Written By: Andrew Gibson (04/10/2021)
In the past weeks, China hasn’t only been busy with concerns of financial delinquency contagion stemming from the liquidity problems of its second largest real estate developer (6). The world’s second largest economy is now struggling with an energy crisis. The cause? In part, its own environmental commitments (3). Naturally, the question arises: how could the environmental obligations be so short-sighted as to cause such a severe shortage? Of course, they aren’t, and they didn’t, right? Surely there’s something else afoot. But, does it matter? Not really. In a world of narrative economics, the story can sometimes be more compelling than the facts. Indeed, surging power demand, a cessation of Australian coal imports, lagging coal production and a resulting depletion of inventories (4) make it seem as though the energy problem is arising from market forces, not concerns for the environment. Yet, many Chinese are pointing the finger at government policy. Interestingly, they might not be wrong for doing so.
Evidence from China’s Energy Crisis?
To begin, coal power generation plants which provide a large majority of China’s power, and are partially state-owned, are required to sell their energy at a centrally planned price (5). This reduces their capacity to absorb input material price shocks. As a result, the strategic response to higher coal prices is to begin depleting finite reserves, after which coal must be imported at significant cost. Secondly, the government’s stance on decarbonization, and control over the economy, understandably deters investment into further coal production. New energy demand must be met by supply from somewhere, but where? The problem is that the responsibility lies with the Chinese Communist Party to catalyze investments into more carbon friendly production, given their role as central planners. This is in contrast to their recent agenda focused on reductions in coal-based production. Without alternative, China’s positive economic demand shock is met with inelastic energy supply limited by coal reserves.
With all of that said, what are the realities we are left with? First, China’s economy is heavily composed of manufacturing which has a large demand for energy, and a strong recovery from the COVID-19 economic slump is further proliferating the demand for energy. This demand must be met in large part by supply from coal-based energy production due to a lack of alternatives. Rising coal input prices and centrally controlled energy output prices have caused coal reserves to be depleted. The remaining coal must be imported at significant cost. Due to Chinese government environmental mandates, coal-based energy production volume is capped; resulting in the blackouts experienced as coal plants hit their maximum quota and must cease production.
Thus, the arguably noble pursuit of the Chinese Communist Party to reduce carbon emissions has been successful in disincentivizing further investment into coal-based energy production. However, the cost paid for that success so far has been: energy blackouts, record high coal prices, environmental damages due to the shipment of imported coal, coal plants breaking quotas to overproduce (5) in an attempt to support China’s economy, and long-term erosion of public opinion of the party’s decarbonization agenda. Thus, China’s decarbonization policy is at such odds with its economy that some of its citizens can no longer heat their homes (2). This unfortunate reality presents a lesson for other nations: over-regulation of energy supply, regardless of how well-meaning the justification, can cause serious shortages that can threaten the lives and livelihoods of citizens. Even environmentalists who believe there is no price too high to pay for environmental health are reminded that achieving such goals are an international team effort, and democratic nations require the support of its citizens to commit to long-term environmental policies.
1.1news.info. 2021. “China turns to stranded Australian coal amid power crisis.” Australian News. https://www.1news.info/australian-news/china-turns-to-stranded-australian-coal-amid-power-crisis-1119371
2.AP. 2021. “Power Blackouts in China Hit Homes, Shutter Factories.” CBC. https://www.cbc.ca/news/business/china-power-cuts-1.6193281
3. Bloomberg. 2021. “China’s Energy Crisis Has Villagers Questioning Climate Path.” Financial Post. https://financialpost.com/commodities/energy/chinas-energy-crisis-has-villagers-questioning-its-climate-path
4.Burns, Stuart. 2021. “China Can’t Keep up with Surging Energy Demand.” OilPrice.com. https://oilprice.com/Energy/Energy-General/China-Cant-Keep-Up-With-Surging-Energy-Demand.html
5.Fickling, David. 2021. “The Government Blinked First in China’s Energy Crisis.” The Washington Post. https://www.washingtonpost.com/business/energy/the-government-blinkedfirst-in-chinas-energycrisis/2021/10/04/ebdd620a-2566-11ec-8739-5cb6aba30a30_story.html
6.Toh, Michelle. 2021. “5 Things to Know About the Evergrande Crisis: A Simple Breakdown.” CNN. https://www.cnn.com/2021/09/24/investing/china-evergrande-group-debt-explainer-intl-hnk/index.html