The Chinese government is tightening its "dual control" policy, aiming to regulate energy-intensive and high-emitting projects. On August 17, the National Development and Reform Commission issued the Barometer of Progress in Achieving the Targets of Controlling Energy Consumption and Intensity in Different Provinces in H1 2021. According to the document, rather than falling, energy intensities rose for Qinghai, Ningxia, Guangxi, Guangdong, Fujian, Xinjiang, Yunnan, Shaanxi and Jiangsu provinces in the first half of the year. Besides, the decrease in energy intensities for other 10 provinces was behind schedule. All this indicates grave situation for China’s energy conservation efforts. The principles of the "dual control" policy are to strictly control energy intensity, reasonably control total energy consumption and appropriately increase management flexibility. Thus it can be expected that the 9 provinces seeing increased energy intensities will be subject to stricter energy consumption regulation. On September 16, the National Development and Reform Commission issued the Plan for Improving the Policy of Controlling Total Energy Consumption and Energy Intensity, pointing out that for the "14th Five-Year Plan" period, there are a large number of energy-intensive and high-emitting projects that are planned to come online or have been put into production, which means significant additional energy consumption and will seriously hinder the progress in achieving the target of controlling energy intensity and total energy consumption. Thus curbing the blind development of such projects has become the top priority as the government works to control energy intensity and total energy consumption and to achieve the goals of "peaking carbon dioxide emissions" and "carbon neutrality". Local governments also regulate energy consumption by introducing policies designed to limit power consumption and ensure orderly power use.
Under the "dual control" policy, many industries are required to limit power consumption, restrict production or suspend production, including deformed steel bar, yellow phosphorus, electrolytic aluminum, industrial silicon, building materials and coal power. Product prices in these industries are soaring due to tight supply. As leading firms suspend or reduce production, the imbalance between supply and demand will worsen. Thus it is expected that more energy-intensive products will be in short supply and their prices will rise in the future.

Coal shortage is also a reason behind the restriction on power consumption. On the supply side, this year domestic coal producers have to reduce production as a result of the environmental inspections. Due to the tension between the two countries, China stopped importing coal from Australia starting from December 2020. And imports from Mongolia have also declined owing to the resurgence of the COVID-19 pandemic. On the demand side, coal demand rises as a result of increased power consumption amid accelerated industrial production in response to soaring exports. With a supply deficiency, the coal inventory level is at a historical low. Coal prices have skyrocketed since August, which has caused losses on some power plants and forced them to suspend production. This in turn leads to short power supply. Presently, only very limited amount of electricity consumed in China is derived from photovoltaic and wind power. Autumn and winter are traditional dry seasons, which means hydropower cannot be counted on. So, even without considering the "dual control" policy, domestic firms will still suffer power shortage, which justifies the government’s policy of limiting power consumption.

Why is the "dual control" policy tightened? There are three reasons. First, the tightened policy is not a result of the government’s attempt to tighten regulation, but due to its attempt to slow total energy consumption as it is reaching the quota. Second, as the task of achieving the goals of "carbon neutrality" and "peaking carbon dioxide emissions" is urgent, preliminary results should be achieved in the first year of the "14th Five-Year Plan" period. Finally, by limiting production in energy-intensive sectors, the problem of power shortage can be alleviated.

Implications of the policy: In the short term, the supply of raw materials may become tight, which will further push up raw materials prices. This will increase cost pressure on midstream and downstream chemical companies, thus inhibiting their demand. And this situation is unlikely to shift in the short term. In the long run, the policy will help improve energy efficiency and facilitate the transition to green economy. Meanwhile, it will help eliminate obsolete production capacities in many industries. Thus firms developing environmentally friendly technologies and possessing core competencies will benefit from the policy.