The real war on coal is happening in China right now

The most important global warming story over the past two years has arguably been China's struggle to suppress its once-insatiable appetite for coal.

And lately, those efforts have begun paying off. Recent data suggests that China's carbon dioxide emissions fell in 2015, driven by a sharp drop in coal use. There's always tons of uncertainty with China's energy stats (a major caveat to keep in mind throughout this post), but the recent shift does look significant:

Chart and analysis by Glen Peters and Jan Ivar Korsbakken, using both China's official stats and BP's Statistical Review of World Energy.

As I've written before, a sluggish economy can explain part of this dip — but not all. China is making a long-term transition away from heavy industry. The central government is trying to clamp down on air pollution and setting aggressive targets for clean energy sources like nuclear, hydro, wind, and solar. There's a major push to green the economy and hit peak CO2 emissions by (or before) 2030.

And yet … with China, nothing's ever that simple. Over the past year, as a recent report from Greenpeace details, some of China's regulatory agencies have also approved permits for 210 brand-new coal plants across the country — which, if built, would make it harder for the country to meet its climate targets. Many of these plants are being urged on by coal-mining provinces that have been hit hard economically of late.

These 210 new coal plants aren't (yet) guaranteed to be built. In fact, key officials in Beijing are lobbying to cancel many of them. But the controversy around the plants helps illustrate just how tricky it will be to clean up the world's largest CO2 polluter. The government is trying to throttle back on fossil fuels — but it also has to be mindful of high unemployment and potential unrest in its key coal regions.

China's coal use may be peaking — but coal won't go away quietly

Let's start with the big picture. After two decades, the era of relentless growth in Chinese coal consumption appears to be finally coming to a close.

Trevor Houser and Peter Marsters of the Rhodium Group shared with me some recent numbers they crunched on China's energy trends. This first one shows how energy demand has changed recently. We'll focus on coal because that is still the vast, vast bulk of China's CO2 emissions:

(Rhodium Group)

Between 2002 and 2012, China's coal consumption grew 10.4 percent per year as the economy expanded rapidly, bolstered by growing steel, cement, and aluminum production. By 2012, China was burning nearly as much coal as the rest of the world combined, with half used to generate electricity and half used directly by industry (in steel mill blast furnaces, for instance).

By 2013 to 2014, however, China's coal consumption was starting to taper off. And in 2015, coal use actually dropped 3.4 percent, according to official stats.

A big reason for this decline: China's industrial sector is no longer growing at the same breakneck rate it used to. After a certain point, there's only so much infrastructure you can build. So construction has slowed lately, as has steel and cement production. Houser and Marsters estimate that this accounts for about three-quarters of the drop in China's overall coal use:

(Rhodium Group)

The other big factor: China has been shifting to cleaner sources of electricity, building ever more hydropower dams, nuclear power plants, wind farms, and solar panels. In order to cut down on the horrendous smog that's choking its cities and tackle climate change, the government has vowed to get 20 percent of its total energy from carbon-free sources by 2030.

This clean-energy boom accounts for roughly the other quarter of the drop in coal demand. Hydropower (thanks partly to a rainy year in 2014) and nuclear have seen especially big rises:

(Rhodium Group)

The future doesn't look terribly bright for Chinese coal, either. "It's entirely plausible that 2013 was the peak in Chinese coal consumption," Houser says. The International Energy Agency has reached similar conclusions.

Again, there's a fair bit of uncertainty, but here's how peak coal could happen: Going forward, China's economy is expected to grow at a slower pace as it moves up the development ladder, shifting away from heavy industry and toward services. If that transition goes smoothly, then most of the future growth in electricity demand could likely be met by China's aggressive targets for nuclear, hydro, wind, and solar.

If that all happened — and clean energy actually can satisfy most of the future demand growth — then China's overall coal burning would likely plateau for the next five years or so before starting to decline gradually.

The prospect of peak coal is why a growing number of analysts now think China's overall CO2 emissions might well peak way before 2030 — the government's agreed-on target. That would be good news for climate change.

The hitch is that, even if coal demand does peak, the transition won't be entirely painless. There's still a huge amount of coal infrastructure around the country left over from the country's boom years. And that industry won't just disappear overnight.

Despite the drop in coal use, officials just green-lit 210 new coal plants

A good example of how messy China's clean-energy shift can be comes from this recent report by Greenpeace. The group discovered that China's central and provincial environmental agencies have granted permits for at least 210 brand-new coal plants over the past year — with a total capacity of 169 gigawatts:

(Greenpeace)

This seems utterly nuts. China arguably has too many coal plants right now. Its existing fleet only runs roughly half the time (a very low utilization rate for coal). And, as noted earlier, the government's sweeping mandate to build more renewables and nuclear may well be enough to satisfy any future growth in electricity demand.

So why would anyone in China contemplate building new coal plants right now?

I called Lauri Myllyvirta, the lead author of the Greenpeace report. He argued that these proposed plants are a byproduct of a massive and still-ongoing investment bubble in China. In order to prop up the ailing economy, the central government has encouraged provincial officials to keep spending on new projects. And the state-owned banks that finance these projects don't always scrutinize them closely.

So a number of provinces have given the go-ahead for new coal plants — particularly those provinces rich in coal resources, like Shanxi, Xinjiang, and Inner Mongolia. They're doing this despite the fact that the plants may not make much financial sense and are likely to cannibalize business from other, existing power plants. It's a desperate move by regions that are struggling economically to find some, any new outlet for their coal in the face of slumping demand.

"It's a bubble," says Myllyvirta. "There's already overcapacity, and if these plants are built, it's likely to get much worse."

The trouble is that if all — or even most — of these coal plants get built, they would complicate China's efforts to shift toward greener energy.

Right now, Houser points out, provincial grid operators often give preference to coal over renewables (this is in contrast to places like the United States, where renewables are dispatched first because they operate at zero cost). So a glut of new coal plants could impede the growth of clean energy.

Worse, building new coal plants would make it harder for China to cut CO2 emissions over the long run. After all, it's not enough for the country's coal use to simply peak and plateau in the coming years. In order to fight climate change, coal burning will ultimately need to decline sharply. That could mean retiring many existing coal plants before the end of their natural lifespan. But any future retirement push will be all the more difficult if hundreds of new plants get built today.

Will China's central government try to cancel these excess coal plants?

What's an extra 210, give or take? (Shutterstock)

Now, it's still far from certain that all — or even most — of these 210 coal plants will actually get built.

For one, they've only received various stages of environmental approval so far, Myllyvirta says. Many of them have not yet received the final go-ahead from China's National Development and Reform Council to start construction. Greenpeace is calling for the government to step in and rescind approvals.

It's not hard to imagine the central government blocking them. Officials have already been taking drastic measures to reduce excess capacity in the mining and steel industries. Earlier this year, Beijing announced it would aim to close half the coal mines in the country, 5,600 in all, to help curtail the glut in supply.

More recently, Nur Bekri, the head of China's National Energy Administration, hinted that the government may take similar steps to block excess coal plants — though he refrained from giving any specific numbers. The government has also been contemplating reforms to the electricity sector that, among other things, would no longer give preferential treatment to coal power.

But these moves aren't simple — and they come with economic repercussions. The government's crackdown on excess steel and mining capacity is already expected to lay off some 1.8 million workers, a whopping 15 percent of the workforce. Officials in various coal provinces have been fretting about strikes and protests over the job losses. Blocking further coal plants could exacerbate the strain on the industry.

This is all part of the delicate balance China faces in rebalancing its economy without triggering mass unemployment and social unrest. On Monday, Prime Minister Li Keqiang announced the central government would need to set aside $15.3 billion for areas ravaged by unemployment. He also promised that future job growth in other sectors would help absorb losses in the declining coal and steel sectors. But no one knows if China can pull off this tightrope act.

Ultimately, there's no stopping China's shift away from coal. The days of rapid growth seem to be behind us. But how well the country manages the transition to what comes next is still very much an open question.

Further reading

• Note that China's slumping coal demand isn't just a China story. It's also walloping US coal companies that bet heavily on exporting metallurgical coal, used by steel mills, to China. This is the key reason for all the US coal bankruptcies of late.
• I took a look at China's falling CO2 emissions last year. That piece included a big caveat about China's energy stats.

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