China’s COP Cop Out On Coal

CHINA HAS EMERGED from the COP26 climate summit in Glasgow relatively unscathed, given that it is the world’s top emitter of CO2.

As one of the world’s top two oil producers and exporters, Saudi Arabia took the early heat in Glasgow from activists pushing for an end to the use of fossil fuels. As attention swung to coal, the most polluting of fossil fuels and on which China remains heavily dependent for power generation, India, not China, was most prominent in watering down COP26’s final agreement.

At the last minute, the wording was changed from ‘phasing out’ the use of coal to ‘phasing down’, the same formulation that had appeared in the China-US climate dialogue agreement that the head of the Chinese delegation Xie Zhenhua and his US counterpart John Kerry had forged three days earlier.

Although Delhi put forward the revised wording to the final agreement, Beijing had been instrumental behind the scenes in getting the language changed, reportedly threatening to torpedo the final agreement if it was not. Washington lent its support by not offering any opposition.

Alok Sharma, the Conservative UK politician chairing COP26, offered an emotional apology subsequently, saying he was ashamed by the last-minute change and that China and India would have to justify themselves to the countries most vulnerable to climate change.

The glass-half-full view is that this is the first of the 26 rounds of COP meetings to make any formal commitment on coal. The half-empty view is that the compromise over phasing out its use belies the scale and urgency of the task.

Fatih Birol, executive director of the International Energy Agency, says that to reach the goal of limiting global heating to 1.5C, more than 40% of the world’s existing 8,500 coal plants would have to close by 2030 and no new ones built.

Last year, China commissioned more coal capacity than the rest of the world retired, according to a study by Global Energy Monitor. This US-based pro-green energy group that tracks fossil fuels says China commissioned 38.4 gigawatts (GW) of new coal plants in 2020, accounting for 76% of the global 50.3 GW new coal capacity and offsetting the 37.8 GW of coal capacity retired last year.

Facing disruptive energy shortages, China hit a new record for daily coal production during COP26. With the sixth plenum coinciding with the second week of COP26, it was inevitable that domestic concerns would be foremost for China’s delegation in Glasgow.

China Lays Out Ambitious Vault To Net-Zero Carbon Economy

CHINA’S PATH TO ‘peak carbon’ by 2030 and becoming a net-zero carbon economy by 2060 is dubbed 1+N — one overarching blueprint and n number of implementing policies. On October 24, we got the ‘1’ in the form of a guidance document jointly released by the Party’s Central Committee and the State Council.

All future policy decisions on economic planning, macroeconomic adjustment and industrial policies will have to be compatible with the blueprint, which contains objectives and timelines for broad areas of the economy, including heavy industry, energy, transport, construction and finance.

The headline objective is raising non-fossil fuels share of energy consumption to at least 80% by 2060, a fivefold increase from 2020’s level, with a timeline for non-fossil fuels to hit a 20% share by 2025 and 25% by 2030. Both interim targets have been previously announced, but not the 2060 one.

Even before the current electricity shortages, coal accounted for approaching 60% of energy consumption, so scaling that back will be a dramatic change, and one being undertaken slowly.

Over the past five years, non-fossil fuels have been increasing their share of energy consumption by barely half a percentage point a year. That will need to be accelerated to triple that rate if the goal of creating a ‘green, low-carbon and circular economic system’ is to be met.

That is not only a question of increasing non-fossil fuel energy generation. It also means structural changes to industry and consumption to make the economy less energy-intensive. To have any hope of achieving its goals, Beijing will have to oversee the world’s largest reduction in carbon intensity.

As well as the coal, oil, and gas industries, chemical and petrochemical producers and steel makers can expect close attention from authorities regarding their energy efficiency.

The risks to economic growth inherent in a full-blown green transition are recognised. He Lifeng, head of the National Development and Reform Commission (NDRC), the top economic planning agency, says carbon reduction must be balanced with ensuring the security of industrial output and supply chains and, in what appears to be a nod to recent power outages, disruption to ‘people’s everyday lives’.

A leading group was established under the NDRC in May to guide and coordinate the transition. Yet, much of the implementation will depend on provincial and municipal authorities, and provinces will get some latitude over timing depending on the industrial structures.

However, local officials are on notice that their performance will be judged on their success in meeting their carbon reduction targets. Those who fall short can expect the same criticisms that came the way of officials who failed to meet economic growth targets when they were the benchmark. Officials will, no doubt, get as creative over emissions reductions accounting as they were with growth.

The guidance promises financial carrots as well as administrative sticks. Beijing is considering creating a national fund to promote the transition to a low carbon economy. That would likely support the development of carbon sinks, carbon capture and storage, and other carbon removal mechanisms.

An expansion of the national carbon trading market is all but inevitable. Supportive central banking (e.g., incorporating green credit into macroprudential assessment) and development of the green finance sector are also mentioned in the guidance.

So, too, is the encouragement of private investment in low-carbon industries. Banks and other financial institutions will be guided to provide long-term, low-cost funds for green and low-carbon projects. Policy banks will play a core role in underpinning long-term stable financing to support the green transition, which will not fail for lack of a plan.

This Bystander expects further details to emerge during the COP26 climate summit in Glasgow that starts at the end of this week.

Power Cuts Highlight China’s Decarbonisation Challenge

REPEATED POWER BLACKOUTS are a sign of misfiring economic management that does not reflect well on governments. Electricity shortages have hit many regions of China over the past month, affecting manufacturing, traffic and street lighting, and homes, often without warning. Sixteen out of 31 provinces have begun rationing electricity, and the northeast faces the prospect of power cuts running through the winter.

The power shortages are the consequence of a combination of contradictory policies: moves to improve energy efficiency and cut consumption in support of carbon reduction goals, and fitful reform of the largely coal-fired power generation sector where long-standing subsidies and price controls cannot withstand the rise in global coal prices, leaving power plants short on fuel.

Provinces’ implementation of obligatory emission-reduction targets imposed on them by central government has been haphazard, varying from draconian to lax. In addition, the 3% reduction target for energy intensity for 2021 has also got ahead of the planning process.

The 14th five-year plan (2021-25) mandates targets for improving energy intensity (energy consumption per unit of GDP) and reducing CO2 emissions per unit of GDP. There is also a binding minimum target for the domestic energy supply from all sources of 4.6 billion tonnes of standard coal equivalent (versus 4.86 billion in 2019), but no caps on carbon emissions and coal consumption, and only an aspirational goal to increase the share of non-fossil-fuels in total energy consumption.

The 14th Five-Year Plan for Energy, likely to be published around or after the COP26 summit in Scotland in November, will provide provincial and municipal governments with a more detailed road map. However, that will cover the years through to 2025 and not show the full path to the 2060 net carbon neutrality target date. However, until they have that road map, Chinese and foreign firms operating in China will delay drawing up the emissions reduction strategies that are likely to be required.

The current energy intensity target has also run headlong into China’s infrastructure-investment pandemic stimulus and export- and industry-driven recovery. Factories have put filling orders now, with the consequent surge in demand for power, ahead of improving their energy efficiency.

Last year, primary energy consumption rose 2.1%, coal consumption 0.6% and carbon emissions 0.3%, whereas energy consumption and emissions declined in almost every other economy. The trends have accelerated into 2021.

Beijing is now having to arrange emergency coal supplies for fuel-short provinces and marshall the distribution grid for inter-provincial power-sharing.

The power situation illustrates the costs Beijing will have to shoulder politically and economically if President Xi Jinping’s decarbonisation goals are to be met, and more generally in structurally changing the economy for the next phase of economic development.

Achieving both will mean slower growth, which will have political as well as economic management dimensions. All but the wealthiest provinces are still industrialising, reliant on energy-intensive infrastructure and industries for growth and jobs, and remain fossil-fuel dependent. Xi has also set a goal of doubling the economy over the next quarter-century, implying 4% annual growth.

Yet even with modest growth rates reducing energy demand, technological advances in energy efficiency and the fledgling national carbon trading market taking wing, it will still require rigorous enforcement of central government policies to change the country’s energy mix to lessen its dependence on fossil fuels. As the efforts to impose energy intensity standards are now showing, provincial and local officials will readily foot drag or worse in implementing Beijing’s policies when it is in their interests to do so.

As with many aspects of rebalancing, the tight networking of local officials and local industries provides inherent resistance to policy direction from the centre. This is exacerbated by many of the major players in energy, including the oil companies, major power generators, the two grid companies and industrial consumers such as steel and cement manufacturers, are state-owned enterprises with size and political influence, especially at the local level.

China is far from alone in having to deal with the conflicting tensions between climate mitigation measures and jobs and economic growth. Beijing has prioritised the former of late, but continuing to do will require sufficient political will at high enough levels of the leadership. That will continue to exist until it does not because the political calculations have changed.

China Will End Coal-Fired Power Plants Abroad If Not Yet At Home

CHINA WILL STOP funding the construction of overseas coal-fired power stations under the Belt and Road Initiative, President Xi Jinping told the UN General Assembly meeting in New York via a video link.

The decision will be taken as a welcome, if somewhat symbolic, boost to global control of greenhouse gas emissions, with the next round of COP climate discussions due to take place in Scotland in November.

However, Xi was light on details of how the policy change would be implemented; his announcement amounted to a single sentence in his speech. It appears that China has not funded any coal-fired power stations abroad so far this year, although it has accounted for the majority of new coal projects around the world in recent years.

The bigger switch for China, the world’s largest emitter of greenhouse gases, would be to wean itself off its dependency on coal for domestic power generation.

Half the coal burned in the world is burned in China, and in the first half of this year, authorities approved the construction of 24 new coal-fired domestic power plants, according to Greenpeace, although that is a fall of 80% from the same period last year.

Many of these plants will have a lifespan of 40 to 50 years. That will make meeting Xi’s other climate commitments made last year at the UN, including China achieving peak emissions before 2030 and then transitioning to carbon neutrality by 2060, challenging to achieve.

China Will Rebalance The World’s Energy

ACROSS THE MORE heavily industrialised provinces, factories and plants are being ordered to shut down or limit production during the winter months. This is both to curtail excess industrial production and also to curb seasonal smog, a byproduct of China being the world’s largest consumer of coal, which provides 65% of its energy.

The newly published annual outlook from the International Energy Agency (IEA) brings a glimmer of a silver lining to that particular dark cloud. China, it says, will remain a ‘towering presence’ in coal markets, but it believes coal use peaked in 2013 and is set to decline by almost 15% over the period to 2040.

China burnt 2.75 billion tonnes of coal in 2013, more than the rest of the world put together.

It is no secret that Beijing sees pollution as a potential political problem and that it is keen for China to go green. Lian Weiliang, deputy head of the National Development and Reform Commission, said earlier this week that the country was ahead of pace in its goal to cut coal capacity by 500 million tonnes within three to five years of 2016, while the Ministry of Industry and Information Technology forecast that environmental protection equipment manufacturing would be a 1 trillion-yuan ($150 billion) industry by 2020.

The new era will be about energy policy where the focus is on electricity, natural gas and cleaner, high-efficiency and digital technologies, not an energy system dominated by coal and a legacy of serious environmental problems, giving rise to almost 2 million premature deaths each year from poor air quality.

The switch will also flow from rebalancing the economy from a development model based on heavy industry, infrastructure development and the export of manufactured goods to one driven by higher-value-added manufacturing, services and domestic consumption.

Signs of the new era are there to be seen. Energy demand growth slowed markedly from an average of 8% per year from 2000 to 2012 to less than 2% per year since 2012. Official plans call for it to slow further to an average of 1% per year to 2040.

Energy efficiency regulation is a large part of the explanation. Without new efficiency measures, the IEA reckons, end-use consumption in 2040 would be 40% higher.

Nonetheless, such is the compounding effect of economic growth that by 2040, per-capita energy consumption in China will exceed that of the European Union and electricity demand for cooling alone in China will exceed the total electricity demand of Japan today.

The IEA reckons that China will need to add the equivalent of today’s United States power system to its electricity infrastructure to meet the demand expected by 2040. Such will be the scale of China’s clean energy deployment, technology exports and outward investment that it will play a huge role in determining global energy trends and in particular provide the momentum behind the low-carbon transition.

“When China changes, everything changes”, as the IEA says.

The agency lays out the future thus:

One-third of the world’s new wind power and solar PV is installed in China … and China also accounts for more than 40% of global investment in electric vehicles. China provides a quarter of the projected rise in global gas demand and its projected imports of 280 billion cubic metres in 2040 are second only to those of the European Union, making China a lynchpin of global gas trade. China overtakes the United States as the largest oil consumer around 2030, and its net imports reach 13 million barrels per day in 2040. But stringent fuel-efficiency measures for cars and trucks, and a shift which sees one-in-four cars being electric by 2040, means that China is no longer the main driving force behind global oil use – demand growth is larger in India post-2025.

China will also continue to lead a gradual rise in nuclear output, overtaking the United States by 2030 to become the largest producer of nuclear-based electricity.

The shift to a more services-oriented economy and a cleaner energy mix will take a decade to have its effects on the skies above. The IEA projects carbon dioxide emissions will plateau at only slightly above current level by 2030 before starting to fall back.

Jobs’ Challenge To Slowing Growth

THE ECONOMY CONTINUES along its glide path to slower growth. Last year’s GDP growth target of ‘about 7%’ has been replaced by 6.5%-7% for this year. Announcing this to the National People’s Congress (NPC), Prime Minister Li Keqiang warned that the rebalancing of the economy towards consumption-driven growth faced challenges and tough times ahead.

One of those will be keeping unemployment ‘within 4%’ – of a workforce of more than 800 million that has been adding 12 million jobs a year for the past five years and faces an unusually high number of 15 million new graduates joining the workforce this year.  A detailed reading of the 13th Five-Year Plan, the economic development blueprint to 2020 due to be approved by the NPC, will provide some insight into how that will be done.

The official unemployment rate was 4.05% in the second half of last year.

Like any economy deindustrialising, China has to bear a heavy burden of workers left without jobs or the skills to get new ones. At least 3 million jobs, or 30% of the workforce, could go from heavy industry as a result of cutting surplus production capacity. The bulk of those redundancies will fall on the coal and steel industry. Human resources minister Yin Weimin says that 1.8 million jobs in those industries, an estimated 10-15% of the workforce, are at risk.

With that comes the possibility of social unrest and thus a threat to Party rule based on the premise of delivering ever higher living standards. The number of strikes and protests by workers, at more than 2,700 last year, was more than double 2014’s number, according to the China Labour Bulletin, a Hong Kong-based civic group.

The response has been carrot and stick — a crackdown on labour activists and non-governmental organization to snuff out any political nexus forming and financial measures such as the 100 billion yuan ($15.3 billion)  to be given to local authorities ‘solve the problem of worker placement’ under the umbrella an industrial enterprise restructuring fund.

The stick, though its use is well practiced, is not without hazard. Overzealous suppression of labour unrest could cause the Party itself to become a target of worker anger, and especially in provinces such as Guangdong, where local officials have traditionally held a relatively tolerant attitude towards labour relations but where several labour activists were arrested in January and put on trial as ‘foreign subversives’.

The only officially sanctioned trade union, the All-China Federation of Trade Unions (ACFTU), has recently reformed itself to stress its role as an instrument of Party and government and to straighten its top-down control over its local unions. This could have the unintended consequence of turning disgruntled workers more towards unofficial channels.

So far, though, labour disputes are overwhelmingly economic, not political, and a Party leadership that puts a premium on maintaining stability will want to keep it that way.

There are risks in the carrot, too. Local governments already have a debt time bomb ticking quietly under them. For all the help they will get from Beijing, they will face immense fiscal pressure as growth slows to pay for dealing with shuttered mines and mills and factories and workers demanding unpaid wages (a chronic problem, particularly in the construction industry), redundancy pay and social security.

The pressures will be particularly acute in those areas where heavy industry is concentrated, notably the rust-belt of the northeast, in the export factories in the Pearl River delta, and where the reforms of state-owned enterprises bite hardest, particularly the proposed rationalization of ‘zombie’ companies hitherto kept afloat by local governments seeking to avoid job losses.

If more and more workers see the Party failing to look after their interests, the overarching risk is that their acceptance of the social compact that underpins the Party’ monopoly on political power will erode, which is what the Party is most set on avoiding.

This Bystander recalls a far more drastic set of state-sector reforms and sharply decelerating growth in the late 1990s.  If there is a ray of hope for the top leadership, it is that the Party got through that when it had fewer carrots and less sophisticated capabilities with its sticks.

Slow Burning Coal

Changes in electricity consumption are a rough and ready proxy for GDP growth. In the first five months of this year, China’s electricity consumption grew by 5.8%. In the same period last year, it grew by 12%. To this Bystander that feels like a better measure of the extent of the current slowdown than the official GDP numbers.

One other irregular but related measure of economic activity is how much coal is stacked up at the docks. China generates more than two-thirds of its electricity from coal. There is a lot of it right now. Coal stockpiles at China’s largest coal port, Qinhuangdao, reached 8.8 million tonnes earlier this month, up from 7.8 million tonnes at the end of last month and approaching record high of 9.2. million tonnes in November 2008 during the depths of the global financial crisis. Typically, stocks are in the 6 million-7 million tonnes range.

It is a similar story at Hebei’s other coal ports, Huanghua and Tangshan, and at Guangzhou and Fangcheng in the south. In all there are around 20 million tonnes of coal with nowhere to go. The six large power generators in eastern and southern China now have enough coal stockpiled for more than a month’s generation.

China Forces More Coal Industry Consolidation

China is to give a big push to the consolidation of its dirty, deadly and inefficient coal mining industry. For some years thousands of small, dangerous and outdated mines have been closed down. It is these that have mainly been responsible for the industry’s appalling safety record. In the latest such mine accident, five miners were killed and 17 trapped underground on Thursday after a gas explosion ripped through the Dahuang No. 2 Coal Mine, a seemingly illegally operating mine in Liaoyang City in Liaoning.

The explosion happened the same day that the new five-year plan for the coal industry was released by the National Energy Administration. This says that by 2015, 10 large coal mining companies (100 million tonnes annual capacity) and 10 medium-size ones (50 million tonnes annual capacity) will be responsible for 60% of the coal output in the world’s largest producer and consumer of coal. These companies will be created by merger and acquisition. Overall, the country’s 10,000 coal companies will be reduced in number to no more than 4,000.

Apart from improving the industry’s safety record–China’s largest coal mining companies now have safety records to compare with the best in the world–the closures and consolidation support the official drive to reduce greenhouse gas emissions by cutting the mining and use of China’s highly polluting brown coal and lignite, and to preserve fast disappearing agricultural land which mining operations make unsuitable for farming. Production is to be capped at 3.9 billion tonnes a year by 2015. That is about what the country mined last year.

Increased imports, particularly from Chinese-owned mines overseas, will make up the shortfall in demand, which is forecast to increase by 7% a year in line with GDP growth. China’s mining companies will be encouraged to increase their investments in overseas coal fields. The industry will also add domestic coal-production capacity of 750 million tons a year in the five years ending 2015, according to the plan, three quarters of it in the West, as it upgrades to more modern mines as part of the consolidation drive.

China’s New Resources Tax Won’t Extend Beyond Oil And Gas For Now

China’s new resources tax regime has came into effect, taxing oil and gas producers on the value of what they produce, instead of its weight or volume. It is the royalties model on extractive industries that is common in much of the world. The change will significantly boost provincial governments’ revenues at a time when local-government debt is of growing concern to central-government policymakers. Forget the official explanation that this is about environmental protection and resource conservation.

Or at least it will raise the revenues of the coastal and western oil-producing provinces. Inland coal-mining provinces will not benefit as much. China’s coal mining companies just don’t have the profits to absorb the tax hit in the way the big state-owned oil and gas companies do, for all Beijing’s efforts to consolidate the coal industry. This Bystander is also tempted to think that applying the resources tax to coal now would work through to consumer prices in a way that the oil and gas SOE’s won’t be allowed to pass on. So we don’t expect the tax, which is starting at a flat 5%, to be applied to coal, or metals, companies anytime soon.

Eventually it will come, though. The pressure from provincial governments will be intense. A pilot scheme raised Xinjiang’s government’s take from 370 million yuan in the first half of 2010 to 2.3 billion yuan in the same period this year. The near-term question is whether oil and gas companies will shut down economically marginal fields as a result of the new tax.

China’s Power Shortages Set To Persist

The drought in southwestern China is now not only leaving farmland parched but it is also starting to hit industry hard. Officials say a lack of water to drive hydroelectric power plants will cause electricity shortages not just this autumn, as has become the seasonal norm, but through the winter .

Water levels in the drought affected areas are down 30-40% from last year, with only limited replenishment from rains expected this autumn. The hydro-caused shortages are been exacerbated by coal-fired power plants also falling short of output goals. Coal prices are rising but utilities can’t raise prices to end-consumers by anything like as much, so they are cutting back production and taking plants off-line for ‘maintenance’ rather than suffer increased losses by generating power.

Difficulties in shipping coal to the power plants has only made matters worse, while the lack of a national grid means that regions with surplus power, notably Inner Mongolia, can’t export it to the rest of the country. Industrial plants in Shanghai and elsewhere on the eastern seaboard have been subject to intermittent power rationing since the summer, as have those in some other parts of the country, such as Guizhou, Qinghai, Gansu and Shanxi. Commercial users have been leaned on to reduce their demand by closing down operations at times of peak demand.

Earlier this year, officials anticipated a nationwide shortage equivalent to a generating capacity of 40 gigaWatts, or 4% of national capacity. The persistent drought in the south and southwest has probably made that number an underestimate. The power shortages are said to be the worse since 2004.

Demand has also been boosted by the boom in sales of white goods over the past couple of years and the property bubble, which has seen badly insulated buildings thrown up by the acre. On some estimates four out of five new homes built since 2008 are thermally inefficient.

With an installed power generation capacity of more than 1,000 GW, China has the largest power system in the world after the U.S. but demand is growing at more than 10% per year. Meeting it requires investment along a rickety supply chain that runs from antiquated coal mines to power plants and on to end-users.

Getting more market based pricing for electricity would go a long way to sorting out the problem. Wholesale electricity prices were raised in parts of the country in May and some commercial and industrial users saw higher tariffs in June, but it is politically difficult to raise prices for residential consumers while consumer price inflation remains so stubbornly high. In truth, China’s energy sector is stuck half way between state and market. As a result, there are incoherent signals about what is the necessary level of supply and investment, and over the incentives for energy saving, despite the much touted development of green energy technologies to make the economy less energy intensive.