By Michael Lelyveld
As China’s carbon emissions continue to climb, the government has responded to economic pressures by ordering more production of high-polluting coal.
On May 19, Premier Li Keqiang called an executive meeting of the cabinet-level State Council to consider responses to the growing wave of commodity price hikes that threatened China’s economic recovery with surging costs of raw materials including iron ore, copper and coal.
The government was spurred into action by a sharp 6.8- percent jump in the official producer price index (PPI) for April, raising the risk that inflationary pressures could be passed on to consumer markets, disrupting recovery from the pandemic slump.
Particular attention was paid to coal, which accounted for 56.8 percent of China’s primary energy last year and about 60 percent of its current electricity consumption, according to the China Electricity Council and China Dialogue, an independent organization that reports on China’s environment.
As in previous cases of price pressure, the government responded with a combination of promises to increase supplies and non-market measures to bring prices under control.
“The country’s rich coal resources will be further tapped,” said Li, as reported by the official Xinhua news agency.
“Key coal companies will be encouraged to raise production and supply while ensuring safety, and the capacity of wind, solar. hydro and nuclear power will be increased to ensure energy supply during summer peak time,” he said.
Four days later, the country’s top planning agency and four other departments called industrial groups together for an apparent tongue-lashing, threatening them with penalties for reacting to the market forces of supply and demand.
According to Xinhua, the National Development and Reform Commission (NDRC) told officials from industries dealing with iron ore, steel, copper and aluminum to “run in accordance with laws and regulations and keep prices in order.”
At both meetings, the government cited the influence of “global price rises” as a contributing factor in pushing the commodities to record highs. The accounts said nothing about China’s soaring demand for the materials or the 18.3-percent economic growth rate in the first-quarter recovery as having anything to do with price spikes.
Instead, the authorities blamed “excessive speculation” and ordered industrial groups to keep quiet about price pressures.
There would be “zero-tolerance” for “irregularities such as price manipulation, the making and spreading of false information on price hikes, price gouging and hoarding,” the authorities warned.
Such practices would be “dealt with to the full extent of the law,” the agencies said.
The immediate effect sent a chill through the hot commodities market as buyers backed away from the government threats.
Steel prices slid more than 5 percent and the plunge in iron ore approached its daily trading limit, Bloomberg News reported on May 24. But beyond the immediate effect, the impact remained in doubt.
The government’s attack on the demand side seemed likely to stun suppliers into a slowdown followed by shortages at a time when the government is also worried about lagging consumption that has slowed its recovery plans.
Similar episodes of meddling in overheated markets have played out badly in China, and orders to curb prices seemed sure to damage investment and profits.
At an event organized by the China Finance 40 Forum, economists urged the government to let the market forces follow their course, the South China Morning Post reported.
“If the government takes immediate action against price increases by capping prices or subsidizing enterprises, it would affect the normal adjustment of the market,” said Gao Shanwen, chief economist at Shanghai-based Essense Securities.
Unpredictable industry responses
Conflicting policies on coal are likely to give the industries little confidence in the government’s short-term remedies.
Last month, Reuters reported an apparent attempt to stop a run-up in coal prices since April by suspending daily price index reports. The tactic seems to have had little effect.
On May 24, the index of the China Taiyuan Coal Transaction Center in Shanxi province recorded a 4.67 rise from a week earlier, marking the sixth consecutive week of increases.
On May 31, the index flattened with a decline of 0.02 percent, but prices for the month remained up by nearly 14 percent.
While the threat of a government crackdown has stoked market fears, industry responses remain unpredictable.
“That Beijing is dealing with a problem partly of its own making is most evident in steel, where prices spiked to records after the government set targets on output curbs and ordered production to fall this year. Instead, output surged to record levels in April,” Bloomberg said.
Controlling coal prices may be a key to gaining compliance from the energy-consuming industries.
But another increase in coal output will pose an additional challenge to President Xi Jinping’s climate pledge to reach a peak in carbon emissions by 2030 and achieve net neutrality by 2060.
Coal production rose 0.9 percent last year to 3.84 billion metric tons after climbing 4.2 percent in 2019 and 5.2 percent in 2018. In the first four months of this year, coal output has increased 11.1 percent from a year earlier, according to National Bureau of Statistics (NBS) data.
Rising carbon emissions
Even before the latest threat of inflation and plans to boost output, Xi promised in April only that China would “strictly limit the increase” in coal use during the 2021- 2025 planning period and would only start to “phase it down” in 2026-2030.
The continuing increases are driving carbon emissions to new heights and decreasing the impact of the eventual reductions that China has pledged.
In a report last month for www.carbonbrief.org, climate activist Lauri Myllyvirta calculated that China’s carbon emissions climbed 14.6 percent from a year earlier in the first quarter, the fastest rate in over a decade.
Some 70 percent of the increase in emissions came from higher consumption of coal. And 60 percent of the increased coal use came from the power sector, Myllyvirta said.
Over the past year, environmental advocates have issued countless studies and reports criticizing China for continuing to build coal-fired power plants despite the prospect that many and perhaps all will have to be closed prematurely in order to meet Xi’s climate goals.
But in the past month, at least five Chinese provinces warned of power shortages this summer due to a combination of factors including recovery-driven demand and lower hydropower production this year.
The provinces of Shandong, Guangdong, Jiangsu, Zhejiang and Yunnan accounted for over a third of China’s power consumption last year, Platts Commodity News said.
The early onset of hot weather and recovery-driven demand have already led to electricity rationing for commercial and industrial users in Guangdong and Yunnan provinces, the South China Morning Post reported this week.
High-tech factories in several manufacturing hubs have been ordered to cut back or shut down for between one to three days a week, the Financial Times said.
The electricity shortages may have put a temporary stop to the controversies over new coal-fired power plants and the arguments that they are no longer needed, although a Reuters report in May also cited deficiencies of China’s power grid.
“Coal-fired power plants remain critical for ensuring the stable supply of electricity and provide necessary supplements for renewable energy power generation,” said Su Wei, deputy secretary-general of the NDRC, according to Platts.
The escalating costs to China’s economy will be weighed against those for the global climate, but it appears that the government has already decided to serve short-term interests in calling for more coal.