Peak Coal in China?

Back in 2013, air pollution in China made headlines so frequently that some declared it the “Year of the Smog.” That year was when the term “airpocalypse” became common parlance, face masks became fashionable, and apps that track PM2.5 proliferated. The Chinese public sought answers to the pollution crisis and the Chinese government promised swift and dramatic actions.

Many factors contribute to China’s urban pollution, but the nature of the country’s energy consumption is often blamed as the chief cause. In particular, coal has been singled out as the main culprit. And rightly so, since China is essentially a coal-based economy and burns close to 4 billion tons of the black stuff each year—or roughly half of the world’s consumption.

Yet even as airpocalypse dominated the headlines, China’s energy conditions were undergoing a deeper shift that may turn out to be more significant than many realized at the time. The shocking images of smog enveloping Chinese cities may have obscured something more profound. Was 2013 also the year of “peak coal” in China?

Not to be confused with debates over “peak oil,” which is about running into supply constraints, in this instance I’m referring to whether coal demand reached a turning point in that year and will either continue to level off or decline.

Of course, predicting the peak of anything is perilous. Still, data from the past few years suggest that there are positive signs that coal’s position in China’s energy structure is waning. Several charts below illustrate this trend.

Figure 1: Coal consumption has declined since 2013

Source: National Bureau of Statistics (NBS).

Not only was total coal consumption down nearly 5% in 2016 from 2015, its proportion in China’s total energy consumption also dropped by about two percentage points (see Figures 1 and 2).

Figure 2: Proportion of coal in energy mix declines

* stce = standard coal equivalent.
Source: NBS.

This has led to a fairly significant bump in the proportion of cleaner energy sources, including natural gas. In fact, as I have argued elsewhere, Chinese natural gas demand has proven to be robust, with total consumption up 8% and gas imports up 22% in 2016. At the end of last year, cleaner fuels accounted for nearly 20% of the energy mix in China (see Figure 3).

Figure 3: Proportion of clean fuel in energy mix rises

Source: NBS.

The decline of coal over the last few years may receive cheers in certain quarters that champion China’s energy rebalance. But for the country’s coal industry, it has been downright dispiriting as it comes to grips with the possibility that the best times are behind it. The leading coal provinces of Inner Mongolia and Shanxi—the Chinese “West Virginia or Appalachia”—saw their production levels plummet through most of 2015 and 2016, with slight recovery toward the end of 2016 as coal prices modestly rebounded (see Figure 4).

Figure 4: Coal country blues: y-o-y production decline
Source: NBS.

A microcosm of the cost of post-industrial economic transition, how the Chinese coal industry copes with the end of the golden era of coal will directly affect the prosperity of provinces like Inner Mongolia, which constitutes about one-quarter of the country’s total coal output. For some of the larger coal players that have valuable assets, they may be able to diversify into coal-bed methane and other areas to ride China’s natural gas demand. For others, their futures may be more grim. Already, the Chinese government is aiming to cut 1.8 million jobs in the coal and steel industries.

In many ways, these challenges should resonate with regions in the United States that have also experienced industrial decline, coal being one of them. The key difference, of course, is that in the Chinese political system, the state, when politically committed enough, can usually force industrial restructuring without worrying about votes. Instead, it simply doles out subsidies from Beijing’s still plush coffers to make sure that the afflicted industries get through the transition without too much instability and economic dislocation.

The Chinese coal industry, and its prospects over the next few years, bears watching because its recent downturn may also be cyclical and could stabilize as the broader economy picks up a bit more steam. Given secular economic trends and Beijing’s policy emphasis, however, the coal industry appears unlikely to return to its previous heights.

Chinese policymakers may have arrived at a similar assessment, which probably lent them more confidence in committing to their climate change pledge at Paris. That is, if the recent pace of having coal’s proportion in total energy consumption fall by about 2 percentage points a year can be sustained, then by 2022, coal would only be about 50% of the energy mix. That would mark a dramatic change from just a few years ago, when coal was still nearly 70%. It would certainly make it easier for China to meet both its 2020 and 2030 energy and emissions targets.

Coal’s centrality in fueling China’s economic engine won’t change overnight. But its demotion in the country’s energy pecking order may be swifter than previously anticipated. If so, then a silver lining may be poking through the smog clouds.