Peak Coal in China?

Geoff Fattig and Hou-Ying Li

March 15, 2015

Overview

As China’s economy has boomed over the past two decades, coal consumption has skyrocketed to environmentally unsustainable levels. China currently consumes about half of the world’s supply of coal, and its net increase of 9 percent in 2010 alone was equal to Germany’s total annual coal usage.1 Coal accounts for about two-thirds of the total Chinese energy mix, and is the cause of roughly 80 percent of the country’s carbon emissions.2 This reliance on coal generated energy has helped power an economic revolution unparalleled in human history, with GDP growth averaging over 10 percent annually in the first decade of the twenty first century, and lifting an estimated 400 million Chinese out of poverty during that time.3

The environmental effects of such heavy coal use, however, have become all too apparent, with many Chinese cities suffering appalling levels of air pollution. For many years, Chinese citizens were willing to put up with the horrid air quality in return for sustained economic growth, but the situation seems to have reached a turning point. In 2012, the government succumbed to public pressure by agreeing to publish PM 2.5 readings in major cities for the first time.4 The following year, Beijing and other cities experienced an “airpocalypse” of unprecedented pollution levels. Demand for heating during the winter months led to greater dependence on the coal fired power plants responsible for roughly half of the capital’s air pollution.5 At its worst, PM 2.5 levels in Beijing reached 25 times the level considered hazardous according to US standards.6

Public outrage about the deteriorating air quality, coupled with increasing concern about climate change, finally spurred action by the central government. In September 2013, the government announced its “Action Plan for Prevention and Control of Air Pollution,” designed to reduce air pollution in several key areas across the country, with a particular emphasis on reducing the amount of coal consumption in these regions.7 This was a milestone in China’s efforts to rein in air pollution as it represented the first coordinated action by central planners to address one of the major environmental problems caused by the country’s dependence on coal-based energy supplies. The government of Xi Jinping built upon these efforts last year by

                                                                                                                         1  Li  Shuo  and  Lauri  Myllyvirta,  “The  End  of  China’s  Coal  Boom,”  Greenpeace  Fact  Sheet,  April  11,  2014    http://www.greenpeace.org/international/Global/international/briefings/climate/2014/The-­‐End-­‐of-­‐Chinas-­‐Coal-­‐Boom.pdf  2  Li  Zhidong,  “Peak  Coal  in  China,”  China’s  Energy  Crossroads,  NBR  Special  Report  #47,  November  2014,  p.  30  3  World  DataBank  website,  World  Development  Indicators.    Poverty  rate  calculated  using  $1.25-­‐per-­‐day  statistics.  4  Brian  Spegele,  “Comparing  Pollution  Data:  Beijing  vs.  US  Embassy  on  PM  2.5,”  WSJ,    January  23,  2012  http://blogs.wsj.com/chinarealtime/2012/01/23/comparing-­‐pollution-­‐data-­‐beijing-­‐vs-­‐u-­‐s-­‐embassy-­‐on-­‐pm2-­‐5/  5  Louisa  Lim,”Beijing’s  ‘Airpocalypse  Spurs  Pollution  Controls,  Public  Pressure,”  NPR,  January  14,  2013  http://www.npr.org/2013/01/14/169305324/beijings-­‐air-­‐quality-­‐reaches-­‐hazardous-­‐levels  6  Lim  7  Philip  Andrews-­‐Speed,  “China’s  Energy  Policymaking  Processes  and  Their  Consequences,“  China’s  Energy  Crossroads,  NBR  Special  Report  #47,  November  2014,  p.  10  

signing a landmark climate agreement with the United States, and recently announced a commitment to cap domestic coal consumption by 2020.8

These actions have raised hopes that the Chinese government is finally serious about addressing the country’s addiction to coal, and by extension the massive increases in carbon emissions that have been produced since the turn of the century. In the past few years, coal consumption increases have registered less than 3 percent annually after growing at more than 10 percent per annum during the first decade of the 2000s.9 More promisingly, a recent analysis by Greenpeace suggests that coal use may have actually dropped by 1-2 percent in 2014.10 This suggests that the possibility of ‘Peak Coal’ in China may be much closer than many analysts had previously assumed.11

The new pollution measures have also created domestic tensions between the central and local governments in China, as officials in charge of implementing policies at the ground level are faced with the competing priorities of ensuring economic growth while fulfilling pollution reduction mandates. The successful implementation of central government policies relies to a large degree on  the  will of local officials. Understanding the existing policy dynamics between the central and provincial governments is thus a crucial component for predicting the effectiveness of efforts to shift away from China’s coal-based economic model.

This paper will use these insights to make a projection about Peak Coal in China and what implications this has for the future Chinese energy picture. It begins by discussing why the country is so heavily dependent on the dirtiest fossil fuel and touch on some of the environmental damage that this dependency has caused. It will also provides a picture of the Chinese domestic coal market and conduct an analysis of recent measures that the central government has implemented to reduce coal’s share of the energy mix. Challenges faced in implementing these policies at the local level will then be discussed. The article concludes by offering some thoughts about how these cuts will play into the larger projections of global CO2 releases that are linked to climate change scenarios, as well as challenges faced by Chinese policymakers as they seek to limit the use of coal beyond 2020.

The Primacy of Coal in China’s Economic Development

As the most effective and easily accessible energy resource, coal has powered the engine of Chinese economic development. In 2013, coal accounted for 65.7 percent of Chinese energy consumption.12 While this is an extremely high figure compared to the United States and EU nations, where coal makes up roughly a quarter of the total energy mix, it still represents the lowest portion since 1990, when coal accounted for more than three quarters of the total energy

                                                                                                                         8  Edward  Wong,  “In  Step  to  Lower  Carbon  Emissions,  China  Will  Place  a  Limit  on  Coal  Use  in  2020,”  New  York  Times,  Nov.  20,  2014,  http://www.nytimes.com/2014/11/21/business/energy-­‐environment/china-­‐to-­‐place-­‐limit-­‐on-­‐coal-­‐use-­‐in-­‐2020.html  9  Greenpeace,  “The  End  of  China’s  Coal  Boom,”  April  2014    http://www.greenpeace.org/international/Global/international/briefings/climate/2014/The-­‐End-­‐of-­‐Chinas-­‐Coal-­‐Boom.pdf  10  Damian  Carrington,  “China’s  coal  use  falls  for  first  time  this  century,  analysis  suggests,”  The  Guardian,  October  22,  2014,  http://www.theguardian.com/environment/2014/oct/22/chinas-­‐coal-­‐use-­‐falls-­‐for-­‐first-­‐time-­‐this-­‐century-­‐analysis-­‐suggests  11  For  example,  a  2013  report  from  the  energy  consulting  firm  Wood  Mackenzie  projected  China  coal  use  would  continue  to  increase  to  7  billion  tons  by  2030.    http://www.woodmacresearch.com/cgi-­‐bin/wmprod/portal/corp/corpPressDetail.jsp?oid=11324244  12  Li  p.  39  

supply in China.13 Although the percentage has declined slightly in the past two decades, the total amount of annual coal consumption has quadrupled to over four billion tons.14 Not coincidentally, carbon emissions have increased dramatically as well, rising from just over three billion tons in 2000 to over 8.5 billion tons in 2012, with China overtaking the United States as the world’s leading carbon emitter in 2006.15

Urbanization and industrialization have been the two major factors driving China’s coal boom in recent decades. Beginning in the 1990s, an average of 15-20 million Chinese have been moving from the countryside to urban centers each year in search of jobs and a piece of the nation’s newfound prosperity. Urban residents use double or even triple the energy supply of those who remain in the rural areas, with a large portion of this demand coming in the form of electricity.16 These trends are expected to remain constant well into the future, with the new arrivals helping push China’s projected urban population to over one billion by 2030, and increasing the share of total energy used by the urban sector to 90 percent from its current level of roughly three quarters.17

One of the results of these dual trends of urbanization and industrialization has been a surge in electricity demand. Electricity plays a major role in driving coal consumption levels, drawing in just over half the amount of all coal-based energy generation.18 The graph below shows the correlation between rising electricity demand and coal consumption rates.

Throughout the first decade of the 21st century, electricity consumption closely mirrored economic growth, rising at over 10 percent annually before dropping to 5.6 percent in 2012 as a

                                                                                                                         13  US  Energy  Information  Administration  Statistics  Database  14  EIA  15  “China  overtakes  US  as  world’s  biggest  CO2  emitter”  The  Guardian,  June  19,  2007  http://www.theguardian.com/environment/2007/jun/19/china.usnews  16  Stephen  Hammer,  “China’s  Urban  Energy  Challenge,”  Cities  and  Climate  Change,  Sapiens  Vol.2  No.  3,  June  2010    http://sapiens.revues.org/958  17  Hammer,  p.2  18  EIA  China  Country  Profile  

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Source:  EIA      

result of an economic slowdown.19 Despite recent efforts by the government to increase the share of natural gas and renewables as sources of power, coal still accounts for 80 percent of all electricity generated in China.20 Given that power consumption is expected to increase nearly threefold by 2040, pushing electricity’s share of all coal-based energy to nearly 60 percent, diversifying of the sources of electricity production will be a crucial part of the government’s energy strategy in the coming years.21

China’s Domestic Coal Market

Unlike the oil sector in China, which is dominated by three state owned companies, the coal industry is a vast combination of large and small state owned enterprises, and provincial and local entities that collectively operate around 12,000 mines domestically.22 The largest of these companies, Shenhua Group, is the biggest coal producing company in the world and enjoyed a revenue stream of almost $60 billion in 2013, yet accounts for only about 10 percent of the entire Chinese market.23

China’s coal market bears special features due to variances in geographic location. On the production side, China’s major coal producing region is located in the northcentral provinces of Shanxi, Henan, and Inner Mongolia. In these areas, transportation costs account for about 40% of coal’s market price.24 The map below shows how transportation cost from the mines differs across China. This was created using average transportation cost per ton per mile of highway, railway, and waterways in order to illustrate the cost differences owning to distance.25

                                                                                                                         19  Michael  Davidson,  “China’s  Electricity  Sector  at  a  Glance:  2013,”  The  Energy  Collective,  Feb.  3,  2014  http://theenergycollective.com/michael-­‐davidson/335271/china-­‐s-­‐electricity-­‐sector-­‐glance-­‐2013  20  ChinaFAQs,  “Coal  For  Electricity”  Issue  Brief,  http://www.chinafaqs.org/issue/coal-­‐electricity  21  EIA  China  Country  Profile  22    EIA  China  Country  Profile,  http://www.eia.gov/countries/cab.cfm?fips=CH  23  Fortune  Global  500  Company  Profile,  http://fortune.com/global500/shenhua-­‐group-­‐165/  24  “Cost  Analysis  of  Coal  Industry,”  Yunnan  Logistic  Industry  Group,  accessed  Dec.  2014,  http://www.ylig.cn/showinfo.asp?id=2687  25  “National  Coal  Transportation  Situation,”  Guang  Da  Future,  accessed  March  2015,  http://www.coalstudy.com/study/zjfx/5434.html  

With the exception of the industrial heartland in northeast China (Hua Chung) most regions in the country are bearing significant transportation burdens. Due to the high cost of railway transport and a lack of water channels near the mines, transporting coal from the producing regions to major population centers in the southeast is roughly the same price as importing the resource from Australia.26 This helps to shed light on why the country actually became a net importer of coal in 2009 despite its ample mineral reserves.27

This inefficiency in transportation divides China’s provinces into two groups with conflicting interests. One group is the coal consumption provinces which have relatively small amounts of coal reserves, and are primarily located in southeast China. The other group is the coal production provinces which house most of the country’s reserves, and have economies that are highly linked to coal production and related industries. These groups often have competing interests on the question of coal policy. For example, before the Chinese government revoked the zero import tariff policy on coal, southeast coastal provinces consumed over 70% of imported coal, with the decrease in domestic demand resulting in the closure of thousands of small domestic coalmines due to increase competition.28

The cap on coal use and probability of higher energy costs will lead to economic losses in both groups of provinces, however the northern coal producing regions are far more vulnerable to a shift away from coal. Not only do these provinces hold the majority the country’s coal reserves, but there is also a significantly higher amount of coal consumption. This is because heavy

                                                                                                                         26  “Cheaper  Coal  from  Imports  than  Inland,”  China’s  News  Review,    http://hk.crntt.com/doc/1028/3/4/5/102834594.html?coluid=7&kindid=0&docid=102834594  27  Javier  Blas,  “China  Set  to  Become  Largest  Importer  of  Thermal  Coal,”  Financial  Times,  June  23,  2010  http://www.ft.com/intl/cms/s/0/43cc3c94-­‐7eec-­‐11df-­‐8398-­‐00144feabdc0.html#axzz3LVzHwKYZ  28  C  Wang  and  C  Ducruet,  “Transport  Corridors  and  Regional  Balance  in  China:  the  Case  of  Coal  Trade  and  Logistics,”  Journal  of  Transport  Geography,  2014.  

industries like steel, cement, and iron production need to be located close to the coal mines. The map below shows the disparity between coal reserves and consumption throughout China.

Heavy industries require a high volume of coal consumption; therefore, they tend to be located in the same provinces where coal production is abundant and transportation costs are cheap. This gives the coal production provinces double dependence on the coal related industries, and makes them more vulnerable to policies mandating coal reduction. On the other hand, China’s coal consumption provinces are less impacted by any measure to cap the coal use, as long as they find ways to diversify energy sources. However, the fact the Chinese economy still runs on coal means that any price increase will have negative consequence on growth. This is the dilemma for policymakers in a nutshell: how to transition away from coal without raising energy costs to unsustainable levels, while also ensuring steady and reliable supplies?

Social and Environmental Impacts of Coal Dependency

Transitioning away from dependence on coal is no longer an option, but a necessity based on the damage that this economic model has had on China’s environment and health of its population. Apart from causing the lion’s share of the country’s carbon emissions, coal combustion is also the largest source of PM2.5, accounting for nearly 20 percent of the total in the skies above Chinese cities.29 PM2.5 is a small but particularly dangerous particle that can carry a variety of toxic heavy metals, acid oxides, and micro-organisms such as bacteria and viruses. The United States embassy in Beijing began tracking PM 2.5 in 2008, and disparities between those readings and official Chinese government statistics finally forced the adoption of more transparent monitoring standards in 2012.

                                                                                                                         29  Greenpeace,  “PM2.5:  Measuring  the  human  health  and  economic  impacts  on  China’s  largest  cities”  2012    http://www.greenpeace.org/eastasia/Global/eastasia/publications/reports/climate-­‐energy/2012/Briefing%20Dangerous%20Breathing%20-­‐%20Greenpeace.pdf          

Recent PM2.5 levels in the Beijing-Tianjin-Hebei region have consistently measured two to four times above World Health Organization guidelines, and studies have noted an increase in the rate of lung cancer in these areas, in particular occurrences of adenocarcinoma, a type of lung disease linked to air pollution and secondhand smoke.30 A policy which provided free winter heating from the provision of coal to power boilers in regions north of the Huai River was linked to a five year loss in life expectancy for the roughly 500 million citizens living in those areas.31 There are also emerging studies establishing a concrete link between high levels of air pollution and heightened risks of birth defects and infant mortality.32

Apart from risks to human health, air pollution has begun to affect other sectors of the country as well. Persistent smog and haze have interrupted photosynthesis in plants by blocking natural light, and scientists have warned that this could have disastrous effects on China’s future agricultural output, with one going so far as to compare current pollution levels to a “nuclear winter.”33 This dire prediction coincides with burgeoning research on the interaction between pollution and agricultural output, with a recent MIT study finding that emission control measures could help alleviate a portion of the expected global food losses due to climate change. The study found that effective pollution controls could reduce projected crop decreases from 15 to 9 percent by limiting the exposure of plants to ozone pollution.34

Perhaps the most disturbing aspect of these studies is that the extent of the damage from burning unprecedented quantities of coal and the resultant increase in air pollution and PM2.5 levels is only beginning to come to light. The health costs to Chinese citizens will continue to rise due to prolonged exposure to hazardous pollution levels, and their demands for a cleaner environment will remain the primary driver of government policies to address the issue.

National Level Policy Responses

To their credit, Chinese leaders have begun taking serious steps to tackle the herculean challenge of reducing coal use in the economy. This has involved a multi-pronged effort ranging from increasing energy efficiency and investing in renewables to establishing carbon markets and placing strict restrictions on the use of coal in certain regions of the country. One of the first of these policies appeared in the 11th National Plan (2005-2010) with a goal of reducing energy intensity by 20 percent. This initial target level was largely achieved, with official media announcing a reduction of 19.1 percent.35 The 12th National Plan (2010-2015) followed up on this accomplishment, with a target for a further reduction of 16 percent, which plays into the larger goal of reducing carbon emissions per unit of GDP by 40-45 percent by the year 2020, compared to 2005 levels.36

                                                                                                                         30  Wang  Qingyun,  “Lung  Cancer  Cases  Linked  to  Air  Quality,”  China  Daily,  Feb.  27,  2014  http://usa.chinadaily.com.cn/china/2014-­‐02/27/content_17308056.htm  31  Yuyu  Chen,  Avraham  Ebenstein,  Michael  Greenstone,  Hongbin  Li,  “Evidence  on  the  impact  of  sustained  exposure  to  air  pollution  on  life  expectancy  from  China’s  Huai  River  policy,”  Proceedings  of  the  National  Academy  of  Sciences,  May  28,  2013  http://www.pnas.org/content/110/32/12936.abstract  32  Christina  Larson,  “Air  Pollution,  Birth  Defects,  and  the  Risk  in  China,”  Bloomberg  Business  Week,  March  28,  2013  http://www.businessweek.com/articles/2013-­‐03-­‐28/air-­‐pollution-­‐birth-­‐defects-­‐and-­‐the-­‐risk-­‐in-­‐china-­‐and-­‐beyond  33  Jonathan  Kaiman,  “China’s  toxic  air  pollution  resembles  nuclear  winter,  say  scientists”  The  Guardian,  Feb.  25,  2014  http://www.theguardian.com/world/2014/feb/25/china-­‐toxic-­‐air-­‐pollution-­‐nuclear-­‐winter-­‐scientists    34  David  L.  Chandler,  “Climate  change  and  air  pollution  will  combine  to  curb  food  supplies,”  MIT  News  Office,  July  27,  2014  http://newsoffice.mit.edu/2014/climate-­‐change-­‐air-­‐pollution-­‐will-­‐combine-­‐curb-­‐food-­‐supplies-­‐0727  35  Andrews-­‐Speed,  p.7  36  Peter  Sopher  and  Anthony  Mansell,  “China’s  Carbon  Markets:  A  Case  Study  Guide  to  Emissions  Trading,”  EDF/IETA  Briefing  Paper,  June  2013  

The effort at decreasing energy intensity seems to have had some impact in decoupling GDP growth from energy consumption over this period, as the graph below illustrates. From 2000-2005, total energy use increased by 62 percent coupled with an average GDP growth rate of 9.3 percent, whereas in the second half of the decade, average GDP growth actually increased to 10.8 percent, even though demand for energy use rose by 47 percent in that time.37 The success of this initiative was due to a combination of new investments, strict energy intensity targets for state owned enterprises and local governments, and the promotion of measures to increase sales of energy efficient appliances.38

Only recently as a result of environmental concerns has the government announced its intention to begin shifting away from manufacturing to a new era of service-oriented growth, which is viewed by some analysts as an important tool for decreasing the country’s reliance on coal and lowering carbon emissions.39 To this point, services as a portion of GDP has risen from 39 to 45 percent from 2000-2012, with a further rise to 47 percent targeted in the 12th National Plan (2010-2015).40 It is worth noting, however, that the modest service growth levels did little to stem either the amount of coal consumption, or carbon emissions during this period. As such, the effects of this shift should not be overstated.

In addition to an emphasis on reducing energy intensity, 2013 saw the Chinese government implement two important measures designed to combat carbon emissions. The first was the rollout of carbon trading markets in seven jurisdictions across the country. These markets were originally established in Beijing, Shanghai, and Tianjin in 2008, and became fully operational last year. Taken together, these seven areas account for roughly one quarter of the nation’s

                                                                                                                                                                                                                                                                                                                                                                                                       http://www.ieta.org/assets/Reports/EmissionsTradingAroundTheWorld/edf_ieta_china_case_study_september_2013.pdf  37  EIA  and  World  Bank  statistics  38  Andrews-­‐Speed,  p.7  39  Li,  p.33  40  Luke  Sussams,  “The  Great  Coal  Cap”  Carbon  Tracker  Initiative  Briefing  Paper,  Sept.  2014,  http://www.carbontracker.org/wp-­‐content/uploads/2014/09/gcp1.pdf  

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GDP, and in terms of emissions coverage, represent the second largest global trading scheme, behind only the European Union, and far ahead of anything yet developed in the United States.41

One of the key features of China’s emissions trading markets is the diversity of the regions selected. Hubei, for example, is one of the nation’s least developed and poorest provinces, whereas Guangdong is far more economically developed, with a much higher per capita income level. Market integration is also a feature of these pilot programs, with the city of Shenzhen responsible not only for its own emissions trading scheme, but also coordination with the surrounding province of Guangdong.42 These differences are important as China seeks to expand these regional trading centers into a single national market. Depending on the effectiveness of the markets, the National Development and Reform Commission (NDRC), one of the primary agencies in charge of preparing strategies to combat climate change, envisions that this integration will occur with the release of the 13th National Plan in 2015.

It should be noted, however, that these markets are still in their infancy with little in the way of results having been reported so far. Therefore, it is difficult to project how effective they will prove to be in reducing emissions. Multiple pilot programs designed to reduce pollution levels by encouraging emissions trading have proven largely unsuccessful, including a bid to regulate sulphur dioxide (SO2) levels among power plants in Jiangsu province.43 There are considerable challenges to setting up a national market, including permit allocation, the type of emissions cap – whether absolute or intensity based – along with questions of agency administration and enforcement. China also lacks effective emissions monitoring technology, which is one of the preconditions for this mechanism to work. While the government is undoubtedly committed to seeing this market implemented as quickly as possible, in the short term it is probably unrealistic to expect this policy to have a significant impact in bringing down emissions levels, due to the complexity of the challenges involved.

Along with the rollout of the emissions markets, a pollution reduction strategy was unveiled in September 2013. The goal of this policy is to improve air quality particularly in the population centers of Beijing, the Yangtze River Delta, and the Pearl River Delta. These areas collectively account for roughly half of the country’s population, 70 percent of GDP, and 52 percent of total coal usage.44 This was the first national policy designed specifically to address air pollution, with targets for reducing PM2.5 by 25, 20, and 15 percent respectively in each region by 2017.45 Other provinces were required to reduce PM 2.5 levels by 10 percent, compared with 2012 levels. This map shows the proposed cuts nationwide, as well as the seven carbon emissions trading zones.

                                                                                                                         41  Sopher  and  Mansell  42  Sopher  and  Mansell  43  Karl  Hallding  and  Guoyi  Han,  “China’s  Carbon  Emissions  Trading:  An  Experiment  to  Watch  Closely,”  Stockholm  Environmental  Institute  Policy  Brief,  2012,  http://www.sei-­‐international.org/mediamanager/documents/Publications/china-­‐cluster/SEI-­‐PB-­‐2012-­‐China-­‐carbon-­‐markets.pdf    44  Clean  Air  Alliance  of  China  Policy  Briefing,  “12th  Five  Year  Plan:  On  Air  Pollution  Prevention  and  Control  in  Key  Regions,”  English  Translation,  April  2013  http://www.epa.gov/ogc/china/air%20pollution.pdf  45  Edward  Wong,  “China’s  Plan  to  Curb  Air  Pollution  Sets  Limits  on  Coal  Use  and  Vehicles,  “  New  York  Times,  Sept.  12,  2013  http://www.nytimes.com/2013/09/13/world/asia/china-­‐releases-­‐plan-­‐to-­‐reduce-­‐air-­‐pollution.html  

While the air pollution plan represented a positive step, critics in the Chinese environmental community noted that it did little to address the underlying problem of coal consumption, placing the onus on local governments to develop their own target limits, rather than setting national standards. This led to concerns that local governments, who may tend to be more concerned with economic growth than pollution, would simply water-down the target levels. Perhaps in response to these criticisms, the government took a significant step in November 2014 with a plan to cap national coal consumption at 4.2 billion tons annually by 2020, and bring down the portion of coal in total energy use to 62 percent.46 Given that central policy directives have proven to be largely effective in changing the behavior of various actors, it is likely that these new guidelines will be met with success.47 However, there are still a number of significant challenges faced due to the complex dynamics present between central and provincial governments.

Political Obstacles to Coal Reduction

The Chinese political system ties economic performance and social stabilities to local officials’ political career. The intricacies of the system mean that the coal reduction policy will arouse only reluctant cooperation from the provincial officials. The economic impacts on these provinces will affect provincial leaders’ evaluation, local government fiscal revenue, personal incomes, and likelihood of promotion. As a result, understanding the various actors and their motivations is important for determining how effective central government efforts to reduce coal consumption are likely to be.

The central government can arbitrarily add financial obligations to provincial governments, increasing the amount of revenue they are required to send to Beijing. A recent study found that local governments now have to hand over roughly 60% of income from tax revenue and are

                                                                                                                         46  Wong  47  Andrews-­‐Speed,  p.8  

forced to fund local social welfare and education expenditures from the leftover amount.48 Officials thus try to maximize their local budgets through state owned enterprises (SOEs) which are administered at the provincial level. Unsurprisingly, SOEs in coal producing provinces tend to be concentrated in the coal industry and the heavy industries which are dependent on coal consumption. Provincial governments not only earn profits because of the operation of these state companies, but also increase their tax revenue from the resulting service industries created by the SOEs.49

Complimenting these provincial entities are central level SOEs, which are the other important stakeholder in China’s coal reduction policy. SOEs in the coal industry claim about 60% of market share, and these SOEs from time to time intervene in the regulation making process through formal and informal ways. Since SOEs at the central level occupy ministerial level status, and their position tends to favor the status quo economic model, their lobbying influence and market power are factors which can slow China’s energy reform.50

The influence of provincial officials over the decision making process is more complicated than central level SOEs. Provincial leaders may exert informal influence through faction politics. To this point, over 78% of Chinese politburo members have served as provincial leaders, while 68% of the current provincial leaders are former assistants or secretaries to the provincial leaders.51 These personal relations inherent to the party system are at the center of reconciling different interests, so that a balance of gains and losses among the competing factions can be reached. This helps explain why central government planning has usually proven to be effective in China’s political structure.

In addition to settling the personal agendas of government officials, bridging the divide between the net coal producing and consuming provinces will be critical in the drive by the Chinese government to implement proactive its reduction policies. The root of the conflicts lies in the economic impact from different reduction plans. In an effort to address this problem, pricing the externality of carbon emission may be one of the solutions, and this has been at the root of China’s decision to create emissions trading zones. These zones have the potential to compensate the coal reduction policy’s damage to local economies by allowing transactions to occur. However, as discussed previously, the government faces many challenges for developing a well regulated and functioning emissions market.

Short Term Projections in Energy and Emissions

The recent pronouncements on coal usage show how quickly projections can change, and how difficult it can be to make accurate predictions about future energy trends. The following graph illustrates four different scenarios for Chinese coal consumption that were produced in the past two years. They vary widely in their estimates of coal usage in 2020, with a top range of 4.76 billion tons from the China National Association, to a study earlier this year from the Planning

                                                                                                                         48  Fubing  Su  et  al.,  “Local  Official’s  Incentives  and  China’s  Economic  Growth:  Tournament  Thesis  Reexamined  and  Alternative  Explanatory  Framework,”  China  &  World  Economy,  Vol.  20,  No.  4,  2012,  p.  12.    49  Ibid.  50  Joachim  Betz,  “The  Reform  of  China’s  Energy  Policy,”  GIGA  working  papers,  Feb.  2013,  p.  10.  51  Cheng  Li,  “China’s  Midterm  Jockeying:  Gearing  up  for  2013  (Part1:  Provincial  Chiefs),”  China  Leadership  Monitor,  Winter  2010.  

and Design Research Institute of Coal Industry which pegged consumption at slightly under the 4.2 billion ton announced cap.52

Such a range of estimates show the inherent difficulty of projecting future trends, but with a coal cap is firmly in place, it is possible to draw some possible conclusions about the Chinese energy picture in the coming decades, and the resulting impacts on carbon emissions. Over the past decade, coal and carbon emissions have been inextricably linked, rising in tandem with even a brief levelling in the aftermath of the 2008 financial crisis, before resuming their steady increase. This can be clearly seen in the following chart.

                                                                                                                         52  Li  p.  36  

2020  coal  cap    

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2012  2013  2014  2015  2016  2017  2018  2019  2020  

Coal  usage  (b

illion  tons)  

Year  

Coal  Consump4on  Projec4ons    

IEA  -­‐  New  Policies  Scenario  

China  Natl.  Coal  Assocaion  

BP  World  Outlook  2030  

PDRI  -­‐  Coal  Industry  

Yet, in the landmark climate agreement that was signed with the United States in November 2014, China did not forecast a peak in total emissions until 2030. As the coal consumption limits were announced a mere week after the climate deal, this reflects the fact that Chinese policymakers clearly expect emissions will continue to rise for a period of time even after the use of coal stabilizes. This suggests that coal use is likely to remain relatively constant after the cap is reached, rather than begin to seriously decline. At the same time, it means that after 2020, the country will need to meet future energy demand increases primarily by using sources other than coal.

This begs the question as to where these alternative sources of energy will come from. Total energy consumption is slated to rise 50 percent from its 2010 level to roughly 150 quadrillion BTU by 2020, with a further increase to 200 quadrillion BTU by 2030.53 In order to meet this demand while also sticking to its commitment targets, it is estimated that China will need to have at least 20 percent of its energy consumption come from zero-emissions sources.54 This will require bringing online new capacity equivalent to the total amount of coal-fired power plants in the country today, an incredibly ambitious undertaking, and all the more staggering considering that in 2012, China had plans to construct an additional 360 coal-fired plants, or a 75 percent increase on current capacity.55

To meet reach this target in renewables, the Chinese government has been investing heavily, spending almost $89 billion in the renewables sector alone in 2014.56 For comparison, this figure is more than Europe combined, and nearly double what the United States invested in renewable energy last year. This accounts for spending across the hydro, wind, solar, and nuclear power industries. China currently leads the world in installed wind power capacity,                                                                                                                          53  Adam  Siemenski,  “International  Energy  Outlook  2013”  US  Energy  Administration,  July  25,  2013  http://www.eia.gov/pressroom/presentations/sieminski_07252013.pdf  54  White  House  Fact  Sheet  on  US-­‐China  Joint  Climate  Change  Agreement,  Nov.11  2014,  http://www.whitehouse.gov/the-­‐press-­‐office/2014/11/11/fact-­‐sheet-­‐us-­‐china-­‐joint-­‐announcement-­‐climate-­‐change-­‐and-­‐clean-­‐energy-­‐c  55  Damian  Carrington,  “More  than  1,000  new  coal  plants  planned  worldwide,”  The  Guardian,  Nov.  20,  2012  http://www.theguardian.com/environment/2012/nov/20/coal-­‐plants-­‐world-­‐resources-­‐institute  56  Bloomberg  New  Energy  Finance  and  Business  Council  for  Sustainable  Energy,  “Sustainable  Energy  in  America:  2015  Factbook,”  http://www.bcse.org/images/2015%20Sustainable%20Energy%20in%20America%20Factbook.pdf    

0.00  1.00  2.00  3.00  4.00  5.00  6.00  7.00  8.00  9.00  10.00  

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2009  

2010  

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CO2  Em

ission

s    

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sump4

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Coal  consumpion  (billion  tons)  CO2  Emissions  (kt  -­‐  millions)  

Sources:  EIA  and  World  Bank  StaSsScs    

although difficulties in grid connection mean that it is estimated to receive 30-40% less energy from its turbines than the US, and the country actually lags behind in terms of overall production.57 Solar power installation has also risen dramatically, as country has revised targets to produce 70GW of solar power by 2017, after having received almost no energy from this source in 2010.58 This effort has not been without problems, however, as an emphasis on solar production has led to a supply glut of Chinese made PV panels, resulting in bankruptcies of many domestic companies, and a long-running trade dispute over dumping of those panels in the American market.

New supplies of cleaner burning natural gas are expected to make up some of the difference as well, and the country has rapidly increased the consumption of this resource. In the past five years, natural gas has nearly doubled as a share of the total energy mix, going from 4 to 7 percent as China has begun to receive imports of the fuel via newly constructed pipelines in Central Asia and Myanmar.59 These imports make up nearly a quarter of the total natural gas supply today, a dramatic increase from 2006, when the country was essentially self-sufficient.60 With the goal of increasing the share of gas to 10 percent by 2020, China has also entered into recent agreements to build pipelines with Russia, actions that will eventually drive imports to almost half of the total consumption.61 Domestically, the Chinese government's own efforts to develop its vast shale gas resources have fizzled, with geographic difficulties and technological shortcomings leading to 2020 production targets being cut in half by the country’s National Energy Administration.62

In the short term, the culmination of these actions will have relatively little effect on the country’s carbon emissions if coal use continues to increase at a relatively constant rate until the cap in 2020. Indeed, even though the percentage of coal may decline in proportion to the total fuel use, net consumption with continue to increase, albeit at a much slower rate than in the previous decade. Emissions from natural gas will also rise as that fuel begins to play a larger role in the energy mix.

Global Implications

The expected status of China’s carbon emissions is a major issue as it relates to the global debate over climate change. Scientists have warned that the international community will need to peak carbon emissions by 2020 and start seeing noticeable declines soon after in order to avert a temperature rise of over 2 degrees Celsius.63 Given the role of Chinese coal as the primary driver of emissions in this century, there is really no hope of avoiding this eventuality without a substantial and sustained effort to make a decisive shift away from the existing energy paradigm.

                                                                                                                         57  American  Wind  Energy  Association,  “US  Is  World’s  Largest  Wind  Energy  Producer,”  Nov.  11,  2014  58  Bloomberg  News,  “China  Targets  70  GW  of  Solar  to  Cut  Coal  Reliance,”  May  16,  2014,  achttp://www.bloomberg.com/news/articles/2014-­‐05-­‐16/china-­‐targets-­‐70-­‐gigawatts-­‐of-­‐solar-­‐power-­‐to-­‐cut-­‐coal-­‐reliance.  Accessed  March  10,  2015  59  Mikkal  E.  Herberg,  “China’s  Search  For  Oil  and  Gas  Security:  Prospects  and  Implications,”  China’s  Energy  Crossroads,  NBR  Special  Report  #47,  November  2014,  p.  30  60  Jeannette  Lee,  “China  and  India  hope  higher  prices  will  spur  gas  production,”  Office  of  the  Federal  Coordinator,  Aug.  21,  2013  http://www.arcticgas.gov/china-­‐and-­‐india-­‐hope-­‐higher-­‐prices-­‐will-­‐spur-­‐gas-­‐production  61  Herberg,  p.20  62  Christina  Larson,  “China’s  Huge  Shale  Gas  Hopes  Crash  Into  Mountainous  Reality,  “  Bloomberg  Business,  August  8,  2014    http://www.bloomberg.com/bw/articles/2014-­‐08-­‐08/chinas-­‐shale-­‐gas-­‐production-­‐target-­‐cut-­‐in-­‐half-­‐by-­‐top-­‐official  63  Carrington  

The climate agreement with the United States represents a modest but hopeful starting point. China’s emissions were largely expected to peak around 2030 even before the pact was announced, and so in that sense, it probably represents a baseline of what policymakers feel can be achieved.64 However, the moves undertaken by the central government are genuine, and if those can lead to a peaking of coal before 2020, it would be a huge boost to efforts to rein in global emissions. Negotiations in Lima recently concluded with the outline of a deal to be implemented at the United Nations Climate Change Conference in Paris later this year, although many of the details are still to be decided. Given the rancor and lack of consensus that have typified past climate conferences, it is easy to be cynical about the prospects for a meaningful agreement emerging, so any developments that create a positive atmosphere and momentum in advance of Paris would be most welcome. While this remains an unlikely possibility, evidence that Chinese emissions could peak sooner than expected would be game changing in terms of its impact on global emissions scenarios.

Questions Beyond 2020

These uncertainties are just two of the issues facing Chinese policymakers as they attempt to diversify away from coal in the years ahead. At the same time, demand for energy will continue to grow steadily as the economy keeps up growth rates projected to be in excess of 7 percent per annum. While industry projections which had coal consumption peaking at 7 billion tons annually now 2030 seem wildly inflated,65 what happens if some of these alternative fuel sources do not come online as quickly as the government had hoped? In that case, could there be a reversion back to the old standby fuel source? Could an increase in the 2020 cap be a possibility? These are important questions, and underscore the fact coal will likely remain the country’s predominant source of energy, and continue to account for the majority of fuel use far into the future.

Conclusion

China’s coal boom has fueled both the country’s industrialization and unprecedented levels of CO2 emissions over the past two decades. The resultant environmental damage, particularly in the form of air pollution but also concerns over climate change, has led the Chinese government to take a variety of commendable, aggressive measures aimed at curbing the country’s coal addiction. These are credible actions which will likely have a considerable impact in the long run despite the various internal obstacles to implementing coal reduction policies. Indeed, there are already signs that the cumulative effects of these policies are paying off, as evidenced by the decline in coal consumption this year. Their recent actions in the international arena on this issue are also to be applauded.

At the same time, however, it is important not to minimize the magnitude of the challenge at hand. Coal is not going away as the dominant fuel in the economy, and some of the moves the government has tried, for example establishing a carbon market, will likely not begin to show results for the next 5-10 years, making their impact uncertain. Given that 2020 is when emissions need to start falling under the IEA 450 scenario to avert a potentially catastrophic rise in world temperature, these efforts alone will probably not be sufficient, despite the seriousness of their intentions. This suggests that climate negotiators should adjust their goals at the Paris Conference in order to reflect this new reality.                                                                                                                          64  Jonathan  Kaiman,  “China’s  emissions  expected  to  rise  until  2030  despite  ambitious  green  policies,”  The  Guardian,  Nov.  20,  2012  http://www.theguardian.com/environment/2012/nov/26/china-­‐emissions-­‐rise-­‐green-­‐policies  65  Wood-­‐Mackenize  Press  Release,  “China  Thermal  Coal  Demand  Will  Reach  Nearly  7bn  tpa  by  2030”,  http://www.woodmacresearch.com/cgi-­‐bin/wmprod/portal/corp/corpPressDetail.jsp?oid=11324244  

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