China’s 13th Five Year Plan offers no hope for coal markets, further suppressing CO2 emissions

The recent shift in China’s economy has been one of dramatic speed and scale.

The first decade of the 2000s saw China’s economy grow at a startling rate and consume increasing quantities of fossil fuels in doing so. Over the last two years, the nature of this growth has changed entirely. This has seen coal consumption flip from strong year-on-year growth to declines close to 4%, as seen in 2015[1]. Consequently, China’s energy-related CO₂ emissions declined by 1.5% in the same year[2]. This March, China released a draft of its 13^th Five Year Plan (FYP) for 2016-2020 – it sends signals that the Central Government intend to continue moving away from domestic and international coal consumption.

Energy targets show no sign of a slowing transition

One could be forgiven for thinking that energy consumption and carbon emissions targets in the 13^th FYP might be less aggressive than previous plans as gains become gradually more difficult to obtain. But the plan to 2020 does nothing of the sort. China targets a fall in energy intensity of 15% to 2020, just 1% lower than the previous FYP target[3]. This is another significant step towards decoupling energy demand from the economy, which itself is expected to grow by an average 6.5% each year. Decoupling CO₂ emissions from economic growth is also a priority for the Central Government. As such, China has ramped up its carbon intensity ambitions by 1% on the previous FYP, aiming for an 18% improvement to 2020[4].

Total CO₂ emissions growth will slow drastically to 2020 under the 13^th FYP

In Figure 1 we combine these trends with forecasts from other institutions and plug them into the Kaya Identity – a formula utilised in our Lost in Transition report[5] and a recent report from the London School of Economics[6] – to illustrate how the 13^th FYP might translate into CO₂ emissions. It concludes that while China’s CO₂ emissions could still grow to 2020, they will slow drastically from the 5.4% annual growth averaged over the past 10 years.

Figure 1: CO₂ emissions implied by China’s 13^th FYP, 2016-2020 (annual growth %)[7]

Overall, these drivers equate to total CO₂ emissions growing by approximately 2.1% each year under the 13^th FYP. This is a significant slowdown on the 5.4% CO₂ emissions growth seen between 2005 and 2014 and confirms the conclusion of much recent research that China’s CO₂ emissions are likely to peak earlier than the 2030 target[8].

As our recent Lost in Transition report highlighted, the assumption made for each component of the Kaya Identity is a debated unknown. And what transpires in China over the next five years is no different. For example, the report from the London School of Economics is more aggressive in its energy intensity assumption for the 13^th FYP and, as a result, sees CO₂ emissions grow by only 1.24% per annum to 2020. This is one example which reiterates that reducing domestic emissions does not rely on reducing economy growth, but can be achieved through improving the energy efficiency of an economy.

China’s CO₂ emissions could be much lower than expected

Data from the previous Five Year Plan suggests the assumptions of the 13^th FYP and the LSE’s calculations, which imply CO₂ emissions growth to 2020, could be overly conservative. The IEA suggest that energy-related CO₂ emissions in China fell in 2014 and 2015 in response to successful efforts to decarbonise its electricity generation.[9] Whether this downward trend continues through to 2020 is uncertain, but many feel that China is well on the way to exceed the 13^th FYP energy targets. The NRDC says it is ‘very likely’ China will overachieve on its 40-45% carbon intensity reduction target for 2020 compared with 2005 levels[10]. Furthermore, China outperformed their 12^th FYP targets, with energy intensity decreasing by 18.2%, against a 16% target, and carbon intensity by 20.2% against a 17% target. If the drivers of China’s falling CO₂ emissions over the past 24 months prove to be more structural than mere annual variations, China’s CO₂ emissions could very well plateau at current levels.

Coal will not supply CO₂ emissions growth

There are a number of signals in the 13^th FYP to believe coal demand in China will not increase again:

Economic transition is affecting power demand: In 2015, China derived half of its GDP from the service sector. This represents a rapid shift away from the energy intensive industrial sector which used to drive China’s economic growth. This was a key driver of total power generation in China falling for the first time in decades last year. In the 13^th FYP China aims to derive 56% of its GDP from services[11]. This is likely to result in even greater falls in power generation in China and, therefore, less demand for coal. Data from January and February 2016 suggests thermal power generation fell by 4.3% on the previous year and this is dominated by coal in China[12].

Renewable energy sources take coal’s market share: An upsurge in low-carbon power generation is the likely reason for the falling relative contribution of coal in thermal generation. China exceeded its 12^th FYP target by increasing its non-fossil energy share to 12% in 2015[13]. The 13^th FYP places an absolute limit on energy consumption by 2020 and China aims for 15% to be supplied by non-fossil sources. Specifically, targets have been put in place to raise installed nuclear power to 58GW, solar PV to between 150-200GW (43GW in 2015) and wind power to 250GW (145GW in 2015), all by 2020[14].

Air quality remains a top priority: The 13^th FYP is the first to include specific targets on particulate matter – a major cause of air pollution. China’s cities are now expected to be rated ‘good’ or better for air quality at least 80% of the time by 2020, up from 76.7% in 2015. This will be achieved by reducing emissions of PM2.5 by 25%[15]. Any increase of coal consumption, especially near urban areas, will make these targets very difficult to hit.

Coal production in January and February 2016 fell by 6.4% on last year[16], suggesting the trends highlighted in this blog are strengthening China’s move away from coal consumption, not reversing it. The world’s coal exporters, and their investors, should see China’s 13^th FYP as another signal that the world’s largest economy is permanently moving away from coal. This is likely to see China’s CO₂ emissions peak much earlier than the 2030 target outlined at the Paris COP21 and could even plateau at current levels.

Luke Sussams, Senior Researcher, Carbon Tracker Initiative

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