The impact of China's increasing energy consumption

Following a period of dramatic industrialisation in the country, China’s energy consumption has risen significantly over the past fifteen years.

In 2000, China accounted for around 10.5% of global primary energy consumption and in 2010, China overtook the United States to become the world’s largest energy consumer. This continued rapid growth in energy consumption resulted in China accounting for 22% of the global total in 2012.

That said, on a per capita basis, China’s energy consumption remains comparatively modest – exceeding the global average for the first time in 2010, with China’s per capita energy consumption less than half the level of the advanced economies in 2012.

China is now the world’s largest energy consumer 

But alongside this growth, one of the major challenges for China’s Central Government in 2014 will be how it addresses the ongoing issue of air pollution across the country.

Rising levels of smog and hazardous PM 2.5 particles (floating particles less than 2.5 micrometres in diameter) have increased public health concerns, leading to greater public commentary about pollution in the nation’s press and social media.

One of the key factors contributing to the air pollution problem is the composition of China’s fuel mix – particularly the exceptionally high reliance on coal. Coal is by far the dominant energy source in China – accounting for around 68% of total primary energy consumption in 2012¹.

In contrast, coal only accounted for 30% of global energy in 2012, 20% of which was in advanced economies.

Coal is the dominant fuel in China's energy mix

In mid-2013, the State Council announced plans to spend 1.75 trillion Yuan (around US$277 billion) between 2013 and 2017 to combat air pollution. The bulk of funding is to be focused on high polluting provinces, such as the broader Beijing-Tianjin-Hebei region.

Under the plan, around 37% of funding would be directed towards cleaning up industry and a further 28% on cleaner energy sources. The Chinese Academy for Environmental Planning, who was involved in drafting the plan, argues that this spending will result in a net gain for the Chinese economy.

However, official targets of reducing pollution are relatively modest. As part of its five-year action plan, China’s State Council intends to cut the level of airborne particulate matter by 10% in major cities by 2017.

The target for Beijing is stronger – cutting by 25% by 2017, however this would only bring PM 2.5 levels down to 60 micrograms per cubic metre, still well above national standard.

The head of the Beijing Municipal Environmental Protection Bureau notes that given a rising number of motor vehicles and increasing energy consumption, meeting this target will “remain very challenging” and “require the capital to come up with more stringent measures” (China Daily).

Addressing air pollution will require long term changes to China’s energy policy – both in terms of the composition of different fuel sources in the country’s energy mix as well as energy efficiency.

Over the past two years, China has been attempting to quell air pollution concerns with a range of policy measures such as cutting coal use, phasing out older motor vehicles, and overhauling or closing factories; however, the impact has not been significant.

According to the Beijing Municipal Environmental Protection Bureau, the average level of PM 2.5 particles in the city was largely unchanged in 2013.

Until recently, China’s energy focus has been related more to efficiency than pollution – namely energy intensity (the consumption of energy per unit of GDP). Under the twelfth five year-plan (running from 2011 to 2015), the Government targeted a 16% decrease in energy intensity (over 2010 levels).

In November 2013, the National Development and Reform Commission suggested that the country was lagging on this plan – with only a 5.5% decrease being achieved over the first two years of the plan.

These estimates are based on a comparatively low rate of growth for energy consumption – at 3.9% in 2012 – compared with stronger growth from other sources – around 7.6% according to the BP Statistical Review of World Energy (which indicates energy intensity relatively stable since 2009).

Energy efficiency presents a key opportunity within China’s economic development. In 2011, China accounted for around 21% of global energy consumption, but only around 10% of global GDP.

Rapid development of less energy intensive parts of the economy – particularly consumer and business services – will improve this balance, closer to advanced economy levels. 

However there are still challenges which must be overcome. Apart from executing measures which lack significant impact, local government officials often overlook environmental policies to improve efficiency given that short term economic growth is more likely to benefit political regimes.

Having highly regulated prices for energy provides limited incentives to implement change. The regulatory environment is still largely unclear, with the responsibility for monitoring and administering policies spread across a wide range of government departments at both the national and local level.

China’s consumption of oil and natural gas remains comparatively low. Natural gas – a considerably cleaner burning fuel, particularly in domestic heating applications – accounted for just 5% of China’s primary energy consumption in 2012 (compared with around 26% in the OECD).

That said, consumption has increased by an annual average rate of 15% over the past five years. China’s proven natural gas reserves are slightly smaller than Australia’s, and are largely located in the country’s western and north-central regions – geographically distant from key demand regions on the eastern coast.

As a result, infrastructure constraints (both in terms of domestic pipelines and capacity to receive LNG imports) have limited growth in gas consumption.

Domestic pricing controls have also hampered natural gas development – particularly non-conventional resources. There have been some experiments in deregulation – including linking prices to international benchmarks in two regions from late 2011, however further progress has been limited.

Broader energy price reforms may be critical to longer term air pollution management. Official targets for natural gas are relatively modest, with a goal of expanding the share of total energy consumption to 10% by 2020. 

The outlook for China’s energy consumption

In the longer term, energy consumption in China will continue to increase – reflecting the comparatively low level of per capita consumption, along with the country’s long term growth potential. The US Energy Information Administration forecasts energy consumption to increase at an annual average rate of 4.6% in the decade to 2020 and expanding further (though at a slower rate) to 2040.

In these forecasts, coal remains the dominant fuel in the country’s energy mix, but is declining in share – down to 63% in 2020 and 55% by 2040. Even so, coal consumption is expected to increase significantly, around 38%higher than 2010 levels in 2020. 

Coal to remain the dominant fuel longer term

Despite investment by the Government, solutions to the pollution problem will have to compete for priority with economic growth, as energy consumption continues to increase. And with coal forecast to remain the dominant fuel in the long term, the pollution issues aligned with this growth have no simple solution.

Nearby resource trading partners in Australia and Indonesia can only watch China progress through a period of dramatic change, with any changes to China’s coal trade and energy policy doubtlessly having significant impact on global markets. 
 
¹ Source: BP Statistical Review of World Energy 2013