Is China’s coal addiction getting in the way of its climate change goals?

Chinese policymakers face difficult decisions as recent events have shown the country will still depend on coal despite its lofty climate pledges
There is still much to be done, but the substantial progress in the shift to renewable energy offers hope

David Chao

Published: 9:15am, 20 Dec 2021

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China reported an eye-catching 12.9 per cent year-on-rise rise in its producer price index last month as the country struggled with supply-side constraints such as electricity and semiconductor shortages. Producer prices rose 60.5 per cent year on year for the mining industry and 43.8 per cent in the energy sector, creating near-term headwinds for the world’s second-largest economy to get back on track.

Beijing policymakers have ordered domestic miners to produce more coal and relaxed a year-long ban on Australian coal imports to help alleviate some of the supply-side cost pressures. In October, China imported 2.78 million tonnes of Australian coal.

Meanwhile, at the UN climate change conference in Glasgow, 197 countries concluded an agreement to limit greenhouse emissions. Even though Beijing did not offer any new pledges, the country remains committed to cut down its coal reliance to achieve its 2030 peak carbon emissions target.

Therein lies the dilemma. Can China still grow at a reasonable rate while relying less on coal to power its factories and businesses?

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During this year’s UN General Assembly, Beijing pledged to end financing for new coal power plants overseas but stopped short of including domestic plants. It is clear China will still rely disproportionately on coal to meet its own energy needs in the next few years.

Coal-fired power still accounts for about 60 per cent of China’s electricity generation, and many rural areas rely on coal as their only source of power. In the first half of 2021, 43 new domestic coal-fired power plants and 18 blast furnace projects were approved by Chinese authorities. When built, these would add 150 million tonnes of carbon dioxide emissions when constructed.

China accounts for around 30 per cent of the world’s carbon emissions. Not only is China the largest emitter by far, which is not surprising since it has the world’s largest population, last year it also had one of the highest figures of major economies for carbon intensity per unit of GDP, at 0.42, almost double the level of India and the United States.

China’s carbon intensive economy reflects its role as the factory of the world. Domestic manufacturing and industrial production have propelled the world’s second-largest economy forward during the pandemic.

That said, China’s carbon intensity is steadily declining. This could reflect its long-term goal to shift away from heavy manufacturing towards services and household consumption, which should reduce the intensity level in the future.

Among Group of 20 countries, China was in the middle of the pack in per capita carbon emissions in 2020. Its per capita emissions are still rising, though, and this must be reversed if the country is to reach its goal of net-zero emissions by 2060.

Still, the government is taking action to improve the situation. Since 2006, policymakers have implemented a “dual control” policy that reduces overall energy intensity and promotes energy consumption by allocating annual energy quotas and targets to each province.

The dual control policy, coupled with the corresponding decrease in coal mining investments over the years, created a perfect storm for coal shortages in the autumn.

Chinese utility companies wound down their coal inventories in the hope that soaring commodity prices would only be temporary, only to be squeezed when prices continued to remain high, contributing to the worst power shortages in China for more than a decade.

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The crisis forced Beijing to quickly revise coal usage guidelines and encourage greater supply production. Meanwhile, the National Development and Reform Commission instituted measures to start liberalising electricity prices.

The recent energy crisis has brought into focus the intricate balance the government must make between growing the economy and reducing carbon emissions. At first, it might seem premature to even think about passing the energy baton from coal to renewable alternatives.

Still, China has made substantial progress in the shift towards renewable sources of energy. There are positive signs renewables are contributing more meaningfully to the country’s overall energy market.

There is little doubt that China is one of the global leaders in renewable energy supply. Half of the world’s new renewable power supply in 2020 came from China, with the country adding 72 gigawatts of wind power and 49 gigawatts of solar. China doubled its construction of new wind and solar power plants in 2020 from a year earlier.

The share of renewables in China’s total energy consumption rose from around 7 per cent in 2010 to about 15 per cent in 2019. Additionally, market-based approaches to the issue are being implemented. The People’s Bank of China recently unveiled low-interest loans to help support firms working on China’s energy transition.

Electricity workers patrol a solar and wind power generation project installed above a fishery in Sheyanghu, Jiangsu province, on November 3. Photo: Xinhua

According to estimates by the Institute of Climate Change and Sustainable Development at Tsinghua University, a scenario where global temperatures are kept within 1.5 degrees Celsius by 2050 as per the Paris climate agreement would require non-fossil fuels to account for 90 per cent of electricity production in 30 years.

It is feasible to think that the transition away from coal could materialise in time for China’s 2060 carbon neutrality commitment, as long there are continuing energy conservation efforts and developments in renewable energy technologies such as carbon capture and storage.

China’s goal to rely less on coal to reach its carbon emissions targets is ambitious. How quickly the country reaches this goal is still up in the air, though the road to achieving these targets through promoting alternative energies already appears to have been paved.

David Chao is Invesco’s global market strategist for Asia-Pacific.

David Dodwell is away