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Decarbonising Amid an Energy Crisis in China

by Curtis Lam Asia Jan 10th 202210 mins
Decarbonising Amid an Energy Crisis in China

Recently, China has appeared to make a “U-turn” on its climate pledges: instead of reducing coal usage, China has actively ramped up coal production. Sparking massive international outrage, existing doubts about China’s commitment to climate action have only been reinforced. However, China’s postponement of climate action is an inevitable result of the country’s unique energy challenges. To overcome the current energy crisis, China needs to abandon its tight control on electricity prices. It also needs to be more strategic and precise about how it will go about transitioning to more sustainable energy sources. But the question of how it can do so without compromising the wellbeing of its 1.4 billion citizens remains difficult to answer.

Is China Making a “U-turn” on Its Climate Pledges?

When the COP26 climate summit in Glasgow took place in November 2021, many eyes were turned to China: how far will China go to reduce its emissions? Prior to the summit, China had already announced numerous concrete actions to curb its emissions and had made agreements to stop funding overseas coal-fired projects. Building on this momentum, China went on to sign agreements to combat deforestation and to support the development of renewables by making them less costly. In a surprise announcement at the summit, China even made an agreement with the US to boost climate cooperation despite ongoing political tensions. Many were pleased.

However, others have also expressed disappointment in China’s reluctance and lacklustre commitment. This was heightened at the end of the conference when China and India dealt what many considered a frustrating blow to discussions: objecting to the phrase “phasing out” in reference to coal. They instead argued that the phrase “phasing down” would be more appropriate. This was regarded by many of the more vulnerable Small Island Developing States (SIDS) as a betrayal, worrying that this would effectively be their “death sentence” – China’s sluggishness would basically allow sea levels to continue to rise, thereby disregarding their existence as they would eventually be “allowed” to fully submerge underwater.

Despite China’s increasingly cooperative attitude toward international climate action, some of China’s recent domestic energy policies appear to indicate the contrary. In fact, China has continued to actively increase coal production in a time when the global trend gestures toward a decline, as local mines have been told to produce “as much coal as possible”.

The way in which China is framing climate action has also been under heavy scrutiny. An analysis of China’s most recent climate policy documents by Carbon Brief suggests that China conceives climate action only as a domestic directive rather than an international responsibility, leading many to criticise it for its self-interest. Moreover, China’s newest national plan on greenhouse gas emissions has been criticised for its lack of ambition.

China has been under fire for not doing enough on its part. So why has China not done more, then?

The Energy Crisis in China

The main reason why the country has “backtracked” on its commitments is due to the energy crisis in China as a result of the COVID-19 pandemic. As countries are beginning to recover from the pandemic, demand for China’s exports are bouncing back at unprecedented rates. Consequently, China’s energy infrastructure has been put under enormous pressure recently, as manufacturers and retailers find themselves overwhelmed by the sudden need to restore productive capacities to pre-pandemic levels. Industries have also found themselves competing against others for power, thus contributing to surging electricity prices.

However, the energy crisis in China is a political crisis as well. In response to Australia’s calls for investigation into Beijing’s handling of the COVID-19 pandemic, China has decided to ban Australian coal imports, leading to a scarcity of coal supply in the region and a huge surge in coal prices. To avoid financial losses, local governments have imposed power restriction policies and coal-power companies have reduced production, causing a significant undersupply of electricity. These electricity blackouts not only put a halt to production lines but have also reached residential areas. Many families are struggling to keep warm during the winter.

To tackle the crisis, the Chinese government has subsequently ordered factories to increase coal production capacity to ensure power and heating supply to residential users. In 2021, China built more than triple the amount of new coal power capacity as the rest of the world combined.

There appears to be an unsettling dilemma in China. On one hand, the Chinese government is very aware of the need to move away from coal to more sustainable alternatives, as this new coal “spree” will derail its plans of keeping global temperature rise within 1.5 degrees Celsius, a target which was established in Paris in 2015. On the other, the current energy crisis in China is too significant to be overlooked since it is a matter of survival. It has therefore had to “rethink” its decarbonisation roadmap. As Chinese Premier Li Keqiang stresses, “China’s energy transition needs to put the people first.”

China’s Extreme Dependence on Coal

But what makes this trade-off between accelerating decarbonisation and meeting the energy needs of the present so hard to resolve? The reason why China’s transition is not so straightforward is that China’s energy infrastructure remains heavily coal-oriented. More than half of its electricity is generated from burning coal, making it the biggest coal-burner in the world, burning more than the rest of the world combined

This is not to say that China has not realised the importance of looking to alternative energy sources to provide electricity across the country – China has actually been working hard to expand its use of natural gas and solar panels, wind turbines and hydroelectric dams, and without a doubt has produced remarkable results. Instead, this illustrates precisely the difficulty of transitioning to cleaner and renewable forms of energy. China’s extreme dependence on coal and its unbelievable landmass means that energy diversification will be a long and hard process. Therefore, in the context of China’s current energy crisis, coal remains China’s best bet for ensuring the country’s electricity security of supply.

While it is highly unlikely that China will revert to previous climate commitments given the severity of the crisis, and while it may take decades for China to phase out coal completely, this does not mean there is nothing for China to do now. Speaking optimistically, senior policy analyst at climate and energy think tank Ember Dr Muyi Yang points out that the energy crisis today has revealed key areas for improvement and opportunities in China’s roadmap to decarbonisation.

You might also like: US and China Announce Surprise Cooperation to Tackle ‘Existential’ Climate Crisis

energy crisis in China, wind farm china Wind Farm in Guangling County, Shanxi. Image by: Wikimedia Commons

Lessons to Learn from the Energy Crisis in China

Looking at the whole situation with a rather positive attitude, Dr Yang believes that while the energy crisis has exposed China’s weaknesses, it might provide powerful lessons for policymakers to accelerate and revise the country’s climate actions.

The first lesson China needs to learn from the energy crisis is that China needs to reform the electricity market. According to Lead Carbon Analyst at Refinitiv Yan Qin, China’s heavily regulated power market is partially responsible for China’s energy crisis today. Surging coal prices have not been able to pass through to electricity prices (which have been suppressed), meaning that power plants have effectively been selling electricity at below-cost prices. This has therefore led to a humongous disparity between demand and supply.

Recently, the Chinese National Development and Reform Commission (NDRC) has declared that all electricity generated from coal will be priced through market transactions. By liberalising electricity, electricity prices can fluctuate more responsively to price increases resulting from the current coal scarcity, so that power plants can be incentivised to generate power and ensure electricity security to populations. 

Deregulation can also diversify the electricity market by encouraging supporting start-ups and attracting multinational investments in China. It is therefore encouraging to see China introduce institutional tax deductions and fee cuts to try and reduce the research and development (R&D) expenses of companies so that China can better understand the ways to improve energy and electricity efficiency.

In particular, the industrial sector would be a great beneficiary of such R&D. In China, industry consumes almost 60% of energy, which is almost three times that of the services sector and that of residential areas. In fact, China’s industrial and services sectors are significantly more electricity intensive than any other country in the world. While China’s high consumption levels can reasonably be attributed to its enormous population, these levels also reflect China’s inefficiencies in power generation. These are arguably the result of a lack of market signals to motivate the improvement of energy efficiency in many sectors and also the continued structural dominance of manufacturing industries in China, where energy-intensive equipment and poor working practices have contributed to considerable energy losses.

By improving efficiency in the industrial sectors, power distribution can be improved, as other sectors may have better access to electricity without having to increase the overall level of energy consumption in China. Combined with the aforementioned economic incentives for promoting R&D, China may also see itself promoting the expansion of renewables capacities and other decarbonisation industries.

More Specific and Ambitious Climate Commitments

For certain, these lessons will be easier realised than translated into action. As deputy programme director of Greenovation Hub points out, China still lacks a clear timetable for phasing out fossil fuels – there has yet to be a plan for the removal of fossil fuel subsidies. Despite China offering justification for its climate hedges today, it has not specified how it will finance energy transition in the long term.

If China is to improve its energy efficiency, it will have to be more specific and ambitious in its conceptualisation and evaluation of efficiency, that is, in establishing standards for energy efficiency projects. While the People’s Bank of China (PBOC) has launched a new Green Bond Endorsed Project Catalogue in 2020 which has defined more precisely the kinds of projects that fall under the category of “energy-saving”, more clarity is needed to encourage investment and facilitate systematic tracking and evaluation.

China has recently announced the implementation of a new set of energy consumption benchmarks and orders: by 2025, businesses in energy-intensive industries are required to reduce energy consumption and raise their installed proportion of renewable energy power generation by more than 50%. It also introduced the world’s largest national emissions trading scheme (ETS) in July 2021, with the aim of lowering the intensity of emissions of domestic companies. While this is definitely a move in the positive direction, critics believe that the scheme is still inadequate, as the bar is set too low and the penalties for non-compliance are still too low. Hence, many believe that the scheme will need to be tightened for it to make meaningful reductions in China’s overall emissions.

Is the Future Bright for China?

While China has an arduous journey to undertake, it has everything it needs for it to break free from its current energy challenges and to achieve carbon neutrality. The level of investment required for China to achieve its climate goals such as transitioning from coal to renewable energy, revamping its electricity pricing models and improving the electricity efficiency is completely within its financial means.

China’s delay on its climate pledges does not necessarily signify its refusal of international climate responsibility. As the International Energy Agency concludes in a report detailing its assessment of China’s climate visions, China has clearly demonstrated a willingness to get itself out of its current plight. The question today, however, is whether China can identify the appropriate investments to help it reach its goals. It is unlikely that China will make another U-turn to reduce coal usage amid international calls for decarbonisation in the near future, but Dr Yang believes that China’s step back (which hopefully will only be temporary) will be vital to China’s re-embarkment on its journey to sustainable transition in the future.

China’s ability to be precise is therefore of paramount importance. It must move away from using generalised language and instead begin formulating specific strategies and timelines at the local level that elaborate on overarching national policy goals. For example, at what point do we decide to move on from tackling power shortages to restructuring reliance on different fuel sources? When is the most appropriate circumstance to accelerate transition? Which provinces or cities demand greater attention? 

These questions are further complicated by the issues arising from the wider geopolitical environment. As we have seen in COP26, China’s “exchanges” with other countries reveal poor relations with many other countries. How can China transcend lines of political conflict to resume cooperation with countries such as Australia, which China has long depended on for coal? What can it actually do to protect the weaker island nations that are at high risk of disappearance? What will China do differently in 2022?

While none of these questions will be easily answered, many are confident that China has all the expertise it needs to navigate itself out of this complex maze. However, we must also recognise that China’s transition cannot be a rushed effort. If decarbonisation is undertaken prematurely and insensitively, China’s socio-economic troubles may only persist and resurge, and climate action may only be interrupted once again.

Featured image by: Wikimedia Commons


About the Author

Curtis Lam

Curtis is a Research Analyst at Peace Generation (Hong Kong). He completed his MPhil in Knowledge, Power and Politics in Education at the University of Cambridge, where he also did his undergraduate degree in Education Policy and International Development. His research revolves around issues in education, exploring how education can promote equality, democracy, peace and climate justice in different contexts around the world.

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