China has an environmental problem which the government has been aware of for years. Polluters have been able to dump massive amounts of toxic wastes into China’s air and water for many years with no repercussions because the mandate from Beijing was for economic growth at all costs.

But that is all changing. China now has an environmental movement among its people which is in its infancy, but growing quickly. The interesting facet of China’s nascent environmental movement is that the central government in Beijing is actually listening to the environmentalists, at least to a certain extent. They are cracking down on some of the worst polluters and shutting them down.

Beginning in late 2008, Beijing began a crackdown on numerous illegal, dangerous coal mines which also happened to be the biggest polluting mines. Many of these operations have been shut down permanently.

Many investors may think to themselves – so what? But these actions do have serious investment implications as the shutdown of these facilities has shown that China is having difficulties in sustaining elevated levels of commodities production, such as coal production, after these shutdowns occurred.

As is most often the case with commodities, it comes down to supply and demand. The actions by the Chinese government has reduced the supply of coal in China, while the demand has not changed. This has led to – you guessed it – increased prices for coal.

Coal prices have jumped to their highest in a year thanks to the drop in Chinese output. This has forced China to greatly increase their demand for imported coal.

Imports of coking coal rose to 12.6 million tons in the first half of 2009, up from 1.1 million tons in the same period last year. Imports of thermal coal were 24 million tons in the first half of 2009, against exports of 4 million tons in the same period last year.

The increased demand for coal from China really caught major Australian coal miners such as BHP Billiton off guard. Coal mining companies were braced for a prolonged period of low prices because of low demand from traditional buyers in Japan and South Korea.

The degree of tightness of the coal market was evidenced in August when American coal company Consol Energy shipped the first cargo of US coking coal into China in five years.

The price increases have been particularly noticeable in the price of coking coal, which is used in steel-making and is scarcer than thermal coal which is used to fire power plants.

Spot prices for coking coal surged recently to $160 a ton, up nearly 40% in three months and to the highest level in 12 months. This price is nearly 25% above the price at which annual contracts were settled for 2009-2010. Thermal coal spot prices recently were at $75 a ton, up 25% from the March low of $60, but still well below last year’s record of more than $180 a ton.

Investors can easily participate in the rally in coal and coal stocks. There are two broad-based coal ETFs which cover coal companies – VanEck MarketVectors Coal ETF (NYSE: KOL) and Invesco PowerShares Global Coal ETF (NASDAQ: PKOL).

Investors can also purchase individual coal stocks including Consol Energy (NYSE: CNX), which had that recent coal shipment to China and Peabody Energy (NYSE: BTU), which has some large coal mines located in Australia.

Finally, investors can also buy the large global miners such as BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RTP).