At the vast industrial complex of Ta Shan, in northern China, the coal miners’ afternoon shift change happens between 2 p.m. and 3 p.m. Miners masked in black grime pile into the back of a pickup for the ride back to the barracks—a low narrow building with a group shower and a changing room, where soiled towels hang from banged-up metal locker doors. Wearily they shed their work clothes, shower, dress, and mount aged scooters for the long ride to their housing towers. Outside a gang of eight laborers toils at the bottom of a pit, installing a new sewage line. Everything is covered in fine black grit. Smog blankets the sky, and the sun is just a rumor.

The Ta Shan mine is part of the “Ta Shan Circulated Economic Park,” a conglomeration of industrial facilities about 20 miles south of the city of Datong, in Shanxi Province, China’s coal heartland. The Economic Park, in turn, is contained within the even bigger Jinbei coal cluster that stretches across much of northern Shanxi. Owned by Datong Coal Mine Group (“Tongmei” in transliterated Chinese, which loosely means “Unity Coal”), the Park comprises coal and iron mines, the Ta Shan Power Plant, which includes a pair of 600 megawatt coal-fired boilers, a methanol plant, a sewage treatment plant, chemical plants, its own railway, and a factory to make bricks from gangue, the nonflammable material that encases coal in ore.
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Under continuous construction since 2003, Ta Shan is touted as a new, environmentally friendlier model for the Chinese coal industry. Excess heat from the power plant is used to heat employees’ apartments, while fly-ash (the residue from burnt coal) is recycled as raw material for the cement plant. One plant’s waste becomes input for a neighboring facility in “a garden-like new mining area,” according to the Tongmei website, that “beautifies the environment, clarifies the air, reduces pollution, and … creates a clear, comfortable and beautiful working environment for the employees.”

To a Western eye there is nothing garden-like about Ta Shan. Shoved up against the flank of the Luliang mountain range, it is a blasted plain of smokestacks, huge silos, polluted streams, and savaged earth. Enormous towers for high-voltage electricity transmission march into the hazy distance like giant skeletal robots. It’s not surprising to learn that Ta Shan was the site of one of the deadliest accidents in China’s exceedingly deadly history of mining disasters: In September 2008, not long before the new coal mine was completed, 262 people were killed when dam holding back iron ore tailings burst and the toxic sludge overwhelmed a village downstream.

Lunchtime at Datong’s Tong Xiu coal mine in Ta Shan near Datong.Photograph by Adam Dean—Panos Pictures for Fortune

This vast industrial complex represents the Chinese government’s long-term energy strategy. In response to the country’s environmental crisis, the central government plans to consolidate its far-flung coal industry, creating enormous “coal bases” like Ta Shan, where, in theory, pollution can be contained, waste can be recycled, and miners’ lives can be safeguarded. The problem with this vision is that, like Tongmei’s glowing description of Ta Shan, it doesn’t capture the full environmental havoc that these coal clusters will wreak, both on the surrounding areas and on Earth’s climate.

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China’s economic miracle has been fueled by coal. The black mineral provides around three-quarters of the country’s primary energy, and China burns nearly as much coal every year (more than 4 billion tons) as the rest of the world combined. Low-cost power has fueled the steel mills and construction cranes and electronics factories that drive the country’s export-led economy, while also providing electricity to run the air conditioners, refrigerators, and flat-screens of its nascent middle class. China is the world’s largest producer and consumer of coal, and in recent years it has provided a coal-hungry market for imports from Australia, Indonesia, and, potentially, the United States, where big coal producers like Peabody Energy and Arch Coal are looking to Asian markets to replace dwindling demand in their home market. (For more on Peabody Energy and the future of the U.S. coal industry, read this story on Big Coal’s last stand.)

But China’s insatiable appetite for coal has brought on environmental, economic, and public health costs that are no longer supportable. The big eastern cities like Beijing, Shanghai, and Hangzhou are plagued with crippling smog that, according to a study sponsored by Greenpeace, causes 250,000 premature deaths every year. Last December, coal-smog actually shut down Shanghai’s busy, modern international airport, Pudong, when visibility dropped below acceptable levels for takeoffs and landings.

A worker looks over a conveyor moving coal through the An Tai Bao open pit coal mine A veil of coal dust on the first of May: A worker looks over a conveyor moving coal through the An Tai Bao open-pit coal mine near Shuozhou, China.Photograph by Adam Dean—Panos Pictures for Fortune

Long tolerated by citizens and by the foreigners who have flocked to Shanghai and Beijing to get in on the China boom, air pollution has passed the point of acceptance. At the annual Coaltrans conference, in Shanghai in April, more than one executive commented that, “You can’t pay people enough to live in Beijing anymore.” Multinationals in China are having trouble filling vacant jobs. “Forget about raising a family here,” remarked an Australian expat who has decamped to Singapore.

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As dire as the environmental crisis has become, the business emergency facing China’s unruly coal industry is equally troubling to coal producers.  Economic growth has cooled, as worldwide demand for steel flattens and the government tightens controls on easy money. Slower industrial activity means less demand for power, but China’s coal producers—which include gigantic, mostly state-owned mining conglomerates like Tongmei and Shenhua Group, as well as an untold number of small, independent, often unlicensed mines—have not adjusted their output accordingly. Long accustomed to ever-rising demand (and, to a large degree, insulated from market forces), the Chinese coal industry has known only expansion: production rose from about 1.5 billion tons in 2002 to more than 4 billion in 2012.

Prices, naturally, have suffered. Coal spot prices at Newcastle, Australia, the world’s largest thermal coal exporting terminal, dropped from a monthly average of $142 per metric ton in January 2011 to under $80 in March 2014.  Recent analysis by Goldman Sachs concluded that miners now lose 15% on every ton of coal they sell. In the coal-mining region of the interior, which encompasses the provinces of Xinjiang, Shanxi, and Inner Mongolia, unsold coal has begun to pile up outside mines, and hundreds of small, inefficient mines, battered by low prices and tightening government regulations, have shut down.

But even as domestic supplies outstrip demand, imports to supply the coastal cities continue because transportation routes from the interior are constricted. China’s coal industry is faced with a period of restructuring and modernization unseen since the economic reforms that followed the Cultural Revolution.

A worker sweeps coal dust in front of a billboard A worker sweeps coal dust in front of a billboard outside the entrance to the Datong Coal Mine Group’s (Tong Mei) Tashan Power Plant complex near Datong, China. The message is “Build Up Tong Mei & Build Up New Life.”Photograph by Adam Dean—Panos Pictures for Fortune

Like the challenges the industry faces, the government’s response is two-pronged—even contradictory, some would say. On the one hand, Beijing is imposing a forced restructuring on the industry, shutting down unlicensed mines and announcing limits to future consumption. On the other, it is embarking on a massive coal infrastructure building campaign that will transform the country’s energy landscape—and enable the continued growth of coal-energy production.

Already, the National Energy Administration has announced the closure of more than 1,700 small, inefficient mines in the next year, while planning up to 70 new coal-fired plants, most of them at large coal bases like Ta Shan. In the population centers of the coast, coal is being phased out: coal use in Hebei, the province that surrounds Beijing, will be reduced by half by 2017, the government says.

That power generation is not vanishing, though; nor is it, for the most part, being taken over by clean energy sources, even though China is now the world leader in investment in renewable energy. It’s merely being moved west, to “mine-mouth plants” like the ones at Ta Shan.

“We will create multi-function power supply centers in the west, where power plants will use clean coal to provide power to the coastal cities,” said Li Haofeng, the deputy director general of the Coal Industry Section of China’s National Energy Administration, speaking at the Shanghai coal conference in early April.

A farmer talks on the phone after working in the fields A farmer talks on the phone after working in the fields in front of the Shentou coal-fired power plant and transmission lines near Shuozhou on May 1, 2014.Photograph by Adam Dean—Panos Pictures for Fortune

To move all that electricity from the interior of the country to the coast, Beijing will invest nearly half a trillion dollars in ultra-high-voltage transmission lines built along west-to-east “power corridors.” Earlier this year the world’s largest UHV line started transmitting electrons from Hami, in Xinjiang Province, more than 1,500 miles east to Shanghai.

Locating these industrial complexes China’s vast hinterland may make the skies over Beijing and Shanghai bluer, but it won’t do anything about China’s overall pollution problems. And in terms of carbon emissions and water constraints it could make things much, much worse.

Representing arguably the largest fossil-fuel development program in the world, China’s coal cluster program will encompass at least 14 centers spread out from Jinbei, in northern Shanxi Province (which includes the Ta Shan complex), to Lianhuang, in Anhui Province, near Shanghai in southern China.  (Much of the detail on the coal clusters was first reported by William J. Kelly in Inside Climate News.)  The largest, the Xinjiang cluster in the far western desert, near the border with Kyrgyzstan, covers nearly 14,000 square miles—an area greater than New Jersey and Rhode Island combined.

The three bases in Shanxi, where I recently traveled, are spread across a combined 13,600 square miles, which is roughly the size of Israel. Called Jinbei, Jinxhong, and Jingdong, these three clusters will produce a total of 735 million tons of coal a year—nearly as much as the entire U.S. production in 2013.

Much of this coal, the government says, is not for burning. While they will supply a large share of China’s urban electricity, to a large degree the coal clusters are being built to convert coal into other forms of energy—synthetic natural gas, coal-based gasoline, chemicals, and fertilizer. That’s in addition to coalbed methane, a gas captured in association with coal deposits, which already powers the bus and taxi fleet in Taiyuan, the capital of Shanxi Province.

These coal-to-liquids and coal-to-gas projects form the keystone of China’s 21st century energy strategy.  Simply put, China has plenty of coal but little petroleum. (The company is trying to unlock its reserves of shale gas, but these are trapped in “tight,” or geologically challenging, formations, and drilling technology in the country is at least a decade behind the U.S.).

China is the world’s second-largest importer of oil, behind the U.S., buying more than 5 million barrels of oil a day. Much of that supply squeezes through the Strait of Malacca, the narrow passage between Malaysia and the Indonesian island of Sumatra that forms the gateway between the South China Sea and the Indian Ocean. Chinese strategists are keenly aware that a military attack, an act of terrorism, or an embargo that shut down the Malacca waterway would quickly squeeze the country’s energy supply. Thus, building vast chemical complexes to convert coal to liquid fuels is more than an economic move; it’s a geostrategic imperative. In January, China’s National Energy Administration announced a program to deliver 50 billion cubic meters of synthetic gasoline from coal by 2020— enough to supply one-eighth of the country’s gas demand.

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Unfortunately the price will be high.  For one thing, it takes a lot of coal to make liquid fuel: about half-a-ton to produce one barrel. And converting the raw coal to liquid, which involves gasifying the coal by heating it without oxygen at super high temperatures, and then liquefying the gas via something called the Fischer-Tropsch process, takes a lot of energy and a lot of water.  A 2011 study by the National Resource Defense Council, drawing on earlier data from the RAND Corporation, found that the carbon emissions from gasifying coal, combined with the carbon emitted when the gas is actually burned for transportation or heating or electricity, doubles the total emissions that would be released from just using conventional gasoline.

Meeting the NEA’s coal-to-gas targets for 2020 would release an additional 12 billion tons of CO2 into the atmosphere, and would far outstrip the water supplies available in the arid western provinces where the coal clusters are to be located. Many Chinese officials and scientists are confident that the majority of this smokestack carbon will be separated, captured, and stored permanently. But carbon capture and storage technology, which has been in the R&D phase for more than 20 years, remains uneconomical at scale.

The NRDC estimates that, if all the plans for coal clusters are carried out, China will build hundreds of new coal-fired plants in the coming decades, adding some 558 gigawatts of capacity—nearly three-quarters of the country’s total capacity in 2011. And the most recent Five-Year Plan calls for the addition of 860 million tons of coal mined each year, pushing annual production north of 4.1 billion tons a year.

That’s why, despite the falling price of coal and the industry’s current struggles, despite the government’s drive to reduce coal stockpiles and cap coal consumption, and notwithstanding a spate of recent analyses from international organizations, such as Greenpeace’s report “The End of China’s Coal Boom,” few people are betting on a major contraction in the industry in the next 10 or 20 years.

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On a recent Sunday outside Datong, at the northern tip of China’s coal heartland, three old coalmen took the air outside their apartments, next to the Qing Ci Yao mine. Dressed in Mao-era blue serge jackets and dark caps, they enjoyed a rare bout of sunshine. The sky was washed blue by recent rains. Altogether, they told me, they totaled about a century-and-a-half underground.

I was on a two-week “coal safari,” from the industrial heartland of Guangdong, near Hong Kong, to Shanghai and Hangzhou, and on north through Shanxi Province. I wanted to see how the upheaval in the coal market is affecting ordinary Chinese people, and what the government’s coal strategy looks like on the ground. I’d flown from Shanghai to Datong, a coal city of 5 million people near the Great Wall and the border with Inner Mongolia. Despite the coal slowdown, the city is surrounded by high-rise condo towers under construction. On the road west, from downtown, we’d seen a donkey cart negotiating the traffic of Toyotas, Volkswagens, and Hyundais, and a pen of chow dogs for sale along the road.

Traffic is seen in front of a construction site in New Ping Wang Traffic is seen this past April in front of a construction site in New Ping Wang, a housing community for workers from the Datong Coal Mine Group (Tongmei) in Datong.Photograph by Adam Dean—Panos Pictures for Fortune

Liang Sheng Cai, who spent “four or five decades” working deep under ground, now has three sons and one daughter who work for the mining company. He lives in the “Harmony Village,” a cluster of mustard-colored apartments just outside the mine gates; like many Chinese mines, Qing Ci Yao is a self-contained community, with schools, housing, and shopping all within walking distance. He has never been to Beijing. Liang’s life has been contained within this small world.

“This is a local mine,” he told me through a translator. “The benefits, the revenue, go to the local region—not like the big state-owned mines.”

It is also the sort of operation that the central government is determined to eliminate: small, outmoded, and inefficient. Production has risen slowly, from about 1.2 million tons in 1999 to 1.5 million in 2013.  Within the last decade the provincial government has closed most of the smaller mines in the area; Qing Ci Yao is surely on the list.

A shepherd drives his sheepA shepherd drives his sheep past the Datong No. 2 coal-fired power plant.Photograph by Adam Dean—Panos Pictures for Fortune

“My children had no other choice” but to go to work in the mine, Liang said. Now, times are tough: recently miners’ pay has been in arrears.  “They just got paid for February. This mine no longer works well. Not only can they not get paid, but also young people can’t get jobs here anymore. The mines are fully staffed.”

Up at the mine, a front loader dumped coal from a 30-foot pile into trucks that rumbled down a road covered with oily black sludge. A pair of ancient bulldozers that could have served in the Great Leap Forward, in the 1950s, stood abandoned in a gravel lot. On the hilltop above the mine stood a quartet of wind turbines, turning slowly in the breeze like harbingers of a cleaner future.

Cao Guo Zhang, the coal quality section chief at Qing Ci Yao, has an optimistic view of that future. “This mine could run for 50 more years, maybe,” he told me in his modest office, with glass sample jars of powdered coal and a 2000-era computer on the desk. Then he flashed a broad grin. “Or it could shut down next week. No one is sure.”

Workers are seen in a coal yardWorkers are seen in a coal yard at the Datong’s Yukou coal mine on April 30, 2014.Photograph by Adam Dean—Panos Pictures for Fortune

That uncertainty extends to An Tai Bao, a huge mining complex that, when it opened in the late ‘80s, was the world’s largest open-pit mine. It is part of the even more expansive Pingshuo coal district, southwest of Datong, a region of hundreds of square miles where “coal cities” provide employment for thousands.

Along with a local guide and a Shanghai-based interpreter, I bribed my way past An Tai Bao’s front gate and drove toward the center of the mine, until we were stopped at a second checkpoint and told we could go no further.  We proceeded on foot to a crusher where coal was separated from raw ore and carried by conveyors hundreds of meters to a conical processor where it was sorted by the size of the rocks. An endless stream of the black mineral rattled past, gleaming dully. Beyond the machinery, the bare crater of the pit mine vanished into the smog, which glowed an infernal pinkish-gray in the afternoon light.

Villagers scavenge for discarded, low-grade coal Villagers scavenge for discarded, low-grade coal being dumped near the Datong Coal Mine Group’s Mei Yukou coal mine.Photograph by Adam Dean—Panos Pictures for Fortune

Shutting down small independent mines is one thing; corralling the big producers like Shenhua Group, Tongmei, and the China Coal Industry Export and Import Corp., part owner of An Tai Bao, is another. An Tai Bao actually started out as a joint venture with California oil and gas major Occidental Petroleum, whose owner, Armand Hammer, wearing a full-length mink coat and a beaver hat, attended the initial demolition that opened the mine in 1986, according to Hammer biographer Steve Weinberg.  Occidental extracted itself from the money-losing project in 1991, but An Tai Bao has been producing coal ever since, with little regard for the ups and downs of the market.

Huge operations like this make up at least 90% of China’s coal industry, and there is little indication that they have been responsive to the central government’s efforts to rationalize the industry.  Tian gao, huangdi yuan, goes the proverb: “Heaven is high and the emperor is far away.”

“There’s a lot of new supply still coming on, mainly from consolidation, from the bigger mines with larger capacities,” Ming Chang, a young British-educated trader whose family runs Fen Wei, a coal consultancy based in Taiyuan, told me over dinner one evening. “And none of them are willing to reduce their production. No one wants to be the first to take the bite. ‘I’m waiting for the first idiot,’ they say. And so far not many idiots have appeared.”

Ultimately the planners in Beijing cannot have it both ways: either coal production and consumption must be limited, or the industry will continue clanking along like the conveyors at An Tai Bao, producing coal for which, at least for now, demand is shrinking. Coal-to-gas conversions and chemical processes, at clusters like Ta Shan, will soak up some but likely not all of the excess capacity. In Shanxi province, coal has a momentum of its own, and Beijing is far away.

An alternate version of this story ran in the July 21, 2014 issue of  Fortune.