewable energy could deliver heat and light in rural areas.

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[1] China meets 2020 carbon target ahead of schedule: Xinhua Source: indiatimes.com (27 March 2018)

[2] PM2.5 in Beijing down by 54%, but nationwide air quality improvements slow as coal use increases – Source: greenpeace.org (1 January 2018)

[3] India to outnumber China in population by 2025: US Census Bureau – Source: indiatimes.org (30 December 2017)

[4] India Energy Outlook – Source: iea.org (27 November 2015)

[5] India home to 14 of world’s 20 most polluted cities – Source: asiancorrespondent.com (2 May 2018)

[6] Number of employees at Coal India Limited from 2002/2003 to 2016/2017 – Source: statista.com (31 March 2017)

[7] Indian state oil firms betting on natural gas as next big thing – Source: reuters.com (17 November 2017)

[8] Living in the dark: 240 million Indians have no electricity – Source: bloomberg.com (24 January 2017)

David Li

Senior Portfolio Manager, Director, Impax Asset Management

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