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Reducing Coal Consumption in China Requires Sweeping Reform

Summary

To achieve its goal of carbon neutrality by 2060, China needs to ditch coal-fired electric power plants for renewable alternatives. However, doing so will require dismantling an antiquated system of incentives that are in place for local officials and power producers. Whether Beijing can summon the political will to overcome powerful vested interests opposed to these changes will be an important indicator of China’s capacity for meaningful reform.

On New Year’s Eve 1879, the modest town of Menlo Park, New Jersey, welcomed visitors to bathe in the unfamiliar light of Thomas Edison’s latest invention – the incandescent lightbulb. In the days preceding Edison’s grand unveiling, The New York Herald had published a full-page article dedicated to the newfangled contraption responsible for producing the “bright, beautiful light, like the mellow sunset of an Italian autumn,” that would take the world by storm. While the light bulbs themselves emitted no smoke nor foul odor, the commercialization of electricity spawned the construction of coal-fired power plants, which culminated in the environmental impact the world is now grappling to contain.

Few countries understand this as intimately as China, where coal makes up 60% of its total energy supply and over one million people die every year from the adverse health effects of air pollution. After four decades of environmentally unsustainable development, the country is currently struggling with the impact that air pollution has brought on public health. Having aggressively pushed for renewable energy generation since taking office, President Xi Jinping formalized China’s transition to sustainable development in September, when he went before the UN General Assembly to announce China’s commitment to carbon neutrality by 2060. However, reducing emissions is directly contingent on reducing China’s historical reliance on coal-fired power plants. To shed its dependence, China must overturn a system of preferential treatment towards electric power producers developed nearly 40 years ago and in doing so, summon the political will to challenge powerful vested interests.

Carbon Neutrality

Carbon neutrality refers to net-zero emissions, a state when carbon emissions are offset by carbon removal. To achieve carbon neutrality, a country must either reduce emissions to zero, develop advanced carbon removal capabilities, or employ both strategies in tandem. Given the limitations of current carbon recapture technologies, the creation of carbon sinks through reforesting and similar measures remains the most viable form of carbon recapture. Nonetheless, because reforesting takes decades to cultivate, the most attractive path to carbon neutrality rests on overall emissions reduction. A research report put together by the Institute for Climate Change and Sustainable Development (ICCSD) at Tsinghua University, one of China’s leading environmental policy think tanks, seizes this approach and offers a likely roadmap for achieving carbon neutrality within the next forty years.

Currently, coal-powered electricity generation and the use of combustible fuels like gasoline for transportation and direct heating dominate the energy mix. To transition to a less carbon-intensive composition, Tsinghua’s proposal emphasizes expanding electricity’s share in the energy supply and reducing coal’s to virtually null by 2050. By generating electricity to satisfy the growing demand for energy in the transportation and residential sectors, which have grown 80% faster than overall demand since 2010 and now account for one-third of all energy demand in China, China would leapfrog petroleum-based heating and transportation fuels that are widely used in the US and Europe. The real challenge for Beijing, however, lies in eliminating coal from the energy supply in order to generate electricity as cleanly as possible.

Coal composes 62% of China’s energy supply, and though this represents a slight reduction from ten years ago, it is still a far cry from the share required to achieve carbon neutrality. According to the Tsinghua report, China must reduce coal to 10% of the energy supply by 2050 to achieve carbon neutrality by 2060. In the end, coal should be all but cut out of the energy mix. Non-fossil fuel sources, which encompass renewables and nuclear, would pick up the slack. The report goes on to specify that China must increase solar power capacity 10-fold and wind and nuclear capacity seven-fold over the next 30 years to achieve its goals. By 2060, the role of fossil fuels and non-fossil fuels will have reversed, with non-fossil fuels satisfying 85% of the country’s energy needs. Although this scenario would require China to invest the equivalent of 1.5-2% of GDP annually over the next 30 years, its economic model, which allows the government to rapidly redirect substantial resources to high-priority projects, will likely enable it to make the necessary investment. 

All Fired Up Over the Green Revolution

Making the transition to a sustainable energy future will require a combination of political will, thoughtful development policy, and technological breakthroughs. Increasingly, Beijing appears to possess all three. The 13th Five-Year Plan issued by the government signaled a move toward a “clean, low-carbon, safe, and efficient energy system,” and President Xi called for a “Green Revolution” during his address to the UN in September. Furthermore, President Xi has made the creation of an “ecological civilization,” after decades of environmental mismanagement, a cornerstone of his promise to “rejuvenate the Chinese nation” by 2049. 

In addition to embracing environmentally friendly rhetoric, Beijing has enacted pro-transition policies that have increased the share of non-fossil fuel sources in the energy mix from 9% in 2010 to 12% in 2018. As government intervention continues to significantly incite the market for electric vehicles (EVs), the number of EVs on the road topped 2.58 million in 2019, by far the highest in the world. The most important indicator, however, of Beijing’s commitment to carbon neutrality will come from its ability to successfully reign in Big Coal.

Understanding the Capacity Glut

Not unlike the US, China has vested business interests that shape policy outcomes. During the 1990s, Beijing designed China’s financial system to deploy capital as quickly as possible in order to accelerate domestic investment. Achieving infrastructure targets set by the central government took precedence over curtailing economic waste, and countless projects of questionable value were commissioned during these go-go years. Ultimately, ill-considered investments into unproductive enterprises created vested economic interests determined to maintain their access to cheap credit and preferential treatment. One such vested interest is the coal industry, which exploded in size and influence thanks to Beijing’s emphasis on affordably expanding the energy supply to support accelerating rates of economic growth.

Since 2011, utilization rates among China’s coal plants have fallen precipitously from 60% to 49%. Coal consumption has flatlined as a share of total energy consumption over the past decade, and the construction of new coal-fired plants has only continued to drive utilization rates even lower. The continued growth of the coal sector is not the product of irrational decision-making, but rather a consequence of government incentives and China’s governance architecture.

Two policies have extended China’s love-affair with coal: guaranteed operating hours and wholesale electricity prices set by the state. During the 1980s and 1990s, Beijing prioritized the rapid expansion of electric generation capacity to maintain the country’s heady growth rates. To bring generation online as quickly as possible, Beijing enticed electricity producers by guaranteeing demand – operation hours, for example – for their product. Furthermore, the state set the wholesale price of electricity at a level that would guarantee a reasonable return on investment. These policies effectively ensured producers a profit and contributed to an unsustainable boom in generation capacity.

Comprehensive Governance Reform

These policies alone do not explain why China added 50% more coal-fired capacity over the past five years than the rest of the world combined. It is important to note that until 2014, the central government wielded tight control over permit approvals for coal plants, which partially offset the high incentive to invest. Reforms that devolved the authority to approve permits to provincial governments lifted the final damper on investment into coal-fired generation, and in the following year, approval rates tripled and investment into coal generation took off. Provincial administrators were quick to issue approvals and shore up investment since they are promoted on the basis of economic growth in their jurisdictions, and power plant construction boosts employment as well as economic activity in the short run. By the time overcapacity becomes evident, the administrator in question has already been promoted. Consequently, devolution has cut approval times in half and led to the construction of excess coal-fired capacity.

As a result, China has to overcome the self-made hurdle by scaling down the system of incentives created nearly 40 years ago, and either rethink how it evaluates the performance of provincial administrators or reclaim the authority to approve or reject permits. While an increase in generation capacity does not necessitate an increase in coal consumption, China cannot make the same mistakes with economic waste in the energy sector if they want to invest in renewables. Furthermore, China’s coal interests grow more entrenched with each new power plant. If the government shunned the construction of new coal-fired plants, pro-coal special interests in Beijing would have their political influence reduced.

A Road Forward for Sustainability

A window of opportunity has opened for China to transform its energy sector and set the country on a path of sustainable development. The stars are aligned across all relevant actors in China’s policy making pipeline – the party, the private sector, and policy think tanks– for a rapid energy transition. Furthermore, the structure of China’s economic model makes it possible for the central government to rapidly allocate resources toward high-priority projects.

However, that very model of development is also China’s biggest stumbling block to achieving carbon neutrality by 2060. Beijing’s ability to successfully overcome fossil fuel interests created by China’s dated system of incentives will serve as an important indicator of the country’s capacity for reform. Failure to reign in Big Coal over this decade will bode poorly for Beijing’s ability to deepen market reforms elsewhere, which are prerequisites for transitioning to an innovation-driven economy. With the clock ticking on climate change and China’s development goals, the stakes could not be higher.

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