License: All rights reserved. Credit: Greenpeace

Decline in China’s coal consumption steepens – how do we know and what does it mean?

Lauri Myllyvirta
License: All rights reserved. Credit: Greenpeace

China recently pledged to peak its CO2 emissions by 2030, in an important shift of stance in international climate negotiations. However, change might be happening faster than the pledge indicated.

In October, Chinese coal production dropped 8.5%, imports dropped 17% (for the third month in a row), and coal-fired power generation dropped 6%. This brought the coal production drop during the first 10 months of 2014 to 1.5% and drop in imports to 8%, while thermal power generation was still 0.1% larger than last year. So what does this mean for China’s coal consumption this year, and for the following years?

The fall in consumption is a result of radical policies on air pollution, directed at controlling coal consumption, and budding indications of some tectonic changes in the world’s second largest economy.

Over the past couple of years, China has put in place requirements to reduce coal consumption in absolute terms in 10 provinces consuming 40% of coal, bans on permitting new coal-fired power plants in key economic regions, requirements to close down older heavy industry capacity, and is bound to start a national emissions trading scheme in 2016.

With air pollution levels firmly in the ‘hazardous’ range as of writing this, the impetus for controlling coal use is hardly fading. At the same time and partially as a result, the economic modernization agenda appears to be gaining real traction, with economic growth shifting from energy-intensive bulk industry and large investment projects to services, hi-tech and household consumption.

We have been reporting on the astonishing slowdown in China’s rapid coal consumption and CO2 emissions growth closely since July, and banks and other financial players have been paying close attention to what’s happening.

Most other commentators have been, however, slow to recognize the change. Take the example of the reporting on China’s 2030 pledge: you will find many more stories mentioning China building one coal plant per week than mentioning the dramatic drop in coal consumption.

How reliable is the China coal data?

Like most countries, China only reports total coal consumption annually – the numbers for 2014 are due in February or March 2015. Most international experts will only take note when global energy statistics are released by the IEA and BP in June 2015 and in the US by the Department of Energy in late 2015.

In the meantime, coal consumption can be calculated as so-called “apparent consumption”. This is based on the fact that every tonne produced or imported must be either consumed or added to inventory. In other words, production, plus net imports, minus change in stocks must equal consumption.

While Chinese customs and power generation data is generally reliable, coal production and consumption data is often problematic. However, there is little doubt that production is dropping as the financial results of listed and state-owned companies are showing major losses and the industry is calling for the state to force mines to cut output. Coal stocks are reported to be at record levels nearing 400 million tonnes, which also shows that consumption is not being fueled by running down stocks. Taking the reported changes together indicates a reduction in coal consumption of around 2%, but it is too early to give exact numbers.

Ironically, the uncertainties in China’s coal consumption data also mean that official statistics might not even show a drop yet for this year, but rather “only” a very dramatic slowdown in growth.

The “energy intensity” of China’s economy is improving

It might seem counter-intuitive that coal consumption can be dropping while output of heavy industry products such as steel and cement is still growing, and output of thermal power was still growing when we first reported that coal consumption had dropped.

This is due to the fact that China has been improving the “energy intensity” of its industry and economy rapidly – only this improvement has been overshadowed by the even faster growth in output. For example, coal consumption per tonne of steel has been dropping at an average of 1% per year; per unit of thermal power generated by 2% per year; and per tonne of cement and glass by 5% per year over the past five years of data. For each of these products, the growth rates this year have dropped below the past rate of coal intensity reductions, enabling total coal consumption to drop.

In other sectors, where it is easier to replace coal by other fuels or by electricity, the reductions have been even faster. As a result, coal consumption has likely dropped both in the power sector, which uses half of China’s coal, and outside the power sector. The only sectors where output growth was above past rates of coal intensity reduction are chemicals and non-ferrous metals, which consume less than 8% of China’s coal.

Preliminary information on the consumption of the other fossil fuels, oil and gas, indicates slow growth as well: oil consumption at 1.8% and gas at 9.5%. If this proves correct, it is even possible that China’s total CO2 emissions will drop this year.

Projected coal consumption changes by sector based on output growth in 2014 and past reductions in coal use intensity

The big question: What’s happening to the economy?

For the climate, all that matters is the amount of CO2 entering the atmosphere. However, the political implications and the outlook for the next few years depends crucially on why heavy industry growth has slowed down.

The pessimistic interpretation is that the Chinese economy is slowing down dramatically, and the government will probably step in to boost infrastructure and construction spending to get it going again. The other interpretation, which seems to be favored by most economists, is that there is some economic slowdown but services, hi-tech industries and consumer spending are compensating for the slow growth in traditional heavy industry, enabling economic growth and employment to be maintained while heavy industry and coal consumption slow down dramatically.

This “economic rebalancing” has been the aim of the government for a long while, as it has been generally recognized that the economy is overly dependent on investment spending, big infrastructure, industrial and real estate projects and heavy industry products.

China will certainly need a lot more apartments and infrastructure in the next decades, as people move to cities and living standards improve. However, shifting growth to other sectors would still mean maintaining the current, very high level of construction activity, which is certainly enough to satisfy the need for infrastructure.

The dramatic shift in coal consumption, changes in the economic growth mode, and the government’s commitment to boosting renewable energy as a part of the non-carbon energy targets give hope that we will see a CO2 peak well before 2030.

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