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Coal-Fired Industry: After COP21, Don't Let China Off the Hook

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Message Clifford Price

With the historic COP21 agreement reached between 195 countries on December 12, the usually fractured global community seems to have finally made a breakthrough in the fight to curb climate change. On that emotional day in Paris, the world's largest economies finally committed themselves to a sustained movement toward clean, renewable energy. If we are to save ourselves and our planet from the worst ravages of climate change, the global course of action provided for by COP21 will be critical. But now that the ink has dried on the agreement, countries both rich and poor need to take the plans they have drawn up and turn them into concrete reality.

Out of all the signatories, the "developing" heavyweights -- particularly China and India -- will need to do the most to overhaul their coal-addicted industries and rethink their energy infrastructure. In India, the government sees coal as a cheap, abundant source of fuel for its rapidly growing economy, increasing production targets to deal with expanding demand and relaxing environmental regulations to help coal producers get there. Even more disturbing, is that just a few weeks before the COP21 talks began, China's government revealed that its national coal consumption was 17% more than previously reported -- a discrepancy that accounts for nearly a billion tons of carbon dioxide every year, or more than the total emissions of Germany.

But the damage done by this reliance on coal is not just limited to emissions. Chinese overproduction of key commodities, such as aluminum, fueled by cheap and dirty (but dirt-cheap) coal, is threatening the cleaner business models of other aluminum producers worldwide.

When compared with other centers of production, China's aluminum industry demonstrates how much ground policymakers and economic planners in Beijing need to cover in moving away from fossil fuels. Outside of China, other major aluminum producers in Norway, Iceland, Russia and the United States have turned to clean energy sources (and hydropower in particular) to balance out the large amount of energy needed in the production of aluminum. While recycling aluminium can make up for over 90% energy savings, electric power accounts for 20-40% of the cost of producing primary aluminum.

In Iceland, the government leveraged its ample supplies of hydroelectric and geothermal power to attract outside aluminium companies. Giving them access to clean power at affordable rates, Icelandic officials succeeded in developing an aluminum export industry that now rivals its fisheries sector in terms of scale. Russia's aluminum giant UC Rusal, meanwhile, has invested billions in developing hydroelectric infrastructure to power their operations in Siberia. American aluminium company Alcoa has made similar investments in facilities such as the Yadkin project in North Carolina. According to Alcoa, Yadkin generates nearly 215 megawatts of clean electricity.

Meanwhile, China's investment in cleaner energy sources has been slow to come to fruition. The country boasts the world's largest hydroelectric station (the Three Gorges Dam) and already has plans for capitalizing on its considerable potential capacity. China's new hydropower facilities, however, are located in remote western provinces, with a poorly built electrical infrastructure wasting an incredible amount of that energy potential (more than the country's total output for 2014) before reaching large cities in the east. Fed instead almost entirely by cheap coal, China's aluminum production has ballooned from just a fraction of global production in 2000 to over 55% of it in 2014. This rapid growth has corresponded with a subsequent crash in global commodity prices, despite growing demand from the automobile industry and airplane manufacturers for aluminum parts. The price of a ton of aluminium has dropped from over $2,000 USD in November 2014 to just over $1,420 a year later. In the US, this collapse has forced companies like Alcoa to cut back on production, endangering thousands of jobs in the process. In some cases, it has taken direct intervention to keep the industry afloat, as was the case with the State of New York stepping in to save Alcoa's smelting facility in Massena, New York.

So far as official pronouncements go, Chinese leaders have done and said the right things when it comes to meeting their COP21 obligations. Xi Jinping was one of several major leaders to add momentum to the talks by making a personal appearance, while China's lead envoy on climate change, Xie Zhenhua, called the COP21's outcome "equitable and reasonable, comprehensive and balanced, ambitious, durable and effective."

Unfortunately, China's economic planners have yet to take the message of cutting back on excessive production to heart. Instead, the Chinese government is doubling down on a past mistake by subsidizing aluminum manufacturers' energy costs at the same time it is encouraging them to reduce capacity. Additionally, just before the start of the COP21 talks, Xie (who is China's highest-ranking climate change official) defended his country's decision to build yet more coal-fired power plants by arguing that old, inefficient facilities were being replaced by newer and "cleaner" ones.

But with its immense potential for the development of hydropower and its future as the engine of global growth, China needs to lead in the transformation to cleaner and renewable energy sources. Without China fully on board, the goal of halting the rise in temperatures below 2 degrees Celsius will be impossible to achieve. For that to happen, Chinese policymakers and businessmen alike will need to break the vicious cycle of burning coal to power their key industries and significantly increase investment in clean energy sources. China's fellow COP21 signatories, especially the US, should not shy away from reminding it of its global obligation.

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I am an engineering graduate interested in the evolution of commodity markets.
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Coal-Fired Industry: After COP21, Don't Let China Off the Hook

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