China currently emits more CO₂ into the world’s atmosphere than any other country (but not more per capita). It faces international pressure to control these emissions because they are a primary cause of climate change, but China claims it should not be held responsible for CO₂ “export emissions” that can be attributed to the production of items for export to the United States and other nations.

It is an accepted fact that China’s exports are responsible for large amounts of greenhouse gas emissions; in 2005, carbon dioxide emissions from China were estimated at 1700 Mt (million metric tons, compared to around 30,000 Mt emitted by humans due to fossil fuels each year), or 6 percent of global emissions from fossil fuels, which is unusually high, as US exports are about 500 Mt. Reacting to international demands to reduce greenhouse gases, China has claimed that limits on carbon dioxide emissions would hamper both economic development and its efforts to relieve poverty. It has also emphasized that per capita emissions ranked only seventy-third in 2004, but this ranking is higher than some developed countries, and it is growing rapidly. China also argues that its historical, cumulative contribution to carbon emissions is low, and while this is true on a per capita basis (China ranked ninety-second in cumulative emissions from 1900 to 2004), it is fourth in cumulative emissions since 1990. A final argument against mandated emissions limits is related to the role of exports (that is, products made in China for sale elsewhere): China claims that it should not be held responsible for emissions that can be attributed to the production of items for export to the United States and other nations.

Gauging the contribution of exports to China’s carbon dioxide emissions is not easy, but they have clearly risen dramatically over the past decade. A 1997 study by the ecologists Ahmad and Wyckoff found that 15 percent of China’s emissions were “embodied” in products to be exported to other countries (that is, they were the byproduct of the manufacturing of toys, electronics, shoes, and other exports, while only 3 percent of China’s domestic emissions were imported. By 2001, further studies found that the figures had increased to 24 percent and 7 percent respectively, showing that a larger volume of goods was being traded. But the export amount is still much higher than that of imports, as one would expect from the current balance of trade between China and, for example, the United States.

Export Growth

In 1987, 12 percent (230 Mt) of China’s domestic carbon dioxide emissions were created during the production of exports; by 2005, this figure steadily had risen to 33 percent (1700 Mt). These numbers closely mirror the rise of exports as a percentage of China’s gross domestic product (GDP), which suggests that export products are no more or no less carbon-intensive than products for domestic consumption.

Of China’s 1700 Mt of export emissions in 2005 (which was comparable to the 1850 Mt total emissions of Germany, France, and the United Kingdom), 22 percent came from exports of electronic goods, 13 percent from metal products, 11 percent from textiles, and 10 percent from chemical products. The recent surge in export emissions can be attributed to value-added products, which is evident when compared to previous years. In 1995, for example, the breakdown was very different: 19 percent textiles, 13 percent electronics, 12 percent machinery, 10 percent chemicals, and 7 percent metal products. Emissions embodied in primary product exports—such as minerals, raw timber, raw chemicals, and basic metals—decreased from 20 to 24 percent during the years from 1987 to 1992 to only 13 percent during the years from 2002 to 2005, showing how the Chinese economy has evolved into producing higher value-added items, such as electronics, which are more valuable as a product than their parts combined.

International attention to China’s role in causing—and mitigating—climate change shows how important trade is in the environmental profile of many countries. In general, small countries have larger shares of domestic emissions from the production of exports (for example, most European countries have a 20 to 50 percent share) while relatively self-sufficient countries have lower shares (such as the United States with 8 percent, Japan with 15 percent, India at 13 percent, and South Korea, 28 percent). China does not fit into this categorization because it is a large country with a large share of exports contributing greenhouse gases; its exports therefore play a more important role in its environmental profile.

Environmental Implications

Experts question whether the rapid growth of exports in China (or any other country) comes at the loss of production in developed countries, a phenomenon termed “carbon leakage” or the “pollution haven hypothesis.” The Intergovernmental Panel on Climate Change (IPCC), the international group that represents the consensus on climate change science, has not rated carbon leakage as very important, because its definition of leakage only considers marginal emission changes in nonindustrialized countries that have been caused by climate policy in industrialized countries. It remains unlikely, however, that this is the case in China, where the increase of emissions is most likely a byproduct of China’s other advantages for production—in particular, lower environmental standards and lower labor costs.

A large proportion of goods responsible for China’s export emissions go to the developed world: approximately 27 percent to the United States, 19 percent to the twenty-seven European Union countries, and 14 percent to the other remaining Annex B countries, mainly Japan, Australia, and New Zealand. (Annex B countries are those industrialized nations that have agreed to emissions caps according to the Kyoto Protocol, a binding intergovernmental agreement signed in 1992.) While approximately 40 percent of China’s export emissions go to other developing nations, flows to these countries may displace their own domestic production or production from another trading partner that might have produced goods with less energy intensity than China. (Energy intensity is defined as the energy required per unit of economic output, or energy demand per unit of GDP.) This may be significant because production is more polluting in China than in many other countries due to inefficient systems and a coal-dominated electricity supply. The apparent low cost of Chinese production comes with other consequences: damage to the Chinese environment and increased energy emissions that contribute to the international risk from global warming. Some energy experts point out that if the Chinese could decrease the cost of the production of environmentally friendly items such as energy-efficient lighting or wind turbines, the effect of emissions would be outweighed by the beneficial impacts of their use.

Potential Solutions

A possible approach to solving the problem of a huge amount of export emissions would be to use monetary or tax policies to discourage large-volume export commodities such as electronics, machinery, metal products, and textiles. But these higher value-added products contribute to China’s economic growth more than primary products like natural resources, so in a time of economic challenge, this could lead to a loss in competitiveness and higher costs to consuming countries through inflation. Over the long term, it is in the interest of both the West and China to lower the energy and carbon intensity of its production practices, and to cooperate on low-carbon research and development.

While China benefits from export growth in terms of its GDP and balance of trade, consumers in developed countries also benefit. For this reason, there are efforts to hold consumers in developed countries at least partially accountable for emissions occurring because of the demand for low-priced goods. If consumers were to take some responsibility for China’s export emissions, it is conceivable that China would be more willing to play an active role in post-Kyoto climate commitments. And if China does not want to be held wholly responsible for its export emissions (as it claims), then it must at least be held responsible for what it imports. This could become important in the future, as China shifts to more of a consumption-driven economy.

Although one-third of China’s carbon dioxide emissions result from the production of exports, the remaining two-thirds need to be addressed as well. Inefficient, coal-dominated electricity production is the major cause of China’s carbon dioxide emissions, accounting for 44 percent in 2005. Urgent improvements are needed in this sector. Increasing efficiency in manufacturing as well as domestic and commercial building and in transportation is essential. Other solutions are expanding renewable energy generation and investing in new technologies such as carbon capture and sequestration (CCS), which seeks to develop ways to capture, purify, and store carbon dioxide instead of releasing it and contributing to climate change. Allowing parties to the Kyoto Protocol to shoulder some of the incremental cost of CCS as part of their commitment to decrease greenhouse gas emissions would be a first step, as this would allow importers of China’s carbon-intensive, emissions-producing goods to invest in lowering the carbon intensity of what they buy.

Christopher WEBER

Further Reading

Ahmad, N., & Wyckoff, A. A. (2003). Carbon dioxide emissions embodied in international trade of goods. OECD Science, Technology and Industry Working Papers. Paris: Organisation for Economic Co-operation and Development. Retrieved February 13, 209, from http://masetto.sourceoecd.org/vl=3507516/cl=16/nw=1/rpsv/cgi-bin/wppdf?file=5lgsjhvj7ld6.pdf

International Energy Agency. (2007). World Energy Outlook 2007. Paris: Author.

Intergovernmental Panel on Climate Change. (1996). Revised 1996 IPCC Guidelines for National Greenhouse Gas Inventories (Vols 1–3). Author. Retrieved February 20, 2009, from, http://www.ipcc-nggip.iges.or.jp/public/gl/invs1.html

Peters, G. P. & Hertwich, E. G. (2008). CO2 embodied in international trade with implications for global climate policy. Environmental Science and Technology, 42, 1401–1407.

Peters, G. P., Weber, C. L., Guan, D., & Hubacek, K. (2007). China’s growing CO2 emissions—a race between increasing consumption and efficiency gains. Environmental Science and Technology, 41, 5939–5944.

Streets, D., Yu, C., Bergin, M., Wang, X., & Carmichael, G. (2006). Modeling study of air pollution due to the manufacture of export goods in China’s Pearl River Delta. Environmental Science and Technology, 40, 2099–2107.

Weber, C., & Matthews, H. S. (2007). Embodied environmental emissions in US international trade 1997–2004. Environmental Science and Technology, 41, 4875–4881.

World Resources Institute. (2007). Climate Analysis Indicators Tool (CAIT) Version 5.0. Washington, DC: Author.

Economic growth, especially as a result of investment in heavy industry, has rapidly increased China’s share of global energy use. Weak enforcement from Beijing and local authorities who appear to opt for profit over environmental efforts emphasize the need for a stronger energy policy in twenty-first-century China.

Between 1978 and 2000, the Chinese economy grew approximately 9 percent annually while energy demand increased 4 percent. At the turn of the twenty-first century, China accounted for 10 percent of global energy demand but met 96 percent of this demand with domestic energy supplies. After 2001, however, economic growth continued apace, but changes in the structure of the economy pushed energy demand up. By 2006, China’s share of global energy use swelled to over 16 percent, forcing the country to rely on international markets for more of the oil, gas, and coal it consumes.

This fundamental shift in China’s energy profile has created both shortages at home and market volatility abroad and raised questions about the sustainability of China’s growth curve. According to the International Energy Agency, China is now the world’s second-largest energy consumer and has likely become the leading source of greenhouse gas emissions.

Evolution of Energy Demand in China

Decades of state planning and ideological aspiration prior to reform in the late 1970s had distorted China’s energy demand profile. Rather than embracing a development strategy compatible with its natural endowments as Japan, Hong Kong, Taiwan, and others had done, Chinese leaders ignored a comparative advantage (that China is rich in labor but poor in capital, arable land, and technology) and dragged China—kicking, screaming, and sometimes starving—toward Soviet-style industrialization. For thirty years, resources sporadically were shifted out of agriculture and into energy-intensive industries like steel and cement. Data from within China claims that between 1949 and 1978, industry’s share of economic output grew from 18 to 44 percent, and the amount of energy required to produce each unit of output tripled.

This command-and-control fiasco resulted in severe inefficiency. In 1978 leaders began to unleash China’s potential. Beijing reformed agricultural production targets and let prices rise, with dramatic results. Farm output increased, and the early 1980s saw rural residents with more time on their hands, cash in their pockets, and freedom to use it as they chose. Much of this new wealth was invested into township and village enterprises (TVEs) set up to exploit what China was best suited for: labor-intensive light manufacturing.

Reform also brought changes within heavy industry, which reduced the energy intensity of Chinese growth. Economic incentives—such as the right to keep profits—were introduced, and awareness of bottom-line profits made enterprises focus more on top-line expenses, including energy. As enterprises were becoming more aware of the impact of energy costs on profitability, their energy bills were growing as a result of the partial relaxation of oil, gas, and coal prices. The introduction of limited competition for both customers and capital, not just from other state-owned enterprises (SOEs) but also from a growing private sector, made energy cost management all the more important. Domestic competition was accompanied by a gradual integration with world markets; lower trade barriers not only exerted pressure on SOEs from energy-efficient foreign companies but also allowed them to acquire the more energy-efficient technology their competitors enjoyed. China’s small existing base of modern plants and equipment enabled it to absorb new technology quickly, significantly improving the efficiency of the country’s capital stock.

By 2000, Chinese economic activity required two-thirds less energy per unit of output than in 1978. Energy intensity improvement on this scale was unprecedented for a large developing country, and it meant that in 2001, China accounted for 10 percent of global energy demand rather than the 25 percent that had been projected based on its 1978 energy performance.

Investment-Led Energy Surprise

At the start of the new millennium in 2001, China’s leaders expected the energy intensity improvements that had been taking place since 1978 to continue. Most energy forecasters at home and abroad assumed that the structural shift away from energy-intensive heavy industry would persist; at least, no one expected the evolution to reverse quickly.

In 2001 both the Chinese government and the International Energy Agency (IEA) predicted 3 to 4 percent energy demand growth between 2000 and 2010.

In actuality, both wildly missed the mark. The economy grew much quicker than anticipated from 2001 to 2006, but the real surprise was a change in the energy intensity of economic growth: Energy demand elasticity (the ratio of energy demand growth to gross domestic product, or GDP, growth) increased from 0.4 (during 1978–2001) to 1.1 (2001–2006). In 2006, energy consumption in China grew to 16 percent of global demand, four times faster than predicted. And yet on a per capita basis, China’s energy demand remains one-sixth that of the United States, triggering anxiety about how much more growth is yet to come.

This discovery not only shocked domestic and international energy markets but also prompted a fundamental reassessment of China’s energy future—and hence the world’s. In its 2007 World Energy Outlook, the IEA raised its 2030 forecast for China’s energy demand to 3.8 billion tons of oil equivalent, up from the 2.1 billion tons it had predicted in its 2002 outlook—a 79 percent upward revision. Under this scenario, China will account for 22 percent of global energy demand, more than Europe, Russia, and Japan combined, easily surpassing the United States as the world’s largest energy consumer.

What caused China’s two-decade history of energy intensity improvements to change course? Many authorities assume that the recent evolution of China’s energy profile reflects growth in consumption and transportation—for instance, air conditioning and personal cars—but this is not correct. Consumption-led energy demand will be a major force in the future, and it is already significant in absolute terms, but the main source of current growth is energy-intensive heavy industry. Industrial energy efficiency has continued to improve over the past six years; every new steel mill is more efficient than the last one. But the late-twentieth-century structural shift away from heavy industry toward light industry has reversed, and a new steel plant—no matter how much more efficient than its predecessor—uses substantially more energy than a garment factory. The IEA asserts that industry accounts for two-thirds of final energy consumption in China today, while the residential, commercial, and transportation sectors account for 12, 5, and 13 percent, respectively.

This industrial energy consumption is high by either developed or developing country standards. (See Table 1.) But when pundits express shock at how much more energy intensive China is than Japan, for example, they usually ignore the important factor of what the country makes. High energy-intensity partly reflects the role of industry in the Chinese development model, as opposed to India, which has taken a more services-heavy approach, or Japan, which has lowered its energy intensity in part by relocating its energy-intensive sectors to China. According to Chinese statistics, industry accounts for 48 percent of all economic activity in China, compared with India at 29 percent and Japan at 26 percent. So the fact that one unit of economic output requires five times as much energy in China as in Japan says more about the type of economic activity taking place in China than the efficiency with which it occurs.

Table 1 Energy demand by sector, 2005 (percent)

Sector China India Russia Brazil Japan EU-27 US World

Agriculture 4.6 7.2 2.3 4.9 0.9 2.2 1.1 2.4

Industry 63.8 52.1 38.4 41.1 38.3 32.4 26.8 37.8

Commercial 4.7 3.0 8.1 6.8 17.7 10.5 13.0 9.0

Residential 12.3 16.7 26.2 10.3 15.7 22.0 16.8 17.1

Transportation 12.8 18.5 22.7 36.9 26.9 29.8 41.4 31.5

Other 1.9 2.5 2.1 0.0 0.0 3.0 0.9 2.0

Total (million tons 890 199 417 128 348 1,249 1,546 6,893

of oil equivalent)

Note: This table excludes biomass but includes nonenergy use of energy commodities.

Source: International Energy Agency,World Energy Statistics and Balances 2007.

Increasingly, economic activity in China is slanted toward capital investment, and from an energy standpoint, the current investment cycle is different than in the past. Rather than importing, China is now producing domestically more of the energy-intensive basic products (such as steel and aluminum) used to construct the roads and buildings for which investment pays. China now accounts for 49 percent of global flat glass production, 48 percent of global cement production, 35 percent of global steel production, and 28 percent of global aluminum production. Some of this production also reflects the migration of industry from other parts of the world not only to meet domestic demand in China but also for export. Whereas China used to be a net importer, it has now become a major global exporter of steel, aluminum, and cement.

The changing composition of China’s industrial structure is also a result of competition among provinces and localities to grow GDP, tax revenue, and corporate profits. Not just Beijing but also local interests (including industrial enterprises) set the rules of competition. And regardless of who sets the rules, implementation is a local matter. Within this context of competition, short-term economic incentives—specifically low operating costs and profits—explain much of the increase in heavy industrial activity.

After-tax earnings in energy-hungry industries have been good, rising from near zero in the late 1990s to a level comparable to that of their light-industry counterparts—ranging from 4 to 7 percent in steel, glass, chemicals, and cement in recent years. With China modernizing over 170 cities of more than 1 million people, certainly there is a large domestic market for basic materials; supply was squeezed by breakneck growth after 2001. But with overcapacity arising almost as soon as the first profits come in, the ability of firms to sell surplus production in international markets has been critical to remaining profitable.

China’s energy-intensive industry enjoys low operating costs, which has allowed for rising profit margins and a dramatic growth in capacity that is at the center of China’s overinvestment in heavy industry. Local governments often provide deeply discounted land, and they often do not enforce regulations to protect air and water. Construction time is short, and labor costs are low. These benefits apply to all industries, however, they are particularly valuable in the energy-intensive sector, where capital costs are large.

Energy Prices and Environmental Costs

Energy prices in China, once highly subsidized, have gradually converged with world prices over the past thirty years. Yet, it can be difficult to accurately assess the price a specific firm pays for coal, gas, oil, or electricity. Chinese prices for raw energy commodities (including coal and natural gas), particularly in interior provinces close to resource deposits, can be significantly cheaper than elsewhere in the world. For coal, low prices result not from subsidization but rather from low extraction costs in areas isolated from international markets; as obstacles to transportation ease, coal prices will rise toward world prices. Beijing also directly controls natural gas prices, attempting to keep them competitive with the Middle East. But this approach has failed to encourage development and delivery of sufficient quantities of natural gas to meet demand, and authorities are allowing domestic prices to increase.

China’s industry increasingly receives its energy in electrical form, and reported prices of electricity are high compared with those in developing and some developed countries; only in Germany, the United Kingdom, and Japan are costs greater. However, based on conversations with Chinese business leaders and industry analysts, it is likely that many industrial enterprises do not bear the full cost provided by national average figures from the Statistical Bureau. China’s National Development and Reform Commission (NDRC) sets electricity tariffs province-by-province based on the recommendations of local pricing bureaus, which answer to local officials. While the NDRC would like to see energy pricing rationalized to reduce overall energy consumption, it is sensitive to local social and economic development concerns.

Energy prices in China have not reflected environmental costs historically. Over 80 percent of the country’s electricity is generated from coal. But at the end of 2006, less than 15 percent of coal power plants had flue gas desulphurization (FGD) systems (used to remove sulfur dioxide from emissions streams) installed and even fewer had them running. Operating an FGD system reduces production efficiency by 4 to 8 percent and therefore contributes to higher electricity prices. If all the power plants in China installed and operated FGD systems, average electricity tariffs could rise by 10 to 20 percent. Industries that burn coal directly (such as steel and cement) are subject to sulfur taxes, but these are generally too low to reduce pollution. Other air pollutants, such as nitrogen dioxide and mercury, are largely unregulated. Regulated or not, enforcement generally falls to the provincial and local governments, which must balance environmental concerns against economic growth priorities. In the absence of a strong environmental regulator, like the U.S. Environmental Protection Agency, that balance is skewed toward near-term economic growth, as industry threatens to cut jobs and tax revenue if enforcement of environmental regulations is increased.

While it is a daunting and subjective challenge to compute the external impacts of China’s penchant for heavy industry, it is important to recognize that they exist: China does not necessarily do the world a favor by overproducing. Moreover, there are other effects to be considered. A rebalanced China, better aligned with its natural endowment of labor, could be a bigger economy, grow faster, and be less prone to collapse; hence it would be a better engine of world growth. Also, heavy industry in China is less likely to attract innovation and technological change due to weaknesses in intellectual property protection and the difficulty of recovering research-and-development investments. Similarly, institutional weaknesses in regulation and enforcement of pollution controls undermine the process of finding innovative ways to remedy environmental damage.

Trevor HOUSER and Daniel H. ROSEN

Adapted from Houser, T. & Rosen, D. H. (2008). “Energy Implications of China’s Growth.” In C. F. Bergsten, C. Freeman, N. R. Lardy, & D. J. Mitchell, China’s Rise: Challenges and Opportunities (pp. 137–145). Washington, DC: The Petersen Institute for International Economics.

Further Reading

International Energy Agency (IEA) (2007). World Energy Outlook 2007. Paris: Organization for Economic Cooperation and Development. Retrieved February 16, 2009, from http://www.worldenergyoutlook.org/

Lardy, N. R. (2006). China: Towards a consumption driven growth path. Policy Briefs in International Economics 06-6. Washington, DC: Peterson Institute for International Economics.

Lieberthal, K & Oksenberg, M. (1988). Policy making in China: Leaders, structures, and processes. Princeton, NJ: Princeton University Press.

Naughton, B. (1995). Growing out of the plan: Chinese economic reform, 1978–1993. New York: Cambridge University Press.

Rosen, D. & Houser, T. (Forthcoming). China’s energy evolution: The consequences of powering growth at home and abroad. Washington, DC: Peterson Institute for International Economics.

With increasing energy demand and limited conventional energy resources, China is recognizing the need to develop renewable energy. In 2007, the consumption of renewable energy accounted for 8.5 percent of the country’s total primary energy consumption. In order to improve renewable energy development, the government has taken a series of countermeasures and has issued some related regulations.

China is one of the largest energy production countries in the world; it is also one of the largest energy consumption countries in the world. In 2007, China’s total commercial energy production reached 2.35 billion tce (ton-of-coal equivalent) among which coal production accounted for 76.6 percent, crude oil 11.3 percent, natural gas 3.9 percent, the aggregation of nuclear power, hydropower, and wind power generation 8.2 percent. In terms of consumption, in 2007, China’s aggregate energy consumption reached 2.66 billion tce, 7.8 percent more than in 2006. Of the total consumption, coal accounted for 69.5 percent, while petroleum accounted for 19.7 percent, natural gas accounted for 3.5 percent, the aggregation of nuclear power, hydropower, and wind power accounted for 7.3 percent (NBSC, 2008). The net imported petroleum reached 184.8 million tons in 2007; the rate of dependence on import reached 50 percent. As a result of increasing energy demand, the share of coal in total energy consumption was increased by 0.1 percent from 2006 to 2007.

The United States is the world's largest energy producer, consumer, and net importer. It also ranks eleventh worldwide in reserves of oil, sixth in natural gas, and first in coal (EIA, 2008c). In 2007, primary energy production in the United States reached 2.58 billion tce: coal accounted for 32.8 percent, natural gas 27.7 percent, crude oil 15 percent, NGPL (Natural gas plant liquids) 3.4 percent, nuclear electric power 11.7 percent, renewable energy including hydropower, geothermal, solar/PV, wind and biomass only 9.5 percent. Primary energy consumption reached 3.66 billion tce: coal accounted for 22.4 percent, natural gas 23.3 percent, petroleum 39.2 percent, nuclear electric power 8.3 percent, renewable energy including hydropower, geothermal, solar/PV, wind and biomass 6.7 percent (EIA, 2008b). The United States imported about 58 percent of the petroleum, which includes crude oil and refined petroleum products, that it consumed during 2007 (EIA, 2008a).

Challenges and Opportunities

China is facing many challenges concerning the production and use of traditional energy, which in turn are yielding great opportunities for expanding sources of renewable energy (Asif and Muneer, 2007). Energy, on one hand, is an important foundation for the development of China’s socio-economy. Since implementing the reform and expanding market policies in the early 1980s, the nation’s energy sector has made great achievements. Over past three decades, China’s energy supply has generally kept pace with the demands of the growing national economy.

The long-term energy bottleneck issues, on the other hand, have always existed in China. Since the sixteenth Chinese Communist Party Congress (CCPC) put forward the goal of building a well-off society, the initiative of all communities to promote economic development rose to an unprecedented level, and the pace of national economic development accelerated. As a result, since 2002, energy supply-and-demand problems have emerged again. For example, the coordination between the transportation, supply, and the demand for coal, electricity, and oil have become a great challenge. The phenomenon of “limited power supply” is occurring over large areas around the country owing to the shortage of coal power. Oil imports have increased greatly. It is widely acknowledged that the energy shortage has become a critical factor, limiting the nation’s socioeconomic development. In the long term, the energy issue will be one of the most serious problems facing China.

In terms of the current energy supply and demand, China is facing three main problems:

1. Extremely limited energy resources: China’s total proven reserves of conventional energy sources is about 820 billion tce. Its proven remaining exploitable reserves are 150 billion tce, about 10 percent of proven remaining exploitable reserves in the world. In terms of average energy consumed per capita, the China uses only 70 percent of the world average, while the petroleum consumed per capita is 10 percent of the world average, and natural gas consumed per capita is 5 percent of the world average. China’s hydropower resources are relatively abundant. Both the total theoretical capacity and economically exploitable capacity of hydropower are the largest in the world. It should be noted, however, that the exploration of hydropower resources is tremendously restrained due to the environmental impacts, floods loss, migration, and many other issues.

2. Dependence on coal, which is causing serious environmental problems: China is the world’s largest coal consumer, accounting for 40 percent of world consumption in 2007 (EIA, 2008b). Coal meets nearly 70 percent of China’s primary energy needs. At present, the coal-dominated energy structure has caused substantial impacts on the ecological environment. China ranks second in the world to the United States in carbon dioxide emission, while China’s emission of sulfur dioxide is estimated to be first in the world. Clean-coal power-generation technologies must be developed to gradually reduce the proportion of coal consumption in the overall energy structure.

3. Low technical levels in energy utilization and low efficiency of energy use: China’s fast economic growth is, to a large extent, dependent upon the great amount of consumption of various physical resources. The energy consumption per unit output in China is clearly much higher than international advanced levels. Coal consumption from coal-fired power plants per unit output, for examples, is 22.5 percent higher than other advanced levels in the world.

China, of course, will have a continuing thirst for energy. The World Energy Outlook 2007 published by the International Energy Agency forecasts that total energy consumption in China in 2015 will be about 2.85 billion toe (tons of oil) and about 3.82 billion toe in 2030 (IEA, 2008). In addition to restructuring its economic growth, increasing energy efficiency, and building an energy-conserving society, special attention continues to be given to the development and use of China’s abundant, inexhaustible, and environmentally friendly renewable energy resources.

Development

In 2007, the consumption of renewable energy in China totaled 220 million tce, accounting for 8.5 percent in the total primary energy consumption (Zhao et al., 2008). But China has abundant renewable energy resources, and the potential for developing and utilizing these resources is very great. The main types of renewable energies in China include hydropower, wind power, biomass energy, solar energy, geothermal energy, ocean energy, and others. Despite disagreement about hydropower internationally, it is widely agreed that small hydropower (SHP) is a valid source of renewable energy. In the case of China, those hydropower stations with a capacity of less than 50 megawatts fall into the SHP category.

China has the theoretical potential for ranking number one in small hydropower development, with resources are located in 1,600 counties (or cities) across thirty-one of China’s provinces (and provincial level municipalities, excluding the Taiwan, Hong Kong, and Macao). Small hydropower resources are particularly plentiful in southwest China, where over 50 percent of the total SHP resource base is located. China’s technology for hydropower station design, installation, and operation is quite mature, and it has installed more than 80 percent of its hydropower capabilities, with roughly a third coming from small hydropower sources (Shi, 2008), (REN21, 2008).

Wind resources are particularly rich in northeastern China, northern China, northwestern China, and the eastern coastal regions. By the end of 2007, Germany had the largest wind power capacity in world, while China ranked fifth, with over 158 wind power farms on the mainland. The manufacturing technology and capabilities of China’s wind power equipment have also greatly improved, as has the volume of their production.

China enjoys the availability of plenty of solar energy. Most of China’s land area is located south of 45°N latitude. Over two-thirds of China’s land area receives over 2,200 hours of sunshine per year, with a total solar radiation received by China’s land areas annually being equivalent to 1.7 trillion tce. At present, solar energy is mainly applied in two areas, solar thermal and photovoltaic (PV). By the end of 2007, China had installed PV power to supply electricity for residents in remote rural areas and for transport and communication stations.

In recent years, China’s solar water heater (SWH) industry has been developing very quickly and has already become quite competitive. China’s export of solar water heaters, boosted by demand in the international market, also rose. In 2007, China’s export value of solar water heater increased by 28 percent from 2006 to equal US$65 million (CBI, 2008).

Biomass energy resources mainly consist of wastes from agriculture and forest industries, industrial wastewater, animal and human manure, and municipal solid wastes. China is a major agricultural producer, and biomass wastes from agriculture are widely distributed, especially those from crop stalks. Fuel-wood forests, timber-processing industries, and other forestry sectors generate biomass waste of over 600 million tons annually, of which 300 million tons can be used in energy applications. The industrial wastewater and manure from livestock and poultry farms are a substantial source of biogas. China’s cities are predicted to produce about 210 million tons of municipal solid waste by 2020. Once land-filled and waste-combustion power generation technologies are implemented, the annual energy produced could be 15 million tce. According to preliminary estimates, the total exploitable annual capacity of biomass energy in China is 500–800 million tce from now to 2030 (NDRC, 2007).

China is currently undertaking research experiments for the production of solid and liquid fuels from biomass. Considering the technology for compressed biomass solid fuel that is under research and developed at Tsinghua University, solid biomass fuels combined with advanced combustion technologies hold great promise in satisfying the household energy requirements of rural people, making full use of biomass resources, as well as in improving living conditions in rural areas.

Geothermal resources have already played a positive role in supplying heat and hot water in China. Geothermal pump technology is considered to have a great future in heating systems for buildings.

In addition to hydropower, wind power, solar energy, biomass, and geothermal energy, other renewable energy resources include ocean energy and hydrogen energy. Ocean energy in China is currently focused on tidal power generation. Due to the limitations of resources and high costs, its use is not widespread.

Incentives

Realizing the great importance and huge potentials of renewable energy, the Chinese governments have implemented a series of policies to promote sustainable development. At the level of macro-policies, the National People’s Congress had already promulgated China’s Renewable Energy Law by February 2005. Critical systems were established in the law: (1) a system of government responsibility, requiring the government to formulate development targets and strategic plans, and to guarantee measures for renewable energy; (2) a system of public cost-sharing (realized by a cost-sharing system of the grid), whereby all citizens will be required to share the extra costs associated with developing renewable energy; and (3) a system of punishment and reward, which was designed to encourage the entire society, particularly companies, to develop and use renewable energy, and has financially punished those companies and individuals that have not met the obligations set out for them in the law (NPC, 2005). In addition, some specific regulations, legislation, and standards to implement the law have been constituted. In particular, the medium- and long-term development plan of renewable energy in China was issued in 2007. Clearly, the legal system to develop renewable energy has built a preliminary foundation.

Some direct economic incentives have also been implemented to encourage the development of renewable energy industry in China. First, is the customs tariff relief. Customs duties on imported complete wind turbines are 6 percent, whereas duties charged on imported components of wind turbines is 3 percent. Second, some value-added tax (VAT) is waived. Currently, most renewable energy products are taxed at the full VAT value (unified VAT rate is 17 percent). The exceptions are rates of 13 percent for biogas generation, 8.5 percent for wind power, 6 percent for SHP, and 0 percent for municipal solid-waste power generation. A third incentive is loan savings. Discounted loans were aimed to support biogas projects, solar-thermal applications and wind-power generation technologies. The government offered a 50 percent discount on regular commercial bank-loan interest. In addition, the government made a limited number of low-interest loans available for SHP. Some wind companies have benefited from the discount loans for the first 1 to 3 years. Fourth, central authorities offered subsidies in research and development (R&D) and marketing demonstration, as well as some local subsidies for solar energy systems for homes and for small wind systems in rural regions.

In addition to the central governments incentives, local governments have also formulated their own preferable measures. For example, income tax from wind companies was waved for the first two years in Inner Mongolia, and from 50 to 200 yuan was subsidized to each home PV system or small wind turbine.

Obstacles

Ironically speaking, some barriers to renewable energy development have indeed existed in China. Although the Chinese government has issued some policies to promote the development of renewable energy over the past ten years, the share of renewable energy in the total primary energy consumption is still low. Breaking the barriers that obstruct renewable energy development in China will be significant to China’s energy future.

First, the government must apply some incentive measurements to promote renewable energy in its initial stage. At present, the policy system to support renewable energy such as wind energy, bio-energy and solar energy is imperfect; the incentive measure is not enough, the implementing of policies is poor, and policies are unconnected. The absence of effective investment and financing mechanisms greatly restrain the R&D processes. Owing to the characteristics of high cost, diffuse distribution, small-scale and discontinuous production, most renewable energy still lacks competitive capability in comparison with conventional energy technologies. Therefore, an integrated, powerful, stable, effective stimulus combined with incentive mechanisms based in law is necessary for further development.

Second, the market mechanism is imperfect. As a result of the above-mentioned characteristics and the absence of a definite long-term target to develop renewable energy, a continuous and stable demand for renewable energy in China has not yet emerged. The driving force of the market is so limited that technological innovation of advanced renewable energy has moved slowly. A few technologies, such as SHP and solar water heater, have to some extent, realized commercialization after years of improvement, though their market share is still very small compared to their entire potential and total energy demand. To further expand the market, there is a need to decrease the production cost and improve technology reliability.

Finally, the technology and industrial system is still fragile. Excluding hydropower, solar water heaters, and biogas, the investment in R&D in most renewable energy remains low, and China’s production capacity is inferior to that of developed countries. In addition, some key technology and devices have depended on imports for many years, such as the PV module production lines and large wind turbines. Moreover, there are no professional, accurate and integrated evaluation systems, and there is no quality control system. The human resource training system and technology service systems are imperfect due to the shortage of communication, and dissemination of information about renewable energy.

It is clearly expected that the development of renewable energy has stepped into a crucial phase in China. In next twenty years, whether renewable energy can be developed on an industrial scale will depends on support of further preferable policies and market expansion.

SHEN Lei, CHENG Shengkui, and XU Zengrang

Further Reading

Asif, M., & Muneer, T. (2007). Energy supply, its demand and security issues for developed and emerging economies. Renewable and Sustainable Energy Reviews 11, 1388–1413.

CBI. (2008). China solar water heater market report, 2008. Retrieved December 24, 2008, from http://www.chnci.com/reports/2008-05/200852985417.html

Energy Information Administration (EIA). (2008a). How dependent are we on foreign oil? Retrieved December 24, 2008, from http://tonto.eia.doe.gov/energy_in_brief/foreign_oil_dependence.cfm

Energy Information Administration (EIA). (2008b). International/Data. Retrieved December 24, 2008, from http://www.eia.doe.gov/emeu/international/contents.html

Energy Information Administration (EIA). (2008c). United States energy profile. Retrieved December 24, 2008, from http://tonto.eia.doe.gov/country/country_energy_data.cfm?fips=US

Energy Information Administration (EIA). (2007, December 10). World energy outlook 2007: China and India insights. International Energy Agency. Retrieved December 24, 2008, from http://www.iea.org/textbase/speech/2007/Cozzi_Bali.pdf

Energy Information Administration (EIA). (2008). Industrial report of new & renewable energy of China [2008 Zhongguo xin nengyuan yu ke zaisheng nengyuan chanye fazhan baogao.] China: Guanzhou.

National Bureau of Statistics of China (NBSC). (2008). China statistical yearbook 2008. Beijing: China Statistics Press.

Renewable Energy Network for the 21st Century (REN21). (2008). Renewables 2007 global status report. Paris: REN21 Secretariat and Washington, DC: Worldwatch Institute.

Shi, D. (2008). The institutes and outlook of China’s renewable energy development (Zhongguo ke zaisheng nengyuan fazhan xianzhuang yu zhanwang). Retrieved December 24, 2008, from http://www.counsellor.gov.cn/content/2008-10/25/content_1264.htm

Wang, Z. and Li, J. (2008a). Report of renewable energy industry of China 2007. Beijing: Chemical Industrial Press.

Wang, Z. and Li, J. (2008b). Report of renewable energy industry of China 2007 [Zhongguo ke zaisheng nengyuan chanye fazhan baogao 2007]. Beijing: Chemical Industrial Press.

Zhao, X., Wang, S. and Liu, Z. (2008). Renewable energy developed fast in China (Ke zaisheng nengyuan jinru kuaisu fazhan shiqi). Retrieved December 24, 2008, from http://news.xinhuanet.com/fortune/2008-09/21/content_10086374.htm