China’s Energy Crossroads: Balancing Clean Growth with Rising Emissions

China, responsible for 30% of global greenhouse gas emissions and driving 90% of CO2 growth since 2015, faces a crucial turning point. Despite a clean energy boom in 2023, soaring energy consumption has spiked emissions. With new climate targets for 2035 on the horizon, will China sustain its green momentum or fall back on fossil fuels? This article delves into the delicate balance of China’s energy future and its global impact.

CO2 emissions rose in late 2022 and 2023 due to a slump in hydropower generation caused by historic droughts in southwest China

During the zero-Covid period from 2020 to 2023, China’s energy consumption growth almost doubled to 4% per year, compared to 2.4% in the preceding five years. CO2 emissions grew from 0.1% to 3% annually, while electricity consumption increased slightly from 5.5% to 6.3%.

This surge is surprising, as most countries saw energy consumption decline during the pandemic. Analysts noted that electricity consumption in China has been growing faster than GDP, and industrial electricity consumption outpaced industrial value added. Even as GDP growth slightly slowed during 2020-23, energy use increased, a trend attributed to several factors.

One key factor is electrification—the shift from direct fuel use in buildings, industry, and transportation to electricity. High-tech and cleantech manufacturing, exports of refined metal products, and a rise in residential power consumption due to the transition from coal to electricity for heating in northern China also contributed. Increased air conditioning demand during heatwaves, the rise of data centers, and AI-related energy use further fueled this growth.

However, electrification alone does not explain the increase in total energy consumption. A major shift towards energy-intensive manufacturing to compensate for weak growth in services and consumer-facing industries, which use less energy, is a significant driver. This shift resulted in an economy more dependent on energy and electricity.

University College London researchers have highlighted this trend, showing rapid growth in energy-intensive sectors like non-ferrous metals and chemicals since 2020. No single subsector dominated this growth, indicating an economy-wide trend.

The pandemic and related policies negatively impacted service industries. The government’s pro-business policies, including discounted electricity, tax cuts, and export promotions, favored manufacturing. Most other countries boosted private consumption with direct financial support to households, which tends to be less energy-intensive than manufacturing. In contrast, China’s demand shifted from services to durable goods, increasing manufacturing demand.

Experts from China Business News also noted weakened government controls on energy consumption growth in recent years. The manufacturing of batteries, electric vehicles (EVs), and solar-power equipment—the “big three” products—accounted for around 3% of China’s CO2 emissions and contributed to a 2% increase in emissions from 2020 to 2023.

An unexpected factor was the strong growth in energy-intensive industrial output despite a contracting real-estate sector. Investment in manufacturing created significant demand for steel to build industrial machinery and facilities, offsetting the decline in steel demand from the real estate sector. Consequently, steel output remained stable while cement output fell.

In addition to these structural changes, CO2 emissions rose in late 2022 and 2023 due to a slump in hydropower generation caused by historic droughts in southwest China. This shortfall was compensated by increased coal-fired power generation, contributing to a 1% increase in emissions from 2020 to 2023. However, as rainfall returns to normal levels, hydropower output is expected to recover, displacing coal-fired generation.

China’s future emissions trajectory will depend on balancing energy demand with clean energy growth. The country’s upcoming climate targets for 2035 will be crucial in determining its ability to meet global climate commitments. By addressing both structural and policy-driven factors, China can navigate the complex landscape of energy consumption and emissions, contributing to global efforts to mitigate climate change.

China’s Energy Conundrum

Many sector-specific explanations have been offered for the rapid increase in electricity demand in China. Data centers, while significant local electricity consumers, account for a mere 2% of electricity demand growth, similar to other “strategic emerging industries.”

Heating and cooling demand has increased significantly. However, the residential and commercial buildings sector contributed only a quarter of the growth in electricity demand, with heating and cooling responsible for slightly more than half of that. Overall, heating and cooling account for 15-20% of electricity demand growth.

While extreme heatwaves grab attention, their direct effect on power demand is minimal. The gradual increase in cooling needs is more significant annually. Heatwaves have driven many households and businesses to install air conditioners, which are likely to be used even in milder weather.

Efforts to reduce household coal-burning have shifted heating to electricity and gas. Although energy-efficiency improvements in buildings could help reduce electricity demand, progress has been underwhelming.

Will Rapid Energy-Demand Growth Continue?

The critical question is whether high energy-demand growth will persist. As services recover post-pandemic, the energy-intensive industrial growth pattern should unwind. The recovery has been slower than anticipated, but recent data for retail sales and service sector growth in March is promising.

A successful recovery of household consumption and economic transformation would result in lower energy-demand growth relative to GDP growth. However, the government’s focus on manufacturing as the key economic growth engine, emphasized by President Xi’s “new productive forces” initiative, may continue to drive an energy-intensive growth pattern.

Investment in manufacturing capacity and industrial output cannot sustain recent rates due to oversupply and overcapacity issues. The focus needs to shift from energy-intensive commodities to higher value-added products. While air-conditioning usage will grow, long-term projections indicate slower growth rates due to market saturation and improving energy efficiency.

Clean Energy: Was 2023 an Anomaly or the New Normal?

Since announcing its carbon neutrality target for 2060, China has seen a surge in clean-energy installations. In 2023, China installed 217 gigawatts (GW) of solar power—double the current solar capacity of the US and four times what China added in 2020. Wind power also grew significantly, adding 76 GW, more than Germany’s total installed capacity in just one year.

In 2022 and 2023, China permitted ten new nuclear reactors each year, accelerating construction starts. Each reactor, taking approximately 5-7 years to complete, will add around 1.2 GW of generating capacity.

The new solar, wind, hydro, and nuclear capacity added in 2023 alone will generate an estimated 420 terawatt hours (TWh) of electricity annually, equivalent to France’s total consumption. This capacity is sufficient to cover energy-demand growth at pre-pandemic levels.

However, opinions on future developments vary widely. The solar and wind industries advocate maintaining annual capacity additions at 2023 levels, while the government targets more modest growth. Zhang Jianhua, head of the National Energy Administration, suggests that clean energy should cover 70% of energy-consumption growth from 2026-30, implying continued reliance on fossil fuels and CO2 emissions increases.

The Grid is the Key

A key constraint on clean-energy growth is the ability of grid operators to integrate large amounts of clean energy. Last year, several provincial grid operators limited new wind and solar additions due to integration challenges. This is concerning, as the share of wind and solar in China’s power generation is still modest at 15%, compared to around 40% in Germany, Spain, and Greece.

China’s grid management is outdated. Reforming grid operations requires overcoming powerful interests, notably coal-fired power plant owners reluctant to reduce coal-power generation. Local governments support clean-energy projects for economic benefits and are keen to resolve these issues.

Without major grid reforms initiated by the central government, the focus will be on engineered solutions. Pumped hydro is booming, and grid-connected batteries and green-hydrogen projects are taking off. Some provinces are requiring new solar and wind farms to install on-site electricity storage. Increasing the allowed percentage of “wasted” solar and wind generation from 5% could also ease integration challenges.

Such measures might reduce the profitability of new clean-energy projects but not enough to make them unprofitable. They would increase the capacity that can be installed without requiring significant grid reforms.

Is Peak Emissions Imminent?

The outlook for clean energy in China is promising. There is strong willingness to develop projects and invest, driven by local governments and companies. However, the central government’s level of ambition remains unclear. There is no concrete plan to meet or exceed China’s 2025 and 2030 climate commitments, nor a commitment to maintain 2023’s level of clean-energy installations.

More clarity is expected with the publication of China’s new climate targets under the Paris Agreement in early 2025 and the next five-year economic plan in early 2026.

China’s climate policy has shifted from controlling energy and fossil-fuel consumption to building a green industry. The manufacturing drive risks making the economy more energy-intensive, counteracting clean-energy efforts.

For now, clean-energy investments are driven by local governments and markets. Central government action will be needed to overcome roadblocks like outdated grid operations that limit clean-energy capacity additions.

China’s future emissions trajectory remains uncertain. However, the clean-energy boom and potential shift to less energy-intensive growth engines provide an opportunity to peak emissions imminently and achieve substantial reductions over the next decade, if the country chooses to pursue this path.