China: Decisive Move on Coal Power, Heavy Industries; Another Boost for PV/Clean Energy and Public Transportation

Dance to the Revolution 2013-06-19

On Friday June 14th, China’s State Council established ten measures to combat air pollution and proposed ways to strengthen China’s PV industry. Here are some of my thoughts, and I did a full translation of the texts at the end of the post for your reference. 1. The set of 10 air pollution measures are China’s toughest attempt yet to tackle this problem.

a. Take Measure No. 2 for instance, it sets out to reach the 12th five year plan (FYP) goal one year in advance in eliminating the outdated production capacities on key coal downstream industries such as iron & steel, cement, etc. The goal as set in the 12thFYP  was to eliminate the outdated 20 GW power capacity, 48 million tons of iron and steel, 42 million tons of coke fuel, and 370 million tons of cement, which would affect 150 to 160 million tons of coal, i.e. 31.29 million tons of standard coal annually. To reach the goal one year advance would cut 39.11 million tons of standard coal consumption annually, which converts to roughly 60 million tons of raw coal per year. This number may not seem big in China’s overall coal consumption, but it means that this measure alone could cut China’s future annual raw coal demand growth by one third. (China expect to reach peak coal use in 2015 at 4 billion tons/year.)

b. It is clear from these measures that the Chinese leadership has come to understand that air pollution is not just the matter of concern for the environmental protection agencies, but rather of acute and crucial national importance. According to the 2010 Global Burden of Disease Study, in 2010, outdoor air pollution contributed to 1.2 million premature deaths in China. Furthermore, the annual cost of medical treatment for illnesses caused by air pollution in China is equal to 1.2% of the country’s GDP, according to a report by environmental experts and the Asia Development Bank released early this year. Researchers at MIT Joint Program on the Science and Policy of Global Change, quantified costs from both lost labor and the increased need for health care, and found that the air pollution cost the Chinese economy $112 billion (4.96% of GDP) in 2005.

2. Central-local dynamic:

a. Elements of these measures have been tested out in different localities, so they are not entirely new. Beijing, for instance, released its 2013 Clean Air Action Plan in March, with all the major elements: strict control on new projects: no more coal, heavy oil or other high-pollution projects (it holds the municipal DRC, Environmental Protection Bureau and each local governments accountable on this); decarbonization of existing plants; green transportation; strengthen air pollution measuring and reporting, research on subsidizing renewable energy-powered heating, etc.

b. In the implementation stage, it would be up to different localities again to take the broad measures and device detailed execution plans. After all, they’ll be the ones held responsible according to Measure No. 10. We can expect regional policies and standards to be established very soon, and those of Beijing-Tianjin-Hebei, Yangtze River Delta, Pearl River Delta regions would be more stringent than the national policy.

3. Creating new growth points: natural gas, renewable energy, public transportation, especially metro and railway, and energy efficiency industries.

a. I’ll write about the solar industry separately in response to the State Council meeting’s measures to give solar a boost, but China is developing each of these sectors at a massive scale. Take metro (urban rail) for instance, last month, China Communications and Transportation Association reports that 35 cities has been approved to build nearly 6,000 km of urban rail lines, at an estimated cost of US $212 billion. “150 million people will be living along those metro lines in about 35 cities over the next 10 years, and this is going to fundamentally change the shape of China,” according to Jonathan Woetzel, a director in McKinsey’s Greater China office.

4. Challenges and Next Steps

Broadly speaking, China is doing a hard balancing act between social stability and economic development, in which the mounting public pressure propelled the government to take real actions against pollution, but it has to do so without upsetting its economic growth, which has been in the past two decades, the source of its legitimacy and relative stability. It’s going to struggle with the evolving role of the government as market forces begin to play a more important role. SOEs and banks would have to reform and improve their practices. The government is going to face the push back from strong existing interests groups, including from local governments, every step of the way, but still, the biggest engine for it to move forward on this agenda is probably the humongous public demand for the government to clean up the environment, to guard public health, and to accommodate the newly urbanized by the millions. In more specific terms though, there are a few important things China would have to resolve relatively soon:

a. Financing these infrastructure projects. As Patrick Chovanec quickly pointed out, the China’s local governments will fund these projects by issuing high-yield bonds they have no realistic means of repaying. China’s National Audit Office reported in January that the total debt at 36 local governments had risen 13% to stand at 3.85 trillion RMB (US $627.70 billion) at the end of 2012 from two years before. Standard Chartered estimates local government debt at 15% of the country’s GDP at the end of 2012, while Credit Suisse put the number at 36%. As a senior auditor commented, China’s local government debt is “out of control”, and could spark a bigger financial crisis than the housing market did in US.

b. Codification — move beyond these administrative measures and put them into laws and regulations. Measure No. 7 called for the amendment of the Air Pollution Control Act and other relevant laws. China is also considering enhancing the collection of coal resource tax, pollution discharge tax, etc. These are all important legislative developments to watch. China launched its first pilot carbon emissions exchange today in Shenzhen. Now trading at $4.90/metric ton, 22% below (largely considered failed) Europe’s Emissions Trading Scheme. So how to design these economic tools to curb emission and promote growth, especially on a national scale, will be a huge challenge for the government.


Ten Measures for Air Pollution Control

1. Reduce pollutant emissions

Comprehensive renovate small coal-fired boilers; accelerate the desulfurization and denitrification, and elimination of dust in key industries. Remediate urban dust. Improve fuel quality, eliminate yellow-standard cars before set deadline.


2. Strictly control additional production capacities of high energy consumption, high polluting industries.

Accomplish the elimination of outdated production capacity in iron and steel, cement, electrolytic aluminum, flat glass and other key industry one year ahead of the Twelfth Five Year Plan schedule.


3. Vigorously promote clean production. Decrease the main atmospheric pollutants emission intensity in key industries by 30 percent by the end of 2017. Vigorously develop public transport.


4. Accelerate the adjustment of energy structure; increase natural gas, coal methane and other clean energy supply.


5. Strengthen the constraining power of energy-saving and environmental indicators constraint.

For projects that fail to pass energy or environmental evaluation, they shall not get approval for construction, shall not get land provision, shall not be provided loans, or receive power or water supply.


6. Implementing both incentives and constraints in the new energy saving mechanism, and enhance the effort to collection pollution discharge fees. Increase credit support for air pollution prevention and remediation. Increase international cooperation. Rigorously nature environmental and advanced energy industries.


7. Using laws and standards to “force” industrial restructuring and upgrading.

Formulate or revise emission standards for key industries. Propose to amend the Air Pollution Control Act and other laws. Instill mandatory environmental information disclosure on heavy polluting industries and enterprises. Announce urban air quality rankings in key cities. Increase the penalty for violations.


8. Establish Beijing-Tianjin-Hebei, Yangtze River Delta, Pearl River Delta and other regional joint prevention and control mechanism; strengthen the PM2.5 control in densely populated areas and key large cities; build target responsibility system at each province (district and municipality) on atmospheric environmental remediation appraisal.


9. Include heavily polluted weather into local government emergency management.

According to the level of contamination, implement production limits, emission limits on heavy polluting enterprises, and implement vehicle use limits in a timely manner.


10. Establish a “breathe together, struggle together” code of conduct in the whole society. The local governments shall assume full responsibility on local air quality, and enforce the corporation’s responsibility of remediating of their pollution. The State Council, and its relevant organs shall coordinate linkage, promote savings and green consumer behavior and lifestyle, and mobilize the citizen participation in environmental protection and supervision.