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COLUMN-China's "war on pollution" needs more than words: Clyde Russell

--Clyde Russell is a Reuters market analyst. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, March 12 (Reuters) - That China needs a "war on pollution' isn't in doubt, that it will get a concerted and sustained effort to clean up its environment is still in doubt.

Premier Li Keqiang declared China's pollution as "nature's red-light warning against inefficient and blind development" in his address to the annual meeting of parliament on March 5.

But the speech, while strong on rhetoric, was short on details and it remains to be seen what practical steps China will take to tackle its unwanted status as the world's top polluter, where just three out of 74 major cities met minimum air quality standards last year.

A high-level policy report released on March 9 did outline plans to tighten environmental protection laws, allowing for significantly higher penalties and the shutdown of polluters.

Again, exact details were lacking, but stricter regulations will only work if they are enforced, something that has been a problem in the past.

The environment ministry has been viewed as one of the weaker parts of the central government, often unable to police existing rules and unable to force regional and local governments to conform to regulations.

But even if China does beef up its environmental rules, and throws the full weight of the government behind their enforcement, the key issue is likely to be the cost of lowering pollution.

The case of coal-fired power shows the extent of the problems the authorities are facing.

The major source of pollution in China is from coal-fired power plants and other users of the fuel, such as steel and cement makers.

Much of China's fleet of coal plants are modern units fitted with scrubbers, units designed to remove sulphur dioxide, one of the gases blamed for causing acid rain and respiratory illness.

More than 70 percent of the approximately 700 gigawatts of coal-fired power in China have these units, but they cost money to use, adding around 10 percent to operating costs for power generators.

This means that the scrubbers are often not used, and attempts by the authorities to force utilities to turn them on are ignored.

The Washington Post reported in May last year that Huadian, one of China's largest power producers, turned off scrubbers at its plants near Beijing.

Fines levied on offending coal plants are likely to be lower than the cost of operating scrubbers, meaning power companies have little incentive to follow the laws.

USE EXISTING TECHNOLOGIES FIRST

Before new rules and regulations are implemented, one sure way to see if China is serious about pollution will be if the use of scrubbers in enforced and policed at coal plants.

It will be hard to take seriously any new efforts to curb pollution as long as existing technologies like scrubbers are idle because of the costs involved.

While China is keen to shift away from coal-fired power by using more natural gas, nuclear and renewables, the cost advantage of coal remains compelling.

Converting coal to an energy value such as million British thermal units (mmBtu) shows that coal generation ranges around $3 to $4 per mmBtu, depending on the coal quality and boiler efficiency, while spot liquefied natural gas is currently around $18 per mmBtu.

Improving the quality of coal used will lower pollution, but again is likely to increase costs and also require modifications to boilers designed to run on poor quality coal.

China imported 267 million tonnes of coal in 2013, with 39.7 million tonnes of this being classified by customs as "other coal," which is mainly low-rank fuel from Indonesia.

China also has plans to add about 106 gigawatts of new coal capacity in the next five years, much of it designed to run on the cheaper, low-quality grades.

The trend, not only in China, but elsewhere in Asia is to plan coal capacity based on poorer quality fuels, rather than higher-value coal of the type most commonly exported by Australia.

Improving coal quality will reduce pollution, but this will require a change of mindset and regulation by utilities and authorities.

Plans to improve pollution by shutting down excess capacity in heavy industries such as steel may also not be as successful as hoped.

The government has said that 27 million tonnes of steel capacity will be closed this year, out of a capacity in excess of 1 billion tonnes.

Shutting down a quarter of one percent of capacity isn't going to make much difference from a pollution perspective.

It's clear China faces huge challenges to wean itself off coal use, both in power generation and in industry, but it can take steps immediately and longer-term to help mitigate pollution.

Enforce the use of scrubbers, close older coal and industrial plants and police existing environmental regulations are the short-term steps.

Longer term, China will have to decide if can afford the cost of moving away from coal power.

(Editing by Ed Davies)