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16 September 2020

What does the coronavirus pandemic mean for the Chinese energy economy – threat or opportunity?

2020 was off to a good start for China following the conclusion of the US-China phase one trade deal on January 15. But soon, the Year of the Rat was marred by the novel coronavirus.

What does the coronavirus pandemic mean for the Chinese energy economy – threat or opportunity?

From a Chinese cultural perspective, a crisis as significant as the COVID-19 pandemic is often perceived not only as a threat (危wei), but also an opportunity (机 ji) – or wei ji (危机). Beijing can use the COVID-19 pandemic to reshape China’s national energy mix and decouple its carbon emissions from economic growth. But is it happening? We are tracking the developments of the Chinese energy economy since the lockdown due to COVID-19.

The widespread outbreaks of the Coronavirus across the globe have severely impacted economic growth, energy demand, and energy policy. Prior to the pandemic, China’s energy sector had already been undergoing a systematic transition from a coal-dominant system to a less carbon-intensive one, with the share of coal in China’s energy mix declining from 73 percent in 2007 to 58 percent in 2019.

Nevertheless, China’s carbon emissions are driven by the rather pronounced growth of national energy demand to sustain economic growth. Between 2007 and 2019, China’s national carbon emissions increased by more than one third. These additional emissions alone are responsible for about 63 percent of the total increase globally. Not surprisingly, the international community wonders whether COVID-19 will accelerate the positive structural transition or undermine the global climate agenda.

COVID-19 has posed an unprecedented challenge to China’s energy economy

In the first quarter of 2020, China experienced the first economic contraction since the end of the Cultural Revolution in 1976 – the Chinese economy declined by 6.8 percent year-over-year (YOY). In the same period 2019 Chinese economy grew by 6.4 percent YOY. With the rapid spread of the coronavirus beyond China’s national border, multiple forecasters downgraded China’s GDP growth outlook along with the rest of the world. Prior to the COVID-19 outbreak on January 9, the International Monetary Fund (IMF) projected that the Chinese economy would grow by 6.0 percent YOY in 2020. In April, it revised the forecast downward to 1.2 percent. In June, it lowered it again to 1.0 percent. This downward correction was certainly also influenced by the global development of the pandemic affecting the Chinese market.

National power consumption fell at a rate similar to the overall economy in the first quarter of the year. China’s power demand trajectory will largely depend on the recovery of industrial activity because this sector alone accounted for nearly 70 percent of national power consumption last year.

The carbon-intensive economic recovery is an alarming sign

In March 2020, the pandemic was brought largely under control within China, allowing economic activity to pick up in the second quarter of the year. China was thus the first major economy to clearly recover from coronavirus-induced economic slump, with GDP growth returning to a positive 3.2 percent YOY in the second quarter. Assuming that the outbreak in China remains largely contained, positive economic growth is expected in 2020, followed by a more pronounced rebound in 2021.

By the end of June, quarantines had been lifted and manufacturing resumed, so cumulative national power consumption had declined by only 1.3 percent YOY. As the power sector alone accounts for about half of national coal consumption, China’s economic recovery in the second quarter has been rather coal-intensive.  

From April to June, China’s economy not only seems to have recovered from the COVID-19 shock, but also to be returning in leaps and bounds to the old path of rapid and energy-intensive growth. Power generation, steel and cement manufacturing are major drivers underlying China’s appetite for coal. Output in the three sectors in June 2020 all exceeded 2019 levels, accompanied by an increase in coal consumption.

The recovery of the Chinese oil industry has been slower than that of coal. However, oil supply is rebounding with record high crude imports, much of which is flowing into commercial and strategic storage.

COVID-19-induced climate and environmental benefits seems to be short-lived

Due to the sharp fall in transport and industrial activity during the national lockdown in the first quarter, air pollution in China was drastically lower, especially for the major source of smog: particulate matter (PM2.5), which is mainly produced by the combustion of oil and coal.

In February and March, the national average PM2.5 concentration decreased by 27 percent and 22 percent year over year, respectively. With the lockdown lifted, the monthly PM2.5 concentration rebounded quickly to pre-crisis levels, reaching a 3.1 percent increase YOY in April.

China’s carbon emissions have rebounded slightly in recent years after plateauing at 2014 levels for two years, with national emissions growing by about 1.2, 2.2 and 3.4 percent annually from 2017 to 2019. In the first quarter of 2020, carbon emissions in China followed the downward trajectory of economic activity and energy demand. The International Energy Agency (IEA) estimates that China’s carbon emissions declined by 8 percent that quarter. The unexpected drop of carbon emissions in the first quarter of 2020 could serve as a good start to turn the trajectory downward.

However, the industry-led recovery in the second quarter is driving a resurgence of power demand and fossil-fuel consumption, with increasing risk of “retaliatory pollution and emissions”, which means that the industries would double their efforts to compensate the losses during quarantine in quarters to come. At Carbon Brief, researcher Lauri Myllyvirta concludes that China’s fuel combustion carbon emissions increased by around 4 to 5 percent YOY in May.

The current continuation of pre-crisis behaviour is not at all aimed at counteracting climate risks. The only way for China to keep the coronavirus-induced climate benefits from the first quarter is to deepen a structural reform with a green stimulus package capable of steering economic recovery in a more environmentally sustainable direction.

Learning from the past: transforming the coronavirus-induced crisis into an opportunity

Following the global financial crisis in 2018, China adopted a 4-trillion-yuan stimulus package (500 billion euros) to boost its economy. The package included massive investments in energy-intensive infrastructure construction, such as highways, bullet trains, and subways. The investment-led recovery plan was effective in bringing the economy back to normal but also locked China on a high-carbon pathway.

To learn some lessons from the past, climate change should this time be a key pillar of any stimulus package. The concept of ‘New Infrastructure Projects’ proposed by the Chinese leadership back in March is a positive development in this regard. As new infrastructure projects focus on digitalization-oriented, innovative and smart infrastructure building, this concept offers a fair opportunity to move China’s low carbon development agenda forward if implemented appropriately, especially at the local levels.

Furthermore, the unexpected performance of renewables during the pandemic is also an encouraging sign. China’s power generation by wind and solar in the first quarter of 2020 rose by 10.4 percent YOY and 19.9 percent YOY respectively, whereas thermal power generation fell by 8.2 percent. This trend clearly indicates that recent policy-driven changes to dispatch rules and the push to invest in state-of-the-art transmission infrastructure have indeed created a more favorable environment for grid integration of variable renewables in China.

The long-term effect of a stimulus package requires China to carefully formulate its recovery pathway. A green stimulus package is urgently needed to provide a solid foundation to support China in preparing its 14th Five Year Plan for 2021-2025. As a result, Chinese decision-makers should double down on efforts in the clean-energy transition in order to better balance short-term political targets with longer strategic goals. If this happens, China can, in the post-coronavirus world, become a true global leader in clean-energy investment and the future low-carbon economy.