The answer matters if you’re trying to predict how enthusiastically China will likely pursue alternative sources of energy and/or act to curb coal usage.
In the paper highlighted this week, from Paul J. Burke of the Australian National University and Hua Liao of the Beijing Institute of Technology, they reach an encouraging conclusion. The price elasticity of demand in their survey period, from 1998~2012 was between -0.3 and -0.7 over a trailing two-year period.
Hooray? Not so fast. The authors acknowledge in the period under analysis coal prices were rising so what they were witnessing was perhaps more the marketization of the China coal complex rather than a price/demand dynamic. Also, if the authors are right about higher coal prices having an effect on demand what then should we conclude about attitudes since 2012, a time when the price of coal has fallen sharply? Surely demand must have increased?
Again; not so fast. [Not in the paper but my own two-pennyworth here] The economic slowdown over the period is in the mix and so too now is technology. The development of ultrasupercritical (USC) coal fired boilers allowing for up to 45% efficiency and their replacement of older facilities means China will get more bang from existing resources than before. Efficiency on the demand side too is a structural benefit that will be progressed for another generation at least and the development now of advanced-USC technology, facilitating even greater efficiency gains, is ongoing.
Bottom line. China can’t kick the coal habit. However, with increased marketization prices can be used as a demand management tool unlike in the past when subsidies for use were common. Moreover, new power generation technology combined with increased efficiency of use may hold back the tide of demand for some time to come. Here’s hoping.
Happy Sunday
[The paper in full can be accessed at Is the Price Elasticity of Demand for Coal in China Increasing?]