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China pivots to boost coal output, putting climate goal at risk

Beijing prioritizes economy and energy security over lower emissions

China is encouraging coal mining companies to increase production as it seeks to revive a sluggish economy.   © Reuters

BEIJING -- Major Chinese coal mining companies are increasing production this year as the government focuses on easing energy prices to underpin the economy in a policy at odds with its carbon reduction goal.

China Shenhua Energy has received approval to expand annual coal capacity by 4.6 million tons. The permits apply to the Shenshan and Huangyuchuan mines in the Inner Mongolia Autonomous Region as well as the Qinglongsi mine in the northwestern province of Shaanxi, according to the late April announcement.

The combined capacity of the three coal mines will jump 30% to 18.2 million tons. This comes after Shenhua Energy lifted output during the first quarter.

Shenhua Energy, a listed subsidiary of China Energy Investment, reported a 24% year-on-year revenue gain for the January-March period thanks to rising coal prices. Net profit soared 63%.

Peers also are boosting production. China Coal Energy said it will upgrade capacity to increase supply in the second quarter. Gansu Jingyuan Coal Industry and Electricity Power, linked to the government of key coal-producing area Gansu Province, plans to buy rival Yaojie Coal and Power.

President Xi Jinping, in a September 2020 speech to the United Nations General Assembly, announced that China aims "to have carbon dioxide emissions peak before 2030 and achieve carbon neutrality before 2060." The country moved to clamp down on the use of coal-fired power generation.

But Beijing changed course in April, looking to lift capacity by over 300 million tons this year. That would increase coal output for 2022 to at least 4.4 billion tons, or at least 7% from last year.

In keeping with the central government's agenda, regional authorities have ordered coal companies to boost production. Shandong Province in eastern China said output will climb 2% to 95 million tons this year. Shanxi and Henan provinces have issued directives to produce more coal and stabilize supplies.

The People's Bank of China is propping up the expansion in capacity. The central bank in May raised the refinancing cap for lifting output and stockpiles to 300 billion yuan ($44.5 billion), up from 200 billion yuan.

Soaring energy prices are a huge driver of this policy change. Global supplies have tightened due to Russia's invasion of Ukraine. Crude prices are up more than 50% from a year earlier.

To combat inflation, China ordered utilities to curb electricity bills. But the cost of procuring coal jumped by 130 billion yuan collectively, leading to the majority of major utilities reporting first-quarter losses, according to Chinese media.

Workers toil at the Qinglongsi coal mine, operated by China Shenhua Energy in Shaanxi Province. (Photo taken from the coal mine's social media)

Coal prices in China surged by 20%-30% in the first quarter. Beijing believes that raising output of cheap domestic coal will ease the price gains and improve the finances of major utility, leading to stable economic conditions.

The expanded production also includes a national security wrinkle. The government has led a shift toward natural gas, considered to have a smaller carbon footprint than coal. But nearly half of the natural gas consumed by China comes from overseas sources. The ratio is approaching that of crude oil, of which 72% is sourced abroad.

Much of the natural gas comes from Australia and the U.S., two countries politically at odds with Beijing.

"Because of the long-running Sino-U.S. tensions, more people are reevaluating coal from an energy security perspective, since coal can sourced almost entirely at home," said an executive at a resource enterprise.

"The increased coal production indicates that national security and controlling inflation have taken priority, and decarbonization efforts have tentatively dropped down in importance," a senior regional government official said.

The embrace of coal risks harmful repercussions. Most of the Beijing Winter Olympics took place under blue skies this year because of initiatives to fight air pollution. 

Many urge China to pair its coal expansion with environmental safeguards. Even so, "there are fears that environmental efforts toward decarbonization will take a step back," a source close to the government said.

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