Why China Can’t Break Its Coal Addiction

For years, environmentalists and energy policymakers have seen China’s reliance on coal as a major impediment to reducing global carbon emissions. Burning coal is the world’s single largest source of carbon dioxide emissions, and half of all coal-fired power stations are located in China.

Despite insisting that the country will turn away from coal, Chinese officials have wavered. In September 2021, for example, Chinese President Xi Jinping announced that China would no longer fund coal-fired power plants abroad. But today coal use is on the rise domestically. In the past year, Chinese provincial governments have greenlighted more coal power capacity than they did in the previous six years combined. If these plants are built and operated as usual, China would blow past its climate change commitments, putting global temperature goals out of reach.

The odd truth about China’s coal addiction is that it makes little financial sense. China insists on investing in coal even though coal plants have posted record losses in the past few years. Several factors, including the need for energy security, the structure of China’s climate goals, and the local interests of local governments, help account for this uneconomical behavior. The costs of China’s commitment to coal, however, could be very steep as the planet tries to stave off the worst effects of climate change.

LIGHTS OUT?

In 2021, China experienced its worst power shortages in decades, affecting more than 20 provinces. The following year, the combination of drought and heat waves led to major electricity restrictions in regions that rely on hydropower. Thanks to these power crises, concerns about climate change are now tempered by those about energy security. Xi espouses the slogan “Build first, destroy later,” a reference to his plan to keep traditional energy sources in place for now. Beijing has relaxed its previous “traffic light” system of oversight, whereby the central government in Beijing allowed some local governments to build coal plants only if the capacity were needed and financially viable. As the country’s economy struggles, China will further deprioritize its climate commitments.

In the short term, China has increased its coal production to allay concerns about the security of its energy supply. In the east and south of China, where most of the newly planned coal plants will be located, provinces justify the plant approvals by citing the need for reliable sources of power. Some western provinces say that they need new coal plants in their region to help the integration of new renewable energy sources into their power supplies.

The odd truth about China’s coal addiction is that it makes little financial sense.

The structure of China’s medium-term climate targets gives provincial governments the leeway to issue more permits for coal plants. China has said that its coal use will peak by 2025 and its carbon emissions will peak by 2030. But Beijing has not specified the level of either peak, so energy companies and provincial governments see a brief window to lock in high-carbon investments. Targets to reduce the levels of carbon intensity—a measure of carbon emissions per unit of GDP—have not stopped authorities from approving new coal plants. Economic growth could give more room for emissions growth without harming carbon intensity metrics.

But China’s looming economic downturn may be another reason that localities are handing out so many coal permits. Some provincial governments have justified new approvals by arguing that the plants will stimulate the economy. Authorities employed a similar rationale nearly a decade ago to draw investment and create jobs; when Beijing gave local governments the authority to permit coal plants in 2014, a wave of new constructions ensued until the traffic light system instituted in 2016 slowed the boom.

POOR PAYOFF

And yet investing in coal-fired power is not an economical choice. Indeed, today many power companies seem reluctant to continue building plants because their future profitability is doubtful. China’s coal capacity has grown faster than coal generation, so the revenues made by coal plants may not justify their large upfront costs. State-owned companies largely shoulder the responsibility of expanding coal mining and building more coal power capacity because they are partially insulated from losses by the government. Even after Chinese coal power companies lost unprecedented amounts of money in 2021 because of power shortages, they still have strong credit ratings because they are backstopped by the state.

Many of these new coal plants may fail to become financially viable. Medium-term growth projections do not support the need for so many. Before the COVID-19 pandemic, analysis by grid planning groups and industry associations suggested that coal capacity would peak at 1,200 gigawatts, but recent permitting could raise capacity above 1,400 gigawatts. The pandemic led to a temporary slowdown in energy demand, followed by a resurgence that contributed to power shortages. The demand for electricity in China is projected to grow by six percent in 2023, but no authoritative analyses suggest that China has to build such a large number of new coal plants to meet its energy needs.

China’s slow reforms to energy markets exacerbate the situation. Today, markets such as bilateral contracts and centralized auctions make up about half of all electricity generation in the country, with the rest of the electricity sold through government plans. Still the government caps the price of most electricity sales so that any plant that mostly provides backup capacity will lose money. Shortfalls could be made up for by raising the price of energy at peak times or by having consumers pay for capacity, but so far these efforts have been slow going. New plants, as well as some older ones, may meet the same fate as Beijing’s Gaobeidian coal plant, which was mothballed in 2017, ostensibly to meet air pollution goals, and whose coal units are now kept on standby, operating only a few hundred hours per year.

Given these headwinds, it is still unclear if all the permitted coal plants will actually be built. Some localities that have approved plans for new plants may decide against building them in the near future. It is also unclear how much carbon these plants will emit: most of a coal plant’s lifetime emissions come from how much electricity it generates, not how much capacity it has. If these plants are built but operated only infrequently—used, for instance, as a reserve—they may not have a devastating climate impact in the long run. One thing is for sure: replacing older facilities with newer, more efficient generators can lead to marginal short-term reductions in emissions, but at the expense of cementing a long-term commitment to coal.

ALL EYES ON CHINA

China’s approach to coal will have major knock-on effects to the profitability of its renewable energy industry. If coal growth exceeds demand, the appetite for building renewables might wane. So far, that hasn’t happened. China keeps building wind and solar plants at record rates. On the other hand, if many of China’s coal plants simply become backup energy sources, it could spur renewable energy growth by allowing provinces and clean energy developers to build faster without worrying about energy security.

No country will turn out the lights to meet climate change goals. But there are other ways that China can secure its energy supply while accelerating the transition to low-carbon energy. Expanding energy storage can help smooth the variability of renewable energy. Some localities are hoping to better space out electricity demand, for instance by encouraging people to charge electric vehicles at night and to reduce the use of air-conditioning during periods of peak energy consumption. Building wind and solar plants can also make energy more affordable, a key component of energy security. Once a renewable energy plant is built, most of its future energy costs are locked in, which creates more predictable balance sheets and makes the whole power sector less vulnerable to global fossil fuel volatility.

China is entering a period when emissions trajectories can be dramatically altered based on the interaction of many competing factors. To keep the country on track with its climate goals, Beijing will have to help moderate enthusiasm for coal by providing provinces with road maps to enhance their energy security. Reforming power markets could help manage a large overcapacity in coal power while encouraging low-carbon alternatives to overtake fossil fuels. In either case, the successes and failures of China’s transition from coal will reverberate globally. If China fails to move away from coal while maintaining economic growth, other countries with less advanced power systems might think twice about leapfrogging fossil fuels for cleaner energies. China’s impact on global emissions is therefore a matter not just of how much carbon it pumps into the atmosphere but also of the power of its example.