Don’t be surprised if China puts a cap on carbon

In China – the world’s largest emitter of carbon dioxide – policy-makers have been discussing the possibility of setting a cap on emissions from 2016. This is partly in response to air pollution, which has been a big problem in the country. Since early 2013, nearly 30 Chinese provinces have been exposed to severe fog and haze. This has sparked complaints and public demand that the problem be dealt with. But how? Air pollution in China is basically an energy-related phenomenon and therefore requires an energy-centric approach. For this reason, there is a good chance that China will put a cap on its carbon emissions.

A large part of the problem is due to high energy consumption and a coal-dominated energy matrix. China’s coal consumption in 1978 was a mere 610 million tons. By 2013, this figure stood at 3.61 billion tons – 49.3% of the world’s total consumption. Dealing with the problem will require limits on energy consumption and particularly coal consumption. The Chinese government has already started to recognize this, and in 2013 revealed its most important and practical energy policy to date: the Action Plan for Controlling Atmospheric Pollution, which listed 10 measures to improve the management of air pollution in China, including limits on total energy consumption.

As it starts to put the policy into place, we can expect to see China’s coal-dominated energy structure adjusted in favour of clean energies. The main aim is to reduce the share of coal in primary energy to 65% by 2017. This is a realistic goal. In 2013, the share of coal was 65.7%, down 1% year-on-year since 2011. This was largely a result of natural gas substitution. The share of natural gas was still small in 2013 – 5.9% – but China is increasing its supply. A recent deal with Russia’s Gazprom should see 38 billion cubic metres of gas imported into China. The path to reducing coal consumption is relatively clear – substitute coal with natural gas in the short term and other clean energy sources in the medium to long term.

Research by the China Center for Energy Economics Research indicates that coal consumption might peak by 2020 at an estimated 4.2 billion tons. But timing of the peak will depend on factors such as government determination to ensure cleaner air, clean energy developments, implementation of a carbon tax and energy pricing reforms. It will also particularly depend on coal gasification and coal liquefaction development. Limits on coal consumption and the expected coal consumption peak both suggest the Chinese government will indeed put a cap on carbon emissions in the coming years.

There are actually very few technological challenges to energy sector reform. The main issue is the cost and how this will be met. For historical reasons, China’s energy prices are regulated by the government, which uses cost plus pricing principles. The general public is accustomed to relatively low energy prices and consequently is sensitive to any price increase. Energy pricing reforms in China are subject to affordability and people’s willingness to pay, and have therefore been slow.

But the problem of air pollution has become so serious that there is a good chance the general public will be more willing to accept the cost that comes with reforms. Indeed, the government has already carried out natural gas pricing and coal resource tax reforms. Electricity tariff reforms may follow next year.

These energy pricing reforms, along with coal substitution requirements, will favour the development of renewable and clean energy. Already, China’s renewable energy sources have been growing rapidly in recent years. In 2013, electricity capacity was 1,247 gigawatts (GW). Wind and solar power increased by 16 GW and 11 GW respectively, increasing the proportion of non-fossil fuel generation capacity to 31% (with 15% from large hydro capacities). This is about 5.8% higher than previous year. If energy pricing reforms lead to an increase in the price of fossil fuels, this could make renewable energy even more competitive in China.

China’s goal for this year is to have 18 GW of wind power and 14 GW of solar power. It is now actively promoting distributional energy, and is even providing subsidies. Another energy source, nuclear power, is both affordable and clean, and we can therefore expect to see more nuclear power plants approved very soon.

According to a 2011 estimate from the Energy Information Administration, China has 14.3% of the world’s shale gas reserves; these reserves are higher than any other country. Although it has been slow at developing its reserves, more efforts have been made recently, and this looks set to continue.

If and when these energy pricing reforms come, they will be particularly good for energy conservation and the reduction of carbon emissions.The Chinese government has had some energy conservation and emission reduction targets in place since 2006, but they have been ill-defined. The effects of climate change, in particular the fog that has covered large areas of the country, will lead to more direct and measurable targets for government at all levels. Authorities have already introduced more specific conservation measures, and have been promoting electric vehicles and efficient buildings.

All efforts related to the reduction of air pollution will directly or indirectly lead to a reduction of carbon emissions in China. We should therefore not be surprised if China announces a cap on its carbon emissions very soon.

Author: Lin Boqiang is director of the China Center for Energy Economics Research (CCEER), Xiamen University, China

Image: Chimneys at a coal-fired power plant in Shimen county, central China’s Hunan Province. REUTERS/Jason Lee