ISSN 2330-717X

China’s Economic Stimulus Spurs Climate Costs – Analysis


By Michael Lelyveld

China’s plan to revive its economy with new stimulus measures may spell trouble for energy forecasts and global efforts to control climate change.

As the government tries to stop the slowdown in growth over the coming year, reports suggest that it will revert to familiar formulas, pumping up the economy with new infrastructure projects backed by credit and debt.

A statement following last month’s annual Central Economic Work Conference made clear that the government will “channel more energy into weak areas, including infrastructure.”

The National Development and Reform Commission (NDRC), the country’s top planning agency, has already sped up approvals of transportation sector projects, the official English-language China Daily reported on Dec. 18.

The value of 147 projects approved in the third quarter reached 697.7 billion yuan (U.S. $101.1 billion), rising nearly fivefold over the previous period, the paper said.

A provincial NDRC official was quoted as saying that local governments have prepared “a large number of projects that are able to play a role in stabilizing the economy.”

Bloomberg News reported that the work conference statement “signals that China is ratcheting up the limited, targeted stimulus approach used during 2018,” while stopping short of spending that would weaken the currency and the debt-control campaign.

Other reports raise concerns that the stimulus may not be so limited, renewing memories of the 4-trillion yuan (U.S. $579-billion) project binge in 2008-2009. The building boom buoyed the economy through the global recession but left it mired in pollution and debt.

The push for new projects has raised similar concerns about rapid and wasteful investment.

China is expected to build hundreds of new general aviation airports by 2020, the Chinese Communist Party’s flagship paper People’s Daily reported last month.

And after a period of restraint in approving new subway projects, China’s “building binge is back on track,” the Financial Times said.

The subway splurge includes 95 billion yuan (U.S. $13.8 billion) for four new lines in Suzhou city of eastern Jiangsu province, despite doubtful ridership, the FT reported.

On Dec. 19, the NDRC also approved 298 billion yuan (U.S. $43.3 billion) worth of urban rail projects for nearby Shanghai, state media said.

On Dec. 26, Transport Minister Li Xiaopeng said that 1.8 trillion yuan (U.S. $261.7 billion) is expected to be invested in road and rail infrastructure projects in 2019, China Daily reported.

Effect on coal consumption

The headlong rush for new projects is bound to have consequences for coal consumption, which rose 0.4 percent in 2017, the highest rate since 2013, according to the National Bureau of Statistics (NBS).

Given last year’s stimulus activity, the 2018 consumption figure for coal, China’s main source of power, is likely to be higher. New infrastructure projects will boost demand for energy-intensive products including steel and cement.

Last month, an international group of climate scientists at the Global Carbon Project projected that China’s coal consumption in 2018 climbed 4.5 percent, driving carbon dioxide (CO2) emissions up 4.7 percent.

The group identified China’s increased coal use as the leading factor in last year’s worldwide rise in CO2 by 2.7 percent.

“The biggest change in CO2 emissions in 2018 compared with 2017 is a substantial increase in both energy consumption and CO2 emissions in China, … driven largely by growth in heavy manufacturing,” the group said.

In the first 11 months of 2018, raw coal production jumped 5.4 percent from a year earlier, the NBS said. China produces and consumes about half of the world’s coal.

The Global Carbon Project’s outlook contrasts sharply with forecasts of a gradual decline in China’s coal demand over the next several years.

In its medium-term coal forecast released last month, the Paris-based International Energy Agency (IEA) estimated that demand will edge down at a compound average annual rate of 0.5 percent over the period from 2016 through 2023.

According to forecast data from the IEA’s Coal 2018 report, China’s coal demand will drop slightly by about 0.2 percent in 2019 compared with estimates for 2017.

The figures are important for climate change projections because they may support arguments advanced over the last several years that China’s coal consumption has already peaked.

The IEA data seems to suggest that the turnaround in China’s coal growth is already underway.

But it is unclear whether the IEA’s projections reflect the extent of the stimulus policies that are now being pursued by the government.

“The government is very worried about the economy, which appears to be growing at a rate well below their planned ‘new normal,'” said Philip Andrews-Speed, a China energy expert at National University of Singapore.

Andrews-Speed cited the sudden wave of new airport and urban rail projects, which are likely to drive coal demand for power and building materials.

“Coal consumption is almost certain to grow at a rate well in excess of the IEA’s estimate,” said Andrews-Speed.

“The only way in which the growth could be kept close to the IEA’s estimate is if the government is very effective at suppressing coal-fired power generation in favor of hydro-electric, nuclear, wind, and solar power. But its track record in this respect is not great,” he said.

A rebound in coal use?

In response to RFA questions, IEA senior energy analyst Carlos Fernandez Alvarez said that China’s air quality policies have removed some coal consumption from the residential and small industrial sectors, thanks in part to increases in natural gas.

Efforts to reduce coal in those sectors have been partially offset by higher electricity demand, but the IEA estimates that more coal has been removed than added.

“This is the reason (for) our forecast,” Fernandez Alvarez said in an email.

But he also warned that new stimulus policies could lead to increased coal consumption.

“If you put on top of it a fiscal stimulus supporting power consumption and other heavy industries (steel, cement, etc.), we could see a rebound in coal use in China and, therefore, in the world,” he said.

Fernandez Alvarez sees a repeat of the 2008-2009 stimulus effects as unlikely.

“The current conditions in China are very different from 2008-2009,” he said.

“The energy sector is much more efficient, the power mix is more diversified and the economy is more mature.

Therefore, the strong growth of the first decade is very unlikely,” Fernandez Alvarez said.

But a new stimulus program would still have significant consequences.

“If you run the numbers, coal consumed in China represents 14 percent of global primary energy, and hence, it is the largest energy source in a country by far. Therefore, what happens in Chinese coal is pivotal for the energy and CO2 emissions trends in the world,” Fernandez Alvarez said.

According to the IEA forecast, worldwide coal demand will grow at an average annual rate of 0.2 percent through 2023 with the biggest percentage increases coming in India and Southeast Asia.

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