Coal: the dark side of China's economy

Implications: The path that China is taking in terms of its energy infrastructure will cast a long shadow on its future economic development. On the international stage, the corresponding choice of China's energy services mix will have a knock-on effect on the success of global climate change policies.

Traveling in China’s countryside is a sobering experience indeed: even the most affluent cities such as Beijing, Shanghai, Guangzhou or Hong Kong are engulfed in smog throughout the year. The reason for this is straightforward: over three quarters of China’s energy consumption is powered by coal. Why coal? Because it’s the cheapest primary energy source available. Clean coal technologies resulting in low emissions are encouraged but not systematically implemented by lack of enforcement or incentives.



Analysis: Electricity production is rising at about 15% per annum: the best estimates of new power generation capacity were at least 50 GW in 2004, 60 to 70 between 2005 and 2006. The same types of numbers are expected for 2007. Over the last decade, every unit of GNP by which China grew produced about one half a unit of energy increase. In other words, China has reached a remarkable situation where the so-called energy intensity (the ratio between energy used and GNP was about 0.5, historically an incredibly low number) has shifted back well over 1 in the past few years. China is adding more energy, particularly electricity, than the rate at which it is growing.

As long as China continues to grow, there are very substantial energy increases that are being demanded. China will continue to add huge capacity and there are approximately 250 GW of new coal-fired power stations under construction at the present time.

In its recent report “Energy Technology Perspectives”, the International Energy Agency highlights the very substantial possibilities of energy efficiency gains in large developing countries, among which China and India are the biggest. It is important to note that energy efficiency gains are a different problem than real climate constraints: when energy is used more efficiently there is an avoided cost of building new power plants, thus saving money at the national level in the first place, without the need for an international treaty.

Although such socially effective initiatives might produce substantial gains, their implementation is slow by lack of collective action. In the areas of clean technologies or energy efficiency, albeit we are seeing progress at regulatory level, China still depends on the advice and support from its foreign partners to figure out who is going to make money by doing what is socially optimal, as opposed to trying to do it through regulation.

Opportunities in clean coal technologies and energy efficiency initiatives are enormous, but because they often represent less visible yet systematical small-scale improvements, such initiatives are unlikely to make the front page of the Financial Times.