By Dan Luo, published in China Daily on 6th January.

The vague outcome of the recent climate talks in Durban disappointed environmentalists but the significance of the shift in attitude of the Chinese government toward action on climate change should not be underestimated.

China, for the first time, publicly agreed to consider a legally binding cap on its carbon emissions. The move reflects a growing awareness in Chinese political circles that sustainable development at home can only be attained by reducing its own emissions. But any deal to replace the Kyoto Protocol will be a long time coming. In the meantime the world is hoping the Chinese economy will continue to be the engine of global growth after growing by about 9 percent in 2011.

This relentless economic expansion comes at a high price, and China finds itself well short of immediate solutions on how to rein in its vast energy consumption and, consequently, the environmental pollution that threatens its progress.

In 2010 China’s electricity consumption grew 13.7 percent, outstripping its GDP growth of 10.4 percent. It used 3.2 trillion tons of coal equivalent, or about 20 percent of the world’s energy consumption, overtaking the US to become the world’s largest energy consumer.

Although the government adopted a series of policies to cool the property market and, in turn, the economy, electricity consumption in the first half of 2011 continued to rise, up 13.5 percent year-on-year at 2.2 trillion kilowatt hours. This level of consumption is a direct threat to China’s energy security. When measured per capita, China’s domestic energy reserves are scarce. The per capita average of coal resources is 50 percent of the world’s average, and the per capita average of both oil and natural gas resources is only 6.7 percent.

In 2010 China imported 239 million tons of oil to meet only just over half the country’s total demand. If the current trend continues, by 2030 about 80 percent of the oil supply in China will come from imports.

This places the country in a precarious position because any volatility in global energy prices will have a significant destabilizing influence on its economy.

Another key challenge stems from China’s highly imbalanced energy mix. Over 70 percent of the country’s electricity supply comes from coal, 30 percent higher than the global average.

The pollution that goes hand-in-hand with a voracious appetite for coal saw China overtake the US as the world’s biggest CO2 emitter in 2006. In 2010 alone its CO2 emissions reached 8.3 billion tons, accounting for about a quarter of the world’s total.

An equally taxing question for China is how to enhance the efficiency of its energy consumption. From 1985 to 2000 the country’s GDP growth far outstripped its rate of energy and electricity consumption, indicating a relatively efficient use of energy.

However, from the beginning of the 21st century energy consumption surged. It grew at the rate of 11.5 percent a year between 2001 and 2006. If it was not for the financial crisis, the trend would have most likely continued throughout the decade.

The rapid growth in energy demand pushed up the GDP elasticity of energy and electricity consumption ratios to 1.3 and 1.6 respectively during this six-year period, meaning that for every 1 percent rise in GDP, China needs to consume 1.3 percent more energy and 1.6 percent more electricity.

Given the wider application of advanced technologies and a more educated workforce, China might have expected a decline in these numbers as opposed to an increase. The figures suggest a serious flaw in the Chinese approach to increasing its energy efficiency.

The government recognizes this risk to future growth. It pledged to increase energy efficiency by 20 percent between 2006 and 2010. Then it set a more ambitious target of improving energy efficiency by another 16-17 percent in its 12th Five-Year Plan that began in 2011.

The cause of low energy efficiency in China is multi-faceted and stems directly from its model of economic development. The country’s economy has long relied heavily on the energy- and capital-intensive manufacturing sector. In 2009 the industrial sector contributed 39.7 percent of GDP but consumed 71.5 percent of total energy.

The fast expansion of the industrial sector is partially stimulated by government policy and by growing demand for energy-intensive products, both internally and externally.

Rising disposable incomes of Chinese people have increased the per capita ownership of electrical appliances, and more importantly, vehicles and houses. Meanwhile, demand for products that are heavy in terms of energy intensity increased overseas. From 2005 to 2008 China’s exports rose 23.4 percent a year, and exports of rolled steel and motor vehicles rose 69.3 percent and 67 percent respectively.

Another crucial contributing factor to China’s low-energy efficiency is the relocation of industrial production inland from the coastal regions. As part of the western development plan, China has gradually shifted industrial production from eastern to central and western regions.

However, since energy efficiency is significantly lower in inland areas, this structural shift has led to greater energy consumption per unit of GDP and has hurt China’s overall energy efficiency.

Energy efficiency in the coastal regions is also declining. Resource reserves in eastern regions are much smaller than those further inland, requiring long-distance transport of resources that expends yet more energy.

With the rise in energy consumption showing no sign of abating, what can China do to increase its energy efficiency?

It has been said again and again, but first and foremost China must act to accelerate the pace of its structural transformation, relying more on domestic consumption and less on the continuous expansion of capital- and energy-intensive industries.

It also needs to push the products in its export portfolio up the value-added chain to maintain sustainable growth and stave off international criticism.

Secondly, China should remove the restrictions on the consumer prices of primary energy products to fully reflect their environmental impact, the size of the demand for scarce resources and the imbalance in energy supply.

In doing so, it could effectively control the growth of energy-intensive industries, create more pressure for energy efficiency improvements and encourage economized consumption.

A significant amount of energy could be saved through raising public awareness and enforcing tougher standards on building design.

Since it is impossible to transform the coal-based energy consumption structure in the short term, both central and local governments must look to adjust the energy mix through technological change and improved management of the country’s energy supplies.

The wider use of clean technology such as wind and nuclear power would help rebalance resource supply among different geographical regions in China, saving on energy transport and storage costs.

The journey will be arduous, but China’s energy dilemma can be brought under control in the near term if these strategic adjustments are implemented successfully.

But in the long run, when a proposed emissions cap finally becomes a reality, a series of more radical structural changes will have to be implemented to stave off a full-blown energy crisis.

Dr Dan Luo is a lecturer at the School of Contemporary Chinese Studies, University of Nottingham.

Opinions expressed in the CPI blog do not represent the views of the China Policy Institute or the School of Contemporary Chinese Studies at the University of Nottingham. They are the personal views of the bloggers/authors.



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