Amid China’s breakneck renewables expansion, emissions have dropped for the first time since Covid-19 restrictions were lifted – and air quality has improved throughout most provinces.
Approvals for new coal power plants dropped by more than 80 per cent in the first half of 2024, while the government suspended all approvals for new steel plants.
However, one sector is blurring these positive trends: China’s coal-to-chemicals industry. In the first half of 2024, the chemicals industry was the largest driver of energy consumption and emissions growth. And in the first eight months of 2024, its coal consumption increased by 18 per cent year-on-year.
According to analysis by the Centre for Research on Energy and Clean Air (CREA; an independent research organisation that analyses global climate and energy trends), this drove total national emissions up by 54 million tonnes of CO2. As a result, it negated some of the carbon emissions-reduction progress that has been made in other sectors over the same period.
Coal is expected to phase down in China’s power sector, and in some industrial sectors. Coal-to-chemicals is likely to be the country’s only major, coal-consuming sector that could still see substantial manufacturing capacity expansion and emissions spikes.
Amid energy security concerns and economic uncertainties, local governments and coal mining companies are driving coal-to-chemicals growth through new investments. Meanwhile, the central government has opened the door for further development with a recent, high-level policy.
To meet China’s climate commitments, though, the coal-to-chemicals industry needs to urgently shift gears. Stricter policies and regulations, investments in new feedstock, and enhanced electrification must displace emissions that the global climate cannot digest.
What are the key characteristics of the sector?
Due to China’s substantial coal reserves, its chemicals industry is significantly more reliant on it than other major chemicals-producing countries. Coal constitutes 94 per cent of China’s total fossil energy resources. Oil and natural gas account for only 2.5 per cent and 3.5 per cent respectively. So to enhance energy security, China uses coal to produce oil and gas substitutes, as well as chemicals.
This strategy has become crucial and now has the potential to produce the equivalent of over 30 million tonnes of oil annually. From the coal supply and processing chain, fine chemicals production is thought to offer the most growth potential, an eight-to-twelvefold profit increase. As coal prices decline, major coal enterprises are increasingly looking to chemical products to maximise profits.
China’s local coal conversion policies promote the processing and utilisation of coal near mining sites. Modern coal-to-chemical projects are therefore primarily concentrated in coal-rich regions in central and western China. In 2017, the government designated four demonstration areas for the industry: Ordos in Inner Mongolia, Yulin in Shaanxi, Ningdong in Ningxia and the Junggar (Zhungaer) Basin in Xinjiang.
China’s coal-to-chemicals industry is dominated by large, state-owned enterprises, such as upstream operators China Shenhua Energy Company and Shanxi Coking Coal Group. Projects approved this year highlight the industry’s key midstream operators, such as state-owned Shaanxi Coal and Chemical Industry, and private firm Qiya Group. As coal-to-chemical companies are heavily reliant on coal and water, they are also heavily reliant on the support of local government.
Coal-based chemical production emits significantly more CO2 than petrochemical (from petroleum or natural gas) production. It accounted for 5.4 per cent of China’s national emissions in 2020, according to The Oxford Institute for Energy Studies. For example, producing ammonia using coal emits around 2.2 times more CO2 than using natural gas and 0.4 times more CO2 than using oil. Furthermore, water is scarce in China’s main coal-to-chemicals regions, creating significant conflicts over its use.
Why has coal demand from the sector increased recently?
Since the Russian invasion of Ukraine in 2022, global oil prices have risen rapidly. Meanwhile, China’s energy security strategy has increased coal production and reserves, with the state positioning coal as the “ballast stone” of Chinese energy – reserves have been high since January 2024.
The drop in coal prices since 2023’s fourth quarter has provided even further market stimulus for coal-to-chemicals expansion: year-on-year coal consumption in the chemicals industry was up 46.5 per cent in February 2024.
From January to July, that consumption totalled 220 million tonnes, up 8.5 per cent on the same period last year. Of the four major coal-consuming industries, the chemicals industry is the only one experiencing growth. Overall, its consumption of coal is forecast to climb by 14 per cent this year.
Meanwhile, sluggish economic recovery following the pandemic has galvanised investing to stimulate economic growth. In June 2023, the central government introduced a policy to promote the high-end, diversified and “low-carbon” development of the modern coal-to-chemicals industry.
The sector has since been exemplified as a “new productive force”: in September 2024, the central government issued a policy to promote the “clean” use of coal, which further encouraged coal-to-chemicals expansion and added value to coal reserves.
Furthermore, the central government’s efforts to reduce fossil fuel consumption in line with its emissions goals purposely exclude the consumption of “raw material energy”. So, as opposed to coal that is used for fuel, “raw coal” implies coal used for purposes that include the production of chemicals. This exclusion was designed to protect China’s chemicals industry from the pressures of decarbonisation, but it has inevitably contributed to its strong growth.
In response, coal-rich local governments have unveiled ambitious plans: a grand total of 75 coal-to-chemical initiatives can be found across 15 provincial construction lists. These additions are projected to increase the annual production of coal-based chemicals by millions of tonnes.
Based on mapping by the China-based coal chemical database Anychem Coalchem, coal-to-chemicals’ current production capacity in China totals almost 500 million tonnes per year. Necessitating more than two tonnes of coal per tonne of chemicals, that puts the potential total coal consumption of these facilities at a billion tonnes per year. Projects under construction will extend this further.
The sector’s actual total coal consumption for 2024 is projected to be 340 million tonnes, indicating that its capacity is being heavily under-utilised. In other words, there is major potential for growth among both operating and under-construction projects.
But the coal industry must urgently shrink to achieve China’s climate change targets. Raw coal output may have decreased by 0.3 per cent between January and August 2024, but the major coal-producing provinces have all increased production (except Shanxi, due to coal mine safety inspections).
Coal imports have increased by 11.8 per cent due to price advantages over domestic coal. And in response to energy security concerns following the coal and power shortages of 2021, which led to soaring coal prices, the country has set a target for 300 million tonnes of “dispatchable” coal production annually by 2030.
Although coal-to-chemicals production has risen during 2023 and 2024, weak downstream market demand has caused ongoing price declines for the products. In 2023, profits in the coal-to-oil sector fell by 52.7 per cent year-on-year and coal-to-gas by 39 per cent. In the first half of 2024, China Coal Energy (the leading, state-owned coal-to-chemicals company) reported a 3.5 per cent year-on-year decline in coal-to-chemicals revenue.
Demand for chemicals products has slowed due to China’s weak real estate market, which has unfortunately coincided with a glut of new chemical facilities. Producers planning or constructing new projects may be pausing to question future profitability as the competition intensifies.
What does the future hold?
If current expansion continues, CO2 emissions from the coal-to-chemicals industry could fail to reach a carbon peak before 2030. They may in fact increase, by 1.3 times compared to 2019 levels.
Stricter emissions-reduction policies and regulations will be crucial in pulling coal-to-chemicals from China’s climate change red lines. The government should impose tighter restrictions on the expansion of the sector and set clear targets for emission reductions. An overall target for coal consumption could further help contain emissions growth. Expanding the national carbon market to incorporate chemicals would be another key lever for incentivising low-carbon production, not to mention preparing for the EU’s incoming Carbon Border Adjustment Mechanism.
Innovation and technological advancements in the sector will be just as critical for decarbonisation as for revenue. Even with efficiency gains, coal remains a very carbon-intensive feedstock and energy source for chemicals production. Therefore, the biggest opportunities for lowering emissions are low-carbon feedstock alternatives, such as green hydrogen, and electrification powered by renewables.
As renewables continue to expand and mature, energy security will increasingly also be provided by them. This shift will diminish coal-to-chemicals demand.
Beyond low-carbon production, however, reducing demand for chemical products will also be crucial. China has already put forward improved recycling and circular economy systems through high-level policies. These measures could be further strengthened to reduce the need for primary chemicals production.
Productive international collaboration can also help adopt best practices, accelerating the sector’s transition. As low-carbon production processes and recycling in the chemicals sector are still nascent, Chinese companies and policymakers can learn from international cooperation, as exemplified in the planned offshore wind farm powering a chemicals site in southern China.
The coal-to-chemicals industry will likely remain a key feature of China’s energy and industry landscape in the near term, but its role must evolve. By investing in greener alternatives and reducing reliance on coal, China will get closer to achieving both its energy security and climate goals.
This article was originally published on Dialogue Earth under a Creative Commons licence.
