Analysis: Record solar growth keeps China’s CO2 falling in first half of 2025

China's CO2 emissions fell by 1% year-on-year in H1 2025, primarily due to record solar capacity additions of 212 GW, which fully covered new electricity demand and drove a 3% reduction in power sector emissions. However, this progress is tempered by a projected record 80-100 GW surge in new coal-power capacity and a 20% increase in coal use by the chemical sector, which has added 3% to national CO2 since 2020 and complicates 2030 climate targets. While emissions are declining, China is set to miss several 2025 climate goals, underscoring ongoing policy challenges in its energy transition and industrial decarbonization efforts.

Analysis

China's carbon dioxide emissions fell by 1% year-on-year in the first half of 2025, driven by a 3% reduction in power sector emissions, where record clean-energy growth outpaced rising electricity demand. A policy-driven rush led to a historic 212 gigawatts (GW) of new solar capacity, with solar generation growth of 170 terawatt-hours (TWh) single-handedly covering the entirety of new electricity demand. However, this progress is contradicted by structural challenges that threaten long-term climate targets. A projected record surge of 80-100 GW in new coal-power capacity in 2025, even as coal-fired generation declines, points to significant overcapacity and falling utilization rates for thermal assets. Furthermore, the coal-to-chemicals sector is expanding aggressively, with coal use climbing 20% in H1 2025, adding approximately 3% to China's total CO2 emissions since 2020 and complicating the 2030 peaking goal. The emissions decline was also aided by a contraction in construction-related industries, with cement and steel output falling 4% and 3% respectively, though progress in steel was undermined by a decreasing share of more efficient electric-arc furnace production. Despite the headline emissions drop, China is poised to miss multiple 2025 climate targets, including those for carbon intensity and coal consumption, placing significant pressure on policymakers to enact more ambitious measures in the upcoming 15th five-year plan.

Key Decisions for Investors

• Investors in the Chinese renewable energy sector should monitor the impact of the new pricing policy, as the shift from guaranteed tariffs to direct contracts could compress margins for solar and wind producers, making future growth highly dependent on newly mandated quotas for industrial off-takers.
• The projected record build-out of 80-100 GW in new coal-power capacity against a backdrop of declining coal-fired generation signals a significant oversupply risk, which will likely depress utilization rates and profitability across the entire thermal power sector.
• The 20% growth in the coal-to-chemicals sector presents a niche opportunity, but investors should be wary of its high sensitivity to oil price fluctuations and significant regulatory risk, as its expansion path directly conflicts with China's national decarbonization objectives.
• Anticipate more stringent regulations and ambitious targets in China's upcoming 15th Five-Year Plan (2026-2030) to compensate for missed 2025 goals, creating potential headwinds for carbon-intensive industries like coal chemicals and steel, and further policy tailwinds for green technology and renewable energy supply chains.