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

Cooperation between China and the United States, the world’s two largest emitters of carbon dioxide, to limit emissions and pursue alternative energy paths has become a major global political challenge. NGOs, academic organizations, and policy think-tanks are involved in breaking through current barriers to cooperation.

Cooperation between the United States and China to reduce climate change (or global warming) is widely seen as one of the most pressing issues for the worldwide community. China’s energy consumption and carbon dioxide (CO₂) emissions could grow more than fourfold in the next twenty years, thus catching up with and overtaking large industrialized nations (with the exception of the United States and Canada) in per capita emissions. Or, China could implement advanced energy technologies and policies to cut energy-demand growth, in which case its carbon dioxide emissions might only double. The first case would impact the global environment very seriously; the second case is more tolerable. If the latter is accompanied by significant reductions of greenhouse gas emissions in industrialized countries and the aggressive development of low-carbon energy technology, the world could be on the way to cutting emissions significantly by 2050.

Strategic mistrust between China and the United States, however, has interfered with a binding global agreement on energy caps. The Chinese believe that a commitment to reducing carbon dioxide emissions could stifle their development; the U.S. speculates that, because of its large trade deficit with China, any adoption of a carbon dioxide cap without a comparable commitment by China could drive the two nations’ trade balance out of control.

A solution to the problem of greenhouse gas emissions depends critically on both countries. China and the United States account for nearly 40 percent of current global energy-related carbon dioxide emissions; they also have the greatest potential to reduce emissions growth. The participation of both nations is essential in the effort to establish a global regime to contain these emissions.

Background History

Fossil fuels—coal, oil, and natural gas—provide most of the world’s commercial energy. When they are burned, carbon dioxide is released; it and other greenhouse gases keep solar radiation (or heat) trapped on Earth. This is known as the “greenhouse effect.” According to the United Nations Intergovernmental Panel on Climate Change, the mean global temperature increased approximately 0.6^oC from 1890 to 1990, and they predict a 1.1ºC–6.4ºC rise during the twenty-first century. This increase in surface temperatures on Earth can have catastrophic results, affecting weather, global water levels, and plant and animal life, among other issues. Energy-related carbon dioxide emissions make up approximately 80 percent of the greenhouse gases in the atmosphere, so their containment is a global issue.

While there is disagreement about solutions to climate change, there are some facts that are generally accepted regarding the historical, current, and anticipated future situation of China and the United States and greenhouse gas emissions.

The first mutually accepted fact is that the United States is responsible for 28 percent of total cumulative emissions of carbon dioxide from energy consumption, while China is responsible for 8.5 percent. Because of carbon dioxide’s long “residence time” in the atmosphere (more than 100 years), the contributions from many years ago affect the global greenhouse as much as today’s emissions. Therefore, the most important measure of energy-use contributions to greenhouse gases in the atmosphere is the cumulative emissions of carbon dioxide.

A country’s energy use conventionally is presented in terms of per capita emissions, in the same way that gross domestic product (GDP) per capita, not GDP alone, is a measure of the economic well-being of a country. (GDP is the total market value of all of a country’s goods and services produced in a given year minus the net income earned abroad.)

In describing contributions of a country, it is useful to present this in terms of per capita emissions, in the same way that GDP/capita, not GDP, is a measure of the economic well-being of a country. That is, over the entire period during which we can estimate carbon emissions due to human activity (roughly since 1850), China’s cumulative per capita emissions of energy-related CO₂ are less than 8 percent of those of the United States.

This is generally seen as a remarkable achievement, as virtually all countries undergoing very rapid economic development—China had 9–10 percent annual GDP growth over those two decades—experience energy growth that is faster than GDP growth. China’s reduction in energy demand growth was the consequence of explicit policies carried out domestically. If energy had grown just at the rate of GDP, China’s emissions of CO₂ would be more than twice as great as today’s emissions.

Notwithstanding these reductions in growth of CO₂ emissions, U.S. CO₂ emissions per capita are 2.5 times greater than those of the European Union countries and 2.1 times those of Japan. The European Union and Japan are not far behind the United States in GDP/capita. But these nations have much less land per capita and have much higher population densities. High population density reduces travel demand and results in smaller per capita emissions.

For industrialized countries, emissions are likely to decline over time in proportion to GDP growth because many activities and products have saturated their markets: For example, not many people are purchasing their first car, and virtually all homes have refrigerators and most are not seeking to have a second. This is confirmed by the fact that from 1975 to the present, the United States reduced the growth of its energy-related carbon dioxide emissions more than any other large industrialized country in the world. GDP per capita grew almost 200 percent while energy consumption (and carbon dioxide emissions) per capita remained constant. But it is useful to use a baseline that has carbon dioxide emissions growing at the rate of growth of GDP when making comparisons among countries.

China and the United States currently produce approximately equal levels of energy-related carbon dioxide emissions and together are responsible for almost half of such emissions worldwide. According to the International Energy Agency’s 2008 World Energy Outlook, China is projected to account for more than 40 percent of new energy-related carbon dioxide emissions globally between 2008 and 2030, thus being by far the largest future contributor to increased concentrations of carbon dioxide in the atmosphere. But in 2006, China instituted a national program to reduce energy intensity 20 percent by 2010; it is noteworthy that in 2006 the energy intensity (energy demand per unit of GDP) decreased by 1.3 percent (that is, energy grew 1.3 percent less rapidly than GDP) and by 3.7 percent in 2007, with greater intensity declines projected for 2008. The program started slowly but is now approaching its annual target.

The United States, meanwhile, has the greatest potential of any country in the world to reduce energy-related greenhouse gas emissions. This is true for two reasons: First, because the U.S. per capita intensity of these emissions is considerably higher than those of other large industrial countries (2.5 times that of the European Union and 2.1 times that of Japan), there is greater opportunity to decrease the numbers; and second, the United States has the scientific, technical, and economic capability of developing viable alternatives to fossil-energy technologies and is likely to be the world leader in any breakthrough technology, if one is developed. Annual growth of energy-related carbon dioxide emissions in the United States in the coming decades is expected to be in the range of 0.5–1.0 percent unless new policies are enacted to cut carbon dioxide emissions.

For the future, neither China nor the United States have agreed to binding commitments on greenhouse gas emissions. In 1992 the U.N. Framework Convention on Climate Change (UNFCC) established an intergovernmental plan to reduce and mitigate greenhouse gas emissions; the resulting agreement is named the Kyoto Protocol. China is a signatory to the Kyoto Protocol, but it actually contains no binding commitment for developing countries. Recognizing that developed countries are principally responsible for the current high levels of atmospheric greenhouse gas emissions as a result of more than 150 years of industrial activity, the Protocol places a heavier burden on industrialized nations. As of 2008, the United States had not ratified the Kyoto Protocol.

In describing contributions of a country, it is useful to present this in terms of per capita emissions, in the same way that GDP/capita, not GDP, is a measure of the economic well-being of a country. That is, over the entire period during which we can estimate carbon emissions due to human activity (roughly since 1850), China’s cumulative per capita emissions of energy-related CO₂ are less than 8 percent of those of the United States.

This is generally seen as a remarkable achievement, as virtually all countries undergoing very rapid economic development—China had 9–10 percent annual GDP growth over those two decades—experience energy growth that is faster than GDP growth. China’s reduction in energy demand growth was the consequence of explicit policies carried out in China. If energy had grown just at the rate of GDP, China’s emissions of CO₂ would be more than twice as great as today’s emissions.

Notwithstanding these reductions in growth of CO₂ emissions, U.S. CO₂ emissions per capita are 2.5 times greater than those of the European Union countries and 2.1 times those of Japan. The European Union and Japan are not far behind the United States in GDP/capita.  However, these nations have much less land per capita and have much higher population densities. High population density reduces travel demand and results in smaller per capita emissions.

Two Viewpoints

It is generally not understood in the West that China has put tremendous effort into reducing the growth of energy-related carbon dioxide emissions through the design and implementation of aggressive and innovative energy efficiency policies. Instead, there is a perception that China has paid little attention to the matter of greenhouse gas emissions. From 2001 to 2006, China’s energy demand and energy-related carbon dioxide emissions grew faster than the 10 percent annual growth of GDP. This led to an increase in China’s emissions from 12.7 percent of global emissions (2001) to 18.4 percent (2006). Many in the United States look at these facts, noting how rapidly China has grown in the past five years, and are aware of the forecasts that predict that a large proportion of the world’s expected increase in energy-related carbon dioxide emissions this century will come from China. Many Americans express concern that emissions reductions applied to the United States could increase the cost of producing goods and services there, thus placing the U.S. at a competitive disadvantage with any country that does not do the same.

But the perspective from China is very different. The Chinese note that per capita energy consumption and carbon dioxide emissions are much lower in China than in the United States. They emphasize the disproportionate cumulative contribution of the United States to the global greenhouse gas problem, pointing out that the United States, with a population one-quarter the size of China’s, is responsible for putting far more carbon dioxide into the atmosphere than has China. This point is made to indicate the inequity inherent in focusing on current emissions while a large part of the problem is caused by emissions over long periods of time.

These views may provide a philosophical underpinning that supports China’s major concern looking forward: China believes that it will need more energy for development—much more. Chinese officials observe that the industrialized countries have already been through the energy-intensive phase of their development, but China is in the midst of its own. The possibility of gaining a competitive trade advantage through a new climate treaty is much less significant to the Chinese than the possible roadblocks to achieving social development goals that could result from a commitment to mandatory emissions targets.

Efforts Towards Cooperation

It is not enough that China and the United States both take steps to reduce carbon dioxide emissions; it is essential that the two countries do this cooperatively. As long as China does little to reduce growth of greenhouse gas emissions (or appears to be doing little), it will be politically difficult for the United States to sign a binding international treaty that commits to a serious cap on emissions. And as long as the United States either does little or appears to be doing little, it is impossible to imagine China committing to any international treaty that limits its own emissions.

At a 2008 hearing held by the U.S.-China Economic and Security Review Commission, representatives from the China Energy Group proposed that the United States and China should engage in regular, formal discussions that focus on working together to reduce greenhouse gas emissions, with the goal of influencing global negotiations. A serious proposal agreed to by both the United States and China is likely to be acceptable to both industrialized and developing countries.

A research group that has worked with energy policy-makers in China for two decades to analyze, develop, and enhance Chinese energy policy, the China Energy Group further recommended that in the short term, the greatest support the United States can provide to China (and other developing countries) is to build capacity in those countries to create and implement policies and programs that reduce greenhouse gas emissions. Western resources can provide training and technical assistance to Chinese enterprises that will in turn establish new energy standards and compliance regulations. The assistance develops the potential for the Chinese to pursue energy efficiency, but does not pay for it. Such a program also will need to engage the full participation of the international community: It should include all industrialized countries as donors and key developing countries as recipients. This is not an investment program; it is focused on building capabilities to design and implement policies, many of which will facilitate investments with funds coming from other sources.

In the long term, the solution to climate change will have to rely on technology that is not yet commercialized. New low-carbon technologies are essential to reduce energy-related carbon dioxide emissions to appropriate levels. For the most part, such technology is not available today, and the intellectual property for these technologies does not exist yet. There is a need for programs to support joint development of such technologies, using the technical and financial resources of many countries. The United States government could play a key role in establishing a basis for performing research and development on these technologies with other nations (including China) and the sharing of intellectual property of these future technologies among nations of the world.

The China Energy Group also proposed that the leaders of the high-level teams from both countries should be policy makers above the level of the climate-change negotiators. These discussions should not be construed as bilateral negotiating sessions; the goal is for China and the United States to reach a consensus that can serve as a model for the European Union and developing nations. Any agreement must include binding commitments that will not threaten China’s growth and internal development goals, and that will give China access to the knowledge, tools, and technology that lower the cost of reducing emissions; for the United States, it is crucial that implementation of the agreement will not exacerbate the U.S. trade deficit with China. A formula that might work in China is a commitment that industrial emissions would grow slower than the industrial value added over the next decade, for example, 80 percent as fast, after which time a new formula could be agreed upon. The advantage of this approach is that it places no constraint on the consumer economy, which China views as necessary to meet its social and economic development objectives. A further advantage is that this approach addresses the industrial sector, which is responsible for 70 percent of all energy-related emissions; it thus speaks to the activities in China that are by far the largest contributor to greenhouse gas emissions.

There are other formulas that could be used for China as well. Most involve the adoption of an emissions target that increases as GDP increases, thus assuring China that growth would not be impacted as long as proper measures are taken to reduce the growth of greenhouse gases. Like the industrial emissions approach, the formula could involve a commitment that greenhouse gas emissions grow at a rate lower than that of GDP with the provision of technical support, capacity building, and/or funds to facilitate reductions in greenhouse gas emissions. Achieving better results could trigger greater levels of assistance.

Trade Policies

Trade remains a major divisive topic, but there are different ways to deal with this issue. One, for example, is based on the concept of “carbon credits,” a tool formalized in the Kyoto Protocol and monitored by the UNFCC that expects to reduce greenhouse gases by having countries honor their emissions quotas and offers monetary incentives for being below those targets. (This system has been adopted by the European Union, and it has resulted carbon credits of about $20 or $30 per metric ton.) To avoid impact on trade in the case where limits on Chinese emissions in early years would produce only small increases in the price of its products for export, China would agree to a tax on exports equal to the cost of a carbon credit (in dollars per metric ton). To avoid this being too cumbersome, it would apply only to products that are energy- (and therefore carbon-) intensive in their manufacture. Under this proposal, China would collect the tax and be required to apply it to its program of reducing carbon dioxide emissions. A program such as this would eliminate the trade advantage that China might gain by having less rigid commitments than industrial countries. It would have the further benefit of assuring that resources in China would be used to address greenhouse gas emissions.

An international commission would be needed to oversee the uses of the tax in China (and presumably other developing countries, if the approach is extended to them) as well as the provision of resources from the United States and other industrialized countries to support greenhouse gas abatement in developing countries.

Protecting Economic Growth

In the United States, economic growth and energy use over a period of a decade or longer are relatively predictable. Absent a multiyear recession, annual economic growth over a period of a decade or more is likely to be 1.5–3 percent. Growth in annual energy demand and energy-related carbon dioxide emissions, without new policies, is likely to be in the range of 0.5–1.0 percent. (With a long-term recession, the growth of energy demand and carbon dioxide emissions will be at a decreased rate, thus lowering the difference between targets and emissions in a base case.)

Forecasts in this range apply to most industrialized countries, for which many consumer products such as refrigerators and cars have already approached saturation. In short, it is possible to understand at a general level what is entailed in achieving certain targets for greenhouse gas emissions over a period of one to two decades.

But for a rapidly developing country such as China, growth in energy demand and resulting carbon dioxide emissions can have much greater variations. The Chinese economy grew at annual rate of 9–10 percent from 1980 to 2000; during this period energy demand grew at an annual rate of 4–5 percent. (In only one year during this period did the increase in energy demand growth exceed even 60 percent of that of GDP.) But from 2001 to 2006 GDP in China continued its growth at 10 percent per year (or greater). One might have predicted that energy demand in China would have grown at a rate lower than 5 percent per year, as it had done over the previous twenty years; indeed, forecasters did predict this. But energy demand grew even faster than GDP during the period, averaging almost 12 percent per year.

Consequently, it is extremely difficult in China, in its present stage of economic development, to predict with any accuracy the energy-demand growth over a ten- to twenty-year period. This is one reason that China cannot accept a binding cap that is expressed in absolute terms, unless such a cap were well in excess of the higher range of expected emissions. (But if a cap were set so high, it would be meaningless.)

China and other developing countries will have the largest emissions in the future, and there is great concern worldwide that China will continue increasing its energy demand and spewing carbon dioxide into the environment forever, or at least for a very long time. But China is in the middle stage of building its infrastructure—housing, commercial buildings, roads, hospitals, schools, and the like. It is at a relatively early stage of increasing the mobility of its population, and large quantities of energy are required to accomplish these tasks. This period is likely to last for fifteen to twenty-five years, depending on whether China continues its breakneck speed of construction and whether large numbers of rural dwellers continue migrating into urban areas. At the end of this construction period, China’s economy will be much like today’s developed countries. Energy-demand growth will decline markedly, just as it now has in the industrialized world. Scarcity of traditional energy sources could slow energy-demand growth even further in this time.

Outlook for the Twenty-First Century

The key question about the future concerns what China’s energy demand will be when its economy becomes mature, or when infrastructure is built out and most amenities have been met. If China has a structure of consumption similar to that of the United States today, and the construction techniques and industrial processes are inefficient in their use of energy and other resources, then not only China but the world will be in serious trouble. But from 1980 to 2000, China has shown its willingness to grow its economy while constraining energy growth to less than half that of economic growth. Today China exhibits a serious willingness to once again limit energy growth, and significant support from industrialized countries can help greatly in achieving this objective. If at the same time the industrialized countries learn to reduce greenhouse gas emissions—and transfer this knowledge to China and other developing countries—then a sincere start at addressing the serious challenge of climate change will be possible. This approach can buy time while energy supply technologies that produce low carbon emissions are developed and deployed on a large scale.

Mark D. LEVINE

Further Reading

Asia Society. (2009). Common challenge, collaborative response: A roadmap for US-China cooperation on energy and climate change. An Asia Society Task Force Report January 2009. Retrieved February 20, 2009 from http://www.asiasociety.org/taskforces/climateroadmap/

Energy Information Administration. (n.d.). Retrieved on January 23, 2009, from http://www.eia.doe.gov/

Levine, M. D. (2008, August 13). Testimony presented at the U.S.-China Economic and Security Review Commission hearing “China’s Energy Policies and their Environmental Impacts.” Retrieved on January 23, 2009, from http://www.uscc.gov/hearings/2008hearings/written_testimonies/08_08_13_wrts/08_08_13_levine_statement.pdf

United Nations Framework on Climate Change. (n.d.). Kyoto Protocol. Retrieved on January 23, 2009, from http://unfccc.int/kyoto_protocol/items/2830.php

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.