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Coal and China

November 26th, 2014

Among the sceptical reactions to China’s part of the joint announcement on climate policy made by the US and China, two were particularly prominent

* The statement didn’t require China to do anything until 2030
* The statement simply reflected “business as usual”

These arguments were almost immediately refuted when China announced, in its http://thediplomat.com/2014/11/in-new-plan-china-eyes-2020-energy-cap/ that it would cap coal consumption at 4.2 billion tonnes by 2020, with total primary energy consumption (including oil and gas) held below 4.8 billion tonnes of coal equivalent. By contrast, in 2013, the estimate was for 4.8 billion tonnes of coal alone. Back in 2010, the US Energy Information Administration was predicting continued growth in Chinese coal assumption to 2035 and beyond.

The idea that the statement didn’t require any action before 2030 was always silly. Did those making it, imagine, for example, that the number of cars, energy-using appliances and so on would grow fapidly until 2030, then stop at that point? That would entail a an overnight shutdown of most of the capital goods sector. But, the 2020 peak in coal use hammers the point home more than a logical refutation.

As for the “business as usual” idea, it’s true that this agreement is, for both the US and China, mostly a public commitment to goals that have been made feasible by recent changes in policy, rather than an announcement of a new policy shift. But the changes that made the announcement possible, notably including limits on coal-fired electricity in both countries represent a massive change relative to the policies and trends of the past.

Coming back specifically to coal, it’s obvious that in China, as in the developed world, the move against coal is motivated as much by concern about local pollution effects as about global climate change. Indeed, the work of Mendelsohn and Nordhaus has shown that local health effects would imply a very substantial carbon tax even if the global warming problem could be overcome. So far, these concerns haven’t had much salience in India (where indoor pollution from cooking fires is still a bigger problem in many places), but they are bound to emerge as the country gets richer.

As regards Australia’s coal industry, a peak in Chinese coal demand, combined with a push for self-sufficiency, suggests that Chinese import demand will peak before 2020. With India also aiming at self-sufficiency, it’s hard to see much scope for long-term growth in exports.

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  1. Matt Hardin
    November 26th, 2014 at 11:04 | #1

    And yet Campbell Newman gifts taxpayers cash to new coal mining developments. Is it too much to expect a strategic view from those we trust to lead?

  2. rog
    November 26th, 2014 at 11:21 | #2

    Given both the knowns and unknowns money set aside by Australian govts for new coal projects can no longer be described as an “investment” more properly a “wager”.

  3. Ian Milliss
    November 26th, 2014 at 11:40 | #3

    I wouldn’t even call it a wager. I’d call it self-harm.

  4. Hermit
    November 26th, 2014 at 11:48 | #4

    Since I believe China’s current coal consumption is 3.6 Gtpa they can ramp that up to 4.2 and stay there for years. The fact they removed a coal import tariff under the FTA is not a good sign. It is said China now does about half of world manufacturing. Perhaps we in the ‘West’ should shun Chinese made goods. It’s hard though I bought a power tool for $49 and it lasted a year so I bought something similar (also Chinese made) for $52. The European equivalent was over $200.

  5. John Quiggin
    November 26th, 2014 at 11:52 | #5

    I know you love the Eeyore stuff, hermit, but doesn’t it undermine the rest of your argument when you bag out the one country that is doing anything serious with nuclear?

  6. J-D
    November 26th, 2014 at 14:24 | #6

    @Matt Hardin
    ‘Is it too much to expect a a strategic view from those we trust to lead?’

    Who trusts them?

  7. Megan
    November 26th, 2014 at 15:48 | #7

    Haixin Iron and Steel went into bankruptcy this week after ceasing production earlier in the year due to “capital” constraints. There are expected to be further bankruptcies in the sector.

    Haixin’s production halt earlier in the year had an effect on the world iron ore price. Presumably China will use a lot less coal as steel production declines.

  8. Hermit
    November 26th, 2014 at 17:13 | #8

    China now seems to be the biggest at most things. Three Gorges dam is the world biggest hydro some 30 GW if I recall but they now have something like 800 GW of coal capacity much of it built since year 2000. Australia is said to have 54 GW of generating capacity of all types. I think the twin CANDU reactors at Qinshan are quite neat looking
    http://www.cni23.com/eng/show.asp?cataid=A00440004&id=707
    Other countries now appear incapable of building big reactors in under 5 years and $4 a watt. Democracy may be fair but it is not efficient.

  9. November 26th, 2014 at 17:30 | #9

    Iron ore is down to under $70 US. That’s about one third what it was four years ago. Presumably China is making more use of recycled steel and now needs less of the new stuff. That means less iron ore will be imported and less metallurgical coal. China’s steel exports are now around a record high and as long as they stay high they will presumably still require imports, but even so coking coal is still at a six year low and around one third the price it was at its peak. I suppose that in a sensible world China would make use of its existing capital and export steel and other countries would forego building additonal blast furnaces of their own.

  10. November 26th, 2014 at 17:44 | #10

    In Australia rooftop solar provides electricity to households and many businesses at a lower cost than any utility scale generation, especially nuclear power. The obvious solution – Smash Democracy, may not work as China also installs solar for about $1 US a watt. Clearly we need some other solution. A third way isn’t good enough, we need a fouth way or maybe even a fifth way. And that way is to destroy the sun. Radiation readings from the sun demonstrate without a doubt that the Solarians have been conducting secret underground nuclear tests for millions of years. In 1859 the sun launched and struck the earth with a deadly radioactive solar flare. The sun continues to provocatively laucn solar flares and another could be launched at the earth without warning at any time. If we don’t act now to destroy the sun, how will you answer when your child raises their head and asks, “Daddy, why does the sun still exist?”

  11. Fran Barlow
    November 26th, 2014 at 18:16 | #11

    The Brits would love it if they could have Hinckley at $4W … 😉

  12. Donald Oats
    November 26th, 2014 at 18:33 | #12

    @Ronald Brak
    We could build massive coal powered heaters that beam back all the excess energy to the sun, to teach it a lesson…oh, hang on.

  13. Matt Hardin
    November 26th, 2014 at 20:34 | #13

    @J-D Too true.

  14. 2 tanners
    November 26th, 2014 at 20:47 | #14

    I have rather liked most of the good humoured responses here. It is clear that the phrase “for all the coal in China” is not going to gain currency any time soon.

  15. jrkrideau
    November 27th, 2014 at 06:08 | #15

    @Matt Hardin

    Is it too much to expect a strategic view from those we trust to lead?

    I don’t know about your Federal Gov’t but Tony Abbott seems to get along fine with Stephen Harper, the Canadian P.M and we, here in Canada, are well aware that he has no strategic vision[1]
    and is about as trustworthy as an annoyed rattlesnake — and with a nastier disposition.

    1. So far he is batting 0 for 5 in international decisons.

  16. John Quiggin
    November 27th, 2014 at 08:20 | #16

    @Ronald Brak

    Since the dawn of time, liberals have yearned to blot out the sun. Next best is to imprison its lifegiving energy in solar “cells”, blackening the earth and ending Life As We Know It.

  17. Mr T
    November 27th, 2014 at 15:43 | #17

    Surely you talk of Redheads wanting to “blot out the sun”

  18. derrida derider
    November 27th, 2014 at 17:54 | #18

    @Megan
    Not disagreeing that the outlook for coal generally is grim, but coking coal (for steel making) and steaming coal (for electricity) are different markets, and it is clearly – on local pollution as much as carbon control grounds – steaming coal that the Chinese are trying to get rid of. The iron ore and coking coal price troubles are more immediate and in part temporary due to simple overstocking.

  19. November 27th, 2014 at 18:51 | #19

    Derrida derider, China’s iron ore and coking coal imports are down and their steel exports have reached record highs. This does not look like temporary shake out to me. As countries industrialise they build lots of new buildings and other infrastructure which requires a lot of steel. But as they start to compete industrialisation they concentrate more on replacing old infrastructure and the old old infrastructure they knock down tends to be full of steel which lets them recycle that instead of using new stuff. Now that China has built enough modern (though cramped by our standards) accomodation for almost everyone and is producing almost as much electricity per capita as a developed country, I think they may be at around that point where they will decrease steel consumption and their iron ore and metallurgical coal imports will fall. Perhaps quite quickly as a result of their building binge ending.

    Now lower prices will probably encourage more steel production and importation in places such as India, but I don’t see any huge relief for iron ore and coke producers in the short term and I really don’t think China’s demand will pick up evah.

  20. James Wimberley
    November 28th, 2014 at 04:43 | #20

    JQ: “…a peak in Chinese coal demand, combined with a push for self-sufficiency, suggests that Chinese import demand will peak before 2020.” If we can trust the multiple reports (here, here) indicating that China’s coal consumption has already peaked, the 2014 decline in coal imports is not a blip but already part of a trend.

    India is the only bet Australian coal miners can now make. The bet is that India will fail to replace imports with increased domestic output (fair enough), and that if and when the Indian government realizes this, they will switch back to imports rather than doubling down on renewables (very dubious). In two years the Indian solar and wind industries will be twice the size they are today, and twice as influential.

  21. derrida derider
    November 28th, 2014 at 16:25 | #21

    Don’t look to India for more coal exports – if they ever get their act together enough to need a lot more steel they’ll be together enough to use their own coal, of which they (unlike China and Japan) have a lot. And their electricity plans mainly involve hydro (they’re pressuring Nepal to let them build some huge Himalayan dams there) and nuclear (using cheap Aussie uranium of course).

    That all said, my point is simply that the short term outlook for coal and iron ore reflects some short term factors, and you need to allow for these and keep this separate in your mind from the long game.

  22. iain
    November 28th, 2014 at 18:55 | #22

    Very little of Australia’s coal goes to China. However, with this signaled increase in Chinese coal consumption, along with a preference for high thermal, low ash, low sulphur – Australia’s coal exports to China should increase, particularly with the FTA doing away with most tariffs.

    China’s peak labour force is imminent, and peak population somewhere between 2020-2030, so any peak coal projection figures are “natural”, rather than a commitment.

  23. November 28th, 2014 at 22:30 | #23

    Derrida, India doesn’t appear to have much if anything in the way of metallurgical coal used for iron smelting. They can use direct reduced iron production which doesn’t require metallurgical coal, but wiith Chinese steel consumption maturing they could presumably just buy coke/steel cheap from overseas making increased direct reduced iron production uneconomical.

    And Indias generation plans include a vast amount of wind power and a target of 100 gigawatts of solar by 2022. The solar capacity alone would be enough increase current Indian electricity generation by over a quarter. Any additonal nuclear capacity is going to be small potatoes compared to that. India might not reach its solar target but a lot of PV is definitely going to be installed.

  24. November 28th, 2014 at 22:39 | #24

    Iain, in the 2009-2010 financial year, China imported 42.4 million tonnes of coal from Australia. It was Australia’s second largest export market after Japan. So a lot of Australia’s coal goes to China. Or at least it did. Coal exports to China have fallen dramatically recently. Apparently they just don’t want as much. They have even been favoring their own domestic producers – the cads!

  25. John Quiggin
    November 28th, 2014 at 23:38 | #25

    Coal is a commodity. What matters is the aggregate balance of demand (more exactly the excess of demand over domestic production, since most countries favor their own producers) and supply. If China’s demand falls or slows, that affects the world price, as we have seen.

  26. Ikonoclast
    November 29th, 2014 at 05:11 | #26

    Campbell Newman recently said. “We are in the coal business.” It is clear this statement is wrong at all levels. Who does this “we” mean? If “we” is Campbell and the LNP then they are properly in the government business. If “we” is the Queensland people then most of us are not in the coal business at all. With this statement he clearly identifies his government with the interests of the coal oligarchs. He is governing for the coal oligarchs only. I guess they bought Campbell and his party for a few hundred thousand dollars of party donations and maybe a few promises of directorships down the road.

    Despite their claims to believe in the “free market” they clearly have little faith in it. If coal was the future of Qld and it was going to do well wouldn’t market forces take care of that? This is clearly a case where the government should step back and let market/international forces (including costing of negative externalities) determine the amount of coal mining activity without subsidies.

  27. TerjeP
    November 30th, 2014 at 22:27 | #27

    Coming back specifically to coal, it’s obvious that in China, as in the developed world, the move against coal is motivated as much by concern about local pollution effects as about global climate change. Indeed, the work of Mendelsohn and Nordhaus has shown that local health effects would imply a very substantial carbon tax even if the global warming problem could be overcome.

    Surely the correct response to deal with localised health concerns would be a tax on the actual pollutants that cause health issues not a tax on CO2. Although perhaps by carbon tax you meant a soot tax rather than a CO2 tax.

  28. Fran Barlow
    November 30th, 2014 at 22:55 | #28

    @TerjeP

    They should ‘tax’ all of them at their community cost. Of course, merely ‘taxing’ (pricing really) CO2 would take the other pollutants with them because it wouldn’t be viable to emit only CO2 from a coal plant, especially when there’s a longer term plan to cap emissions.

  29. James Wimberley
    December 1st, 2014 at 04:50 | #29

    @TerjeP
    As Colbert would tell you, you have to find something before you can tax it. Near-ideal taxes like VAT are a pig to organize. Salt, windows, whisky, cars and gasoline are dead easy. How do you measure and attribute the fine particles before taxing them? The greenest intern can count the wagon-loads of coal going into the power station.

  30. Ikonoclast
    December 1st, 2014 at 07:03 | #30

    @James Wimberley

    “How do you measure and attribute the fine particles before taxing them?”

    Actually, it’s very easy. You burn some fuel (say a kg of a specific coal or a litre of a specific liquid) under laboratory conditions which simulate standard consumption conditions. You measure the pollutants. You impute that amount of pollutants to every kg or litre of fuel burnt under industrial or commercial conditions. You tax the fuel accordingly.

  31. BilB
    December 1st, 2014 at 07:30 | #31

    Well there is one for the record. TerjeP, our local Libertarian, is in favour of taxing externalities even if only when they become physically visible. Soot, predominately a visible carbon by product of combustion, is OK to tax but carbon dioxide, an invisible by product of fossil fuel combustion should not be taxed.

    So what is the taxable factor here?

    Is it that soot is a product of incomplete combustion meaning waste and waste to a Libertarian is offensive and should be taxed?
    Is it that soot is visible whereas CO2 is invisible and if you can dispose of something without being seen then that is OK but being seen to throw trash into the environment should be taxed?
    Is it that soot is an immediate but temporary annoyance and should be taxed within the attention span of a Libertarian whereas CO2 has a long term and permanent environmental impact and is outside the “quick profit” profile of Libertarian philosophy and therefore should not be taxed?

  32. John Quiggin
    December 1st, 2014 at 08:12 | #32

    Terje, I would also be interested to understand the distinction between soot and CO2 on which you appear to rely.

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