At the September 2019 United Nations General Assembly (UNGA) Climate Summit, the U.S. delegation, under the shadow of intended withdrawal from Paris, did not volunteer a speaker. Attention instead focused on China. As the world’s largest carbon emitter, China was poised to assert leadership on the climate crisis.  However, perhaps lacking the sibling rivalry pressure that brought the U.S. and China together in 2014 on a joint climate agreement, State Councilor and Foreign Minister Wang Yi offered no new commitments: no carbon tax, no increased investment in renewables, and no announcement to set a more ambitious coal consumption cap.

While China is projected to fulfill its Paris commitment to reduce the proportion of coal in its energy mix to below 58% by 2020—a full 10 years ahead of schedule—the country remains the world’s largest producer and consumer of coal. As Chinese policies have curbed coal-fired power out of air pollution and climate concerns, the coal industry and subnational governments have searched for alternative sources of coal demand. Thus, we have seen a slow but steady rise of various coal conversion industries.

China is the only country to implement coal conversion at scale, turning coal into coke, fertilizer, and other chemicals (see Figure 1). Since 1998, China’s central and local governments have alternatively pushed forward and pulled back the development of modern coal conversion industries such as coal-to-oil and coal-to-natural gas. But as of 2017, China’s central government has incorporated coal conversion into national planning, releasing the “13th Five Year Plan for the Demonstration of Coal Processing and Utilization.” This first national strategic document on coal conversion development stipulates that coal conversion must become more environmentally viable.

Figure 1

China’s central policymakers have slowly accepted coal conversion because it can supply China’s rapidly growing demand for petrochemical products, such as fertilizer, rubber, and plastic, in the face of uncertain global oil supply. According to Yao Wu, an energy market analyst from ESAI Energy LLC, China consumed 35 million out of 160 million tons of ethylene produced globally in 2018. Ethylene is a basic chemical building block that is widely used for plastic production. 

Investing in coal conversion, however, means gambling on an economically uncertain and environmentally destructive business. Worse, it could perpetuate China’s coal dependence and contribute to carbon emissions for decades to come. As part of the Wilson Center’s Global Choke Point initiative, the China Environment Forum tracked China’s coal conversion trends in its new scoping report, Risky Business: Growth of Water-Intensive Coal Conversion Projects in Western China (see Scribd document below).

Risky Business: Growth of W… by The Wilson Center on Scribd

A Dirty Business

Coal conversion industries pose a troika of environmental threats: water overconsumption, wastewater pollution, and carbon/air emissions (see Figure 2).

• Guzzling Water: Coal conversion has a large water footprint as water is integral to several stages of production, including washing coal, generating steam for power, and processing chemical products. These thirsty plants are often located in China’s dry northwestern regions close to coal mines. If all planned coal conversion projects are put into operation, their water footprint is projected to reach over 3.2 billion cubic meters annually (based on 2017 coal conversion statistics), which is nearly the annual water consumption of Beijing. In response, the Ministry of Environmental Protection released a 2015 rule limiting water usage, and some plants in dry provinces have implemented an innovative water rights trade system with farmers. As coal conversion becomes more efficient, the water footprint will decrease, but is still projected to remain disproportionately large.
• Discharging Wastewater: Coal conversion industries produce vast quantities of toxic wastewater that is difficult to cleanse and safely release. As a result, multiple coal conversion projects have illegally discharged wastewater while others have had accidental leaks. In 2016, a wastewater leak from Datang Duolun coal-to-olefins project forced the relocation of 2,200 villagers. Untreated wastewater can poison vegetation and groundwater, yet lack of monitoring and the capital-intensive nature of wastewater treatment make solutions elusive.
• Releasing Air Emissions: Turning coal into chemicals emits excessive carbon and particulate matter. According to Greenpeace, by 2020, coal conversion will quadruple its 2015 carbon emissions and release 409 million metric tons of carbon dioxide, equivalent to 105 coal fired power plants running for an entire year. This spike in air emissions goes against China’s emissions and air pollution reduction goals.

Figure 2

China’s Choices

Chinese policymakers see coal conversion as offering potential solutions to critical problems, from reducing coal overcapacity by creating new forms of coal demand to increasing energy independence by lessening oil and natural gas imports. Yet even Chinese analysts agree that coal conversion does not make fiscal sense for wide-scale implementation. Researchers from Tsinghua University and the University of International Business and Economics found that substituting imported oil with coal-to-liquids leads to a net energy loss due to coal energy conversion inefficiency.

Coal conversion is a capital-intensive industry with a long payback period. When oil prices drop, China’s coal conversion industries are no longer cost competitive. An increasingly conflictual relationship with the United States has exposed China’s lack of international oil pricing power. It is encouraging that China’s government is investing in technological innovation to ease the environmental impact of coal conversion. However, the fixed costs of such R&D and technology development will increase the capital requirements, making coal conversion even more unprofitable.

The accelerating coal conversion development in China is trapped in environmental and economic dilemmas. China cut its coal consumption to reduce CO2 emissions to fulfill its Paris Agreement commitments. However, coal conversion could undercut China’s efforts to limit coal consumption and greenhouse gas emissions.

Planning certain demonstration coal-to-liquefied fuel/oil projects is reasonable in the context of China’s energy security—China was over 70 percent oil import reliant and almost 50 percent natural gas import reliant in 2018. But this technology should be a strategic option, not a mass investment. To push the chips in on coal conversion would be betting on a risky business.