A STUDY OF THE COAL POLICIES IN CHINA

Liang Peng

ABSTRACT: Since China opened to the world and launched its economy reforms in the early

1980s, the main source of energy in China has always been coal, whether for electric power generation,

railway transport, an input to a vast array of industries, or as the principal heating fuel in the

residential and commercial sectors. The evolution of the Coal industry in China mirrors the countrys

economic development as a whole. Therefore, the coal policy in China is critical not only to its energy

sector, but also to the development of Chinas economy and society. From the international trade

perspective, as the biggest coal producer in the world, China has considerable influence on the

international coal market. Yet, the government controls the coal trade through state-owned trading

companies and export licenses. Thus, in the absence of free trade with China, the international coal

market will remain heavily influenced by decisions made in Beijing. In order to understand Chinas

coal policy, this paper briefly examines salient coal policies in the thirty years of coal industry

evolution (1980-2010). It analyzes some influential factors in coal policy-making through an empirical

approach, and then points out Chinas coal policies for the future in conclusion.

The author is currently enrolled on the LLM in Mineral Law and Policy at the University of Dundee

(CEPMLP), UK. Email: louispeng111@gmail.com

ii

TABLE OF CONTENTS

Abbreviations ............................................................................................................................... iii

1. Introduction ........................................................................................................................... 2

2. Overview of Chinas coal policies in thirty years ................................................................ 3

3. Evaluation of Chinas coal policies ....................................................................................... 7

4. Conclusion ............................................................................................................................ 10

Bibliography

Appendix

iii

Abbreviations

CMA Central Mining Administration

LSOM Local State-Owned Mine

MCI The Ministry of Coal Industry

KSOM Key State-Owned Mine

NDRC National Development and Reform Committee

SACI The State Administration for Coal Industries

TVCM Township and Village Coal Mine

TVE Township and Village Enterprise

2

1. Introduction

In most countries, policies play an important role in energy sector. The reason is simply that

energy is too important to be left to the markets. 1 Coal is a kind of mineral within the

boundaries of the mining industry, but it is primarily an energy product like petroleum and

natural gas.2 Since China opened to the world and launched its economy reforms in early

1980s, the main source of energy in China has always been coal, whether for electric power

generation, railway transport, an input to a vast array of industries, or as the principal

heating fuel in the residential and commercial sectors. The evolution of coal industry in

China mirrors the countrys economic development as a whole.3 Therefore, the coal policy

in China is critical not only to its energy sector, but also to the development of Chinas

economy and society. From the international trade perspective, as the biggest coal producer

in the world, China has considerable influence on the international coal market. Yet, the

government controls the coal trade through state-owned trading companies and export

licenses. Thus, in the absence of free trade with China, the international coal market will

remain heavily influenced by decisions made in Beijing.4 In order to understand Chinas

coal policy, this paper briefly examines salient coal policies in the thirty years of coal

industry evolution (1980-2010). It reveals three different stages of policy development

towards the coal industry, yet each stage had conflicting direction to the coal development.

What caused the inconsistency of the coal policy in China, what are the economic factors

for the policy-making? The paper analyzes some influential factors in coal policy-making

through an economic and empirical approach, and then points out Chinas coal policies for

the future in conclusion.

1 Professor Paul Stevens listed several dimensions for the importance of energy. See The Economics of

Energy (U.K, Dundee University, 2009) 2 Phillip, Crowson, Mining Unearth, (2008) p.11.

3 Elspeth, Thomson, The Chinese Coal industry: An Economic History, (2003) p.2.

4 Brian, Ricketts, Coal in China from a Global Perspective, in Shaping Chinas Energy Security The Inside

Perspective(Michal Meidan ed., 2007)

3

2. Overview of Chinas coal policies in thirty years

The Great Leap Forward: 1980-mid 1990

Energy shortage is undoubtedly the foremost constrain of Chinas economy development.

When Chinas leader Deng Xiaoping launched the reform to economy development in the

ancient country, the first priority was to increase energy supply to fuel the economic

activities. Coal industry was under pressure to satisfy thirsty energy demand in 1980s. In

order to quickly increase coal supply, the central government prescribed several measures to

promote coal production. In 1981, the Ministry of Coal Industries formulated a policy for

small-scale coal mines5 which included higher levels of subsidies, tax allowances,

investment in infrastructure and funds for the maintenance of mines. For example, in

Shanxi Province, these mines received compensation from the provincial government for

every tonne of coal they produced. These funds were to be used for environmental

protection, safety and technology. The year 1983 and 1984 saw two important measures

being introduced by the State Council. One was the introduction of the term township and

village enterprise (TVE) to replace the old commune and brigade enterprise as part of the

highly successful drive to stimulate economic activity at this level. The other was a

document entitled Eight measures on accelerating the development of small coal mines

which was supported by the Prime Minister, Zhao Ziyang. The principal aim was to rise the

level of national coal output by whatever means were necessary, and to encourage coal

production for local consumption and thus ease the pressure on the railways and waterways.

The following year guidelines were issued to promote the simultaneous development of

coal mines of different size and of different ownership. These policy steps culminated in the

introduction of the first comprehensive Mineral Resources Law under the communist

government, in 1986. As a result, from 1979 to 1996, Chinas coal production peak year,

nationwide output increased 738.54 million tons or 116.2 percent. Annex 1 provides total

coal production figures with the annual increments and growth rates from 1978. 6By this

time, the Township and Village Coal Mines (TVCM) produced 48 percent of the nations

5 Small mines has no unified definition, according to the latest document issued by Chinese government, the

mines with annual output below 300,000 tons are small mines and shall be closed. 6 Elspeth, Thomson, The Chinese Coal Industry: An Economic History (2003) p.178.

4

coal and had accounted for more than 70 percent of the incremental coal output in the

previous fifteen years. 7The polices implemented during this period successfully raised the

coal production to satisfy the roaring energy demand, and created the biggest coal industry

in the world, but it ignored the severe damages to air, land, water and natural resources

caused by massive small mines around the country.

Adjustment and Restructuring: Mid 19902000

By the mid 1990s, the number of TVCMs probably exceeded 80,000 and they employed

between 2 and 4 million people, many of them were illegal mines with poor management

and working conditions. It was impossible to know the precise number of such mines. The

drastic growth of local mines and their coal production seriously disturbed the coal market

and damaged the healthy development of coal industry. The industrys losses nationwide

had continued to mount during the late 1980s and peaked at 5.75 billion yuan in 1992. Late

that year, the Central Mining Administrations (CMA) had difficulty meeting the basic

wages of the miners, let alone any extra wages for above-quota production. A major

problem was the default of coal payment by large consumers because the buyer has more

market power in an oversupply coal market. On the other hand, during this period, the

accident rate, at the TVCMs in particular, had been alarmingly high. 8The State Council

noticed the uncontrollable situation of coal industry, and stepped in by restructuring the

industry. Several circulars were issued to regulate small mines, such as the Circular of the

State Council on Regulating Private Coal Mining, and Opinions on Stopping the

Indiscriminate Extraction of Small Coal Mines and on Ensuring Safety in Coal Mining.9 In

all, some 13,000 illegal small mines were closed in 1993.10

In order to strengthen the

regulation on coal industry, the Ministry of Coal Industry (MCI) which had been disbanded

in 1988 was re-established. In May 1993, the Mine Safety Law was entered into force to

improve the safety at coal mines. Chinas first coal law, The Coal Law of China came into

effect in December 1996, in an attempt to regulate coal development and production,

7 Philip, Andrew Speed, Energy Policy and Regulation in the Peoples Republic of China,(2003) p. 82.

8 Elspeth, Thomson, The Chinese Coal industry: An Economic History, (2003) p.152.

9 Broadcast on Xinhua, 0205 GMT, 17Jan. 1993, in FBIS, 27 Jan. 1993, pp.21-2

10 China Statistic Bureau, China Coal Industry Yearbook (1995), in Chinese.

5

establish a rational relationship between the State and individually licensed mines. It also

sought to ensure efficient use of coal resources, labour and equipment. In addition, by late

1997, the government had been openly encouraging a reduction in the role of coal, mainly

for environmental reasons. In June 1998, the coal production target for the year was reduced

by 70 million tones, and in August it was announced that 22,000 mines without licenses

would be closed in 2000 so as to reduce output by the 200 millions tons necessary to bring

down supply closer to demand. By the end of 1999, a total of 31,000 small mines had been

closed. As the result of the above policies, since 1996, the coal production had continually

decreased and reached the bottom in 2000, in which year the coal production was only

880.10 million tons, almost the same level as that in 1985. But, we should also consider the

impact of the Asia crisis, the radical economic reforms towards becoming a socialist market

economy, and the increased consumption of oil and gas, which increased its share in energy

sector from 17.5 percent in 1995 to 23.2 percent in 1999(Table2.1). At the end of 2000, the

adjustment and restructuring of coal industry gained some achievements, the number of

mines was largely reduced with the closure of small, inefficient and illegal mines, 25 large

scale State-owned coal mines reformed into modern mining company, the overproduction

was restrained, and coal export peaked at 59 million tons. But, some problems still existed.

Source: Philip Andrew Speed,, Energy Policy and Regulation in the Peoples Republic of

China (Netherland, Hague: Kluwer Law International, 2003)

Great challenges: 2001-present

Since 2001, China economy has entered a fast track, economic growth rate reached over 10

percent per annum until the Crisis of 2008. Pushed by the increasing energy demand in

heavy industry sector and other high energy consuming sector such as steel, aluminum,

construction material, the coal production has increased dramatically. In 2005, the total coal

production reached over 2 billion tons. When we look to the coal output by mine ownership,

6

it can be seen that the share of TVCMs also increased quickly, according to Statistics, from

2000-2006, the output by TVCMs increased by 232 percent, i.e 6,230million tons per year

while Key State-Owned Mines (KSOM) increased only by 109 percent. In 2006, output of

TVCMs made record high peaking at 8,920 million tons or 38 percent of total output in

China.

[Light blue: TVCM; Gray: LSOM; Blue: KSOM]

Source: IEA., Cleaner Coal in China,

(France, Paris, 2009)

While the central government tried to reform the coal industry towards consolidation and

commercialization of mining enterprises into larger modern conglomerates which owned

mines from different mining areas and different provinces like Yanzhou Coal Group and

Shenhua Coal Group, the TVCMs owned by local governments or individuals still play an

important role in Chinas intensely tight energy market. The reforms to the coal industry

launched in 1998 though gained some progress, has not completed yet. Despite the

structural reform, at the same time, the development of coal industry faces other challenges.

Firstly, the environmental deterioration became a big concern. No wonder, coal is a major

contributor to CO2 and sulphur emission. The indoor and outdoor air pollution created from

the burning of coal has accumulated over many decades in China. One western scholar

writhing in 1997 ventured to say, the smoke burden today in major Chinese industrial

cities such as Chongqing is significantly worse than it was in [the killer smog] in London in

195211. In the mid-1990s, China accounted for about 14 percent of the worlds carbon

dioxide emissions, second highest after the US 22 percent12. Thousands of coal mines also

11

Elspeth, Thomson, The Chinese Coal Industry: An Economic History (2003) p.194. 12

See id., p.195.

7

caused irreversible damages to land resources. A study on the impact of coal mines in

Shanxi Province, which accounts for some 25 percent of Chinas total coal output, revealed

the following:

13 percent of the total land area of the province is affected by coal mining; that is some

20,000 square kilometers out of 156,000 square kilometers;

650 square kilometers of land is subject to subsidence;

More than 200 square kilometers of land is occupied by coal refuse tips totaling more

than 270 million tones in weight;

Within a selected study area, more than 20,000 square kilometers of land required

rehabilitation as a result of coal mining.13

Secondly, the death toll in coal mining accidents has increased sharply. In 2002, the death

toll in coal accidents was 6579.14

In 2005, the State Council issued the Special Provision on

Prevention for Coal Mining Safety. But the coal mining accidents has continually made the

headlines throughout these years. Most of them happened in TVCMs. In September, 2005,

the State Council issued another circular on regulating and consolidating mineral resources

development.

Thirdly, the sustainable coal development became urgent. According to the eleventh five

year plan of coal industry issued by NDRC, the coal exploitation will be more difficult due

to the shortage of water in coal rich areas in western China, such as Shanxi, and the

deteriorating situation of land subsidence in central and eastern China. Therefore, to make

the coal industry sustainable, the enterprises have to adopt new technology to enhance the

efficiency of coal exploitation and recovery rate. However, there are thousands of mines in

China, most of them can not afford to adopt advanced technologies.

3. Evaluation of Chinas coal policies

From the economics perspective, Chinas coal policies during 1980s were wrong. At the 13

Philip, Andrew Speed, Energy Policy and Regulation in the Peoples Republic of China, (2003) p. 189. 14

See http://www.ocn.com.cn/free/200801/nengyuandianli026.htm. (Last visited on Jan 20, 2010), in

Chinese.

8

beginning 1980, China had not enough technologies, knowledge and funds to exploit coal

deposits as many as it wanted. The policies of encouraging local mines contributed directly

to the damages to the coal deposits and local environment, which incurred immeasurable

costs in the later decades to reclaim. The local miners in their ignorance of proper

engineering methods often ruined huge coal deposits, and thousands people lost their lives

in accidents. They removed the coal from the ground using largely improvised equipment

and the efficiency of production was so low that the mines were in fact net users.15

Recovery rate for TVCMs is estimated to lie in the range 10 to 20 percent, compared to

60-80 per cent for the large state-owned mines. 16

Local pollutants include suplhur dioxide,

nitrogen oxides and suspended particulates. The main source is coal used by industry and

households, with vehicle emissions and natural dust being subordinate

contributors.17

Estimates of the economic damage caused by pollution from energy

production and use in China are highly variable, but 3-7 percent of GDP would appear to be

reasonable.18

When the central government realized the negative side of the policies and

launched closure programmes in the late 1990s, the coal industry had been so

uncontrollable that even the government didnt know the exact number of output of the

TVCMs.

Another deficient coal policy was the structure reform launched in 1998 being part of the

economic reforms towards becoming a socialist market economy. The central government

decided to decentralize and marketize most of the state-owned mines in an attempt to

reduce the burden of government and improve the financial and technical performance of

the coal industry. In August 1998, ninety four state-owned coal mines assets were

transferred to provinces, the MCI was abolished and its government functions were

assigned to the State Administration for Coal Industries (SACI), which was later abolished

and its safety function was taken on by the newly-created Coal Safety Supervision Bureau.

The reform of Administration may help to separate the functions of government and

industry and establish the market oriental economy, but, the loose administration caused by

15 Elspeth, Thomson, The Chinese Coal Industry: An Economic History (2003) p.189. 16 Philip, Andrew Speed, Energy Policy and Regulation in the Peoples Republic of China,(2003) p. 86. 17 See id., p.28. 18 See id., p.29.

9

such reforms came too early for Chinas coal industry. In absence of the complete legal

regime, clear defined government responsibilities and efficient administration at provincial

and local level, the central governments effort to build up a consolidation and

market-oriental coal industry has been largely reversed by the booming TVCMs with the

support of local authorities19

. The direct aftermath of the loose administration was the rising

death toll in frequent coal mining accidents. Li Yizhong, the director of the State Safety

Supervision Bureau pointed out that the weak administration was the major reason for

mining accidents20

.

On the other hand, the benefits of the policies were also obvious. The TVCMs were the

most visible symptom of the drive to produce more energy, and they made a greater

contribution to Chinas enhanced energy supply than any other sector of Chinas energy

industry. In the short-term, this was the cheapest and surest way to boost the supply of

energy. Indeed, the short-term cost to the national government was effectively zero.21

TVCMs also played an important role in addressing local energy needs. In 1980s and early

1990s, transportation and infrastructure in China was deficient, TVCMs was the foremost

energy provider for local consumers, especially for large remote rural areas as well as some

population intensive cities in energy-scarce provinces of eastern China. For local economy,

it was the coal mine that acted as the main source of local revenue, supporting the local

development in education, infrastructure and employment. The policies were also

acceptable taking into account that the first priority of China at that time was to eliminate

poverty.

In the long term, we can see that Chinas coal policies were not well developed in a

consistent and sustainable manner. The policies had deficiencies in many aspects. Firstly,

the cost-benefit analysis was ignored. While the rapid development of TVCMs satisfied the

immediate need for energy, the obvious and substantial potential costs was ignored. It has

been proved that the resources can be a curse without considering the costs of mining,

19

See id., p.94. 20

See http://politics.people.com.cn/GB/1027/4663750.html (Last visited on Jan 08, 2010) 21

Philip, Andrew Speed, supra note p.86.

10

including some externalities, like environmental damages, impact on local communities and

so on. Its argued that whether Chinas long-term interests would have been better served by

either allowing the economy to grow at a slower rate or by diverting more state investment

into primary energy production or energy imports during the 1970s and 1980s. The first

possibility would have been quite unacceptable to Chinas leaders, for economic growth

was their first priority. The second approach may have received some consideration, but

falling levels of state revenue would have rendered this unattractive.22

But, even it was the

only choice for China to develop TVCMs at that time, the outcome would have been less

destructive if relevant administration and laws are well implemented.

Unfortunately, the policies to closure of TVCMs had not been effectively implemented at

local level due to the ineffectiveness of the laws and institutions governing the sector. For

example, a number of Chinese commentators and officials reported that local officials were

submitting false statistics during the closure campaign. Some were deliberately falsified and

others were inaccurate because closed mines had subsequently been re-opened. Large

numbers of mines were continuing to operate illegally even in 2001.23

At the heart of the

weaknesses in the institutional framework for regulating Chinas TVCMs lie two

fundamental conflicts of interest: that within local government and that between lower and

higher levels of government. The key driving force behind the growth of the TVEs was the

need for township and village governments to generate funds for local investment. Local

government leaders provided vital support to TVEs in the form of preferential access to low

interest loans.24

3. Conclusion

Since 2001, coal production has increased rapidly year on year driven by the rapidly

economic growth. In 2009, the total production reached 2.96 billion tons. The dominant role

22 Philip, Andrew Speed, supra note p.91. 23 See id., p.98. 24 See id., p.94.

11

of coal in Chinas primary energy supply will not change in the foreseeable future. But, the

government has learned enough lessons on the externalities of the coal industry and

understands that market forces in themselves do not prevent or curb severe environmental

problems.25

According to the Decision on Strengthening Environmental Protection to

Implement Scientific Development Theory,26

, the environmental protection is a

fundamental policy, and governments and enterprises at all levels shall observe this policy

and manage to develop the economy while protecting the environment. In March 2008, the

Ministry of Environmental Protection of China was established, replacing the former State

Bureau of Environmental Protection. This showed the governments determination to

strengthen environmental protection. No wonder, the environmental factor will play an

important role in coal policy making in future.

In addition, the coal industry speeds up the development of clean coal technologies and use

of coal bed methane resources in order to realize sustainable development. For example, In

Xinjiang Autonomous region, two coal-to-synthetic natural gas (SNG) projects have started

construction in 2009. Each project is designed to be able to produce 6 billion cubic meters

of SNG a year. 27

NDRC has approved the second coal-to-gas project on Dec. 23, 2009.The

RMB 8.87 billion ($1.30 billion) plant is designed to produce up to of 1.6 billion cubic

meters of natural gas from coal a year. 28

However, the priority task for the central government is to improve the legal and

administrative regimes of coal industry at various levels. Until now, we cant see any

improved measures on the governing of coal industry. Without effective governing system,

its quite possible that the re-opening of TVCMs will take place. Therefore, its foreseen

that the structure reform towards consolidation will continue in order to strengthen the

governance of the coal industry.

25

Elspeth, Thomson, The Chinese Coal Industry: An Economic History (2003) p.189. 26

State Council,Guofa (2005)No.39,at http://www.zhb.gov.cn/ztbd/jd/ (Last visited on Jan 08,2010) 27

China Energy Report Weekly, Volume VIII Issue 50, (2009). 28

China Energy Report Weekly, Volume VIII Issue 44, (2009).

12

Bibliography

Primary Sources

The Coal Law of China, Decree No 75 of the President of the Peoples Republic of China,

reprinted in NPC 1996(entered into force on 1 Dec 1996)

http://www.jincao.com/fa/05/law05.39.htm (Last visited on Jan 18, 2010).

The Mine Safety Law, Decree No 65 of the President of the Peoples Republic of China,

reprinted in NPC 1992(entered into force on 1 May

1993)http://www1.www.gov.cn/banshi/2005-08/05/content_20702.htm (Last visited on Jan

18, 2010).

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Books

Crowson, Phillip., Mining Unearthed,(United Kingdom, London: Aspermont UK,2008)

Thomson, Elspeth., The Chinese Coal Industry: an Economic History, (United Kingdom,

London: RoutledgeCurzon,2003)

Speed, Andrew, Philip., Energy Policy and Regulation in the Peoples Republic of

China,( Netherlands, Hague: Kluwer Law International,2003)

Articles

Brian, Ricketts., Coal in China from a Global Perspective, in Shaping Chinas Energy

Security -The Inside Perspective(Michal Meidan (ed.), France ,Paris: Asia Centre,2007)

China Energy Report Weekly., Volume VIII, Issue 44, (Interfax information group, Beijing,

2009)

China Energy Report Weekly., Volume VIII, Issue 50, (Interfax information group, Beijing,

2009)

IEA., Cleaner Coal in China,(France, Paris: 2009), at

http://www.iea.org/publications/free_new_Desc.asp?PUBS_ID=2089, (Last visited on Jan

20, 2010), in Chinese.

Other Sources

Stevens, Paul., The Economics of Energy (U.K, Dundee University, 2009).

China Statistics Bureau., China Coal Industry Yearbook 1995, (China, Beijing: 1995), in

Chinese.

13

Appendix