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Ride the Early Tides of a Sea Change

Mar 02, 2015
  • Wang Tao

    Resident Scholar, Carnegie-Tsinghua Center for Global Policy

The Sino-U.S. climate change announcement at the Asia-Pacific Economic Cooperation (APEC) Summit last November saw new mitigation pledges made by the largest two emitters of the world. It is also expected the new climate targets will further enhance Chinese government’s efforts in combating the severe air pollution and other environment issues across the country.

But we might have seen some tides of a sea change in China, which would bring profound implications to China’s environment and climate future.

The Chinese economy continued to slide in 2014, toward a “new normal.” But there were also signals that could not easily be regarded as normal. China’s coal consumption, which at one point could have seemingly grown forever, may have already fallen for the first time this century. Additional evidence is that electricity generated by burning coal (measured in kilowatt-hours) also fell in 2014—another phenomenon unseen in China for decades. As a result, now one of every four kilowatt-hours in China is generated from non-fossil fuels that produce nearly no carbon emissions, whereas in 2006 the fossil fueled power generation was over 82% at the all time high.

What is more noteworthy in 2014, is the provinces that used to top the GDP growth list – fueled by their coal, steel, and other heavy industries – have now sunk to the bottom. Though, it still remains unclear whether dramatic changes are driven by severe over-capacity in these sectors, or the anti-pollution measures taken by the Chinese government. But China’s continuous efforts to improve its energy structure with a greater share of cleaner energy deserves some applauds, so does the bold decision to raise the oil tax three times since last November after the oil prices collapsed.

Changes are not only taking place in the coal and heavy industries that are directly targeted by China’s anti-pollution campaign. Latest data show that China’s oil demand growth also reached a new low at 3.7% per annum, despite the halved international oil price and recent efforts to fill China’s Strategic Petroleum Reserves (SPR). The demand of diesel already fell in the first half of 2014 and the trend is likely to continue in the second half, again the first time in decades. Even the increasing demand for natural gas, promoted in many cities to replace coal, also falls short of expectation.

But policy in oil sector is lagging behind the change. In a recent piece with my colleague David Livingston, we found that oil slipped through the cracks of the recent U.S.-China climate announcement. In an oil regime with increasing unconventional oil supplies, it is in China’s interests to establish a strategy regarding the choice of different unconventional oils, and to meet its demand intelligently with the least environment and climate impacts.

But this approach should, and could not be carried out by China alone. The United States, as the world largest oil consumer, also produces the most light, unconventional oil (from shale cracking) and holds the largest refinery capacity of heavy unconventional oil (from Canadian tar sands). In the last decade when China was very concerned with securing its oil supply, the same selectiveness for unconventional oil was willingly shared too. The Chinese oil companies are piloting light oil extraction processes in various fields in China, including some of the heaviest oil fields. China also builds up the world’s second largest refinery capacity that is mostly suitable for heavy and high sulphur oils.

The environmental bills of these approaches though, could not be neglected.

One of the examples is petroleum coke or petcoke, a by-product in the bottom of an oil barrel after the refinery process. It recently has found its way into the boilers of many heavy industries in China, with a large proportion of them coming all the way across the Pacific from the United States. The accumulated production of high sulphur petcoke in the United States is a result of increasing import of super heavy oil from Canadian tar sands. In the case of China, this is sourced mostly from the Middle East, Russia and South America. Their collective choices made the petcoke a dirtier alternative to coal as China tries hard to cut the consumption of the coal to clean up the air. The two nations need to work together to address this unintended result of their oil choice.

Secondly, the growing array of unconventional oil is very different in their climate impacts through the life cycle, from extraction to combustion. Some of them are solid and more like coal whereas some are very gaseous. The initial result from Carnegie’s research indicates that the high end could be 80% higher than low one in terms of their climate footprints. While there is no competent alternative to oil in the transportation sector yet, it is crucial for the world largest oil consumers such as the U.S. and China to choose wisely how their demands are met while reducing their demand for oil. This would be a critical factor to be considered in their plan of meeting their joint climate targets and work collectively.

Besides the climate impact, other environmental impacts of the unconventional oils also need to be investigated. Water is severely lacking in most of China’s oil fields, whereas unconventional oil production is particularly water intensive. Water pollution is also an issue to be considered in unconventional oil production. The new amendment of China’s environment law that became effective since 2015 and a new Environment Minister with a background in water pollution suggests that water pollution should no longer be a free factor in oil extraction any more, making some of the projects even less economically viable in a low oil price prospect.

A sea change in the prospect of both global oil supply and demand may be on its way. China will find now is a defining moment more than ever before and that its choice could have a decisive impact on its environment and energy future. Unlike the last decade, China now has more choices of how to meet its oil demand. Together with the United States, there is much they could define in our oil choice and climate future.

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