Q&A: How China can meet its carbon reduction targets - Part 2
"China's primary energy source will be coal for a very long time to come. "
Today's newsletter is the second part of The ten obstacles China must overcome to meet its carbon reduction targets 求解“双碳”之路的十个难题 | 新增长故事 " presented by Southern Weekly on its WeChat account. The article invited China's scholars and experts to answer 10 popular questions concerning the country's green future.
The first part, which was posted on GRR two days ago, covered the first four questions related to China’s "dual carbon" goals from a macroeconomic perspective [China plans to reach peak carbon use by 2030 and become carbon neutral by 2060] and the regional differences in reaching the "dual carbon" goals.
The remaining six questions and answers in two sections in today’s piece are mainly about energy security against the backdrop of the "dual carbon" goals and the impact of China’s "dual carbon" goals on the general public. The scholars and experts talked about the fate of China's existing fossil energy plants, the function of coal-based electricity, and what will become of coal plants after reaching the "dual carbon" goals. Moreover, experts also shared views on the influence of "dual carbon" on ordinary people's living costs, new job opportunities in the sustainable energy industries, and whether tech innovations could solve the climate change issue once and for all.
The translation hasn’t been reviewed by the media which conducted the interview or the interviewees, so it should only serve as a reference, not as an official translation of the original text. The highlights are by Ginger River.
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Section 3. Energy security against the backdrop of the "dual carbon" goals
In developed countries' energy production, coal's contribution keeps shrinking, and coal plants phasing out has become a common sight. China's traditional energy endowments are "rich in coal, low in oil, and rare in gas." China's installed coal-fired power generation capacity accounts for more than half of the world's total, and the coal-to-electricity system is young and effective. Following the outbreak of the Russia-Ukraine conflict, the prices of bulk energy commodities fluctuated sharply. The European Commission launched the "REPowerEU" plan in an attempt to "decouple" from Russian gas. Therefore, how to optimize the structure of China's coal industry while ensuring energy security is the long-standing topic.
Question 5: For oil and gas, China mainly relies on imports. Its current energy structure primarily depends on fossil energy. How to understand energy security under the "dual carbon" goals? Are energy security and energy transformation contradictory?
Zhou Dadi: Energy security can be summarized in two respects. The first is to ensure a stable and orderly energy supply, without frequent electricity, water or gas outage. The second is to make sure that energy is economical and affordable. It is reported that due to the rise in oil prices and electricity prices in many Western countries, people have to reduce the use of air conditioning and heating.
The uncertainties in the international situation would lead to fluctuations in energy prices. China must take a coordinated response to face the challenge. First of all, rising energy prices squeeze the profit of traditional processing trade. Therefore, stimulating exports by depreciating RMB under such circumstances is a dead end. The way out of this problem lies in pursuing the high-quality development of China's economy, and raising China's position in the global industrial chain if we take the long view. In the end, what we must do is promote low-carbon energy, and reduce reliance on traditional fossil energy to gain more initiative.
Though there might be problems such as a short supply in the transition stage of energy transformation, energy security and energy transformation are not contradictory. However, we cannot choose kerosene lamps over electric lamps just because of possible power outages. What we should do is to make electric lamps more reliable. Sustainable resources such as wind power, solar power, hydropower, and nuclear energy are not monopolistic, so harnessing renewable energy resources and technologies helps to ensure energy security.
Question 6: China's coal-fired power generation units are only 12 years old on average, while the service life is generally over 40 years in developed countries. Does "carbon neutral" mean that a lot of coal-to-power assets will be "stranded" in advance? How to understand the role of coal-based electricity?
Yuan Jiahai: As the key area for carbon reduction, the power industry must achieve carbon peaking earlier than others. The current idea is to let the capacity and flexible service value play a role through the coal-to-power transformation, rather than simply put the assets out of use. In fact, compared with the 13th Five-Year Plan (2016-2020), the 14th Five-Year Plan (2021-2025) does not require shutting down coal-fired power units directly. Instead, it highlights that coal-fired power units can serve as backups in emergencies.
Therefore, the essential issue is to establish a positive policy mechanism and market environment, so that we maximize the existing coal-fired power units' value. They can provide flexible complements when power generation is low, and swing into efficient operation when more electricity is needed. In emergency situations, they may run at the maximum load to avoid power cuts.
In China, electricity demand and coal consumption are still growing. On the surface, it is due to the increase in economic and social demand. The underlying reason is that China's coal-based energy structure is sensitive to changes in demand. Before the increase in non-fossil energy supply can keep up with the additional power demand, China’s coal consumption will increase with the demand. If many coal plants are "stranded" in advance, the current electricity supply will be under pressure, which is detrimental to people's well-being and economic development.
In the past four or five years, the average loss rate of the coal power industry was 50 to 60 percent. Coal-to-power assets are "junk assets" in terms of financial risks, but they are vital for people's well-being and should be reasonably compensated for the sake of their "survival." Compensation can be made in the form of handing out backup money directly, or in the form of capacity compensation based on principal and interest, depreciation, running costs, generating capacity, etc.
Lin Boqiang: It is inappropriate to "strand" or demolish the assets in advance. At this stage, we need to focus on coal and realize that the colossal coal-fired power units can make a clean energy transition with relatively low cost and high reliability.
Coal-fired power units should be modified flexibly, and the utilization hours should be gradually reduced to make room for renewable energy. After power generation hours are cut, we shall modify technologies to maintain the stable operation of generator sets. When wind power and photovoltaic power are connected to the grid on a large scale, coal-based power can serve as a safety net for emergencies and extreme climates. According to our predictions, wind power and photovoltaic power will account for about 65 to 70 percent of China's energy structure before China reaches carbon neutrality in 2060.
In addition, the core issue of the coal-to-power transformation lies in the interaction between coal prices and electricity prices. The transformation is fair only when the two are connected. Therefore, governments should improve the price system design so that coal prices and electricity prices can be linked smoothly.
Question 7: After achieving carbon neutrality, do we still need fossil energy? What is the future of coal chemical companies?
Lin Boqiang: China's primary energy source will be coal for a very long time to come. Therefore, we still need fossil energy, and we also need to build a clean, efficient, robust and stable energy system, which secures both energy security and industrial chain competitiveness. We have to lower the dependence of strategic energy resources such as oil and gas, and reduce the impact of fluctuations in the international energy market on us.
Coal chemical companies will still survive, but they have to devote manpower and funds to carbon-neutral technological innovations, cut the cost of carbon emissions and carbon capture, and boost running efficiency and market competitiveness. At the same time, governments need to shoulder some responsibility to maintain social stability, avoid mass layoffs, and promote a fair green transition of the coal industry through market-oriented compensation, policy guidance, etc.
Hydrogen energy will be a key component of the future new energy landscape. It will enjoy broad application prospects in high-carbon emission sectors such as the industrial sector and construction, thus contributing to deep decarbonization. At present, the use of hydrogen energy is still primitive. The output is small and primarily used as industrial materials in petroleum refining, synthesis of methanol, etc. Harnessing hydrogen energy requires a relatively high demand for technologies, and the level of core technology will determine the quality of the industrial chain and cost competitiveness. Thus, the government and enterprises need to step up R&D investment in key parts to enhance the overall technological level of the industrial chain.
Section 4: "Dual carbon" goals and the general public
The "dual carbon" goals are a heated topic now. After years of obscurity, it's finally under the spotlight. No matter whether it is fully understood or not, investment, talent poaching, and orders keep coming, and so do disorders. In March 2022, the Ministry of Ecology and Environment reported cases of data manipulation, irregularities in verification, etc. Carbon labels, carbon reduction incentives ... The "dual carbon" goals hinge on the transformation of the energy economy and also concern the basics of ordinary people's lives. What's the relationship between the "dual carbon" and the general public? Will it increase the cost of consumption, or will it create more jobs?
Question 8: Will the efforts to achieve the "dual carbon" goals push up energy prices, and have an impact on consumer goods and people's living costs?
Zhou Dadi: According to our research, despite possible fluctuations in energy prices in the short term, energy prices will fall when renewable energy replaces fossil fuels.
First, the quantity of fossil energy resources such as coal, oil, and natural gas are finite. As the usage increase, the marginal cost will gradually rise. In contrast, solar and wind energy are abundant and free. As technology advances, the production cost of renewable energy will continue to fall in the future.
Second, because of the uneven distribution and relative monopoly of fossil energy resources, energy prices are often the maximum prices acceptable to the consumers rather than reasonable prices. For example, the price of coal in 2021 far exceeded the cost of mining, and oil prices fluctuated between 20 U.S. dollars per barrel and over 100 U.S. dollars per barrel. In comparison, renewables are evenly distributed, and no one can monopolize them, the market price thus would be more reasonable.
The impact on people's spending power can be illustrated by an example. In northern China, farmers used to burn coal for heating while they stay in leaky homes. Extensive coal consumption didn't do much to warm the house. One household used tons of coal in the winter.
After the introduction of clean heating renovation such as the switch from coal to electricity, the heating bills of residents rose in the short term, but the heating cost dropped in the long term due to means like renovations of buildings. For some of the ultra-low energy consumption building projects in the north, the energy consumption for heating equals only 20 percent of the fossil energy.
Question 9: The "dual carbon" goals have a far-reaching influence. What industries, technologies and businesses are worthy of attention for young people?
Zou Juan: The green industry, or sustainable development industry, reaches all aspects of social development. Therefore, young people have many opportunities in both traditional industries and emerging industries.
The most direct one is the momentum of energy storage and lithium batteries, which means the entire ecosystem of the industry is full of opportunities. Industries such as the photovoltaic sector are considering keeping a foothold in China while serving the global market. So there is a corresponding need for talents of a high caliber.
There exist a lot of investment hotspots in the industrial chain and ecosystem of energy transformation, such as green certificates, China Certified Emission Reduction (CCER), green securities, microgrids, small and distributed projects, as well as technological transformation and upgrading.
Indirectly speaking, in the case of the fast-moving consumer goods (FMCG) industry familiar to young people, special attention shall be paid to transformation and upgrading. It's best to incorporate the green supply chain and sustainable development factors into fields such as green product procurement, packaging, and design, which would create new selling points. Meanwhile, many job opportunities would occur in the environmental, social and governance (ESG) areas, such as ESG rating and evaluation, external consulting, publicity and training.
Question 10: How do you view the application prospects of technologies such as carbon capture and geoengineering? Can we harness technological advances to solve climate issues once and for all?
Chai Qimin: Tech innovations seem is almost the only way of achieving carbon neutrality in a high-quality manner, without affecting economic growth or lowering the current standards of living. However, carbon capture technology and geoengineering are the "last resort" to carbon neutrality. Such technological innovation stands at the end [where carbon dioxide has already been emitted] and should complement innovation at the source. At present, such technologies are costly, and still in the demonstration stage. Considering that they are not mature yet, we should guard against possible risks.
Technological innovation is directly linked to policy incentives. The subsidy policy in the Renewable Energy Law of the People’s Republic of China in 2005 led to the rapid development of wind power and photovoltaic industries. Policies issued since 2009 such as subsidies for new energy vehicles and the "double credits" trading policy 双积分交易 [both corporate average fuel consumption credits and new energy vehicle credits are calculated and traded] have also rapidly increased the market share of electric vehicles. Carbon capture, utilization and storage (CCUS) technologies must also be supported by policies, especially in the R&D of major technologies and the construction of major infrastructures, such as the 45Q tax credit adopted by the US.
Technological innovations are often driven by many factors, such as basic scientific research, talent cultivation, business environment, industrial policy, as well as fiscal and taxation mechanisms, etc. We must keep "racing" instead of seeking a "once and for all" approach. Behind technological progress, there lies a systemic change in the economy and society. (Enditem)