China Climate Adviser: Expect Big Cuts in Coal

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China has a real chance of cutting coal dependence to just 55% by 2020, from the current 64%, although it would be "unrealistic" to expect the upcoming national carbon market to deliver substantial emission reductions or be link-ready with overseas markets in the near term, according to Li Junfeng, who heads the country's climate policy think tank, the National Center for Climate Change Strategy and International Cooperation. China's ambitions of leapfrogging over global competitors in the technology space for non-traditional energy sources will also be fraught with challenges, Li tells EI New Energy in an exclusive interview on the sidelines of the Pacific Energy Summit held in Singapore last week (see full interview below). Mild economic growth over the past three years, if sustained, points to China's total energy demand coming in at less than the 5 billion tons of standard coal equivalent (tce) predicted in the current five-year (2016-20) national development plan, according to Li. China's total energy demand -- which stood at 4.3 billion tce in 2015 -- might edge up to only 4.5 billion-4.6 billion tce in 2020 if the country continues in the trajectory that saw consumption rise by only 50 million tce yearly since 2013. With economic restructuring to emphasize quality, green growth, China's energy usage should be enough to drive a GDP target of 6.5% over the next five years, compared with the 7% during the previous five years, Li argues. China has done well in boosting energy efficiency during 2011-15 by achieving a 19.7% reduction in energy intensity, or the amount of energy consumed per unit of GDP (NE Jan.28'16). At the same time, coal's share of the energy mix has been steadily eroded by cleaner energy sources like natural gas and non-fossil fuel supply such as renewables and nuclear. Since 2013, China's incremental energy consumption has been mostly met by gas and non-fossil fuels, the supply of which is expected to rise by a combined volume of 80 million tce annually, for a total increase of 400 million tce over the next five years, according to Li's calculations. This could displace some 250 million-300 million tce in coal-based energy by 2020, so that absolute raw coal consumption would fall from 3.8 billion tons in 2015 to around 3.4 billion tons, which equates to around 2.4 billion tce in energy terms, or under 55% of the total energy requirement of 4.6 billion tce. This would represent a significant overachievement on the official target of cutting the coal ratio to 62% in 2020 (NE Mar.3'16). Such a scenario would be music to the ears of experts on a China Coal Cap research project team, which has advocated a tighter coal ratio of 57.4% by 2020 to effectively rein in emissions (NE Dec.3'15). Prospects of China overdelivering on its other climate-related ambitions are, however, less rosy. The country will face enormous challenges in its quest for energy technology advancements to propel itself into the global club of technology leaders, Li observes. The Chinese culture and tradition is deeply entrenched in discouraging unconventionality or maverick behavior, which is the basis for technological innovation. "China is very good at following trends but we only have very few enterprises that are truly innovative, such as Huawei, which has fundamentally abandoned the traditional way of thinking and become a leader in many ways in the telecommunications industry," Li notes. China will need a fundamental shift in mindset to encourage the type of innovations that originated from technology mavericks in the US, he adds. The high hopes that overseas observers have placed on China's upcoming national carbon market -- to be launched next year -- are also "unrealistic," Li cautions. China's overall economic system is not yet perfected as a market-based structure and is also not recognized as such by the EU and the US. "How then can one expect the Chinese carbon market to be an exception?" says Li, who adds that it would take "many, many years" before China's carbon market can evolve into a well-functioning scheme to deliver substantial emissions reductions, or be ready for linkage with overseas carbon trading schemes. Kimfeng Wong, Singapore What is your assessment of China's progress so far in combating climate change? I am quite satisfied. China has gone through three phases in its climate change awareness. In the beginning, it was questioning and doubt, and even suspicions that it's some kind of conspiracy. The second phase involved many years of communication and talks to understand and recognize the true meaning of climate change. The third phase saw China taking the initiative to participate in the international community and proactively guide climate efforts in the proper direction. In the words of President Xi Jinping, tackling climate change is not something that others are pressuring us to do, but a goal that we ourselves want to pursue. We also had good progress in technology. Many policy measures that were implemented were supported by technology advancement. Since 2013, non-fossil energy sources have been able to meet all the increments in China's power demand, so the timing was also ripe. China's evolution in the climate change cause is progressing in the correct direction. The whole process took almost 30 years. In the '80s and '90s, and even until before 2007, there were still doubts. But after 2007, China started to communicate and understand, so gradually the doubts and suspicions faded. From 2014, China took the initiative to proactively participate and play a guiding role, especially in reaching the Paris climate agreement. The three leaders that contributed most toward the Paris agreement are US President [Barack] Obama, France's President [Francois] Hollande with his strong ability to coordinate, and finally President Xi Jinping. In which areas has China been most successful, and which need improvement? China is a large nation as well as a developing one, and found its climate role through the ability to translate the concerns and ideas of other big countries into a language that developing nations can understand, thus acting as a bridge [between developed and developing countries] because it can communicate with both sides. Domestically, China has also been successful in increasing energy efficiency and promoting renewable energy. In these aspects, China is at the forefront. Also, incremental energy demand is mainly met by non-fossil fuels. The drive now to gradually replace coal with non-fossil energy in China is also quite successful (NE Jun.2'16). An area that needs improvement is the pace of change. We need to move faster in climate efforts amid the ongoing economic and energy restructuring. Bad air is a problem because the first thing that the Chinese, including President Xi, does every morning is to check the air quality. So China needs to speed up the switch away from fossil fuels, especially coal, we need to work harder in this aspect. How will China find the balance between economic growth and environmental goals? If there is a conflict and a choice needs to be made, which will take priority? Actually in China now, there isn't a conflict between economic development and environmental protection. China has passed the fledging phase of economic development and has come to a point where it is a "high-income developing country." To progress toward a developed nation status, any incremental [economic] growth has to be aligned with ecological and environmental considerations. China has no room for sacrificing the environment in its economic pursuits -- this simply cannot be tolerated and the country is in no condition to do so. China is no longer in poverty, so any further development must be quality growth. The country has passed the phase when economic development was achieved at the expense of the environment, so now there should be no conflict between the two. If any conflict does arise, then environment protection must take priority, there is no other choice. How much room is there for energy consumption to increase in order to achieve the national GDP growth target of 6.5% during the 13th five-year (2016-20) period? (NE Mar.10'16) I foresee the increase in energy consumption to be quite muted. Under China's 13th five-year energy planning, total demand is expected to reach 5 billion tons of standard coal equivalent (tce) in 2020. But I think actual demand may not reach that level. My reckoning is that actual demand would be lower at only 4.5 billion-4.6 billion tce in 2020, or 400 million-500 million tce below the predicted level. In 2015, total energy demand was 4.3 billion tce. This means the government has provided for a 700 million tce increase over the next five years, or an average rise of around 150 million tce each year. However, during the past three years, annual energy demand growth has been lower, at below 50 million tce on average, and this was able to support a GDP growth of around 7%. In the coming five-year period, the quality of GDP growth should be improving, so I think a yearly increment of 50 million tce in energy consumption should be sufficient to realize the annual GDP growth target of 6.5%. In other words, the government's energy demand forecast [of 5 billion tce in 2020] is on the high side. In the next five years, the energy-environment pressure would likely ease. Since 2013, China's coal consumption has peaked (NE Mar.3'16). Oil demand growth has also been small. Oil demand has basically also peaked, in the sense that the yearly growth is now quite muted (NE Apr.14'16). The improvement in vehicle fuel efficiency basically offsets the expansion in vehicle population -- so although absolute oil consumption is still rising, the increase is small and not in proportion to the rise in vehicle ownership. The increase in energy consumption is met basically by two sources: non-fossil energy and natural gas. These are more environment-friendly. In addition, coal usage has started to decline. From 2014 to 2015, coal demand fell by 200 million tons. Between 2015 and 2016, coal demand would likely decline by another 200 million tons. The original expectation was for the coal ratio in China's energy mix to fall to 62% in 2020. Now I estimate that the ratio could even fall to 55% or lower. This is totally possible. My calculations suggest that total energy demand would be at 4.6 billion tce in 2020. With the supply of non-fossil energy growing by 60 million tce annually and natural gas by around 20 million tce, that means an annual clean energy supply of 80 million tce, or 400 million tce over five years. This could potentially displace 250 million-300 million tce in coal usage. In other words, absolute raw coal demand could decrease from around 3.8 billion tons now to around 3.4 billion tons in 2020, or an energy equivalent of around 2.4 billion tce, which is under 55% of total energy demand. China is seeking an energy technology transformation. Which are the most important non-fossil fuel technologies that China needs to pursue? The most crucial is storage technology. In the future, most of incremental energy supply is to come from non-fossil fuels, mainly renewable sources. But renewable energy is mostly intermittent and requires storage technology. Another aspect is the trend toward electric vehicles, which is also reliant on energy storage technology (NE May12'16). So energy storage is key to achieving a transformation of the energy industry. What policy measures are in place to spur storage advances? China does not now have any concrete policy targeting the energy storage technology, so progress is dependent mainly on the industry's own efforts in making technological improvement and R&D. But there is a global trend whereby many large automakers are looking at electric vehicles (EVs) and battery storage, so that's a good sign. This is driven not just by the Chinese EV market but also by developments in Europe and in the US, where Tesla was born. So there is an international effort to promote energy storage. The energy revolution is not the concern of just one individual country, but dependent on international efforts. All technological advances are happening through global collaboration, including in the Silicon Valley and by China's technology geeks. Everyone is doing it. China does already have some policies that favor or prioritize EV usage [over conventional vehicles], but needs to strengthen efforts in boosting recharging infrastructure (NE Apr.21'16). In tandem with domestic efforts , is China also hoping to increase its international competitiveness in emerging new energy sectors? That is going to be very difficult. The Chinese culture and education system are not conducive to innovation. The Chinese culture has a deeply entrenched resistance to unconventional or maverick behavior, which is seen in a negative light. The Chinese tradition calls for revising past knowledge in the pursuit of new achievement. But all technological innovation is basically a break from conventionality. China is very good at following trends, but we only have very few enterprises that are truly innovative, such as Huawei, which has fundamentally abandoned the traditional way of thinking and become a leader in many ways in the telecommunications industry. So China needs a cultural shift to encourage unconventional and maverick behavior like in the US, where many technological innovations originated from people deemed to be "mad." But in China, madness is not tolerated. There are three aspects that China needs to work on. The first is the need to encourage unconventional thinking in order to provide fertile soil for innovation. The second is to nurture a climate of respect and protection for intellectual property rights -- China has not done well in this crucial area, whether domestically or internationally. Thirdly, China must weed out the local protectionism that seeks to block the inflow of better products from other parts of the country. These three areas form the larger climate, and if these conditions are right, like in Europe and the US, then Chinese people -- who are very intelligent and hardworking -- can fare well, as many of them have done in making significant innovative contributions when in other countries with conducive environments. Overseas, there are high hopes about the national carbon market China is planning to set up in 2017. What are your thoughts? There is no need to pin such high hopes on an "artificial" market. The overall Chinese system is not perfect in terms of being a market-based economy and is also not recognized as such by the EU and the US. How then can one expect the Chinese carbon market to be an exception? This is impossible. China's carbon market is only one tool -- but not the only nor the most important one -- for cutting emissions. The most important carbon abatement tool is an emissions cap (NE May12'16). At what stage of progress is the Chinese Emissions Trading Scheme (ETS)? It will be set up, just like in other countries. But even the EU carbon market that has been in existence for over 10 years is not very effective. So we should not have high hopes that the Chinese carbon market can play a critical role in cutting emissions. The ETS would be declared opened in 2017, but it will take a long time for it to function effectively. It is also not certain when the whole of China will be effectively covered by a national carbon market. It is going to be a very long process that will take many, many years. How about hopes for a linkage between the Chinese ETS and overseas carbon markets? That is unrealistic. Perhaps if other countries start to accept China as a market-based economy, that would help drive the progress toward a more mature market structure in the overall economy and filter down to the carbon market. How does the government expect Chinese traditional energy giants to evolve in this new era where renewables and other new energy sources are becoming a viable alternative? This is up to the companies' themselves, how they want to adapt in a new age of mega changes. In the past, automakers were ignoring EVs, until Tesla took the lead, and after that, the big car manufacturers all followed suit because they recognize this as one of the new directions of the future and they don't want to be left behind. In the same way, many big oil companies are already changing and so must the Chinese companies, otherwise they will be eliminated by the tide of history. But the traditional Chinese energy firms are not changing fast enough. The largest coal companies in the US have gone bankrupt, and it's only a matter of time -- five years, 10 years or 20 years -- before this happens too in China. The same applies to oil companies. For example, [Royal Dutch] Shell has weighted natural gas more heavily in its portfolio than oil, while Total has taken a majority stake in a US solar company (NE Jun.16'16). But Chinese companies' pace of change is very slow, because they enjoy monopoly, market control and state protection in the domestic market, and thus feel little urgency to change. But their monopoly and control may cause them to become obsolete.

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