COLUMN-China's carbon goal shows coal growth has peaked: Wynn

Wed Aug 7, 2013 7:45am EDT

(The author is a Reuters market analyst. The views expressed are his own.)

By Gerard Wynn

LONDON Aug 7 (Reuters) - China's renewal last week of its commitment to a domestic 2020 carbon target, under a new energy saving and emission-reduction investment plan, backs up forecasts of weakening growth in carbon emissions and coal demand.

But the target also suggests that emissions and coal consumption will continue to rise through the 2020s, even though at a slower rate, barring a major intervention including a shift to cleaner burning gas from coal.

The future trajectory for Chinese carbon emissions has implications both for the timing of new policies including a possible national cap and trade scheme, and for coal demand in the world's biggest importer.

China often misses domestic targets, intended as guidance: GDP growth in the past two years has turned out much faster than envisaged under its present five-year plan from 2011-2015.

It also looks likely to miss various energy and carbon targets under the five-year plan.

Its carbon emissions target for the end of the decade can therefore be treated with some scepticism.

But it may have more force than other goals, given it was pledged under an international climate accord in 2009 which world leaders, including former Chinese Premier Wen Jiabao, committed to stand behind.

The country remains committed to the goal, according to local media reports last week of a plan to invest 2.3 trillion yuan ($376 billion) through 2015 in energy saving and carbon emission-reduction projects.

TARGET

China has an official goal to cut the carbon intensity of its economy by 40-45 percent by 2020 compared with 2005 levels.

Carbon intensity is a measure of emissions per dollar of economic output.

The lower end of the target range implies an average annual cut of 3.3 percent over the 15-year period, but actual carbon intensity was unchanged from 2009 to 2011, energy and GDP data from BP and the World Bank show, leaving the country adrift of the goal. (See Chart 1)

That implies steeper annual cuts now required to get back on track.

As a ratio, the outlook for carbon intensity depends both on China's carbon emissions and GDP.

Assuming an average annual GDP growth through the rest of the decade of 7 percent, which China's leadership has said it can accept, then hitting the intensity target would see carbon emissions rise at only about half the annual rate seen in the last decade (3 percent versus 6 percent). (Chart 2)

The lower the rate of GDP growth, the slower the rise in carbon emissions required.

The implication is that growth in CO2 emissions has peaked.

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Chart 1: link.reuters.com/sed32v

Chart 2: link.reuters.com/ted32v

Chart 3: link.reuters.com/ved32v

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COAL DEMAND

Growth in coal consumption and carbon emissions are almost perfectly correlated in China, reflecting the domination of coal in the country's energy mix and high carbon emissions from burning the fossil fuel.

Actual annual fossil fuel carbon emissions and coal consumption since 1965 have a correlation of 0.9997, according to BP energy data.

In line with meeting the carbon intensity target, therefore, annual coal demand can be expected to rise at the same pace as carbon emissions, or by just over 25 percent from 2012 to 2020, using the same assumption for GDP growth.

That is much slower than in the past decade, but remains faster than the earlier, long-term trend. (Chart 3)

Such number crunching allows a number of observations.

First, meeting the carbon intensity target will require a significant change in trajectory for carbon emissions and coal consumption.

Second, the country is presently on track to miss it.

And third, evidence that growth in coal demand has peaked in no ways means a peak in consumption.

Even under a trend which meets the intensity target, it would appear extremely difficult to halt growth in either carbon emissions or coal demand before the mid-2020s, which may then mark the earliest date for the launch of a cap and trade market in emissions allowances.

(Editing by Keiron Henderson)

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