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China's Coal Power Pollution

Through China's use of coal, it is the largest greenhouse gases emitter in the world. The negative pollution impacts from coal on China's farming could increase the demand for agricultural imports and hinder Chinese foodstuff exports. The energy demand from China's continued rapid industrialization augurs no end in sight to this trend, however this may create market opportunities for manufacturers of cleaner power generation equipment and vehicles.

China's rapid industrialization can be felt not only in changing trade balances around the world, but also in the quality of its air and water. This may create several investing opportunities. Companies offering technology to clean China's power plants, reduce the emissions of its cars, or offer alternative, cleaner sources of fuel may see a bright future in China if they can hit the right price-point. Investing in China's economic growth, through indexes and companies connected to the power industry, might need to be tempered by an understanding of the environmental costs of such growth and when such costs may need to be internalized. Meanwhile, those investing in importers of foodstuffs from China, or exporting respiratory-related medicines to China need to stay up-to-date on these developments as well.


[edit] What Does This Mean for Companies?

[edit] Remediation

[edit] Mitigating Coal's Impact

  • General Electric and Westinghouse are equipment manufacturers that are developing more efficient and upgraded equipment. There are various technologies developed such as integrated gasification-combined cycle coal plants which capture the CO2 before it escapes; although given China's abundance of low quality coal, other technologies could be more suitable such as pulverized coal plants or steam powered turbines.
  • Fuel Tech is a remediation company that has installed their air pollution control systems on over 400 combustion units globally.
  • Yanzhou Coal could potentially see flattening demand for coal with the push for alternative energies, yet coal remains the dominant source of energy. Instead more government attention may go towards coal scrubbing technologies.

[edit] Carbon Credits

A CO2 trading system allowing power plant operators to purchase a credit for the amount of CO2 emitted is growing in Europe. China could be encouraged towards cleaner energy production with the opportunity to sell excess credits, which they could receive as a reward for cutting emissions. Trading Emissions and Climate Exchange would be positioned to benefit from this.

[edit] Alternative Energy Sources

New laws and initatives proposed by the Chinese government offer opportunities for many manufacturers of alternative energy especially renewables.

  • Suntech Power Holdings is attractively positioned as a manufacturer of photovoltaic (PV) cells and modules and also provides systems integration services in China of these products.
  • Nuclear Energy has high potential. China will be spending $50 billion to fund nuclear power capacity from 8.7 million kilowatts in 2005 to 40 million kilowatts in 2020. Westinghouse, General Electric and France's Coface,amongst others, have bid for future nuclear reactor production. 16 provinces have announced their plans for nuclear power in the next 12th Five Year Plan.

[edit] Agricultural Impact

If greenhouse gases and acid rain were to impact China's basic food staples production, this could support firmer food prices and require larger product imports.

  • Archer-Daniels-Midland and privately held Cargill which are both North American food staple producers that could benefit from higher demand and potentially firmer worldwide prices.
  • Conversely, agricultural exports out of China would be limited. Tyson Foods, Inc. has recently announced its ban of food ingredients from China which could translate into higher ingredient and feed costs.

[edit] Domestic Health Issues

  • GlaxoSmithKline's Advair, or Schering Plough and Novartis' jointly-marketed Foradil are popular asthma drugs which could be used the rising respiratory ailment problems in China. Drugs for treating non-small cell lung cancer could see higher demand.

[edit] Automotive Sector

The Chinese government is calling for stricter emissions standards and hybrid technology for its rapidly growing automotive sector.

  • Volkswagen's green diesel or Toyota's hybrid cars, amongst others, would benefit.
  • Sanyo Electric, which manufactures hybrid car batteries, would also benefit from this.

[edit] Coal-Power Spreads Soot Throughout China's Economy

Figure 1Source: UEA WEO 2006, China Energy Report by David Rosen
Figure 1
Source: UEA WEO 2006, China Energy Report by David Rosen

By late 2007, China will be the world’s leading emitter of greenhouse gases, surpassing the United States. The primary source of these emissions are China's coal power plants. In becoming the world’s industrial production center, economic ambition has dwarfed environmental concerns. Already, China has 622 GW of capacity, of which about 80% is from coal which generate much higher levels of pollutants than oil or gas plants. Industry-lead power demand is 70% of China's energy consumption compared with residential and transportation usage at 10% and 7%, respectively. See Figure 1. Notably, pollution rates are slowing elsewhere in the world as China’s industrial growth is replacing their domestic manufacturing and energy demand. See Table 1.

Fossil Fuel-related CO2 Emissions in China, 1998-2003 (in millions of metric tons of CO2)
  1998 1999 2000 2001 2002 2003
CO2 from coal 2,363 2,287 2,339 2,472 2,518 2,731
CO2 from natural gas 47 51 57 64 69 72
CO2 from petroleum 531 566 636 653 686 737
Total CO2 from all fossil fuels 2,940 2,905 3,033 3,190 3,273 3,541
Source: DOE/EIA

Table 1

China’s pollution problems are monumental. Acid rain falls in roughly one-third of China’s land mass, which further exacerbates the country's water problem. Particulates generated from China’s pollution are detectable as far away as the Western United States. The effects are huge: the Chinese government recently issued a report estimating wheat, corn, and rice production could drop 37% over the next 50 years. This scenario could impact demand for overseas food imports from Australia, which is closer yet has had drought problems, but also from North America. Companies such as Archer Daniels Midland and Bunge Ltd., large players in the North American agriculture and commodity food businesses, could see increased demand for their products or at least firmer global prices.

Penalties on industry thus far demonstrate a reluctance to slow current economic growth for environmental reasons. In March 2007, Premier Wen Jiabao did note China's missing its energy intensity goals during his annual address to the National People's Congress. However, regulatory change for future development is supporting installation of cleaner energy capacity, remediation efforts at existing plants, and fuel and size guidelines for the rapidly growing vehicle/transportation sector. Notably, by 2030, China is expected to have more vehicles than the United States currently has. This offers opportunities for remediation companies offering cleaner coal technologies such as General Electric's coal gasification, wind power companies such as Vestas, Gamesa, and for nuclear power plant equipment from Westinghouse.

This emissions problem and acid rain increasingly hurts China's domestic agricultural development and food demand, as well as rising respiratory health issues. Regulations impact remediation efforts for cleaner coal plants, demand for alternative energy sources, and even guidelines for size and fuel for vehicles.

[edit] Becoming the World’s Largest Industrial Manufacturer Drives Coal Demand

[edit] Industrialization and energy intensity

China’s energy demand and intensity has risen dramatically due to its industrialization. This energy demand largely been met with coal-fired power plants, which account for over 80% of domestic power generation capacity. However China’s growth is rapidly outstripping its domestic energy supplies. In 2001, China represented 10% of global energy demand, and met 96% of its demand with domestic energy supplies. By 2006, China represented 15% of world energy demand and is far more reliant on the importation of fuel, significantly affecting world market oil prices. The International Energy Agency (IEA) forecasts that by 2030, China will account for 20% of the world’s energy demand.

[edit] Huge Industrial manufacturing demand

Industry consumes a remarkable 71% of China’s energy. This is quite high by developing and developed country standards. In comparison, industry energy consumption is only 49% in India, 31% in Europe and 25% in the US. (See Figure 1). GDP by sector also shows China to highly reliant on industry at 48% as compared with only 27% in India and 20% in the US. Outpacing even the growth of China’s major manufacturing capacity is the growth in its energy demand. From 1978-2000, China’s economic growth was 9% while energy demand growth was 4%. But after 2001, energy demand grew to 13% per annum.

The growth of heavy industry in China is one explanation why energy demand growth is exceeding overall economic growth rates. Driven by both global and domestic demand, heavy industry’s profitability has surpassed that of light industry. In a recent survey conducted by David Dollar and Shang-jin Wei, since 2002 heavy industries such as iron and steel and basic chemicals have been more profitable than textiles and apparel. Heavy industry demand for iron and steel, for example, has been spurred by the urbanization shift in China with over 170 cities having over 1 million inhabitants. In 1995, 29% of China’s population lived in cities rising to 42% in 2004. From 2000-2005, residential housing space grew to 4.4 billion square kilometers to 10.8 billion square kilometers. This urbanization has driven heavy building, transportation, and roads construction.

[edit] Environmental Costs

[edit] Powering Over 80% of China

China’s exceedingly high energy demand has pushed the demand for relatively cheap coal-fired power. Each week, another 2GW of coal-fired power is put online. While there are other sources of power generation available, China’s ready access to domestic coal reserves means it is significantly cheaper to extract and transport than other fuel. Thus, over 80% of China’s electricity comes from coal. Without filters and other clean-coal technologies, power generation through coal has significant environmental costs. In China’s battle between rapid economic development and profitability versus environmental quality, it is obvious that short-term economic growth and profitability reign. Accordingly, less than 15% of China’s coal plants have desulphurization systems. To install these systems in all coal plants would hike average electricity prices by an estimated 15%. The impact of such filtration systems would be dramatic, however. Some desulphurization systems would help convert sulphur dioxide into gypsum. It should be noted that the Chinese government has subjected heavy coal-burning industries to a sulphur tax, the tax rates are so low that they do not incentivize commercial change.

[edit] A Heavy Polluter

The impact from these coal plants worsens air quality, and creates acid rain which then hurts soil quality and food safety. Carbon dioxide emissions from power generation is highest with coal at 900 g/Kwh, gas at 400 g/Kwh, and nuclear at 4 g/Kwh. In 2005, over 25 million tons of sulphur dioxide were emitted from these coal-fired power and coking plants. Soot emissions were over 11.8 million tons and industrial powder emissions were over 9.1 million tons. It is estimated that over 90% of China's electricity sector emissions comes from coal-fired power plants. In North America, coal accounts for 68% of fossil fuel generated electricity but effects 86% of sulphur dioxide and 90% of nitrogen oxide emissions.

[edit] The Cost of the Particulate Cloud

There is a range of estimates as to the true economic cost of pollution in China. A World Bank study estimates that China loses about $170 billion per annum due to reduced productivity and healthcare costs, while China's State Environmental Protection Administration issued a report estimating it at $64 billion in 2004. Then, in 2006, the deputy chief of SEPA said that the pollution cost $200 billion per annum also emphasizing the need for environmental protection work on water pollution control and drinking water as well as urban protection. China's 11th Five Year Plan calls for a 4% reduction per annum in energy required per unit of GDP.

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