The Strategic Vulnerability of China’s Reliance on Coal

China’s dramatic economic boom has focused attention on the strategic aspects of the country’s efforts to secure reliable energy supplies and satisfy its growing demand for oil and natural gas. Most analysts have examined China’s aggressive pursuit of overseas energy supplies, highlighting concerns this poses to international energy markets. Little attention, however, has been paid to the profound domestic implications of the Chinese need for energy to maintain its economic growth. Regardless of any Chinese success in acquiring oil and natural gas resources, coal will remain the dominant component of the Chinese energy mix for the foreseeable future. The paradox of this situation is that as necessary as coal is to sustaining China’s economic growth, the burden of relying on coal inhibits meaningful political and economic reforms and is emblematic of larger issues of governance in China.

China’s Dependence on Coal

Coal accounts for 65 percent of China’s primary energy consumption (EIA, August 2005). Although this marks a decline for coal’s share in the Chinese energy mix in percentage terms over the last ten years, actual coal consumption has increased as China’s energy and electricity demand has grown rapidly. Despite the problems with coal usage outlined below, China’s thirst for energy makes it unlikely that the energy mix will change substantially in the near future. Chinese coal production itself grew by approximately 575 million tons since 1998 and could conceivably grow by another 300-400 million tons over the next five years (BP Statistical Review, 2005). Beijing’s plan to build 20 nuclear power plants by 2020 could help ameliorate the increasing demand for coal, but more likely is that total Chinese coal consumption will continue to grow. Chinese energy investment and development has thus far proven unable to keep up with the roughly 6-10 percent annual increase in electricity consumption (EIA, August 2005).

The “Soft” Impact of Coal

China’s reliance on coal has a number of consequences for both the Chinese citizenry and the environment. The high sulfur content of much of Chinese coal results in high levels of sulfur dioxide (SO2) emissions that not only aggravates respiratory and heart problems but also contributes to the toxification of water resources and desertification through acid rain. Additionally, mine tailings, particularly from smaller producers, play a noticeable role in the already substantial loss of Chinese farmland each year.

The impressive economic growth of China in the last 25 years has tangibly improved the overall standard of living. Nevertheless, the resulting pollution—especially that from increased coal burning—has had a substantial toll on human life. In both urban and rural areas, diseases aggravated by SO2 inhalation account for 30 to 35 percent of the mortality rate (World Health Organization, 2005). A World Bank report estimated that 178,000 people die each year due to high ambient pollution levels in urban centers brought about in large part by industrial coal usage. Household use accounts for an additional 111,000 premature deaths (World Bank, 1997). While these statistics are somewhat dated, the air pollution problem has indeed worsened as coal consumption has increased.

Coal extraction and resulting mine tailings contribute in part to China’s already serious problem of losing agricultural land to urbanization, economic development and pollution. Moreover, mining and washing coal, particularly by small producers, is contributing to the water shortages already prevalent throughout the country. With 28 percent of the world’s population but only seven percent of its arable land, China cannot afford to continue destroying its most fertile agricultural areas for the sake of economic development—lest it bring about a food crisis. This is what Premier Wen Jiabao was referring to when he discussed the loss of Chinese farmland in his speech introducing the “New Socialist Countryside” (Renmin Ribao, March 6). The combination of the fact that only 28 percent of China’s coal is washed, water shortages in coal-producing areas, and the potential for an agricultural crisis mean that washing coal—one of the most common methods for producing cleaner burning coal—is simply not an option for China (Asian Development Bank, 2002).

Economic Implications

The consequences of Chinese coal usage also extend into the economic sphere, overlapping with the human and environmental problems. The burden that coal places on strained healthcare and infrastructure systems exacerbates the urban-rural and coastal-inland divides in China and makes meaningful reform more difficult.

In terms of deepening the divides within China, heavy reliance on coal inhibits economic growth in rural and inland economies. The air pollution resulting from coal increases national healthcare costs by an estimated two percent of GDP annually (Environment, June 2004). Given that the benefits of the last decade of economic growth have been mostly confined to the cities, this places a disproportionate burden on rural areas for increasing healthcare expenses. These costs inhibit rural and inland government spending on needed development projects including energy, education, and transportation. In areas such as Sichuan and Guizhou, investment in hydropower could conceivably meet increasing energy demand, but the local governments lack needed financial resources while existing projects direct the energy toward coastal areas.

On the transportation side, China’s inland provinces are already inadequately serviced by railways with a transportation density less than one-fourth that of the coastal provinces (Zhongguo Tongji Nianjian, 2004). The need to transport coal, consisting of 40 percent of all freight in China, creates bottlenecks that prevent exports (Asian Development Bank, 2002). Lacking a means to move their products to external or even coastal markets, the inland provincial economies can produce only for themselves. Even goods that in a period of declining profit margins in China could be produced more efficiently and profitably in these inland provinces cannot be moved beyond local markets. The net result is that the bottlenecks created by coal exacerbate unemployment problems and restrict economic potential. Transporting coal, in part, was a significant reason for the failure of the “Open Up the West” campaign designed to improve the economic performance of these inland provinces. Barring substantial reform, the “New Socialist Countryside” campaign is unlikely to prove more fruitful.

Ineffective Regulation and the Problem of Accountability

There are several significant impediments to resolving these human, environmental, and economic problems with coal, both at the national and local levels. At the more macro-level, state-owned enterprises (SOEs) still dominate the energy sector, with the consequence that effective regulation is very limited. The traditional method for levying fines against companies in violation simply does not work against SOEs and only produces what is best described as government-subsidized pollution. The financial penalties meted out to SOEs violating pollution control laws are ultimately recorded as losses paid by the government, as well as taxpayers. To compound the problem of regulation further, many of the regulatory organs are overtaxed and impotent due, at least in part, to staffing shortages. For example, the Energy Bureau of the Development Reform Commission has 27 staff members to oversee a US$1.2 trillion industry, and the government has yet to make meaningful steps forward (China Daily, December 2, 2004). The establishment of the State Energy Office in 2005 led by Wen Jiabao demonstrates official recognition of regulatory problems, but this office is understaffed as well and has not taken an active role.

Local party cadres can also contribute to the regulation problem. The economic transformation and boom has created space for a new kind of party official guided by a “big-fish-in-a-small-pond” strategy who tries to build up his or her own little fiefdom. Rather than aiming for promotion, some rent-seeking cadres attempt to play locals off against their superiors and serve as the intermediary brokering settlements—not coincidentally to their own financial benefit. Also at the local level, party cadres often face a number of contradictory directives. Even when cadres are ordered to lower pollution within their districts, controlling pollution receives a lower priority than economic development on the cadres’ evaluation scale. Consequently, a negative rating will have a minimal impact on an individual cadre’s career—assuming that the official actually seeks promotion—if the jurisdiction performs well economically. A cadre, consequently, is unlikely to shut down a small coal mine that provides jobs and income to the district barring direct higher-level intervention; yet, as noted above, the regulatory organizations are ill-equipped for such a task across the entire country.

Cadre evaluations have been used in the past to cement necessary reforms. During the early days of the reform era, cadre evaluations that focused on economic and market liberalization strengthened directives from Beijing to move away from socialist economic practices. Additionally, in China’s potentially tempestuous domestic political environment, such evaluations demonstrate clearly the central government’s intent for future policy and provide political cover (Holding China Together, 2004). Moving Forward and the Prospects for Resolution The Chinese government is embarking on a new campaign to shut down many of the small coal producers and power plants in an effort to reform the coal sector. The plans call for the creation of coal production base-areas and the closing of all coal mines that produce less than 30,000 tons of coal per year (Xinhua, April 4). Although such plans are already inhibited for the reasons stated above, there is another significant issue here. Chinese construction of coal power plants is proceeding at a very high rate and these plants will need coal. Beijing’s energy planning calls for an additional 562 coal-fired power plants in the next few years and anecdotal evidence suggests that smaller plants are going up at a rate of three to five per day (Christian Science Monitor, 2004). Simply put, coal will be a considerable part of China’s energy future.

China can take a number of steps to alleviate the impact of coal. China’s demonstrated need to improve its debilitating coal situation offers a vast market for both old and new technologies that China can utilize on its own. Coal liquefaction offers a potential source for diesel and gasoline and utilizes China’s abundance of coal, but it is only economically viable with oil prices above 35 to 40 dollars. Newer clean coal technologies designed to improve efficiency and alternative energy could also help ameliorate the Chinese energy dilemmas. From Beijing’s perspective, the capital improvements required for exploiting these technologies in China’s inland provinces could aid the success of the “New Socialist Countryside” campaign and help reduce the rural-urban divide. Any solution will probably need a larger energy bureaucracy with greater regulatory authority and monitoring capability. An expanded and more capable energy bureaucracy alone will not be successful; significant investment in newer and more efficient energy infrastructure and technologies will be required.