Can China decarbonise the world’s factory floor?

China’s massive deployment of electric vehicles, batteries, solar and wind power has stunned many in the west, giving Beijing the lead in the race to transform energy and transport systems. It has also handed the world’s biggest polluter some leverage in climate change diplomacy.

However, China’s build-out of new renewable energy projects and electricity-based transport may turn out to be the easy part in the fight against global warming. The tougher task is decarbonising energy-intensive industry.

The scale of the challenge is eye-watering. Powered by coal and low-cost labour, China has become the world’s factory floor and its industries contribute around two-thirds of the country’s carbon emissions and just over one-third of annual GDP.

Official estimates put the average annual financing needed to make China carbon-neutral — a process that includes factories and the energy sector — at Rmb6.5tn ($900bn) for 40 years from 2021. Other estimates suggest Rmb12tn ($1.7tn) annually for the same period, implying total funding of more than $67tn is required.

Despite these numbers — drawn from an analysis by CP Global Insight, a China-focused consultancy, commissioned by the Federation of German Industries (BDI) — many experts see China as well-placed to drive the world’s industrial decarbonisation efforts and strengthen the country’s position internationally.

“China views green technologies as strategic factors for growth and competitiveness,” says BDI deputy director-general Holger Lösch. “The massive expansion of climate-friendly technologies, standards and supply chains reduces unwanted dependencies and secures China’s global influence and market power in key industries.”

In many western countries climate change and industrial policies have become politicised, creating regulatory uncertainty. In the US, President Donald Trump has gutted the Biden administration’s climate policy as he pivots America back towards fossil fuels.

By contrast, analysts see limited risk of a sharp policy reversal in China’s plans for a green transition — despite an economic slowdown stemming from a collapse of the property sector.

Chinese President Xi Jinping in 2020 pledged to reach peak CO₂ emissions by 2030 and net zero emissions by 2060. That promise, coupled with Xi’s long-held ambitions of Chinese resource and technological self-reliance, has given provincial leaders and the private sector a clear direction of the path ahead.

More recently, Beijing announced that the country’s fledgling emissions trading scheme (ETS) — so far only covering the power sector — will by 2027 be expanded to include all major industrial carbon emitters.

Under the current scheme companies in the power sector are subject to a cap on their CO₂ emissions. Once they exceed their quota they must pay the government for the emissions they produce in the form of allowances, which can also be traded.

The International Carbon Action Partnership — a forum supporting ETS roll-outs — described the expansion as a “transformative step” for the world’s biggest ETS. It will also align China’s emissions regulatory framework more closely with that of the EU.

Still, decarbonisation of Chinese industry includes a panoply of difficult-to-abate sectors — in which processes needing high-temperature heat are supplied by fossil fuels. This means overhauling huge swaths of industry: from steel to cement and petrochemicals, as well as aluminium and copper.

In the long term, China must develop technology and supply chains for new, low-carbon alternative fuels, such as green hydrogen, as well as green methanol and carbon capture and storage.

Phineas Glover, who leads Asia-Pacific ESG and sustainability research at UBS, says there is huge potential in industrial electrification — switching China’s factories from fossil fuels to electricity — with technologies such as heat pumps, electric arc furnaces, synthetic graphite and electric boilers.

“If you electrified the Chinese industry with low-hanging fruit today, by 2030 you’re talking about circa 1,250 TWh of demand growth,” Glover says. “That is nearly double South Korea’s total electricity consumption in 2024, just in demand growth.”

Analysts from S&P Global have noted that some sectors, such as aluminium, have shown signs of shifting production within China, to areas such as Yunnan and Inner Mongolia, which have lower electricity costs and abundant renewable energy. Aluminium producers’ use of renewable energy jumped from 13 per cent in 2015 to more than 24 per cent in 2024 — and the government has a target of 30 per cent by 2030.

According to data from the Industrial Transition Accelerator, an international non-profit tracking heavy industry and transport decarbonisation, China has 54 commercial-scale clean industrial projects either in operation or financed, compared with 18 in the US. In 2025 alone, of 19 projects that have received funding globally 12 were in China.

In other sectors, progress has lagged. The share of steel production using electric arc furnaces has remained at about 10 per cent for the past decade, despite Beijing’s 2022 target for 15 per cent by this year.

Xinyi Shen, who leads the China team for the Centre Research on Energy and Clean Air (CREA) think-tank, cautions against any expectation of a “dramatic” pace of change in sectors such as steel.

She points to a complex suite of central government policy tools that need to be deployed. This includes not just the ETS or requirements for factories to use a certain percentage of renewable energy, but also regulatory control over capacity and output, and demand-side measures to foster the development of a new market for low-carbon materials.

This will also heap pressure on provincial-level officials, who must balance compliance with concerns around economic fallout and job losses from any factory shutdowns. Sub-national level compliance with Beijing’s lofty climate ambitions will be crucial.

According to the CP Global Insight analysis, China is betting on the superiority of its hybrid system, which combines party policy with private enterprise competition and state-owned institutions able to absorb financial risk.

“The competition for climate leadership has changed,” says CP Global Insight partner Erlend Ek. “It is no longer about moral appeals or targets, but about infrastructure, capital and technology — and about who can deploy them at scale.”