Snaking for miles into the vast Mongolian steppe, trucks laden with coal headed to fuel iron ore smelters used to queue for days at the Chinese border. Now the queues have reduced to a trickle as China’s super strict Covid border restrictions slow and deter all but the most determined truckers. China’s zero covid policy also curbed coal production as mines shutdown across the country pushing prices to record highs.
Despite these problems China’s addiction to coal looks set to continue while it announces its net-zero goals. China’s energy policy is beset by contradictions. Chinese technology has powered the renewable revolution, exporting cheap solar panels across the globe. In 2021, President Xi called for an end to Chinese financing of coal fired power overseas and more support for renewable energy. At the same time China’s legendary consumption of fossil fuels has continued, smoggy cities and record greenhouse emissions are the result.
China’s future energy policy is of crucial importance to rest of the world. Below I outline the four biggest risks facing China’s energy policy as President Xi starts his third term.
Chinese Energy Imports
China relies on imports of energy, coal from Mongolia and Australia, oil from the middle east and Africa. Renewable energy technology also relies on the smooth import of certain critical materials: nickel, graphite, copper and many other materials. Any disruptions such as the Russian invasion of Ukraine disrupts commodity trade and pushes energy prices higher.
The biggest risk faced by China is conflict in the Pacific. If China’s military attempts to invade Taiwan, the US and allies would impose a blockade of Chinese trade. The blockade would try and strangle Chinese trade to end the conflict. But this blockade could easily spiral into war and would cause enormous economic and political chaos. China would be unable to import oil, gas and other commodities wreaking havoc on its manufacturing base. Beijing would have to conclude the war rapidly to end the blockade and avoid economic meltdown.
2022 will be remembered as the year climate risks became a reality. In China rivers fell to record lows, an unprecedented heatwave hit the country and farmer watched as crops wilted and yields collapsed. A decade from now 2022 will also be fondly remembered as a time of climate stability.
Climate change looks set to wreak havoc on China destabilising its economy and society over the next decade. More extreme heatwaves will devastate its agricultural sector and force factories to shut down. Responding to multiple overlapping crises will sap the Government’s ability to respond and adapt to climate change.
China has promised to peak carbon emissions by 2030 and achieve carbon neutrality by 2060. Currently solar and wind installations are well ahead of schedule and would reach 1,100 GW by 2025 at current rates. The target is 1,200 GW by 2030. In this regard China is a climate leader promoting renewable energy.
However, China’s energy needs are vast, its coal is not expected to peak for another couple of years. President Xi is likely to travel to the Middle East later this year – his first post-Covid trip where discussion of energy security and oil import with Saudi leader Mohammed Bin Salman will be high up the agenda.
Energy transition is like turning a super-tanker around. China’s economic model is built on cheap energy even when the government has enormous power to instigate and deliver new policies.
China has made enormous strides in developing a renewable energy sector but shifting to clean energy will be difficult and painful. Coal and oil plants will have to shut, workers fired, and power infrastructure upgraded. This change must happen at a time when the economy is already facing heavy disruption from the zero-covid policy, a global economic downturn and climate risks. A lower growth economy should reduce demand for energy, making the transition easier.
The risk is that the longer China continues using coal the harder and more painful the transition will be. Faced with overwhelming climate risks, the government will be pressured to abandon coal and oil, but may end up doing it in a panic creating energy shortages. The challenge is to scale up renewables, increase energy efficiency measures and reduce fossil fuel all while still providing a reliable power supply for the country.
Critical Material Supply Chains
Shifting to a zero-carbon economy means a move from drilling, shipping and burning fossil fuels to one where critical materials are mined, refinery and transformed into modern technology. E.g. Solar panels, wind turbines and batteries. As the IEA stated it the world is moving towards away from a fossil fuel-based economy towards a metal and mineral based economy.
Beijing had the foresight to invest in a renewable energy sector and the supply chain and subsidies to make it happen. Now China leads the world in the deployment of renewable technologies and has cornered niche markets like the refining of so called rare earth metals.
The New Era of Friendshoring
This success has not gone unnoticed. Other countries have realised the importance of the different sectors of the global energy transition and have started to implement their own policies. The US has passed the Inflation Reduction Act (IRA) to guide energy transition and has taken measures to ensure it can sustain its own secure supply chains. Other states such as India, Indonesia, Canada and the EU have taken similar measures.
China’s dominance of the renewable sector is under threat. Now China will have fight for supplies of lithium, nickel and cobalt and other critical materials. Supplies of these metals and minerals can take years to come online and geopolitical shifts could cut supplies and send prices rocketing threatening a smooth energy transition.
China’s energy policy is of critical importance domestically and internationally. China’s Belt and Road Initiative is now promoting renewable energy and has dropped the funding of coal plants. Beijing’s early backing of renewable technology has put it in the lead to dominate this fast growing market. But other states want a share of the action and to avoid overdependence on China. Now China must also grapple with a fast warming climate at home that will make its transition to net-zero more chaotic and difficult with each passing year.
China’s Energy Transition – From Visual Capitalist
Visualizing China’s Energy Transition in 5 Charts – Visual Capitalist