The Coal Trap

In the grasslands of Erdos, in Inner Mongolia, the Shenhua company is erecting the world's first commercial plant that converts coal directly into refined oil that could go into making plastics or fueling cars. Shenhua is also working with private foreign firms--including Shell and Sasol, the South African coal-to-liquid pioneer--to produce clean diesel fuel indirectly from gas, a more proven technology. By 2013, says Sasol China chief Andre de Ruyter, the joint venture will be processing 80,000 barrels a day of low-emissions diesel fuel at each of two new Chinese plants in the provinces of Shaanxi and Ningxia.

Worldwide, the best hope for eliminating coal-plant C02 emissions is a costly, unproven, yet much-trumpeted technology called IGCC--Internal Gas Combined Cycle. It converts coal to gas and siphons off the carbon so that, theoretically, it can be stored underground, once "sequestration" technology hits the market. But that day is perhaps a decade off. China hopes to fire up its first three IGCC plants by 2010.

China's coal industry is a mix of state heavyweights and small operations run by local governments and entrepreneurs (often in collusion). Small mines account for a third of the coal output--and two thirds of all coal-mining deaths. Fatalities fell an estimated 21 percent in 2006 after Beijing shuttered 1,700 of the country's 26,000 mines. The government's work-safety czar, Li Yizhong, described the closed mines as "life-devouring traps." He said that safety-inspection fraud is widespread. Local folk rarely tip off regulators about the existence of unsafe or substandard mines, because the villages depend on them. By law every coal mine must have a washing facility--but only around 30 percent of China's coal is properly rinsed of ash (which adds to pollution) and tailings (that reduce energy efficiency).

Regulation is a problem in the power industry as well. Almost all newer plants in China have equipment to filter out sulfur dioxide or particulates, or both--but it is often unused. Operating the pollution-control systems is expensive--and some plants only turn the filters on when inspectors come knocking, says Jiang Xinmin, a professor with the Energy Research Institute, a state-run think tank under the National Reform and Development Commission, which oversees energy policy.

The market may help save China from itself. As part of its modernization drive, the central government is phasing in new resource taxes to drive unsafe or inefficient coal mines out of business. Sulfur dioxide is the only coal pollutant that is taxed in China today. The fine per ton of discharge has tripled in recent years, but many experts insist it should be higher. China's socialistic power-distribution system will also be reformed. Right now, it gives all producers (big and small, clean and dirty) equal access to the electricity grid. It will be replaced by a system that allows cleaner, more efficient utilities to sell more electricity than others--and to buy out the grid quotas of antiquated plants.

Beyond that, the two-year-old global carbon-trading market, established by the Kyoto Protocol, could help clean up China. It encourages advanced nations to invest in emission-reduction ventures in developing nations. Already, more than 200 projects have been launched in China alone. Jin Jiaman, head of the Beijing-based NGO Global Environmental Institute, is bringing in U.S. investors to back 25 efficient, coal-burning cement factories in China, in return for carbon credits to be sold on to England. The idea, says Jin, is to "set a model" for the rest of China's 4,000 cement makers, which whip up 45 percent of the world's cement and consume more than 100 million tons of coal a year.