The Story So Far
China’s rapid economic rise has come at a heavy environmental cost, and its population is increasingly demanding an “ecological civilization” that addresses health-threatening air pollution, heavily polluted rivers and groundwater, and contaminated land. Studies estimate premature deaths from air pollution at 1 to 2 million per year, while the World Bank puts the overall cost of China’s water pollution crisis at 2.3% of GDP. Policymakers are aware of these threats: the 2013 Third Plenum set environmental reform and sustainable development as some of the government’s main responsibilities. Aided by structural transition away from polluting heavy industries, initial reform efforts are making a difference. Yet much more is required to put a sustainable future within reach, let alone to raise China’s air and water quality to international standards.
- In 2013, officials released the first “Air Pollution Prevention” plan, requiring major Chinese regions to meet air pollution reduction targets within four years. Beijing was required to reduce air pollution by 33%, prompting it to shutter coal-fired power stations and curtail coal-burning heaters. A 2018 “Blue Sky” action plan built on the original 2013 plan by setting out further reduction targets of at least 18% for large cities and regions that lagged 2013 goals.
- Premier Li Keqiang announced a “war on pollution” in 2014, outlining plans to reduce particulate air pollution, cut production in overcapacity industries like steel and aluminum, shift away from coal power, and develop renewable energy and resources. While previous policy efforts suffered from a lack of concrete action, a revised Environmental Pollution Law reinforced the war on pollution by increasing penalties for polluters and integrating environmental performance into local officials’ performance and promotion metrics.
- The winter of 2017–2018 featured an aggressive campaign against air pollution, including a strict coal-heating ban in northern cities. However, natural gas supply shortages and preemptive coal furnace removals prompted a heating crisis in some regions and forced officials to allow some flexibility at the local level. January 2018 revisions to the tax code also implemented sliding pollution tax rates; increased penalties; and initiated new rewards for firms that cut air, water, noise, and solid waste pollution. Importantly, the law put local governments at the forefront of enforcement, enticing them with 100% of pollution tax revenue.
- The State Council created a new Ministry of Ecology and Environment (MEE) in March 2018, consolidating scattered pollution enforcement and environmental powers from seven agencies. The previous Ministry of Environmental Protection had been sharply criticized even by domestic observers for feeble policy and perceived collusion with provincial interests. The MEE was meant to streamline governance and invigorate enforcement and local inspections.
Quarterly Assessment & Outlook
We modestly upgrade our assessment because air pollution levels declined and renewable energy use rose, while water pollution levels remain unchanged.
China’s renewable energy use expanded in 2Q2019, with the percentage of non-fossil- generated energy reaching a high point in our dataset. China also finalized regulations encouraging renewable power use and development, including a renewable energy credit trading system.
China’s environmental plans for winter 2019 set ambitious pollution reduction targets, but weakening economic conditions will limit local authorities’ willingness to curb industrial production and coal use to meet those targets.
This Quarter’s Numbers
China made small strides reducing pollution this quarter. Air pollution decreased across the five cities we track in 2Q2019 compared to last year (see Environmental Impacts), but progress was not uniform. Particulate matter (PM 2.5) levels increased in the northern city of Shenyang. Overall water pollution levels remained unchanged this quarter, with local water quality remaining a problem. The Ministry of Environment and Ecology (MEE) found that water quality in 178 monitored areas was still below standard as of June 2019 due to a lack of water treatment infrastructure. Politburo Standing Committee member Li Zhanshu noted that poor enforcement of the Water Pollution Prevention and Control Law was also hurting water quality.
As air pollution declined this quarter, non-fossil energy use surged: 30% of power came from sources such as wind and solar, marking the best quarter since 2013 (see Non-Fossil Generation). Non-fossil energy use was strong even for a second quarter, when environmental conditions are usually more favorable for renewable power. As China’s National Energy Administration (NEA) reported in July, overall energy consumption growth slowed during the first half of 2019; new renewable energy plants were able to meet energy needs without a substantial increase in coal and natural gas generation. Despite improvement in renewable energy uptake, China’s efficiency in harnessing wind energy did not improve in 2Q2019 (see Wind Energy Curtailment). Around the same amount of wind power was wasted this quarter because it could not be transmitted to the electrical grid.
Meanwhile, New Energy Vehicles (NEV) Sales rose in 2Q2019, accounting for 5% of new auto sales even as overall auto sales declined. With NEV subsidies set to expire in July, producers offered huge deals to sell down inventory, and local policies still provide NEV purchase incentives, such as preferential access to a license plate in some large cities like Beijing. After July, sales plummeted, and the next Dashboard cycle will see a dramatic reversal of the NEV sales picture.
“As air pollution declined this quarter, non-fossil energy use surged: 30% of power came from sources such as wind and solar, marking the best quarter since 2013.”
Policy Analysis
Authorities prioritized renewable energy policy this quarter, issuing guidelines to provincial authorities to encourage renewable utilization and construction. New winter air pollution reduction targets are more ambitious for most cities in northern China, but policy allowing local governments to set their own industrial production curbs is mostly unchanged from last year, and many cities may find it difficult to set strict production cuts amid weak economic conditions.
On May 20, the National Development and Reform Council (NDRC) and the NEA released final regulations establishing a national renewable energy quota system requiring grid companies and provincial energy regulators to meet a minimum level of renewable energy utilization. The regulations aim to harness existing renewable assets and build new ones. Provinces that miss their renewables quotas can buy credits from other provinces to make up the gap. However, if they are unable to meet their quota – through either their own generation or credits – they may face sanctions and restrictions on building new fossil fuel plants. The regulations are a major step toward better utilizing China’s increasing renewable capacity. As our spilled wind indicator suggests, China has made some progress in putting more of its renewable energy on the grid, but not at the needed scale to fully utilize capacity.
Even as Beijing seeks to encourage renewable energy use, it is also relaxing curbs on the coal industry. A March 27 notice from the NEA relaxed a ban on new coal plants, effectively doubling the number of provinces eligible to construct new coal assets to 16, including key polluters like Hebei and Shanxi. National officials also signaled they would not force conversion of residential coal heating to gas this winter, continuing a policy relaxation from last winter after ambitious targets and overzealous enforcement of coal-to-gas switching in 2017 led to heat, power, and gas shortages across the northeast. In July, the NEA announced it would prioritize heating supply this winter by allowing a wider scope of energy sources, like biomass and clean coal, to substitute for gas in coal switching this winter.
Authorities have started to outline winter pollution control measures. On October 16, the MEE released specific air pollution reduction targets for northern China, targeting a 4% average reduction across the key Beijing-Tianjin-Hebei region. Twenty-four of 28 cities in the region have higher pollution reduction targets than last winter, in an effort to reverse some of the region’s air quality deterioration from winter 2018–2019. While air quality targets are more ambitious, planned production cuts appear insufficient to meet them. The MEE eliminated blanket production cuts last winter, as local officials wanted to avoid economic disruption in northern manufacturing areas and were struggling under weaker demand conditions. The 2019–2020 plan gives local officials substantial leeway in formulating production cuts based on local environmental conditions, but if local governments do not set and enforce effective production restrictions, northern China could see a repeat of last year’s high pollution levels. Provincial officials had until the end of October to finalize their own plans.
Methodology
To gauge environmental reform progress, we track measures of air and water pollution. For air quality, we focus on small particulate matter of 2.5 microns (PM 2.5) or less, which is linked to adverse health effects and for which the World Health Organization (WHO) issues pollution guidelines. For water, we monitor the surface water quality of China’s freshwater system. Lower levels in our air and water indices indicate improved environmental conditions. We seasonally adjust these indicators to account for annual weather patterns and energy consumption changes. Variations in these factors may also reflect developments in non-environmental areas, such as a macroeconomic slowdown or industry consolidation. To supplement our analysis, we examine China’s alternative energy development, including sales of new energy vehicles (NEVs) and non-fossil-fuel electricity generation. We also track wind curtailment, the electricity lost when power operators restrict how much is transmitted from wind turbines to the power grid.