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A STUDY OF THE COAL POLICIES IN CHINA

Liang Peng

ABSTRACT: Since China opened to the world and launched its economy reforms in the early
1980s, the main source of energy in China has always been coal, whether for electric power generation,
railway transport, an input to a vast array of industries, or as the principal heating fuel in the
residential and commercial sectors. The evolution of the Coal industry in China mirrors the countrys
economic development as a whole. Therefore, the coal policy in China is critical not only to its energy
sector, but also to the development of Chinas economy and society. From the international trade
perspective, as the biggest coal producer in the world, China has considerable influence on the
international coal market. Yet, the government controls the coal trade through state-owned trading
companies and export licenses. Thus, in the absence of free trade with China, the international coal
market will remain heavily influenced by decisions made in Beijing. In order to understand Chinas
coal policy, this paper briefly examines salient coal policies in the thirty years of coal industry
evolution (1980-2010). It analyzes some influential factors in coal policy-making through an empirical
approach, and then points out Chinas coal policies for the future in conclusion.

The author is currently enrolled on the LLM in Mineral Law and Policy at the University of Dundee
(CEPMLP), UK. Email: louispeng111@gmail.com

TABLE OF CONTENTS

Abbreviations ............................................................................................................................... iii

1.

Introduction ........................................................................................................................... 2

2. Overview of Chinas coal policies in thirty years ................................................................ 3

3. Evaluation of Chinas coal policies....................................................................................... 7

4. Conclusion ............................................................................................................................ 10

Bibliography

Appendix

ii

Abbreviations

CMA

Central Mining Administration

LSOM

Local State-Owned Mine

MCI

The Ministry of Coal Industry

KSOM

Key State-Owned Mine

NDRC

National Development and Reform Committee

SACI

The State Administration for Coal Industries

TVCM

Township and Village Coal Mine

TVE

Township and Village Enterprise

iii

1. Introduction

In most countries, policies play an important role in energy sector. The reason is simply that
energy is too important to be left to the markets.

Coal is a kind of mineral within the

boundaries of the mining industry, but it is primarily an energy product like petroleum and
natural gas.2 Since China opened to the world and launched its economy reforms in early
1980s, the main source of energy in China has always been coal, whether for electric power
generation, railway transport, an input to a vast array of industries, or as the principal
heating fuel in the residential and commercial sectors. The evolution of coal industry in
China mirrors the countrys economic development as a whole.3 Therefore, the coal policy
in China is critical not only to its energy sector, but also to the development of Chinas
economy and society. From the international trade perspective, as the biggest coal producer
in the world, China has considerable influence on the international coal market. Yet, the
government controls the coal trade through state-owned trading companies and export
licenses. Thus, in the absence of free trade with China, the international coal market will
remain heavily influenced by decisions made in Beijing.4 In order to understand Chinas
coal policy, this paper briefly examines salient coal policies in the thirty years of coal
industry evolution (1980-2010). It reveals three different stages of policy development
towards the coal industry, yet each stage had conflicting direction to the coal development.
What caused the inconsistency of the coal policy in China, what are the economic factors
for the policy-making? The paper analyzes some influential factors in coal policy-making
through an economic and empirical approach, and then points out Chinas coal policies for
the future in conclusion.

Professor Paul Stevens listed several dimensions for the importance of energy. See The Economics of
Energy (U.K, Dundee University, 2009)
2
Phillip, Crowson, Mining Unearth, (2008) p.11.
3
Elspeth, Thomson, The Chinese Coal industry: An Economic History, (2003) p.2.
4
Brian, Ricketts, Coal in China from a Global Perspective, in Shaping Chinas Energy Security The Inside
Perspective(Michal Meidan ed., 2007)
2

2. Overview of Chinas coal policies in thirty years


The Great Leap Forward: 1980-mid 1990
Energy shortage is undoubtedly the foremost constrain of Chinas economy development.
When Chinas leader Deng Xiaoping launched the reform to economy development in the
ancient country, the first priority was to increase energy supply to fuel the economic
activities. Coal industry was under pressure to satisfy thirsty energy demand in 1980s. In
order to quickly increase coal supply, the central government prescribed several measures to
promote coal production. In 1981, the Ministry of Coal Industries formulated a policy for
small-scale coal mines 5 which included higher levels of subsidies, tax allowances,
investment in infrastructure and funds for the maintenance of mines. For example, in
Shanxi Province, these mines received compensation from the provincial government for
every tonne of coal they produced. These funds were to be used for environmental
protection, safety and technology. The year 1983 and 1984 saw two important measures
being introduced by the State Council. One was the introduction of the term township and
village enterprise (TVE) to replace the old commune and brigade enterprise as part of the
highly successful drive to stimulate economic activity at this level. The other was a
document entitled Eight measures on accelerating the development of small coal mines
which was supported by the Prime Minister, Zhao Ziyang. The principal aim was to rise the
level of national coal output by whatever means were necessary, and to encourage coal
production for local consumption and thus ease the pressure on the railways and waterways.
The following year guidelines were issued to promote the simultaneous development of
coal mines of different size and of different ownership. These policy steps culminated in the
introduction of the first comprehensive Mineral Resources Law under the communist
government, in 1986. As a result, from 1979 to 1996, Chinas coal production peak year,
nationwide output increased 738.54 million tons or 116.2 percent. Annex 1 provides total
coal production figures with the annual increments and growth rates from 1978. 6By this
time, the Township and Village Coal Mines (TVCM) produced 48 percent of the nations

Small mines has no unified definition, according to the latest document issued by Chinese government, the
mines with annual output below 300,000 tons are small mines and shall be closed.
6
Elspeth, Thomson, The Chinese Coal Industry: An Economic History (2003) p.178.
3

coal and had accounted for more than 70 percent of the incremental coal output in the
previous fifteen years. 7The polices implemented during this period successfully raised the
coal production to satisfy the roaring energy demand, and created the biggest coal industry
in the world, but it ignored the severe damages to air, land, water and natural resources
caused by massive small mines around the country.

Adjustment and Restructuring: Mid 19902000


By the mid 1990s, the number of TVCMs probably exceeded 80,000 and they employed
between 2 and 4 million people, many of them were illegal mines with poor management
and working conditions. It was impossible to know the precise number of such mines. The
drastic growth of local mines and their coal production seriously disturbed the coal market
and damaged the healthy development of coal industry. The industrys losses nationwide
had continued to mount during the late 1980s and peaked at 5.75 billion yuan in 1992. Late
that year, the Central Mining Administrations (CMA) had difficulty meeting the basic
wages of the miners, let alone any extra wages for above-quota production. A major
problem was the default of coal payment by large consumers because the buyer has more
market power in an oversupply coal market. On the other hand, during this period, the
accident rate, at the TVCMs in particular, had been alarmingly high. 8The State Council
noticed the uncontrollable situation of coal industry, and stepped in by restructuring the
industry. Several circulars were issued to regulate small mines, such as the Circular of the
State Council on Regulating Private Coal Mining, and Opinions on Stopping the
Indiscriminate Extraction of Small Coal Mines and on Ensuring Safety in Coal Mining. 9 In
all, some 13,000 illegal small mines were closed in 1993.10 In order to strengthen the
regulation on coal industry, the Ministry of Coal Industry (MCI) which had been disbanded
in 1988 was re-established. In May 1993, the Mine Safety Law was entered into force to
improve the safety at coal mines. Chinas first coal law, The Coal Law of China came into
effect in December 1996, in an attempt to regulate coal development and production,
7

Philip, Andrew Speed, Energy Policy and Regulation in the Peoples Republic of China,(2003) p. 82.
Elspeth, Thomson, The Chinese Coal industry: An Economic History, (2003) p.152.
9
Broadcast on Xinhua, 0205 GMT, 17Jan. 1993, in FBIS, 27 Jan. 1993, pp.21-2
10
China Statistic Bureau, China Coal Industry Yearbook (1995), in Chinese.
8

establish a rational relationship between the State and individually licensed mines. It also
sought to ensure efficient use of coal resources, labour and equipment. In addition, by late
1997, the government had been openly encouraging a reduction in the role of coal, mainly
for environmental reasons. In June 1998, the coal production target for the year was reduced
by 70 million tones, and in August it was announced that 22,000 mines without licenses
would be closed in 2000 so as to reduce output by the 200 millions tons necessary to bring
down supply closer to demand. By the end of 1999, a total of 31,000 small mines had been
closed. As the result of the above policies, since 1996, the coal production had continually
decreased and reached the bottom in 2000, in which year the coal production was only
880.10 million tons, almost the same level as that in 1985. But, we should also consider the
impact of the Asia crisis, the radical economic reforms towards becoming a socialist market
economy, and the increased consumption of oil and gas, which increased its share in energy
sector from 17.5 percent in 1995 to 23.2 percent in 1999(Table2.1). At the end of 2000, the
adjustment and restructuring of coal industry gained some achievements, the number of
mines was largely reduced with the closure of small, inefficient and illegal mines, 25 large
scale State-owned coal mines reformed into modern mining company, the overproduction
was restrained, and coal export peaked at 59 million tons. But, some problems still existed.

Source: Philip Andrew Speed,, Energy Policy and Regulation in the Peoples Republic of
China (Netherland, Hague: Kluwer Law International, 2003)
Great challenges: 2001-present
Since 2001, China economy has entered a fast track, economic growth rate reached over 10
percent per annum until the Crisis of 2008. Pushed by the increasing energy demand in
heavy industry sector and other high energy consuming sector such as steel, aluminum,
construction material, the coal production has increased dramatically. In 2005, the total coal
production reached over 2 billion tons. When we look to the coal output by mine ownership,
5

it can be seen that the share of TVCMs also increased quickly, according to Statistics, from
2000-2006, the output by TVCMs increased by 232 percent, i.e 6,230million tons per year
while Key State-Owned Mines (KSOM) increased only by 109 percent. In 2006, output of
TVCMs made record high peaking at 8,920 million tons or 38 percent of total output in
China.

[Light blue: TVCM; Gray: LSOM; Blue: KSOM]


Source: IEA., Cleaner Coal in China,
(France, Paris, 2009)
While the central government tried to reform the coal industry towards consolidation and
commercialization of mining enterprises into larger modern conglomerates which owned
mines from different mining areas and different provinces like Yanzhou Coal Group and
Shenhua Coal Group, the TVCMs owned by local governments or individuals still play an
important role in Chinas intensely tight energy market. The reforms to the coal industry
launched in 1998 though gained some progress, has not completed yet. Despite the
structural reform, at the same time, the development of coal industry faces other challenges.

Firstly, the environmental deterioration became a big concern. No wonder, coal is a major
contributor to CO2 and sulphur emission. The indoor and outdoor air pollution created from
the burning of coal has accumulated over many decades in China. One western scholar
writhing in 1997 ventured to say, the smoke burden today in major Chinese industrial
cities such as Chongqing is significantly worse than it was in [the killer smog] in London in
195211. In the mid-1990s, China accounted for about 14 percent of the worlds carbon
dioxide emissions, second highest after the US 22 percent12. Thousands of coal mines also

11
12

Elspeth, Thomson, The Chinese Coal Industry: An Economic History (2003) p.194.
See id., p.195.
6

caused irreversible damages to land resources. A study on the impact of coal mines in
Shanxi Province, which accounts for some 25 percent of Chinas total coal output, revealed
the following:

13 percent of the total land area of the province is affected by coal mining; that is some
20,000 square kilometers out of 156,000 square kilometers;

650 square kilometers of land is subject to subsidence;

More than 200 square kilometers of land is occupied by coal refuse tips totaling more
than 270 million tones in weight;

Within a selected study area, more than 20,000 square kilometers of land required
rehabilitation as a result of coal mining.13

Secondly, the death toll in coal mining accidents has increased sharply. In 2002, the death
toll in coal accidents was 6579.14 In 2005, the State Council issued the Special Provision on
Prevention for Coal Mining Safety. But the coal mining accidents has continually made the
headlines throughout these years. Most of them happened in TVCMs. In September, 2005,
the State Council issued another circular on regulating and consolidating mineral resources
development.
Thirdly, the sustainable coal development became urgent. According to the eleventh five
year plan of coal industry issued by NDRC, the coal exploitation will be more difficult due
to the shortage of water in coal rich areas in western China, such as Shanxi, and the
deteriorating situation of land subsidence in central and eastern China. Therefore, to make
the coal industry sustainable, the enterprises have to adopt new technology to enhance the
efficiency of coal exploitation and recovery rate. However, there are thousands of mines in
China, most of them can not afford to adopt advanced technologies.

3. Evaluation of Chinas coal policies


From the economics perspective, Chinas coal policies during 1980s were wrong. At the
13

Philip, Andrew Speed, Energy Policy and Regulation in the Peoples Republic of China, (2003) p. 189.
See http://www.ocn.com.cn/free/200801/nengyuandianli026.htm. (Last visited on Jan 20, 2010), in
Chinese.
14

beginning 1980, China had not enough technologies, knowledge and funds to exploit coal
deposits as many as it wanted. The policies of encouraging local mines contributed directly
to the damages to the coal deposits and local environment, which incurred immeasurable
costs in the later decades to reclaim. The local miners in their ignorance of proper
engineering methods often ruined huge coal deposits, and thousands people lost their lives
in accidents. They removed the coal from the ground using largely improvised equipment
and the efficiency of production was so low that the mines were in fact net users.15
Recovery rate for TVCMs is estimated to lie in the range 10 to 20 percent, compared to
60-80 per cent for the large state-owned mines.

16

Local pollutants include suplhur dioxide,

nitrogen oxides and suspended particulates. The main source is coal used by industry and
households,

with

vehicle

emissions

and

natural

dust

being

subordinate

contributors. 17 Estimates of the economic damage caused by pollution from energy


production and use in China are highly variable, but 3-7 percent of GDP would appear to be
reasonable.18 When the central government realized the negative side of the policies and
launched closure programmes in the late 1990s, the coal industry had been so
uncontrollable that even the government didnt know the exact number of output of the
TVCMs.

Another deficient coal policy was the structure reform launched in 1998 being part of the
economic reforms towards becoming a socialist market economy. The central government
decided to decentralize and marketize most of the state-owned mines in an attempt to
reduce the burden of government and improve the financial and technical performance of
the coal industry. In August 1998, ninety four state-owned coal mines assets were
transferred to provinces, the MCI was abolished and its government functions were
assigned to the State Administration for Coal Industries (SACI), which was later abolished
and its safety function was taken on by the newly-created Coal Safety Supervision Bureau.
The reform of Administration may help to separate the functions of government and
industry and establish the market oriental economy, but, the loose administration caused by
15
16
17
18

Elspeth, Thomson, The Chinese Coal Industry: An Economic History (2003) p.189.
Philip, Andrew Speed, Energy Policy and Regulation in the Peoples Republic of China,(2003) p. 86.
See id., p.28.
See id., p.29.
8

such reforms came too early for Chinas coal industry. In absence of the complete legal
regime, clear defined government responsibilities and efficient administration at provincial
and local level, the central governments effort to build up a consolidation and
market-oriental coal industry has been largely reversed by the booming TVCMs with the
support of local authorities19. The direct aftermath of the loose administration was the rising
death toll in frequent coal mining accidents. Li Yizhong, the director of the State Safety
Supervision Bureau pointed out that the weak administration was the major reason for
mining accidents20.
On the other hand, the benefits of the policies were also obvious. The TVCMs were the
most visible symptom of the drive to produce more energy, and they made a greater
contribution to Chinas enhanced energy supply than any other sector of Chinas energy
industry. In the short-term, this was the cheapest and surest way to boost the supply of
energy. Indeed, the short-term cost to the national government was effectively zero.21
TVCMs also played an important role in addressing local energy needs. In 1980s and early
1990s, transportation and infrastructure in China was deficient, TVCMs was the foremost
energy provider for local consumers, especially for large remote rural areas as well as some
population intensive cities in energy-scarce provinces of eastern China. For local economy,
it was the coal mine that acted as the main source of local revenue, supporting the local
development in education, infrastructure and employment. The policies were also
acceptable taking into account that the first priority of China at that time was to eliminate
poverty.

In the long term, we can see that Chinas coal policies were not well developed in a
consistent and sustainable manner. The policies had deficiencies in many aspects. Firstly,
the cost-benefit analysis was ignored. While the rapid development of TVCMs satisfied the
immediate need for energy, the obvious and substantial potential costs was ignored. It has
been proved that the resources can be a curse without considering the costs of mining,

19
20
21

See id., p.94.


See http://politics.people.com.cn/GB/1027/4663750.html (Last visited on Jan 08, 2010)
Philip, Andrew Speed, supra note p.86.
9

including some externalities, like environmental damages, impact on local communities and
so on. Its argued that whether Chinas long-term interests would have been better served by
either allowing the economy to grow at a slower rate or by diverting more state investment
into primary energy production or energy imports during the 1970s and 1980s. The first
possibility would have been quite unacceptable to Chinas leaders, for economic growth
was their first priority. The second approach may have received some consideration, but
falling levels of state revenue would have rendered this unattractive. 22 But, even it was the
only choice for China to develop TVCMs at that time, the outcome would have been less
destructive if relevant administration and laws are well implemented.

Unfortunately, the policies to closure of TVCMs had not been effectively implemented at
local level due to the ineffectiveness of the laws and institutions governing the sector. For
example, a number of Chinese commentators and officials reported that local officials were
submitting false statistics during the closure campaign. Some were deliberately falsified and
others were inaccurate because closed mines had subsequently been re-opened. Large
numbers of mines were continuing to operate illegally even in 2001. 23 At the heart of the
weaknesses in the institutional framework for regulating Chinas TVCMs lie two
fundamental conflicts of interest: that within local government and that between lower and
higher levels of government. The key driving force behind the growth of the TVEs was the
need for township and village governments to generate funds for local investment. Local
government leaders provided vital support to TVEs in the form of preferential access to low
interest loans.24

3. Conclusion
Since 2001, coal production has increased rapidly year on year driven by the rapidly
economic growth. In 2009, the total production reached 2.96 billion tons. The dominant role

22
23
24

Philip, Andrew Speed, supra note p.91.


See id., p.98.
See id., p.94.
10

of coal in Chinas primary energy supply will not change in the foreseeable future. But, the
government has learned enough lessons on the externalities of the coal industry and
understands that market forces in themselves do not prevent or curb severe environmental
problems. 25 According to the Decision on Strengthening Environmental Protection to
Implement Scientific Development Theory,

26

, the environmental protection is a

fundamental policy, and governments and enterprises at all levels shall observe this policy
and manage to develop the economy while protecting the environment. In March 2008, the
Ministry of Environmental Protection of China was established, replacing the former State
Bureau of Environmental Protection. This showed the governments determination to
strengthen environmental protection. No wonder, the environmental factor will play an
important role in coal policy making in future.

In addition, the coal industry speeds up the development of clean coal technologies and use
of coal bed methane resources in order to realize sustainable development. For example, In
Xinjiang Autonomous region, two coal-to-synthetic natural gas (SNG) projects have started
construction in 2009. Each project is designed to be able to produce 6 billion cubic meters
of SNG a year.

27

NDRC has approved the second coal-to-gas project on Dec. 23, 2009.The

RMB 8.87 billion ($1.30 billion) plant is designed to produce up to of 1.6 billion cubic
meters of natural gas from coal a year.

28

However, the priority task for the central government is to improve the legal and
administrative regimes of coal industry at various levels. Until now, we cant see any
improved measures on the governing of coal industry. Without effective governing system,
its quite possible that the re-opening of TVCMs will take place. Therefore, its foreseen
that the structure reform towards consolidation will continue in order to strengthen the
governance of the coal industry.

25
26
27
28

Elspeth, Thomson, The Chinese Coal Industry: An Economic History (2003) p.189.
State Council,Guofa (2005)No.39,at http://www.zhb.gov.cn/ztbd/jd/ (Last visited on Jan 08,2010)
China Energy Report Weekly, Volume VIII Issue 50, (2009).
China Energy Report Weekly, Volume VIII Issue 44, (2009).
11

Bibliography
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China Energy Report Weekly., Volume VIII, Issue 44, (Interfax information group, Beijing,
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in
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at
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12

Appendix

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