China’s push to expand renewable energy has led to significant improvements in emissions and air quality. However, one sector is complicating the country’s climate goals: the coal-to-chemicals industry. While China’s overall emissions dropped for the first time since the lifting of COVID-19 restrictions, this industry is driving a surge in energy consumption and emissions.
In the first half of 2024, coal-to-chemicals became the largest contributor to China’s energy use and emissions growth, with coal consumption rising by 18% compared to the same period the previous year. According to the Centre for Research on Energy and Clean Air (CREA), this increase in coal consumption contributed to a 54 million tonne rise in national CO2 emissions, offsetting gains made in other sectors.
Despite efforts to reduce coal use in China’s power and industrial sectors, coal-to-chemicals remain a major source of emissions. As local governments and coal companies invest heavily in expanding this sector, the central government has also facilitated growth with a supportive policy shift.
To meet climate targets, China’s coal-to-chemicals industry must undergo urgent reforms. These include stricter regulations, investment in cleaner feedstocks, and a move toward electrification to reduce emissions to levels that align with global climate goals.
The Coal-to-Chemicals Sector: A Closer Look
China’s reliance on coal for chemical production sets it apart from other major chemical-producing countries. Coal accounts for 94% of China’s fossil energy resources, while oil and natural gas make up only a small fraction. This heavy dependence on coal allows China to produce substitutes for oil and gas, as well as key chemical products.
The coal-to-chemicals sector has become essential for energy security and economic growth. Its potential is vast, with the ability to produce the equivalent of over 30 million tonnes of oil annually. Fine chemicals, in particular, are seen as a high-growth area, offering profit increases of eight to twelve times.
As coal prices decline, many large coal companies are increasingly focusing on chemical production to boost profits. China’s local policies support the processing and use of coal near mining sites, and modern coal-to-chemical projects are concentrated in coal-rich regions, particularly in central and western China. Since 2017, four key areas have been designated by the government for the industry’s development: Ordos in Inner Mongolia, Yulin in Shaanxi, Ningdong in Ningxia, and the Junggar Basin in Xinjiang.
The coal-to-chemicals sector is dominated by large, state-owned enterprises, such as China Shenhua Energy and Shanxi Coking Coal Group. Recent projects highlight the role of key midstream operators, like Shaanxi Coal and Chemical Industry and the private company Qiya Group. These companies depend heavily on local government support, particularly due to their high coal and water consumption.
Environmental Impact
Coal-based chemical production generates significantly more CO2 than petrochemical production. In 2020, the sector accounted for 5.4% of China’s national emissions, according to The Oxford Institute for Energy Studies. For example, producing ammonia from coal emits about 2.2 times more CO2 than using natural gas and 0.4 times more than using oil. Moreover, the coal-rich regions of China where these projects are located are often water-scarce, leading to tensions over water use.
Given the environmental impact and China’s ambitious climate goals, it is clear that urgent action is needed to rein in the growth of the coal-to-chemicals sector. Without a shift toward cleaner technologies, the sector’s emissions could undermine the progress made in other areas, threatening China’s ability to meet its climate commitments.
Why Coal Demand in the Coal-to-Chemicals Sector Has Increased Recently
Since the Russian invasion of Ukraine in 2022, global oil prices have surged, prompting China to focus on increasing coal production as part of its energy security strategy. Coal is now considered the “ballast stone” of China’s energy supply, and the country has maintained high coal reserves since January 2024.
In addition to these geopolitical factors, a drop in coal prices in late 2023 has provided further incentives for the coal-to-chemicals sector to expand. In February 2024 alone, coal consumption in the chemicals industry surged by 46.5% compared to the previous year. From January to July 2024, coal consumption by the sector reached 220 million tonnes, marking an 8.5% increase from the same period in 2023. Among the four major coal-consuming industries, the chemicals industry is the only one experiencing growth. Overall, its coal consumption is projected to rise by 14% this year.
The sluggish economic recovery following the pandemic has also driven investments to stimulate economic growth. In June 2023, the Chinese government introduced policies promoting the “low-carbon” development of the coal-to-chemicals industry. By September 2024, the government issued a policy to encourage the “clean” use of coal, further boosting the sector’s growth. Additionally, China’s approach to decarbonisation intentionally excludes “raw material energy” consumption—such as coal used for chemical production—allowing the coal-to-chemicals industry to continue growing without the pressures of stringent emissions reductions.
In response to these policies, local governments in coal-rich regions have rolled out ambitious plans for coal-to-chemicals projects. As of 2024, there are 75 coal-to-chemical initiatives across 15 provinces, expected to significantly boost annual production. According to Anychem Coalchem, a coal chemical database, China’s coal-to-chemicals production capacity is nearing 500 million tonnes per year. With each tonne of chemicals requiring more than two tonnes of coal, the total potential coal consumption of these facilities could exceed a billion tonnes annually. Although actual consumption in 2024 is projected to reach 340 million tonnes, indicating underutilization of capacity, there is still considerable room for growth.
Challenges for Coal and the Industry
Despite the sector’s rapid growth, China must reduce coal usage to meet its climate goals. Although raw coal output dropped by 0.3% between January and August 2024, coal production has increased in key provinces, except for Shanxi due to safety inspections. Coal imports have risen by 11.8% as they are more cost-effective than domestic coal. In light of the 2021 energy shortages, China aims to produce 300 million tonnes of “dispatchable” coal annually by 2030 to ensure energy security.
Despite rising coal-to-chemical production, weak downstream market demand has led to falling prices for chemical products. In 2023, profits from the coal-to-oil sector dropped by 52.7%, while coal-to-gas profits fell by 39%. In the first half of 2024, state-owned China Coal Energy reported a 3.5% year-on-year revenue decline. A slowdown in demand for chemical products, particularly due to the weak real estate market and an oversupply of chemical facilities, has led some producers to pause new investments as they reassess future profitability.
The Future of Coal-to-Chemicals in China
If expansion continues at the current pace, emissions from the coal-to-chemicals industry may fail to peak before 2030 and could rise by 1.3 times compared to 2019 levels. To prevent this, stricter emissions-reduction policies and regulations will be essential. The government must impose limits on sector expansion and set clear targets for emissions reductions. Additionally, an overall target for coal consumption could help curb emissions growth. Expanding the national carbon market to include chemicals would further incentivize low-carbon production, especially in anticipation of the EU’s upcoming Carbon Boder Adjustment Mechanism.
Technological innovation and investment in cleaner alternatives will be key to decarbonizing the coal-to-chemicals sector. Even with efficiency gains, coal remains a highly carbon-intensive feedstock. The biggest opportunities for reducing emissions lie in low-carbon feedstocks, such as green hydrogen, and in electrification powered by renewable energy sources.
As renewable energy continues to grow, it will gradually reduce demand for coal in all sectors, including coal-to-chemicals. Beyond improving production processes, reducing the demand for chemical products will also play a crucial role. China has already put forward policies to improve recycling and promote a circular economy, which could help reduce the need for primary chemical production.
International collaboration will also be vital for accelerating the transition to low-carbon processes. As technologies for low-carbon production and recycling in the chemical sector are still emerging, China can benefit from partnerships and knowledge sharing with global players. For instance, a planned offshore wind farm that will power a chemical site in southern China exemplifies how international cooperation can help drive sustainability.
While coal-to-chemicals will likely remain a significant part of China’s industrial landscape in the near term, its role must evolve to align with both energy security and climate goals. By investing in cleaner alternatives, reducing reliance on coal, and embracing innovative technologies, China can balance its energy needs with its climate commitments.