FREEMAN SPOGLI INSTITUTE FOR INTERNATIONAL STUDIES

THE REAL DRIVERS OF CARBON CAPTURE AND STORAGE IN

CHINA AND IMPLICATIONS FOR CLIMATE POLICY

RICHARD K. MORSE, VARUN RAI, AND GANG HE

Working Paper

#88

August 2009

PROGRAM ON ENERGY AND

SUSTAINABLE DEVELOPMENT
 

About the Program on Energy and Sustainable Development 

The Program on Energy and Sustainable Development (PESD) is an international, 

interdisciplinary program that studies how institutions shape patterns of energy production and 

use, in turn affecting human welfare and environmental quality. PESD research examines issues 

including effective policies for addressing climate change, the role of national oil companies in 

the world oil market, the emerging global coal market, business models for carbon capture and 

storage, adaptation of wholesale electricity markets to support a low-carbon future, and how 

modern energy services can be supplied sustainably to the world’s poorest regions.

The Program, established in September 2001, includes a global network of scholars—based at 

centers of excellence on six continents—in law, political science, economics and engineering. It 

is part of the Freeman Spogli Institute for International Studies at Stanford University. 

PESD gratefully acknowledges substantial core funding from BP and EPRI. 

Program on Energy and Sustainable Development 

Encina Hall East, Room E415 

Stanford University 

Stanford, CA 94305-6055 

http://pesd.stanford.edu

 
 

Authors 

Richard K. Morse is a research associate at the Program on Energy and Sustainable 

Development (PESD). Richard leads PESD’s research on global coal markets, which examines 

the political economy of coal and coal's long term role in the world's energy mix. Other research 

includes carbon markets, renewable energy markets, and financial markets for energy 

commodities. 

Richard received a bachelor's degree in philosophy from Rice University, where he was awarded 

the James Street Fulton Prize for the top graduate in the field. He has worked in commodities 

markets for oil, natural gas, and renewable energy. 

Varun Rai is a research fellow at the Program on Energy and Sustainable Development (PESD). 

Dr. Rai’s research focuses on technologies and policies for carbon capture and storage (CCS), 

technological innovation and diffusion, and the technology and energy policy of India. He leads 

the carbon capture and storage (CCS) research at PESD. 

 

Dr. Rai received his Ph.D. and MS in Mechanical Engineering from Stanford with specialization 

in energy systems and technologies. He holds a Bachelor's degree in Mechanical Engineering 

from the Indian Institute of Technology (IIT) Kharagpur. 

Gang He is a research associate at the Program on Energy and Sustainable Development (PESD). 

Gang’s research focuses on China’s coal sector and its role in the global coal market, and 

China’s energy and climate change policy. Other research includes global climate change and 

clean energy. He leads PESD’s research on China. 

Gang received a bachelor's degree in Geography from Peking University and MA in Climate and 

Society from Columbia University.
 

 
August 26 2009 1 PESD WP#88 

The Real Drivers of Carbon Capture and 

Storage at Scale in China and Implications 

for Climate Policy 

Richard K. Morse, Varun Rai, and Gang He 

I. Introduction 

The capture and permanent storage of CO2 emissions from coal combustion is now 

widely viewed as imperative for stabilization of the global climate. Coal is the world’s fastest 

growing fossil fuel, and coal combustion is now the largest single source of anthropogenic CO2

emissions, totaling 11.686 billion metric tons in 2006. By comparison, oil and natural gas use 

accounted for 10.768 and 5.445 billion tons of annual CO2 emissions in 2006, respectively.1 

Driven by increasing coal consumption in China and India in particular,2 growth in global coal 

use shows no signs of slowing. This trend presents a forceful case for the development and wide 

dissemination of technologies that can decouple coal consumption from CO2 emissions—the 

leading candidate technology to do this is carbon capture and storage (CCS).3 Indeed, IEA 

climate mitigation scenarios call for CCS worldwide to provide overall emissions reductions of 

5-10 billion tonnes of CO2 annually (MTCO2/yr) by 2050 (14-19% of the total warming-gases 

emissions reductions in IEA model scenarios). Because China’s coal-fired power sector is the 

world’s largest,4

 the IEA states that CCS in China will have to supply 20-25% of total emissions 

reductions, and over 60% of those reductions will need be applied to coal-fired power plants.5 

 

1 CO2 Emissions from Fuel Combustion, IEA 2008. 

2

 The IEA (World Energy Outlook 2008) predicts under its reference scenario that China and India alone will 

consume 8.1 billion metric tons of coal by 2030, driving GHG emissions in the developing world to new heights. 

3 IPCC Special Report on Carbon Dioxide Capture and Storage, 2005 and CO2 Capture and Storage: A Key 

Abatement Option, IEA 2008. For the purposes of this paper we treat CCS as referring to carbon capture and 

geological storage. 

4

 By 2030 it is projected that China will have 1332 GW of coal-fired generation capacity, compared to 583 GW in 

the US and EU combined (World Energy Outlook, IEA 2008). 

5 CO2 Capture and Storage: A Key Abatement Option, IEA 2008. 
 

August 26 2009 2 PESD WP#88 

At the same time, the current deployment of CCS is nowhere near the implied 

requirement to stay on pace with IEA projections, and a broadly applicable commercial model 

for CCS is yet to be demonstrated. The majority of existing projects have required favorable 

niche circumstances (for example, government subsidies or special funding) or niche 

applications (often the opportunity for captured CO2 to be used in enhanced hydrocarbons 

recovery) to make high costs recoverable. Also problematic is that only a few of these CCS 

projects and technologies have been applied to coal-fired power plants.6 There is currently only 

one fully-integrated coal power plant with CCS in the world: Vattenfall’s Schwarze Pumpe 

station in Germany. And even there, the scale of carbon capture is an order of magnitude smaller 

than for a fully commercial-size power plant.7 The key factors that have so far deterred 

investments in CCS projects include technological uncertainty, especially regarding performance 

of capture technologies at scale; high costs; regulatory uncertainty including over liability for 

sequestered CO2; and lack of clear carbon policy that could provide a revenue stream for CO2

capture. Though recent government stimulus packages have triggered a wave of new 

government subsidies that will likely kick start a handful of CCS demonstration projects 

globally, an enormous gap remains between the implied need for CCS and a path to viable 

commercial deployment. 

China simultaneously presents the most challenging and critical test for CCS deployment 

at scale. Its coal sector is the world’s largest and the rapid industrialization of China is 

inexorably tied to the same process that fueled the West’s development—burning coal. 

However, the stark reality to be explored in this paper is that China’s incentives for keeping on 

the forefront of CCS technology learning do not translate into incentives to massively deploy 

CCS in power plant applications as IEA scenarios would have it. In fact, fundamental and 

interrelated Chinese interests—in energy security, economic growth and development, and 

macroeconomic stability—directly argue against large-scale implementation of CCS in China 

unless such an implementation can be almost entirely supported by outside funding. In this 

paper, we consider how these core Chinese goals play out in the specific context of the country’s 

 

6

 Rai, V., Chung, N. C., Thurber, M. C., and Victor, D. G., “PESD Carbon Storage Project Database”, PESD 

Working Paper #76, Stanford University, November 2008. 

7

 Schwarze Pumpe is a 30 MW oxyfuel plant. See 

http://www.vattenfall.com/www/co2_en/co2_en/879177tbd/879211pilot/879254schwa/index.jsp for more details. 

Reports in July 2009 indicate that Schwarze Pumpe has not actually sequestered the CO2 that it captures due to 

opposition from local governments. If true, there may be no fully integrated CCS plant in the world at the time of 

this papers’ publication. 
 

August 26 2009 3 PESD WP#88 

coal and power markets, and we use this analysis to draw conclusions about the path of CCS 

implementation in China’s energy sector. Finally, we consider possible leverage points for 

international climate policy to spur the development of CCS in China. 

We make the following four principal observations: 

First, we argue that the primary driver of current CCS projects in China is the strategic 

development of its energy security agenda, with particular emphasis on diversity of energy 

supply, reliable and cheap electricity, and the development of domestic intellectual property for 

energy technologies. Unfortunately, many analysts who are rushing to declare that CCS has 

arrived in China are confusing these motives for an enthusiastic embrace of CCS for purposes of 

large scale CO2 emissions reductions. A crucial distinction must then be made: while these 

energy security drivers are likely to foster the development China’s CCS demonstration efforts 

(as we are likely to witness in the near term), they do not translate into incentives to deploy CCS 

at scale. In fact, as we argue later, CCS at scale will place a heavy burden on China’s coal 

supply chain and is more likely to harm China’s energy security than to help it. The only manner 

in which CCS would concretely serve energy security needs would be if China were subject to a 

stringent greenhouse gas reduction regime at some future time, in which case CCS could 

facilitate the use of domestically-available coal (for either power or for transport using coal-toliquids technology). However, we argue that such a scenario is likely many years from being a 

reality, mainly because China has no core interest in agreeing to and enforcing such a regime on 

itself until it has developed economically to the point where a large domestic constituency values 

climate change action as much as rapid economic growth. But this aspect of energy security 

does explain why China remains interested in developing proprietary CCS technology in the 

demonstration phase. The possibility that some future scenario might leave China dependent on 

CCS in order to use domestic coal provides motivation for the country to develop strong 

indigenous technology capability in this area (which might additionally lead to commercial 

opportunities down the road) so that it can control its energy destiny if CCS ever becomes a 

necessity. Thus, technology demonstration initiatives like the GreenGen plant at Tianjin will 

continue to be popular, but these should not be confused with enthusiasm for wide deployment of 

CCS in China soon. 

Second, deployment of CCS at any serious scale in China (as many climate models 

imply) could in fact have very detrimental effects on China’s energy security by stretching to the 

breaking point a coal supply chain that is already overburdened at many critical points. As noted 
 

August 26 2009 4 PESD WP#88 

above, a widely overlooked point about large-scale implementation of CCS in China is that it 

would almost assuredly result in significantly more coal use due to the parasitic load from CCS 

(typically estimated at 20-30%, although improved technology in the future could bring this 

number down). China’s coal supply chain has some structural issues—among them the 

mismatch between the location of reserves and points of energy consumption that requires a 

massive and already overburdened transportation infrastructure—that make it difficult to rapidly 

(and cost-effectively) expand supply even though reserves are plentiful. If every coal plant on 

which CCS is installed will require 20% more fuel on average,8

 energy planners will need to 

expand coal supply and the supply chain that much more to accommodate the technology. 

Moreover, because significant investment in the bottlenecks in coal supply will be required, the 

full costs of CCS at scale in China could be significantly higher than the already daunting figures 

for CO2 capture, transport, and injection when one takes into consideration the costs of additional 

rail, port, and shipping infrastructure. 

Third, the Chinese government’s non-negotiable desire for cheap power to fuel economic 

development and keep inflation in check precludes cost recovery through higher electricity prices 

for CCS at scale. This constraint will make it even more difficult for CCS for power to develop 

and scale up in China. In 2008, this structural problem was illustrated by the inability of Chinese 

generators to incorporate the full cost of their primary input, coal, into the electricity price. A 

huge run-up in coal prices caused massive losses among Chinese generators. If China’s power 

sector is structurally unable to accommodate fluctuations in fuel prices, it is difficult to see how 

it can support the massive investments that would be required for CCS. Special government 

subsidies may be able to fund isolated CCS projects, but without power markets that allow for 

cost recovery, rapid scaling of the technology in China is likely to prove elusive. 

Fourth, in the absence of viable financial models for domestic funding of CCS, 

international finance will be crucial to the realization of CCS at scale in China. A handful of 

internationally-funded marquee projects are now beginning. But current international policy 

mechanisms for engaging the developing world, mainly the UN’s Clean Development 

Mechanism, are not well matched to the scale of the CCS challenge and will need to be reformed 

if they are to stimulate CCS investment at a scale that will meaningfully impact global CO2

emissions. A further complication of international finance strategies may be political: countries 

may be disinclined to provide the substantial funding required for CCS when the associated jobs 

and technology learning accrue to an economic competitor like China. 

 

8

 Calculated using “Efficiency Loss” figures on p.65 in CO2 Capture and Storage: A Key Abatement Option, IEA 

2008. 
 

August 26 2009 5 PESD WP#88 

These observations have important implications for emissions mitigation efforts. First, 

the climate policy community needs to understand in a more nuanced way the motivations 

behind Chinese activities in CCS, which are largely driven by factors other than an interest in 

CO2 mitigation, in order to design effective policy. Efforts to engage China in joint technology 

development on CCS will likely find a receptive audience in the country, as will international 

funding models. But the assumption of inherent Chinese motivation for wide CCS deployment, 

on the other hand, will likely lead to disappointment as actual results fall far short of outside 

projections. If such deployment is deemed necessary for the stabilization of the global climate, 

concerned nations will likely need to play a central role in picking up the (sizable) bill. Second, 

the climate modeling community needs to move beyond understanding CCS costs in terms of 

just capture, transport, and storage. Any realistic analysis must capture the full costs of CCS—

including through the entire coal-to-power value chain—in order to really understand the 

potential for CCS uptake in China. 

This paper is split into three sections. Section II explores the underlying drivers for 

current CCS activities in China. Section III examines some serious impediments to CCS that 

have thus far received scant attention. We argue these issues will be critical for any serious 

evaluation of CCS at scale in China going forward. Finally, Section IV considers how to 

promote deployment of CCS in China, emphasizing the importance of well-designed financial 

and strategic incentives. 

 

II. The Strategic Drivers of Current CCS Efforts in China 

China’s increasing involvement in CCS projects should be understood in the context of 

its overarching energy-security agenda. That agenda is complex, but at its heart are security of 

fuel supply, availability of cheap and reliable electricity supply, and access to key energy 

technologies. Assessing how CCS could help contribute to longer-term Chinese energy-security 

goals is the primary motivation behind China’s CCS efforts so far.9

 The current progress of CCS 

in China is being largely driven by considerations other than climate change. 

China’s CCS efforts began with a series of central-government policies supporting CCS 

research and development. In late 2005 the Ministry of Science and Technology signed a CCS 

memorandum that initiated government-sponsored CCS research. In 2006 the National Medium 

 

9

 IEA has done some analysis about CCS development in the context of China’s clean coal development; see 

Cleaner Coal in China, IEA 2009. 
 

August 26 2009 6 PESD WP#88 

and Long-term Science & Technology Development Plan (2006-2020) 10 formally designated 

CCS a “cutting-edge technology” in pursuit of clean and high-efficiency use of coal (a broader 

high-priority energy target in China). China’s Science & Technology Action on Climate Change 

200711 established that CCS efforts will focus on RD&D, capacity building, and demonstration 

of CCS technologies. China’s State High-Tech Development Plan, the 863 program,12 later 

allocated 300 million RMB (43 million USD) to CCS technology development from 2008 to 

2010 and further formalized China’s pursuit of the technology.13 While these policies support 

important CCS research in China, they are not geared towards CCS deployment. 

 A few CCS projects that span a range of technologies and commercial models (see Table 

1) are now being developed for the Chinese market.14 Broadly, CCS could disseminate at scale 

in China in three contexts: industrial applications of CCS, for example at steel and cement plants; 

fuel transformations, for example coal to synfuels, especially coal to liquids (CTL); or CCS at 

power plants, either pre- or post-combustion.15 Of these, the last two options are generally 

considered to have better scale-up opportunities and to be better suited for mitigation of China’s 

growing emissions: the IEA projects that in 2050 nearly 25% of CCS in China will be fueltransformation-related CCS, while another 60% will be power-generation based CCS.16 

Accordingly, in our analysis we focus only on these two major applications of CCS. 

The first major CCS projects in China—Shenhua’s CTL project in Ordos, Inner 

Mongolia and the GreenGen IGCC plant in Tianjin— have progressed rapidly because they 

explore technologies with implications for China’s long term security of energy supply.17 CTL 

could provide China with alternatives to importing oil, and the GreenGen IGCC plant tests a coal 

 

10 http://www.most.gov.cn/kjgh/. See Article 5: Advanced energy technology. 

11 http://www.ccchina.gov.cn/WebSite/CCChina/UpFile/File199.pdf 

12 The name 863 comes from the fact that the program was created in the third month of 1986. The program is 

intended to stimulate the development of advanced technologies in a wide range of fields for the purpose of 

rendering China independent of financial dependency on foreign technologies. 

13 Page 154 of CO2 Capture and Storage: A Key Abatement Option, IEA, 2008. 

14 We argue that risk and the ability to mitigate it are leading indicators of the viability of CCS models in energy 

markets. 

15 These models can largely be understood based on technology. Our goal here, however, is to broaden the analysis 

to encapsulate broader commercial conditions. 

16 CO2 Capture and Storage: A Key Abatement Option, IEA 2008. 

17 Huaneng Beijing Thermal Power plant is not a major CCS effort as its capture and sequestration volumes amount 

to 3,000 tons per year, which is stored in beverages. 
 

August 26 2009 7 PESD WP#88 

combustion technology that would reduce coal demand by increasing efficiency while also 

reducing local air pollution. (The CCS phase of GreenGen is slated to come later and remains 

somewhat of an afterthought in comparison with the IGCC development work.) In the case of 

post-combustion technologies which do not have potential benefits for fuel security, China has 

been slower to undertake major projects and is eager to spread risks across international 

partnerships. In the remainder of this section we focus in particular on the Shenhua CTL and 

GreenGen projects and how these climate-friendly efforts align with Chinese non-climate 

objectives. 

Table 1 Current CCS Projects in China 

CCS Projects Technology Partnership model Financial 

arrangement 

Status 

(Aug. 2009) 

GreenGen 

Corporation 

IGCC18

Pre-combustion 

decarbonization 

Gasification or 

partial 

oxidation shift 

plus CO2

separation 

Huaneng with other 7 stateowned energy companies: 

China Datang Group, China 

Huadian Corporation, China 

Guodian Corporation, China 

Power Investment Corporation, 

Shenhua Group, State 

Development & Investment 

Corporation, China Coal 

Group, 

Peabody Energy 

Registered 

capital: RMB 300 

million (about 

USD 44 million) 

Huaneng 51%, 

and other 7 in the 

group 7% each. 

Total Investment 

will reach RMB 7 

billion. 

Under 

construction 

Shenhua CTL Coal to 

synfuels 

(direct coal 

liquefaction) 

Shenhua Group 

Sasol 

West Virginia University 

USD 1.4 billion CTL 

operational, 

CCS 

expected to 

start in late 

2009 

 

18 IGCC stands for Integrated Gasification Combined Cycle. There are some other active IGCC projects with studies 

of CO2 capture in China: the Dongguan IGCC project, the Huaidian Banshan IGCC, and the China Power 

Investment Corporation IGCC project. 
 

August 26 2009 8 PESD WP#88 

Huaneng Beijing 

Thermal Power19

Postcombustion Huaneng 

Australia CSIRO 

USD 4 million 

research project 

by CSIRO 

Operational 

since 2008 

Near Zero 

Emission Coal20

R&DD UK 

China Ministry of Science and 

Technology 

£3.5 million from 

the UK 

Government’s 

Department of 

Energy and 

Climate Change 

In planning 

stages 

COACH project 

(Cooperation 

Action within 

CCS China-EU)21

R&DD COACH project groups 20 

partners (R&D, Manufacturers, 

Oil & Gas Companies, etc...), 

12 for Europe and 8 for China 

Partially funded 

by European 

Union 

In planning 

stages 

II.a Shenhua CTL

Shenua’s CTL project is slated to become the first major CCS project in China, but it is 

not primarily driven by climate concerns. The strategic logic of coal-to-liquids technology is all 

about replacing oil imports.22 Integrating CCS into CTL processes would further boost security 

of oil supply by providing high purity CO2 streams with almost no additional capture cost—the 

largest cost of CCS in power generation (see later)—that could be pumped into declining oil 

reservoirs to yield previously unrecoverable oil supplies (enhanced oil recovery, or EOR). To 

prove the relevant coal-to-synfuels and CO2 EOR technologies, Shenhua’s Inner Mongolia 

project plans to produce one million tonnes of liquid transport fuel annually and expects to begin 

capturing and sequestering CO2 in 2009. The 3.6 million metric tonnes of CO2 that the project 

 

19 Huaneng is reported to plan a launch of its second pilot carbon capture project in Shanghai at the end of 2009, but 

high costs are holding back further progress. http://www.reuters.com/article/GCAGreenBusiness/idUSTRE54O15Y20090525 

20 See more details at official website: http://www.nzec.info 

21See more details at official website: http://www.co2-coach.com/

22 As Chinese economic growth has become increasingly contingent upon oil imports—in 2008 China imported 179 

million tonnes of crude oil (49.8% of its requirement) at a cost of about 19 billion dollars – China’s interest in CTL 

as an energy security contingency plan has grown despite its high cost. China has 114.5 billion tons (13.5% of 

world total reserves) of coal reserves, but only 2.1 billion tons (1.3% of world total) of oil reserves and 66.54 trillion 

cubic meters (1.1% of world total) of gas reserves. 
 

August 26 2009 9 PESD WP#88 

will generate annually will be used for EOR in nearby declining hydrocarbon reservoirs, yielding 

new oil and gas revenue streams that will bolster the project economics.23 

Because coal is China’s largest domestic energy resource, CTL serves as a hedge against 

oil-import dependence. Indeed, deployment of CTL in China, as in other places, is closely 

linked to oil prices: in 2008 when the oil price crested at $147, China had 12 CTL projects in the 

pipeline. Many projects have been put on hold since oil prices crashed, but in addition to the 

Shenhua project, two other CTL plants are being developed by the Yitai Group and the Lu’an 

Group.24 There are strong indications that Chinese CTL investments may surge again in the 

near future. 25,26 

But CCS for CTL in China has limited relevance to global CO2 mitigation goals, for a 

number of reasons. First, CTL is not currently a major source of emissions in China, and its 

growth is much less certain than the growth of coal-fired power. Second, CCS on a new CTL 

plant essentially results in a transport fuel that is roughly net equivalent in carbon emissions to 

oil; it only creates a significant net benefit for climate relative to the very high net emissions of 

CTL without CCS. Third, the simplicity of CO2 capture from a CTL process means that 

technology learning from such applications is not transferable to the largest source of CO2 in 

China – coal combustion at power plants. Relative to post-combustion CCS, where the capture 

process represents over 50 percent of CCS costs, or IGCC-CCS where the costs of IGCC alone 

have thus far proven prohibitive, capturing CO2 from a CTL process is much cheaper and more 

straightforward.27 Indeed, removing most of the CO2 from the gaseous stream after coal 

 

23http://www.netl.doe.gov/publications/proceedings/08/CO2E/PDF/session%201/2008.5.Hangzhou%20CO2%20for

um-EN.pdf 

24 Yitai and Lu’an both planned test plants that would produce 160,000 tons of liquid fuel annually and use indirect 

coal liquefaction technology developed domestically by the Institute of Coal Chemistry in Shanxi. 

25 Reuters and Xinhua reported on June 11, 2009 that Shenhua intends to invest 400 billion RMB in facilities to 

convert coal to oil, methanol, and gas, adding the capacity to convert 100 million tons of coal into 39 million tons of 

oil and chemical products by 2020. On June 22, 2009 Reuters and Xinhua reported that a CTL partnership between 

Shenhua and Sasol will begin construction in 2010 in the Ningxia region. The project plans to consume 3.2 million 

tons of coal annually, producing 80,000 bbls of oil output daily. 

26 CTL requires large amounts of available water resources. Producing one tonne of oil requires roughly four tonnes 

of water. Water scarcity in West China is likely to constrain the expansion of CTL. 

27 The CO2 streams available during coal-gasification processes are at an order of magnitude higher partial pressure 

than those in the flue-gas exhaust of power plants. This not only reduces the size and complexity of the required 
 

August 26 2009 10 PESD WP#88 

gasification is necessary to improve the yield of liquid fuels during the synthesis step of the 

Indirect Liquefaction process. In the Direct Liquefaction process used by the Shenhua CTL 

project, a pure stream of CO2 also becomes available (with no capture equipment) during the 

production of hydrogen, which is used in the hydrocracking step to break down the structure of 

coal. Therefore, while CTL is certainly a response to dependence on the global oil market for 

energy imports, CTL-CCS does not address the major challenges for the largest source of CO2 in 

China – coal combustion at power plants.   

CTL-CCS projects are only likely to be pursued where EOR opportunities exist. CTL 

projects are very capital intensive in their own right, which means that project owners look for 

stable revenue streams over long-time horizons. Adding carbon storage increases capital 

requirements and adds further financial risk to these projects. These risks are not likely to be 

justified absent additional revenue streams from incremental oil recovery.28 

II.b GreenGen IGCC

CCS technology integrated with IGCC,29 as envisioned by GreenGen, is now the major 

focus of state-supported CCS for power plants in China. The main advantages of CCS with 

IGCC are the high combustion efficiencies of IGCC and the relative ease of CO2 capture 

compared with post-combustion CO2 capture (where the CO2 partial pressure is much lower and 

hence capture is more complicated and expensive). While no IGCC project has yet been 

deployed, the central government’s 86330 and 97331 R&D programs favor developing CCS in 

concert with IGGC. 

 

capture systems, but it also permits the use of commercially available and relatively cheap capture technologies 

(IPCC Special Report on Carbon Dioxide Capture and Storage, 2005). 

28 Volatility of oil price hampers CTL projects, which are more attractive where oil prices remain high over the long 

run. Given that carbon storage with CTL is favored only when EOR opportunities are available, volatile oil or low 

oil prices doubly hamper carbon storage based on CTL. 

29 In IGCC steam and oxygen are used to gasify coal into syngas, a mixture carbon monoxide (CO) and hydrogen 

(H2). After removing impurities (H2S, COS, etc.), the syngas is passed through a water-gas shift reactor that 

generates CO2, which is then captured in the next stage. The remaining syngas is combusted in a gas turbine to 

generate electricity. The hot flue-gas stream of this stage is used to generate steam that is used in a steam cycle to 

generate more electricity (hence ‘combined cycle’). 

30 The national high technology research development program, named for starting year and month. 
 

August 26 2009 11 PESD WP#88 

The drivers for making IGCC power plants a state priority in China are again rooted in 

energy security concerns (there are also co-benefits in the form of reduced local pollution and 

synergies with chemicals production).32 First, China’s own internal energy policy provides 

strong incentives for developing IGCC as an efficient coal combustion technology.33 China’s 

national energy-efficiency policy targets a 20% drop in energy intensity of GDP from 2005 

levels by 2010 and depends heavily on generating electricity from coal more efficiently. In 

addition, long-term planning for the reliability of electricity supply necessarily emphasizes using 

coal efficiently, as remaining domestic resources are finite and production and associated 

transport costs will increase as the best and cheapest coal reserves are exhausted over time. 

Second, developing intellectual property and technological capability in IGCC will save 

China from dependence on foreign power plant manufacturers in the future;34 the concern is that 

foreign technology is expensive and may be subject to political restrictions on availability, as is 

already the case for some technology. For this reason, China has directed Xi’an Thermal Power 

Research Institute to develop a domestic gasifier and turbine. China has pursued a similar 

strategy for existing state-of-the-art coal-combustion technologies through an aggressive national 

program for developing domestic supercritical and ultra-supercritical coal-combustion 

technology.35 An additional benefit for China of developing indigenous technology is the 

commercial opportunity to export it to other countries. The appeal of domestic IP and future 

opportunities for export are perhaps the strongest motives for China to investigate carbon-capture 

technologies as well. 

The potential direct benefit to Chinese energy security through higher efficiency and the 

development of potentially lucrative domestic IP help explain why the Chinese government is 

 31 The national key fundamental research development program, named for starting year and month. 

32 Most analysts predict that CCS integrated with IGCC would reduce prohibitive capture costs, and thus is the most 

viable path forward for integrating CCS into coal-fired plants, despite the fact that IGCC technology itself is largely 

commercially unproven. IGCC could also have significant environmental benefits when compared to conventional 

coal combustion, reducing emissions of NOx, SO2, and mercury. 

33 The average efficiency of China’s coal plants is between 32-34%, and IGCC might reach 40-45% efficiency. 

34 China has historically relied on foreign power-plant technology. Today, many foreign firms operate JVs with 

Chinese companies to produce equipment inside of China. The Chinese government has emphasized the pursuit of 

domestic intellectual property as a strategy for weaning dependence on foreign firms. 

35 In 1995-2000, NDRC initiated the “Development of 600MW supercritical coal-fired power unit” project. In 2001-

2005, MOST’s 863 project of “Ultra-supercritical coal-fired power generation technology” further advanced the 

domestic RD&D efforts. 
 

August 26 2009 12 PESD WP#88 

putting its own capital behind GreenGen, the world’s leading IGCC-CCS project. The financial 

risk of GreenGen is significantly borne by the government through eight state-owned companies 

(see Table 1).36 While similar projects elsewhere (for example, FutureGen37 in the US) have 

struggled to get started due to large capital requirements and uncertain benefits that deter firstmovers, full-fledged government support through state-owned companies makes GreenGen’s 

implementation highly likely. The information that GreenGen provides the Chinese government 

about the costs of IGCC and associated CO2 capture will be crucial as China prepares the 

roadmap of its power generation build-out beyond 2020. 

 GreenGen is centered around a 400 MW IGCC coal plant in Tianjin. The project plans 

to incorporate polygeneration (the flexibility to produce a combination of electricity and 

chemical feedstocks) and CCS. The project is envisioned in three stages:38 

• Stage One (2005-2010): 2000 t/d gasifier, 250 MW IGCC operation, hydrogen 

production and CO2 separation at pilot scale; 

• Stage Two (2010-2015): 3000 t/d gasifier, 400 MW IGCC, hydrogen production 

and CO2 separation at 100 MW scale; 

• Stage Three (2015-2020): 3000 t/d gasifier, 400 MW IGCC with full scale CO2

capture. 

An important observation about GreenGen’s development sequence is that CCS remains 

for the moment distinctly an afterthought relative to the more strategically important goal of 

developing IGCC. While the IGCC plant is physically under construction at the moment as part 

of Stage One, the design of any carbon capture system is still very much on the drawing board, 

and carbon storage is even further from a reality, with no CO2 storage sites having been selected 

at this point. 

Looking beyond GreenGen, integrating CCS into IGCC plants looks to be the most 

promising route for deployment of CCS for power in China, because it both addresses emissions 

in the power sector and is well aligned with China’s own incentives on efficiency and local 

pollution, but several key barriers remain. First, IGCC itself has to be proven both 

 

36 Peabody Energy, a US coal company, is also seeking participation in GreenGen. 

37 Two of FutureGen’s major backers, American Electric Power and Southern Company, backed out of the project in 

June 2009 just weeks after the Obama administration confirmed renewed funding for the project. 

38 From GreenGen company website. 
 

August 26 2009 13 PESD WP#88 

technologically and commercially in the Chinese market. The current push for IGCC in China 

envisions gaining efficiencies and additional revenue streams by integrating multiple 

processes—power, process heat, and chemicals—in order to make the technology cost 

competitive.39 Second, the commercial and technological integration of CCS into IGCC needs 

to be proven. 

II.c Other CCS Projects and International Partnerships 

China is leveraging international support for developing CCS wherever possible, but 

especially in cases in which domestic benefits are less clear. It is not a coincidence that the 

projects with fewest direct benefits to China are the ones that involve international financing and 

technology sharing models. These projects have tended to progress at a slower rate than those 

inherently motivated by China’s security interests. 

Several international CCS research efforts are underway in China. Australia is a partner 

in Huaneng’s Beijing post-combustion capture demonstration plant. The EU is also supporting 

the development of CCS in China. In late 2007 an EU-China MOU called for “research of near 

zero emissions coal power generation technology through carbon capture and storage.”40 That 

agreement spawned the Near Zero Emissions Coal project between China and the UK, which 

aims to research and develop an IGCC polygeneration CCS demonstration project by 2014.41 

The EU continues to advocate financing of CCS projects in China and in June 2009 declared that 

it will allocate €60 million to CCS in China and develop a funding mechanism for NZEC.42 In 

May 2008, Japan and China announced a cooperative project to capture CO2 from a Chinese 

coal-fired power plant and inject it into a Chinese oil field for EOR. While all of these projects 

certainly represent useful research efforts, they do not represent a level of investment comparable 

to the Shenhua CTL and GreenGen IGCC projects, suggesting again that finance and progress 

will be closely correlated to China’s energy security interests. And for now, those interests are 

 

39 See Hengwei Liu, Weidou Ni, et al., “Strategic thinking on IGCC development in China”, Energy Policy, 

Volume 36, Issue 1, January 2008, Pages 1-11 

40 http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/er/97355.pdf 

41 http://www.nzec.info/en/what-is-nzec/ 

42 Sheppard, L., “Communication on financing CCS and other clean carbon technologies in emerging and 

developing countries”, European Commission 2009. 
 

August 26 2009 14 PESD WP#88 

not well aligned with installing post-combustion capture on the biggest source of emissions in 

China – the existing 600 GW fleet of conventional coal plants. 

III. Obstacles to Wider Deployment of CCS in China 

As described in the previous section, China’s prioritization of CCS technology 

demonstration projects provides a good window into the inherent motivations behind the 

country’s efforts. But the fact that a few projects are being enthusiastically pursued because they 

line up with longer-term energy security goals should not be taken to indicate that wider 

deployment of CCS in China is likely in the near future, particularly in the power sector. 

Deployment of CCS at scale has not yet been successfully demonstrated in any country, due to 

obstacles including high costs, uncertain storage conditions and capacity, and the absence of 

suitable regulatory frameworks. Beyond these universal barriers, though, implementation of 

CCS in the Chinese power sector presents two special impediments that have not been fully 

considered in most analyses: the structure of the power market and the supply chain for coal. 

These formidable obstacles need to be understood in order to gauge the true potential of CCS in 

China. 

III.a The Structure of China’s Power Market Constrains CCS Cost Recovery 

Depending on the technology, adding CCS is estimated to increase the cost of generating 

coal-fired power by 40-80%.43 IGCC with CCS is estimated to increase electricity cost by 40-

60% (on top of cost of electricity from IGCC), while post-combustion CCS will increase 

electricity costs by 60-80% (on top of cost of electricity from subcritical or supercritical coal 

combustion without CCS). No matter what technology goes forward as the leading contender for 

deployment of CCS, the costs will be daunting. In the European and US markets, policymakers 

need to consider how to cover these costs through some combination of carbon market 

incentives, subsidies, and increased end-user electricity prices. The Chinese power sector, on the 

other hand, is not market-oriented, and regulation of the energy system is largely driven by the 

political priorities of the central government. As we will explore in the remainder of this section, 

the resulting complex organization and inflexibility of Chinese energy markets makes it uniquely 

 

43 IPCC Special Report on Carbon Dioxide Capture and Storage, 2005 and Carbon Capture and Storage: A Key 

Abatement Option, IEA, 2008. 
 

August 26 2009 15 PESD WP#88 

difficult to sustainably recover the costs of CCS. Chinese energy markets in general exist in 

various states of reform and liberalization; for the purposes of CCS, the most relevant markets 

are the coal market and the power market, where the relative imbalance of reform creates serious 

problems.44

China now has mature markets for coal that are increasingly exposed to international 

prices. As a market-based coal sector has evolved, it has not been immune to price volatility. In 

2008 alone, the price of coal at the leading port, Qinhuangdao, mirrored international price 

volatility and fluctuated from 580 to 950 RMB,45 reaching historical highs before crashing again. 

The power market, however, is not market-oriented. China’s central planning apparatus, 

the National Development and Reform Commission (NDRC), keeps tight control over electricity 

prices in China in order to meet its larger socio-political agenda. Reform and liberalization of 

China’s power markets remains a distant prospect. 

The conflict that arises between unevenly reformed coal and power sectors illustrates a 

key problem for CCS in the Chinese energy system: the power market cannot internalize 

increased costs. This means that the Chinese power market is designed in a way that makes it 

nearly impossible for it to deploy a commercially-viable CCS model on its own.46 In 2008, 

much of the Chinese power market could not even bear the cost fluctuations of its primary input 

– coal. Coal currently is the largest cost for power generators in China, and when the coal price 

rises in response to supply shortages or other market events, the power sector cannot 

proportionally increase electricity prices in response.47 In 2008 coal prices reached new heights 

 

44 For a detailed history, see Peng, Wuyuan, “The Evolution of China’s Coal Institutions”, PESD Working Paper 

#86, Stanford University, August 2009. 

45 Historical data from China Coal Transportation and Distribution Association, with average heat content of 

5800kcal/kg. 

46 There is precedent for the NDRC allowing power plants with more advanced environmental controls to charge 

slightly higher tariffs. It allows a price increase of 1.5 cents / kwh for the installation of FGD. However, these 

increases are not well matched to the costs of CCS. Although special power tariffs may be allowed for 

demonstration plants, CCS deployed at beyond the demonstration phase would entail a significant increase in power 

prices. In the absence of cost recovery by pass-through in the power price, it is likely significantly larger direct 

subsidies would be required. 

47 China tried to use a coal-electricity price linkage system to incorporate the coal cost into the power tariff. The 

system was proposed in 2004 and suggests that when coal price raise 5% in 6 months, the power tariff will adjust 

accordingly. In May 2005, NDRC adjusted the power tariff with 2.52 cents RMB increase, followed by another 
 

August 26 2009 16 PESD WP#88 

due to transport constraints and the inability of the Chinese coal sector to keep up with booming 

demand. The price spike could not trump politics, and power generators were forced to operate 

at massive losses—it is reported that Chinese power companies lost an estimated 70 billion RMB 

(40 billion RMB for the Big Five only) in 2008.48 China’s state-owned power generators are 

often forced by the government to operate at losses when independent power producers simply 

shut down. Figure 1 illustrates how tight control of power prices affects the profitability of coal 

fired generators (for example, between April and September 2008) due to the inability of 

generators to pass on basic costs. Where the price of coal is above the price of power, as was the 

case in much of 2008, the costs of coal alone (even excluding all other relevant costs) cannot be 

recovered by power generators. If the structure of Chinese power markets means that generators 

can barely support the cost of coal, supporting the cost of CCS is currently unthinkable absent 

major power sector reforms. 

Figure 1 China’s power market cannot bear the cost of coal 

Source: Power price is Shanghai grid price as reported by Shanghai Development and Reform Commision. Coal 

price is Qinhuangdao price from Reuters. Note: Coal cost is expressed in terms of KWh and reflects the average 

efficiency of coal plants in China, assumed to be 2775 cal/Kwh. Numbers are indicative for the national market and 

may exclude some additional costs of coal and power generation. 

 

adjustment in May 2006. The system was only used twice since and failed to track the dramatic rise in coal prices in 

2008. 

48 China Electricity Council, Office of Statistics and Information. 

0.00

0.10

0.20

0.30

0.40

0.50

0.60

Coal Price (RMB / KWh)

Shanghai Grid Power (RMB / KWh)
 

August 26 2009 17 PESD WP#88 

III.b Major CCS Deployment Would Create New Stress on the Coal Supply Chain 

Many analysts and climate modelers have failed to consider that CCS costs are in fact not 

limited to the power sector—they would extend to the entire coal value chain. There is a 

significant reduction in the efficiency of power generation when CO2 capture is added, as capture 

systems consume a lot of power: adding CO2 capture reduces power generation efficiency by 20-

30% (or 10-15 percentage points).49 CCS thus requires an increase in coal consumption of 

around 20-25% to produce the same amount of electricity. We estimate that CCS at scale in 

China as prescribed by the IEA Blue scenario would demand approximately 200-300 million 

tons per year of additional coal production.50 This level of incremental coal production above 

baseline targets would be accompanied by further stress on the coal supply chain that could itself 

threaten the paramount objective of maintaining cheap and reliable electricity. Infrastructure in 

the coal supply chain already struggles to keep pace with the growth in coal demand to fuel the 

economy; wide deployment of CCS would greatly exacerbate these strains. Beyond the obvious 

additional cost increases for generators, ramping up coal production to these levels would require 

new mining capacity, rail infrastructure, port expansions, and shipping capacity – investments on 

a massive scale. Appendix 1 considers in detail the costs throughout the coal supply chain that 

could be associated with a 200-300 million ton per year expansion in coal production and 

transport capacity to support the CCS deployment demands of the IEA Blue scenario. Costs 

would be well in excess of 100 million RMB (15 billion USD). If one were to include other 

environmental externalities of coal production and consumption, these numbers would be even 

higher.51 

 

49 The loss in efficiency depends on the combustion technology used. For example, the efficiency loss is higher for 

post-combustion capture than for IGCC. See IPCC Special Report on Carbon Dioxide Capture and Storage, 2005 

and Carbon Capture and Storage: A Key Abatement Option, IEA 2008. 

50 IEA Blue scenario projections of for CCS in China are 2 Gt CO2 reductions by 2050, over 60% (or 1.2 Gt) of 

which come from the electricity sector. Our calculations show that achieving that scale will require 375 GW (gross) 

CCS-equipped coal capacity. Assumptions made for that calculation were: 50% gross efficiency; 5% auxiliary 

consumption; 10% efficiency loss due to capture; that is, 35% (50 – 5 – 10) net efficiency with capture; 85% capture 

rate; 0.8 plant load factor. Given that today’s ~600 GW of coal capacity consumes 1.2 billion tonnes per year coal, 

an additional 25% for 375 GW (due to decreased efficiency) would represent an additional 190million tonnes of coal. 

51In the report “The True Cost of Coal”, Mao Yushi, Sheng Hong, Yang Fuqiang et al. report that when the 

environmental costs of coal are considered, along with the impact of price distortion caused by current regulations, 
 

August 26 2009 18 PESD WP#88 

The costs of CCS, therefore, cannot be understood as limited to the power sector and 

instead permeate China’s entire coal-based energy infrastructure. Because industry and 

infrastructure development is normally arranged in a five-year plan system, major infrastructure 

projects first are proposed, approved, and funded in the plan and then deployed into 

construction. Thus, ensuring the availability of coal supply for CCS at scale entails coordination 

of the entire energy industry and economic development system. 

As China’s central planners confront China’s energy challenges, CCS investments have 

to be understood not only in terms of their own system-wide costs but also in terms of 

opportunity costs in foregone alternatives. China is now experiencing a boom in clean-energy 

development. Wind power has grown from 0.76 GW in 2004 to 13.24 GW in 2008. The Chinese 

government has a plan to reach 30GW of wind in 2020, which requires more than RMB 1 trillion 

(146 billion USD) in additional investment. Deployment of solar is planned to reach 10GW, and 

RMB 300 billion (43 billion USD) is estimated to be required in order to achieve that target. 

Nuclear is on track to account for 5% of the energy mix in 2020, and 750 billion RMB (109 

billion USD) is required. CCS would likely come at the expense of some of these investments, a 

sober reality that is sure to weigh heavily on the minds of China’s central planners52 —especially 

given that these other alternatives enhance China’s diversity of energy supply whereas CCS does 

not. 

IV. The Path Forward: Paying for CCS in China 

As we have illustrated, in their current form China’s energy markets will be incapable of 

handling the high costs of CCS. Deployment of CCS in China, even at moderate scales, will thus 

require serious policy interventions and strong financial support. This leaves two broad options 

 

the total external costs of coal reached RMB 1745 billion in 2007, equal to 7.1 per cent of China’s GDP for the same 

year. 

52 Su Wei, director general of the climate change unit at the NDRC made this point in an interview with Bloomberg 

on August 6th 2009, stating: “Carbon capture and storage, particularly for China, is not one of the priorities – the 

cost is an issue. If we spent the same money for CCS on energy efficiency and the development of renewables, it 

would generate larger climate-change benefits.” 

For more analysis on China’s Clean Energy development, see China’s Clean Revolution, The Climate Group 2008 

and Wang, T and Watson, J, “China’s Energy Transition – Pathways for Low Carbon Development”, 2009. 
 

August 26 2009 19 PESD WP#88 

for financing CCS at scale: direct financial support from the Chinese government or international 

financing mechanisms, likely through climate treaties or direct engagements. 

The first option, domestic financial support for deploying CCS at scale, is highly unlikely 

given China’s current energy strategy. China currently has few strategic or financial incentives 

to deploy CCS beyond the demonstration phase. While China is increasingly stressing 

sustainable development, this has not mean CO2 mitigation thus far and economic development 

is still China’s top priority. Spending on CO2 mitigation through CCS is a diversion from that 

goal. Opportunity costs are high (see Section III.b above), and CCS will not measure up against 

other development and economic priorities. Further, investment in environmental controls at 

power plants is focused not on CO2 mitigation but on abatement of local pollutants from coal 

combustion like SO2 and NOX that directly impact China’s citizens on a daily basis. Controlling 

these pollutants also requires large investments, and China is moving ahead with the planning 

and deployment of these technologies. Support for CCS RD&D will continue because it aligns 

with longer-term Chinese objectives of energy security, but as the locus of domestic priorities 

lies elsewhere, new and much stronger incentives will be required for any type of CCS 

deployment at scale in the Chinese power market. 

For the above reasons, international financial support will be needed if CCS deployment 

in China at scale is to become a reality in the near to medium term. Financial mechanisms under 

international climate agreements could conceivably be used to help support CCS projects in 

China. Debates are now underway that would attempt this by including CCS in the Clean 

Development Mechanism (CDM) under the UN’s Kyoto protocol. Under such an arrangement 

firms would earn the market price of Certified Emissions Reductions (CERs) for every ton of 

CO2 abated by a CCS project. The CDM could provide price levels of roughly €8-23 / ton (11 – 

32 USD) of CO2 for CCS investors.53 While meaningful, these price levels are not sufficient 

when the marginal cost of abatement for CCS is on the order of $50 to $100 per ton of CO2 (even 

without considering additional obstacles discussed above).54,55 Another issue is that, for capital- 

 

53 Based on historical data from the Reuters CER index. The DEC ’08 and DEC ’09 CER contracts have fluctuated 

between €7.48 and €22.85 (at the time of publication). Higher CER prices are possible and depend on a number of 

factors including market design and supply and demand. 

54 IPCC Special Report on Carbon Dioxide Capture and Storage, 2005 and CO2 Capture and Storage: A Key 

Abatement Option, IEA 2008. See Economic Instruments and Clean Coal Technologies, IEA Clean Coal Center 

2008 for further arguments that the CDM is insufficient to stimulate CCS investments. 

55 As discussed at several points earlier in the paper, the actual marginal cost will vary with the application, and the 

commercial and regulatory context for that technology. For example, if China builds IGCC/Poly generation for other 
 

August 26 2009 20 PESD WP#88 

intensive projects like CCS, stability of revenue streams is critically important for the project’s 

viability. Paying for the additional cost of CCS projects based solely on CERs will prove 

problematic on this front because of carbon price volatility.56 Thus, CDM alone will not enable 

the widespread deployment of CCS. Funding CCS in China will require policy makers to rethink 

the design and application of international mechanisms for financing CO2 mitigation. 

International negotiations for a post-2012 climate agreement are currently focused on 

potential successors to the CDM. The EU has proposed “no lose” sectoral crediting mechanisms 

that, if properly designed, could be better equipped to stimulate CCS investment.57 As currently 

envisioned for the power sector, the UN would establish a benchmark (likely based on emissions 

intensity), and provide carbon credits to sectors that perform better than the baseline.58 CCS, 

which theoretically allows a very low emissions intensity, could be a potential beneficiary of 

such a policy. However, potential policies along these lines are still being shaped and are not yet 

clearly defined in such a way as to provide credible support for CCS. 

Irrespective of the financial mechanism, those who argue that CCS in China must be a 

part of any climate solution need to soberly evaluate the scale of investment required. In the 

Chinese context, investments in CCS that would yield about 1.2 Gt/yr CO2 emissions reductions 

by 2050 (IEA’s ACT scenario) amount to a cumulative investment of $300-400 billion between 

2030 and 2050, or an annual average investment of $25-30 billion. The total amount is even 

 

reasons then the marginal cost for CCS is much lower. On the other hand, if it does Greenfield power generation 

projects where IGCC w/CCS must compete with conventional coal then the marginal abatement cost is totally 

different (much higher). 

56 Hedging carbon price volatility would be possible with the existence of liquid, long-term derivatives markets for 

carbon. Thus far carbon policy has not been stable enough to provide these markets. 

57 See The UNFCC’s “A text on other issues outlined in document FCCC/KP/AWG/2008/8” for the text of the EU’s 

sectoral crediting proposal. 

58 There are a number of current proposals about the design and administration of a sectoral crediting system. For 

further information, see Meckling, J. and Chung. G.Y., “Sectoral Approaches to International Climate Policy”, 

Discussion Paper 2009-02, Harvard Kennedy School, January 2009 and Schmidt, J., Helme, N., Lee, J., and 

Houdashelt, M., “Sector-based approach to the post-2012 climate change policy architecture”, Climate Policy, 

August 2008 and Baron, R. and Ellis, J., “Sectoral Approaches and the Carbon Market”, IEA 2009. 
 

August 26 2009 21 PESD WP#88 

higher for the IEA’s BLUE scenario for CCS in China, at $450-600 billion. These estimates 

exclude operating costs; including these can increase total costs by a further 50-100%.59 

Thus, if deploying CCS in China is considered an imperative for climate policy, policymakers will need to take note of the staggering scale of investment required and calibrate climate 

policy accordingly. If the scale of the offset mechanisms in the Kyoto Protocol and the US’s 

Waxman-Markey legislation are any indicators of the likelihood and political viability of such a 

massive climate-based wealth transfer from the developed to the developing world, the precedent 

for funding CCS at scale through climate policy is not promising. In an optimistic scenario, CCS 

is included as a CDM methodology (or CDM’s successor) and Waxman-Markey becomes law 

with a CCS methodology for international offsets. If this scenario occurs and 25% of these 

markets are dedicated to CCS funding, the total value of these funds would be around $7.2 

billion annually.60 This optimistic scenario still amounts to about 25% of the implied requirement 

for covering CCS in China ($25-30 billion annually) that is described above. Purely apart from 

the financial capacity of the developed world to support CCS in China, there is the question of 

the political viability of a program which could be seen by OECD voters as steering technology 

and jobs on a massive scale to an economic competitor. 

Climate finance will certainly be critical for getting CCS off the ground in China, but 

given the political difficulties, policy strategies for international engagement will need to include 

additional types of CO2 emissions reduction incentives. Cost-sharing agreements that are 

aligned with China’s own incentives are likely to be the most tenable path forward in the near 

term. CCS is still critical for the abatement of emissions from coal, but in the face of daunting 

costs and risks, investors and policy makers should not ignore the full portfolio of options in the 

coal-fired power sector. Increasing the efficiency of Chinese coal combustion may represent a 

much greater opportunity for CO2 mitigation in the near term. Because it naturally aligns with 

energy security incentives as discussed previously, improvement of combustion efficiency is 

already a top priority of Chinese policy and spending. Increasing the average efficiency of the 

Chinese coal fleet from its current average of 32% to the EU’s average of 38% – a shift that 

 

59 CO2 Capture and Storage: A Key Abatement Option, IEA 2008. The IEA BLUE and ACT scenarios roughly call 

for 2 Gt and 1.2 Gt CO2/year reductions in China through CCS by 2050. 

60 The following assumptions are used to generate this calculation which is purely indicative: (1) Average annual 

CER issuance will be 306 million, based on UNFCC estimates at 

http://cdm.unfccc.int/Statistics/Registration/AmountOfReductRegisteredProjPieChart.html (2) Waxman-Markey 

will maximize usage of international offsets at 1.5 billion per year (3) CER price is €15 (4) US offset price is the 

average of EPA’s high and low scenarios in 2015: $15 (5) Euro to Dollar exchange rate is 1.413. 
 

August 26 2009 22 PESD WP#88 

would be possible utilizing existing proven technologies – could represent a 20% reduction in 

emissions from China’s power sector.61 A critical step in this direction will indeed be to prove 

the viability of high-efficiency IGCC power generation as the GreenGen project hopes to do – an 

effort that could also build a foundation for later deployment of CCS. 

V. Conclusions 

The expansion of coal-fired power in China has propelled the country to its current 

position as the world’s largest coal market and leading emitter of GHGs. As many analysts, 

policymakers, and academics have realized, any serious strategy for avoiding the worst 

consequences of climate change must therefore urgently confront emissions from Chinese coal 

combustion. Wide deployment of CCS technology is required to address this challenge. But 

without a careful assessment that takes into account the structure of Chinese energy markets and 

China’s own priorities, the true potential for deployment of CCS in China will be miscalculated 

and climate policy will not address the coal challenge in a pragmatic way. 

 China is already undertaking CCS projects, both on its own and in international 

partnerships. But not all CCS projects are created equal, and the projects that are most viable 

support long-term priorities of the Chinese government: diversity of energy supply, domestic 

sourcing of energy, cheap and reliable electricity, and control of intellectual property for key 

technologies. Absent major changes in Chinese climate policy, it is these priorities that will 

continue to provide the driving logic for CCS in China. While these priorities have led to 

support of projects like Shenhua CTL and GreenGen, they do not automatically translate into 

support for wider CCS deployment. 

 Policy makers and observers need to understand that not all CCS projects are well 

matched to major sources of emissions in China, and as such China’s CCS efforts offer disparate 

degrees of promise for CO2 mitigation. CTL-CCS is likely to be the major source of sequestered 

CO2 in China in the near term because China’s incentives to add CCS to CTL projects for EOR 

are high and the risks are comparatively low. But the real climate benefits of CCS with CTL are 

minor, as CTL is not a major source of emissions in China. The key to reducing China’s 

emissions from coal is applying CCS at power plants, where China has already made IGCC a 

priority and is charging ahead with GreenGen. While IGCC-CCS is likely to have the most 

 

61 Indicative calculation based on emissions factors in Baruya, “Competitiveness of coal- fired power generation”, 

IEA Clean Coal Center 2008. 
 

August 26 2009 23 PESD WP#88 

chance of success among CCS for power options in China, deploying CCS in this context would 

still involve the formidable task of reinventing how power and chemicals are made in China. 

Effective climate change policy requires both the vigorous promotion and careful 

calculation of CCS’s role in Chinese power generation. Carbon finance must be applied to 

deploying CCS at scale in China. As the world approaches the end of the Kyoto Protocol in 

2012 and crafts a new policy architecture for a global climate deal, international offset policy and 

potential US offset standards need to create methodologies that directly address CCS funding at 

scale. The more closely these policies are aligned with China’s own incentives and the unique 

context of its coal and power markets, the better chance they have of realizing the optimal role 

for CCS in global climate efforts. 

Acknowledgements: 

The authors would like thank Yu Yuefeng of Shanghai Jiao Tong University, Zheng Song of 

GreenGen, Zhang Hong of China Coal Industry Association, Li Hongjun of China Coal 

Information Institute, Zhang Chi of BP China, Wang Wanxing of Energy Foundation China 

Sustainable Energy Program, Peng Suping of China University of Mining and Technology, Yang 

Xianfeng of China Coal Transportation and Distribution Association, and Mao Yushi for their 

support and assistance with our research. The opinions expressed here are purely our own and 

the authors are responsible for all content. Thanks also to David Victor, John Bistline, and 

Jeremy Platt for their detailed comments on earlier drafts of the paper. Finally, this paper 

benefited significantly from the comments and insights of Mark Thurber. 
August 26 2009 24 PESD WP#88 

Appendix 1: Costs Associated with Increasing Chinese Coal Production Capacity by 300 

Million Tons to Support CCS Demands of IEA Blue Scenario 

Increased costs would begin at the mine site. The average cost of extracting one ton of 

coal from underground in Shanxi is about RMB 115 (17 USD) in 2008 by modern mechanical 

systems, though it can as low as RMB 50 (7 USD) per ton by hand.62 The best resources have 

already been extensively exploited, and the remaining coal is increasingly expensive to mine. 

Ramping up production by 300 million tonnes would require 340,000 additional workers and 

RMB 19 billion (2.8 billion USD) more investment in the fixed assets in the coal industry.63

Much of China’s coal production is far from the coastal centers of industry that consume 

it, which requires a massive coal transportation infrastructure. Typical coal supply routes 

illustrate the complexity and challenge of moving nearly 3 billion tonnes of coal per year. For 

instance, in Shanxi Province, where about one fourth of China’s coal is produced, most of the 

coal from the local mine is first transported by trucks to the local rail loading station. From that 

station the coal is transported 653 kilometers by the Da-Qin rail line to the major port 

Qinhuangdao on the Eastern coast. Qinhuangdao serves as a major trading hub that supplies 

industrial China with coal via maritime shipping supply routes to the south. This elaborate 

transport system of coal is used because the rail lines are so overburdened that it is cheaper to rail 

coal to Qinhuangdao and then ship it all the way to southern China on a boat then to rail it 

directly. The main railway line transporting coal from Shanxi to Qinhuangdao has already 

reached 340 million tons of coal carrying capacity in 2008. In 2010 it might reach 400 million 

tons at most with restructuring of the lines and upgrading of the capital stock. A second rail line 

with 200 million tons annual capacity from Lvliang in Shanxi to Qingdao port is under 

discussion, and about RMB 100 billion (14.6 billion USD) is needed to build such a new line. If 

one assumes 300 million tonnes of extra coal for CCS use, this means that it needs the equivalent 

of another Da-Qin rail line to transport added coal, which entails on the order of 133 billion 

RMB (19.4 billion USD) for rail alone given the scale of investment by the Lv-Liang line. 

 

62 From interviews with local firms and industry experts. 

63 Calculated with data from China Coal Industry Yearbook 2006, based on inputs associated with new production 

that year. Fixed assets include facilities and equipment. In 2006, coal production was 2.33 billion tons, the total 

workforce in the coal industry was 2,657,230 and fixed assets investment was 147.9 billion RMB. Using linear 

growth as an indicative calculation, 300 million tons of additional coal requires about 340,000 additional workers 

and 19 billion RMB more investment. 
 

August 26 2009 25 PESD WP#88 

If current rail to maritime routes are maintained, increased transport capacity would mean 

an expansion of the shipping fleet and domestic ports. Currently about 500 million tons of coal 

are moved by maritime trade in the Chinese market. Even moving an additional 150 million tons 

would require expanding the dry shipping fleet by around 1500 panamax vessels and expanding 

port capacity by 1/3 of current capacity. The Caofeidian port near Tangshan illustrates the scale 

of costs associated with additional port capacity. Construction of the port started in 2006 and 

targets 50 million tonnes in annual coal handling capacity in the first stage of development. It is 

estimated that RMB 15 billion (2.2 billion USD) in investment is required.64

 

64 From Caofeidian Port website.