Coal transition in China

Options to move from coal cap to managed decline under an early emissions peaking scenario

2018

An earlier emissions peak and decline is possible in China, with the right policies on coal

Coal is a dominant energy resource in China’s energy mix for decades. Due to the increasing domestic environment concerns (e.g. air quality, water availability) and pressure to reduce greenhouse gas emissions, China is actively looking to phase out coal from its energy system. For instance, China’s coal cap policy has already become a cornerstone of China’s low carbon transition and the implementation of its target to ensure that its carbon emission peak by around 2030. The question is now how China can begin to prepare a managed decline of coal consumption. Although the low-carbon transition is becoming a matter of political consensus in China, there are still various challenges that need to be carefully addressed. Those challenges include (but are not limited to):

  • how market based instrument can be employed to replace traditional command and control approaches, so as to align market incentives and incentives for the clean energy transition;
  • how to strengthen coordination between coal transition policy and other sectoral transition policies, especially with market reform policy in the electricity sector;
  • how to phase out dispersed coal in the residential sector while ensuring that affordable alternative energy carriers to be provided to low income consumers; and
  • how to compensate the coal transition process with just social policies to balance the various winners and losers.

This report argues that with carefully designed policy package, and with particular attention to transitioning awat from coal, China can successfully achieve the coal transition while the transition cost can be limited and managed where necessary. According to our analysis, recent macro-economic and technological developments, combined with additional policies to further limit coal use, could allow China to have its CO2 emissions peak in year 2025 at 10.2Gt level and then drop down to 9.93Gt in 2030. Our analysis also suggests China’s emissions could be 5.7Gt lower than 2020 by the end of 2050, with ambitious policies to tackle coal. This is lower than previous scenarios (Figure ES.1).

Phasing down coal use is essential to achieving the early peaking scenario

However, early peaking of CO2 emissions calls for faster and effective deployment of alternatives for coal consumption, especially in the power sector. The key pillars for a low carbon transition in China are as follows:

  • replacing old coal assets with a low carbon electricity system with high penetration of non-fossil fuels and possibly some implementation of CCUS on thermal power;
  • enhanced decarbonisation in the industry sector through a combination of industry structure optimization, fuel switching, energy efficiency improvement;
  • integrated coal phase out policies in building sectors with city planning polices targeted at controlling floor area, inhibiting the unnecessary early demolition of buildings, improving energy efficiencies of both buildings and appliances, and optimizing the energy mix.

With the implementation of those policies, China can achieve an early peaking of its energy-related carbon emission by around 2025, with a lower CO2 emission level than originally anticipated, i.e. around 10 GtCO2, and see its emissions begin declining thereafter.Moving to an earlier peak and decline scenario implies a strong decline in especially thermal coal demand. As shown in Figure ES.2, coal demand would need to peak in 2020, followed by a steady reduction thereafter.

Feasible policy options exist for a managed coal transition in China

However, the coal transition in China will have some socio-economic aspects that will need to be anticipated and managed. These include changing the future value of coal related assets, declining demand coal from coal producing regions, and reducing the employment of coal sector workers, and ensuring cost-effective energy access during the transition from coal in the residential sector. Policy makers and sector stakeholders will thus need to explore solutions to these questions. Several options exist. For example, for coal producing sectors, the labour policy aiming at low education workers is important to soften the social impact on low income workers. The central government would also need to provide transition funds to help local governments reestablish industries and avoid demographic decline. For the electricity sector, a very large risk of stranded assets is approaching, with overcapacity much more likely than under-supply. The government should take immediate action stop building new coal power plants, accelerate the electricity reform and transaction of generation trade to identify least cost options to manage the stranded assets. Liberalising power market pricing in the electricity sector could also help to compensate for asset stranding and provide opportunities for coal plant to be retired or provide ancillary services to the power market instead of baseload power. Finally, coal consumption in the buildings sector are closely linked with energy poverty and interacts with housing choice and infrastructure availability. In such cases, city planning policies together with infrastructure retrofit policy and subsidies for clean energy can contribute to shift away from coal in residential sectors. At the same time, reducing coal use can also help China achieve other important policy priorities. For instance, the early phase out of thermal coal will also deliver important co-benefits, such asreducing methane emissions due to coal production, reducing health impacts due to poor air-quality and limiting stresses on water for plant cooling. Market liberalization in the power sector can help to reduce wasteful investment, provide cheaper power prices for consumers, while accelerating the shift to alternative, clean energy.

As the largest coal consuming country, China is on its way to phase out coal through concrete policy packages and by promoting a low carbon economy. This transition will not only frame China’s energy trajectory but also the world’s energy trajectory through altering the expectation of producer countries that sell into the Asia Pacific thermal coal market. This report aims to suggest concrete issues, options and pathways for China to follow in implementing its domestic coal transition.

Authors

Insitute

  • IDDRI

  • Climate Strategies

Employer

Tsinghua University