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China threatens to pierce coal export bubble

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The surging growth in China’s hunger for coal – the bedrock of Australian government export revenue forecasts for the next two decades, and for the tens of billions of dollar in private investment in coal mines and infrastructure – could come to an abrupt halt within three years.

News reports from China, quoting Wu Yin, the deputy head of the government’s National Energy Administration, say China is looking to impose an absolute cap on coal energy consumption by 2015 – an innovative twist on global climate change policies that have so far included caps on emissions and renewable energy targets.

According to these reports, the cap will be set at 4.1 billion tonnes in 2015, compared to its consumption of 3.5 billion tonnes in 2011, suggesting that demand growth (which was 7.5 per cent in 2011) will have to be rapidly curtailed in 2012, 2013, and 2014 to meet that interim target.

The news is significant for a couple of reasons. The first is that it signals that China – already the world’s largest energy user and emitter – is clearly prepared to use a range of policy levers to reign in its growth in emissions (unlike in Australia where the government is under pressure to ditch most if not all complementary clean energy policies once it has a carbon price from July 1).

In its current five-year plan, China has already established an ambitious goal to reduce energy consumption per unit of GDP by 16 per cent by 2015, cut carbon emissions per unit of GDP by 17 per cent, and has also increased its “non fossil fuel” energy targets to 11.4 per cent by 2015. It also intends to increase forested areas by 40 million hectares.

Last year, it introduced feed-in tariffs for rooftop and utility-scale solar – a measure that is expected to deliver a sharp increase in solar deployment in coming years, between 50GW and 100GW by 2020), and it is also trialling cap-and-trade schemes for emissions in seven cities and provinces, with a view to wider deployment from 2015.

The proposed cap on coal use is an interesting development, and could come because some of the other measures – such as the reductions in emissions intensity – are proving hard to achieve. According to the reports, individual provinces would be given set budgets which they would be expected to adhere to.

The second point of significance is that it could force Australian industry and energy economists – and those elsewhere in the world – to rethink their forecasts of virtually non-stop growth in the demand for thermal coal in the coming decades.

As we wrote last week, much of the proposed expansion in thermal coal mines and infrastructure development in Australia is based on the assumption that demand – particularly from China and India – will grow unabated over the next two decades. The government’s principal commodities forecasting house, the Bureau of Resources and Energy Economics (BREE), predicts that coal exports will double over the next two decades, growing at 3.3 per cent a year and accounting for almost three-quarters of the growth in mineral exports over the period to 2034–35.

What has not been considered in these forecasts is that China and India may a) join in the rest of the world and set meaningful and ambitious greenhouse gas reduction targets, and/or b) discover that other energy sources such as solar offer not just a cleaner source of energy, but also a cheaper source.

As we pointed out in this article, China expects utility-scale solar to be cheaper than new coal plants by the end of the decade. The Indian government believes that cost curve could be reached within four years because of the higher cost of coal-fired generation and the plunging cost of solar. Even the US government says that wind energy is already cheaper than new-build coal-fired energy, and believes that solar will be too, by the end of the decade.

In its World Energy Outlook 2011, the International Energy Agency forecast that China’s demand for coal would grow around 50 per cent this decade, even under its “New Policies” scenario, where the global community says it will act to limit global warming but fudges on effective policies. It pretty much describes the current state of play.

However, the IEA also recognised that, should the world actually act on limiting average global warming, then China actually ceases to become an importer of any coal beyond 2020, and demand for thermal coal elsewhere is dramatically reduced. In the IEA “450 scenario”, China accounts for one third of global abatement, reducing its emissions by half compared to the”New Policies” scenario, mostly from energy efficiency measures to reduce demand growth, but also from fuel switching from fossil fuels to renewables.

China is yet to announce details of the cap on coal, or explain its reasoning. But it could be that it will opt for increased use of gas-fired generation, along with renewables – particularly solar and offshore wind – and nuclear. Gas offers the opportunity to significantly reduce its domestic emissions. Although gas imported as LNG may not have significantly lower emissions than modern ultra-super critical coal-fired generators, at least one quarter of the emissions will be domiciled in the exporting nations such as Australia, where the gas in processed.

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  • keith williams

    Giles,

    Is anyone in Govt or Opposition acknowledging this information? … or are our planners in complete denial? Surely, someone must be starting to sketch out Plan B for the Australian economy?

    • Giles Parkinson

      Hi Keith. I thought that was what the energy white paper was for. But the first draft doesn’t even recognise alternative technology costs. Ostriches come to mind.

  • Julien

    Anyone told Clive and Gina?

    • Richard Koser

      Isn’t the Qld govt building a ridiculous amount of coal infrastructure like ports and railways so we can export more coal through the Great Barrier Reef? So, subsidising an extractive sector which has – as others have noted – given the rest of the economy Dutch disease. Tourism and education are supremely renewable industries and used to be massively important to our national rconomy. They’ve both been hammered by the flying Aussie $.

      The govt last week even gave the extractors the option of dumping dredge spoil in the GBR marine park for less than council waste disposal charges. “Not necessary, we don’t pollute,” the industry says. “But if we had to pay $10/tonne to get rid of toxic waste we’d all be rooned.”

  • Frank

    Thank you Paul et al for this and other excellent pieces which strangely don’t appear in the nightly news.

    Pieces which clearly show that political ‘leadership’ in matters of real import is, in Australia and other places, sadly lacking.

  • D. John Hunwick

    It is interestng that a non-democratic country like China is in a better position to actually tackle climate change, while democratic countries like Australia are so focussed on the success of business rather than the common good that climate change ideas are treated as optional extras. I am yet to be convinced that democratic countries by their verty nature are capable of tackling the climate change issue in a meaningful, effective and timely way. It will be to our shame if China leads in saving this beautiful, ecologically functioning Earth while we only want more baubles.

    • http://beyondzeroemissions.org Matthew Wright

      Democratic countries like Germany???

      Germany’s renewable energy programs netted 87 Million Tonnes of abatement last year. That’s more than Victorian or NSW Coal fired power generation.

      And they have lowered the cost of Wind and Solar substantially which will lead to future abatement opportunities which will ratchet this figure up in both so called democratic and undemocratic countries.

      The problem for Australia is that those who have the reigns on government are in the business of marketing 19th century coal and gas to the world while our competitors in Germany, Denmark, Spain, Japan, China are marketing Solar and Wind. 50,000MW of wind in China is in the order of 90Million tonnes of coal not burnt.

    • SJ

      Democratic country Australia? You joking!

  • Nichol

    I guess Germany was ahead of China .. so democracies aren’t all bad. And the EU is somewhat of an extension to Germany on this front.

    But yes: Australia is still in the axis of climate denial, with the US.

  • Frank

    Sorry my typo. ‘Paul’ should have read Giles

  • Nick

    Giles –

    Another excellent piece. One truth that is often overlooked however . . .

    For all the focus on Australia’s trading relationship with China (which is important), when it comes to coal, we export more than double the amount to Japan (115m tonnes pa vs around 40m tonnes).

    When it comes to coal exports, China is on a par with South Korea in terms of Australian export revenue. And it is likely that the demand for coal in Japan will remain high.

    Policy changes in China are important. So are the policies in our other major trading partners . . .

  • Tim Buckley

    Giles
    Well done reporting on this. This is a huge announcement from Wu Yin that the Australian government MUST consider. Australia can not afford to be caught funding multi-tens of billions of dollars of rail and port infrastructure that has only one purpose – to facilitate the dream of ever increasing coal exports to China and India. At the very least, I hope the Australian government leaves these projects to be funded by our self-serving, non-tax paying billionaires. The useful life of this coal infrastructure will be severely capped as China then India move from coal to wind, hydro, gas and solar energy over the next decade or so.

  • Ngaire McGaw

    What a difference it makes to my morale when I receive this e-news each day!

  • Peter

    Now it’s time for Japan and South Korea to start revising their growing thermal coal demands.

  • Rohan Wilson

    Giles great story – hope it has legs – so if your a contracted player to the gold coast or the newcastle jets – better get to the fat men and renegotiate now,

  • http://www.solarbusiness.com.au Nigel

    Two questions:
    a) No offence to China, but can we take this target seriously? Will they really stick to it and mandate it?
    b)In 2010, ore was around 17% of all exports and coal around 15%. Both growing hugely and many financial commentators lay the strength of the dollar its the feet of these exports. Interesting to speculate then, what a drop in exports (or value)would do to our $ and, what the knock on effect for PV would be given that 99.9% is imported…..

    When you call Clive and Gina, ask them to sort this out for the sake of PV growth eh?

    • http://beyondzeroemissions.org Matthew Wright

      Why not? When they have a wind or solar target they don’t meet it, they exceed it by two or three fold.

      So if they’ve got a hard cap for coal why wouldn’t they achieve it? They have a government that is run by engineers, so in this part of the society/ economy – infrastructure they are capable of achieving amazing things.

      This will leave Australia with a redundant legacy 19th century fossil fuel economy that has been routed by the unrestrained expansion of coal and gas export industries and no market to sell into.

      All those people in recession hit Victoria caused by the routing of domestic and export education, manufacturing, tourism, agriculture are victims of the mining boom.

  • Ron Horgan

    These rapid shifts in the market for coal and gas will obviously have a great impact on our future.
    How can we bring this information to the people generally so that our politicians will be required to act responsibly?
    Perhaps the Greens are the only political party likely to take up this message?
    While they have only a 10-15% vote, there is good evidence that once a movement for change has a similar percentage of convinced members, they will cause a rapid conversion in the larger society.
    Its a sort of psychological tipping point.
    At the same time massive investment in infrastructure
    to service a diminishing carbon market makes no sense to any investors in such schemes.
    I do hope that our superannuation funds are not financing such white elephants?

  • John Bowman

    This information should be drilled into the ASX, a run on coal miners hopefully could be reinvested in renewables which obviously have a brighter future.

  • john jaffe

    what the chinesse are realy thinking or doing will not be public knowledge,our pollys are not the brightest buttons infact probaly opposite.they are still buying in to companies so they must have needs,john

  • Richard Simpson

    Have toagree with Mathew Wright on this occasion.Indeed “Dutch Disease ” has hit.
    There are solutions but no one has taken any notice.
    I actually had the privelege of talking with Martin Ferguson t a function last year, and he dismissed the idea.

  • Ricardo

    Thank you for your continuing coverage of the area of climate risk; just wait for the phrase ‘We couldn’t have known’ to be come the excuse de jour when investors’ funds are lost by willfully unaware ‘experts’ who directed said funds into soon to be stranded assets. The first climate risk class action law suit is only a matter of time, and that will be the tipping point for clean energy I feel. Regards

    • Richard Simpson

      Hang on, just saw some fairies at the bottom of the garden, must go and have a look

  • Rohan Wilson

    Richard I had a similar experience when I raised the Dutch Disease with Martin Ferguson – he suggested I buy some condoms

  • Max Boronovskis

    Regarding the last sentence of the article, where are emissions domiciled for Australian coal exports? I’ve been arguing with someone about this and its impact on our emissions per capita.

    • Giles Parkinson

      Under current arrangements, the emissions from burning coal are domiciled where that coal is burnt. So coal exported to china is domiciled there. Some fugitive emissions from the process of mining coal (from gassy mines) is domiciled in australia. The issue with LNG is that around 1/4 or 1/3 of its emissions will be domiciled in Australia because of the energy needed to convert gas into LNG. The emissions from when gas is burned will be domiciled where it is exported, but will be much less than coal. But if gas were to replace coal entirely, say, China would halve its related emissions and australia’s would go up sharply – the overall impact might by a reduction, but smaller than most people think.