Reduced coal sales to China in the next five years?: Don’t count on it

Editor’s note: This guest editorial, prepared by Dennis Drebsky with Nixon Peabody, LLP, takes a decidedly different look at coal use forecasts.  While many energy experts are predicting declines in coal use, Drebsky argues that the sheer size of the Chinese energy market, along with the affordability and reliability of coal, and the Chinese focus on economic development entails a long-term Chinese reliance on coal-based energy.


 

NP_logo_2xBy: Dennis Drebsky, Partner, Nixon Peabody, LLP

China is the world’s largest producer and consumer of coal. However, there have been repeated predictions that China’s use of coal will substantially decline during the next decade due to environmental concerns. That China should be a prime target of these concerns should be no surprise since China produces and consumes almost as much coal as the rest of the world combined. A recent survey found that China accounts for 46 percent of the world’s coal production and 49 percent of consumption.[1] To put this in context, China produces nearly four times as much coal as the second largest producer, the United States. Coal accounts for approximately 70 percent of Chinese energy consumption and this use has held steady, if not increased, during the last 30 years.[2]

With huge reserves of coal and countless coal-fueled energy plants, it is unrealistic to expect that China will forego the large-scale use of coal, even in the face of international pressure. China has attempted to blunt criticism by announcing plans to build as many as 50 industrial plants to convert coal into synthetic natural gas and to convert its coal energy plants to use this natural gas, notwithstanding its limited natural gas reserves.[3] China already has two such plants in commercial operation. Whether this initiative will be successful is uncertain.

The much-publicized United States/China agreement on climate change requires very limited constraints on China’s use of coal. China has agreed to impose peak limits on carbon dioxide emissions by 2030 with a promise to increase the non-fossil fuel share of energy to approximately 20 percent.[4] Like earlier pledges by the international community, there are no enforcement mechanisms built into the agreement.

Consistent with aspiration butting up against reality, China has announced that it will limit its dependence on carbon dioxide emissions but delayed meaningful reductions deep into the next decade. However, China has announced a goal of limiting total coal production to 4.2 billion tons by 2020. Moreover, the Chinese government has ordered several cities and localities to formulate plans to reduce coal consumption in an attempt to improve air quality, which has reached dangerous levels in some cities. While these goals sound impressive, China has repeatedly failed to meet environmental goals set in the past and there are no known penalties for future failures.

On that theme, shortly after announcing its decision to limit the use of coal to improve air quality, China exempted the consumption of low quality thermal coal for use in power plants and utilities from this directive.[5] These industries account for roughly half of all Chinese coal consumption. Moreover, as American exports to China are largely thermal and metallurgical coal, it appears that such exports will be largely unaffected in the near-term.

Notwithstanding these limitations, China is making efforts to cut coal consumption, although those efforts have been spotty and carefully tailored so as not to seriously affect its industrial capacity or efficiency. The Chinese Constitution, Article 26, requires that “the state protects and improves the environment in which people live and the ecological environment.” However, the implementation of these goals has been imperfect since it relies on local governmental officials to enforce State policies.[6] Local officials have not been cooperative in enforcing China’s environmental laws and regulations currently in effect, as they are primarily focused on achieving a higher rate of economic growth–which is often a gauge of an official’s effectiveness.[7] As Zhou Xizhou, director of the energy consulting firm, IHS CERA in China, stated, “Eighty percent of the coal-fired units in the country have sulfur scrubbers.” But Zhou also added, “Whether people run them is another question.”[8]

There are indeed regulations and equipment already in place and some experts say China’s pollution problems could be reduced and the problem of decreasing the environmental impact of coal may be less of technological innovation and more related to education and reducing local resistance. A recent Scientific American article described the experience of Hu Tao, the director of the World Wildlife Fund’s Chinese programs. While visiting a Chinese coal-fueled plant, he was told that the installed scrubbers were turned off for “inspection.” When he asked how often these inspections took place he was told, “if no one from the government was visiting,” they are turned off “every day.” [9] China has pledged to deal with local resistance and improve use of available technology in the future.

Even with the world’s attention increasingly focused on protecting the environment, China will continue to rely on coal for the majority of its energy needs for decades to come. In fact, the great majority of energy generating plants being constructed at present require the use of coal. Between now and 2040, China is expected to double its coal-fueled plants.[10] As one fuel analyst has observed, “coal is too low cost, too plentiful and too available from reliable sources to be replaced.”[11] This suggestion is especially true in a society that often judges itself on economic growth. In addition, China is a major producer of steel and the processes used in its manufacture require coal in the form of coke. Presently, there is no practical substitute for coke in steel making.

While China has often been singled out as a major user of coal-created energy, a majority of industrial countries rely upon, and will continue to rely upon, coal. For example, Germany, which often touts its building of solar and water facilities as an alternative to coal, fails to broadcast the fact that in 2013 it put into use more coal-fueled facilities than any time in the last decade.[12]

So, what can realistically be expected from China, regarding the import and use of coal in the next five years? Recent claims that China’s demand for coal has slowed can be attributed to slowing economic growth and lower utilization of its economic base. A more promising development is China’s leading development and use of state-of-the-art scrubbers in new energy generating plants to capture carbon dioxide emissions before they are discharged into the atmosphere. To the extent local resistance can be addressed, and the use of scrubbers becomes widespread, they may be able to lessen resistance against the use of coal. Moreover, as China gradually shifts from an industrial to a service economy, the per capita energy demand may lessen.

However, based upon past experience and despite genuine effort by the Chinese government, it is unlikely China will abandon their long-term focus on economic growth—a growth that will continue to be fueled by coal.


 

[1] “China Produces and Consumes Almost as Much Coal as the Rest of the World Combined” (5/14/14) www.eia.gov/todayinenergy/detail.cfm

[2] id

[3] “China to Build 50 Coal Gratification Facilities” (8/6/14) http://instituteforenergyresearch.org/analysis/china-build-50-coal-gasification-facilities/

[4] “Fact Sheet: U.S.-China Joint Announcement on Climate Change and Clean Energy Cooperation” (11/11/14) www.whitehouse.gov/fact-sheet-us-china-joint-ann

[5] “China Power Plants Exempt From Ban on Using Low-Quality Coal” (9/19/14) www.reuters.com

[6] Constitution of China, Article 26 (1982)

[7] “China’s Growing Coal Use is World’s Growing Problem” www.salon.com

[8] “China Wrestles with Stubborn Air Pollutants,” Washington Post, May 10, 2013

[9] “Can China Cut Coal” Scientific American, November 25, 2014

[10] “Renewables Aren’t Enough, Clean Coal is the Future” (3/14) http://www.wired.com/clean-coal/at10

[11] Id. At 10

[12] Id. At 10

31. March 2015 by Jason Hayes
Categories: Asia, Energy, Environment, Export, Marketplace Information, Power Generation | Tags: , , | Comments Off on Reduced coal sales to China in the next five years?: Don’t count on it