As the largest emitter of carbon dioxide in the world, how much coal China is burning is of global interest. According to the country’s National Bureau of Statistics, the tonnage of coal has fallen for the second year in the row. Nevertheless, there is one scenario in which coal use could easily go back up again: high oil and natural gas prices. Valeria J. Karplus explains.

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In March, the country’s National Bureau of Statistics said the tonnage of coal has fallen for the second year in the row. Indeed, there are reports that China will stop construction of new plants, as the country grapples with overcapacity, and efforts to phase out inefficient and outdated coal plants are expected to continue.

A sustained reduction in coal, the main fuel used to generate electricity in China, will be good news for the local environment and global climate. But it also raises questions: what is driving the drop? And can we expect this nascent trend to continue?

It appears many of the forces that led coal use to slow down in recent years are here to stay. Nevertheless, uncertainties abound.

The future of coal in China will depend on economic factors, including whether alternatives are cheaper and whether a return to high oil prices will encourage production of liquid fuels from coal. Also crucial to coal’s future trajectory are the pace of China’s economic growth and the country’s national climate and air pollution policies.

Overcapacity

First, let’s consider how certain we are that the rise in China’s coal use has reversed course. Unpacking that requires understanding the context in which the data is produced.

China’s national energy statistics are subject to ongoing adjustments. The most recent one, in 2014, revised China’s energy use upward, mainly as a result of adjustments to coal use. The revisions follow the Third National Economic Census, which involved a comprehensive survey of energy use and economic activity that better represent the energy use of small- and medium-sized enterprises.

There is good reason to believe these revised figures better reflect reality, because they help to explain a well-recognized gap between previously published national totals and the sum of provincial energy statistics, and because these regular revisions capture more sources of energy consumption.

In short, the latest numbers show China is using more coal and energy than previously thought, but the last two years of data suggest China’s coal use may be peaking earlier than expected.

China’s latest available energy statistics, based on a more thorough accounting of energy use in China, has the country’s coal use, measured in energy terms, plateauing and declining over the past two years. Valerie Karplus. Data: China Statistical Yearbook 2015 and 2014., Author provided

Working from the revised numbers, the observed leveling off of China’s coal use may be both real and sustainable. Efforts to eliminate overcapacity of coal and raise energy efficiency in electric power and heavy industries are biting: in 2014, coal use in electric power fell by 7.8 percent year-on-year, while annual growth in coal consumption in manufacturing fell to 1.6 percent from 4 percent in the previous year, according to data from CEIC.

The drop in coal use is partly due to structural shifts and partly to good fortune. In electric power, a shift to larger, more efficient power plants and industrial boilers, as well as a reduction in operating hours, has reduced overall coal use.

The contribution of hydro, wind, solar, nuclear and natural gas in the power generation mix also continues to expand. Abundant rainfall in 2014 allowed the contribution of hydroelectric power to total generation to increase significantly as well.

Also, the government-led war on air pollution is giving new impetus to clean up or shut down the oldest, dirtiest plants, and bring online new plants with air pollution controls in place.

These trends, as well as slower economic growth that increasingly driven more by domestic consumption and less by expansion of heavy industry, suggest that coal demand is likely to continue leveling off. This is true even though prices for coal are falling because of overcapacity.

The impending launch of a national carbon market in 2017 will further penalize coal in several sectors that use it intensively. The carbon market will require heavy emitters to either reduce carbon dioxide emissions by using less coal or purchase credits for emissions reductions from other market participants.

In this scenario, China’s coal is likely to instead be increasingly exported to other energy-hungry nations less focused on air quality and climate concerns.

A role for oil prices and air pollution policy

However, there is at least one scenario in which coal use could easily reverse its downward trend: a return to high oil and natural gas prices.

Globally, oil prices have plummeted in the past two years, while natural gas prices in China are relatively low for domestic users. High prices for oil and natural gas would make it attractive to convert coal into products that can be used in place of oil, natural gas or chemicals.

China already has facilities for producing these products, often referred to as synthetic fuels. Plans to substantially expand these activities have been postponed or scuttled due to the lack of an economic rationale.

But a return to high oil and gas prices would give new life to these projects, which even with a modest price on carbon emissions are likely to be economically viable. The scale of existing synthetic fuels capacity is sufficient to reverse the downward trend in coal use, should it become economic to bring it online.

Meanwhile, China’s carbon and air pollution rules are starting to have an impact on coal use, although the ultimate size of any reduction will depend on resources and incentives to implement policies at the local level.

Under the National Air Pollution Action Plan, three major urban regions on China’s populous east coast face significant pressure to reduce the concentration of ambient particulate matter pollution by 20-25 percent before 2017, while a 10 percent reduction target is set for the nation as a whole. Cleaning up the air will involve mobilizing an enormous number of local actors on the ground, financing technology upgrades, and introducing policies to reduce pollution-intensive fuels through efficiency and substitution.

Yet coal use reductions are unlikely to follow in lock step with air pollution reductions. Slower economic growth would be expected to reduce energy demand. But reducing the energy intensity of growth – the amount of energy needed to produce a unit of GDP – will likely become harder over time.

As economic growth slows, localities will be under pressure to expand opportunities for existing businesses and create new ones. If this pressure leads local officials to resort to expanding energy-intensive activities, such as iron and steel, cement, and heavy manufacturing, to boost local GDP, it will become more difficult to continue reducing China’s coal use per unit of economic output.

Carbon market in 2017

Whether coal use continues to decline or goes back up has implications for the timing of China’s emissions peak. At the Paris Climate Summit, China pledged to peak its emissions at latest by 2030, meaning emissions of carbon dioxide would start to fall in absolute terms.

While it is too early to say that China’s carbon dioxide emissions will continue to fall, it is unlikely that they will rise much further even if the country’s economic aspirations are realized.

The expansion of hydro and other forms of low or zero carbon energy will help. If the challenges of integrating the energy generated from solar and wind – less predictable sources of energy compared to dispatchable sources such as coal and gas – can be solved, renewable energy that is already installed has the potential to displace significant additional coal use as well, while contributing the reduction in air pollution and carbon dioxide emissions.

So the answer to the question of whether or not China’s coal use has peaked is: perhaps. China’s coal cap of 4.2 billion tons in 2020 is set roughly 7% higher than the 2013 peak, suggesting that even if the decline reverses course, at least use will not rise much higher. (Note that China’s coal cap sets a limit on coal use on a mass basis, while the above figure reports coal use on an energy basis, and is therefore not directly comparable.)

This is good news because China’s carbon dioxide emissions have already reached levels in line with previously projected peak levels for 2030, prior to the data revisions. So earlier peaks in both coal use and carbon dioxide emissions now look not only desirable, but possible.

Sustaining a commitment in China to cultivating cleaner forms of energy production and use will be challenging in the current economic headwinds, but the potential benefits to human health are great, especially in the medium to longer term.

The country’s national carbon market, planned to launch in 2017, is an important step in the right direction. A sufficiently high and stable carbon price could form the cornerstone of a sustained transition away from coal in favor of clean and renewable energy, developments that would be consistent with existing targets and air quality goals.

Any transition away from coal in China has the potential to help the world curb its carbon dioxide emissions and to improve domestic air quality – something that will allow us all to breathe a little easier.

Valerie J. Karplus, Assistant Professor of Global Economics and Management, MIT Sloan School of Management

This article was originally published on The Conversation. Read the original article.