Behind the rhetoric in Glasgow, step by step the world is imposing a carbon squeeze on China and to some extent India. As world leaders left Glasgow, the price of both thermal and coking coal began to recover after the sharp falls of recent weeks.
That rise reflected a new set of Chinese stimulation measures as China aims at recovering its growth rate – that’s good news for Australia.
About five years ago, China took a fateful step and decided to substantially increase its investment in coal-fired power stations. India saw what China was doing and followed. What the Chinese planners at that time never envisaged was the intensity of the campaign to lower carbon emissions and how it would unite world capital markets.
And no one in China five years ago could have imagined that in 2020 the Chinese president would ban coal imports from China’s best supplier, Australia, and therefore ignite massive rising coal prices to the great benefit of Australia – Xi Jinping’s target. But the coal prices would have increased without the trigger of his Australian ban.
World capital markets are making it increasingly difficult to invest in new coal production and undertake the expansion that would normally have followed the big recent price rises in coal. Chinese and Indian demand is rising and they are trying to lift their own supply. Paradoxically, India and China need the West to slash its usage of coal to curb those price rises. But if the coal moves from Western power stations to China and India, it will not help emissions.
China started the year looking to curb its emissions but the power shortages partly caused by these measures, plus the shortages of coal, have caused a reversal.
Xi announced last year that China’s carbon emissions would begin to decline by 2030, and the country would reach carbon neutrality by 2060. The undertaking required China to balance its carbon emissions by removing an equivalent amount from the atmosphere. By Glasgow standards, that was not a major step forward but for China and it’s new cold-fired power stations it was actually a significant undertaking.
Xi began to act.
As a starting measure, a duel control policy was introduced that required provinces to limit energy use and cut energy intensity. But it didn’t work and a large number of the provinces failed to achieve their targets.
Rather than try to work on a better strategy, Xi and the Communist Party decided to introduce more stringent measures to force the provinces into line. It was a disaster and contributed to widespread power rationing across the country. The power cuts not only enraged consumers, but put small and medium-sized enterprises that account for about 80 per cent of China’s employment in a perilous position.
The gravity of the situation has been multiplied many times by the severe strains on the property market caused by the problems of Evergrande and other property developers. Property dominates the wealth of individual Chinese and large numbers were caught having bought apartments “off the plan” that were not being completed. The combination of the power cuts and the property mess were dangerous to Chinese stability.
Add to that the re emergence of the virus. Not surprisingly, China has changed its course and is telling provinces to buy the required coal to maintain power, although they still won’t let them access Australian coal – at least directly.
The banking system is making it easier for small enterprises to borrow and in various ways solutions are being found to avoid the immediate collapse in the property sector.
In other words, China is undertaking an old-fashioned stimulation and it expects its growth to increase in the next year or two. But the costs in China are going to rise partly because the world is making it harder for China to obtain the coal it requires for power generation by restricting the supply on carbon emission reduction grounds.
It is ironic that the Morrison solution to the crisis is the one China will have to adopt – new technology.
China is leading the world in molten salt-cooled nuclear reactors and it is applying its technology to its naval vessels, led by submarines.
But in the meantime it must keep those coal-fired power stations producing enough power to prevent the blackouts. And the world’s capital markets are making that increasingly difficult.
In the bizarre way, it could be described as the world’s biggest carbon tax.
Read related topics:China Ties
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