China’s energy shortage in recent years has resulted in extensive efforts to obtain additional energy supplies. Beijing has called for domestic production to be increased as alternative and renewable energy resources are now being strongly considered. This desire for energy security has also become an impetus in China’s foreign policy, with state-owned oil majors encouraged to secure production rights at oil fields throughout the world. Conservation, however, seemed to be the key word for China’s strategy for energy security in 2006. The government set compulsory targets for the first time in history, requiring the entire country to reduce energy intensity by 20 percent in unit GDP production by 2010. Yet, the target, announced in March 2006 as a part of the 11th Five Year Economic Program, may be a long shot for a country with an overheating economy.
No Major Improvements in Conservation
In a recent study by the Chinese Academy of Social Sciences, entitled “China’s Energy Economic Situation and Policy Trends” (Woguo nengyuan jingji xingshi yu zhengce zouxiang), the authors acknowledged that little has changed in the wasteful consumption of energy in Chinese industries . While China’s economy grew by 10.9 percent in the first half of 2006, coal and electricity consumption jumped by 12.8 percent and 12 percent, respectively. The energy consumption in producing every 10,000 yuan GDP did not decrease, but in fact increased by nearly 1 percent during the same period. This means that the 20 percent energy intensity reduction plan for 2006-10 already failed to achieve its target in its first year. Rather than meeting the annual energy efficiency goal of 4 percent as it had planned to do so last year, China must now reduce energy intensity by 5.4 percent per year in the next four years in order to meet the overall national energy conservation target for 2010.
Structurally speaking, high-energy consuming industries are still leading the way in China’s economic development. Large-scale investments have gone into nationwide energy development projects, many of which are low-tech, high-waste ventures. Yet, they are still profitable in a country with a voracious appetite for energy. While additional energy industries are moving into other industrial sectors, profit margins continued to grow in the 2000-2005 period with the profits from the energy industry accounting for over 30 percent of the total profits in China’s industries . At the same time, most of the investments are still focused on traditional energy sectors rather than on conservation technologies or “green technologies” that can conserve energy. For instance, China continues to rely upon coal for nearly 70 percent of its energy needs, consuming 22.5 percent more coal than other advanced countries .
China also set a supposedly compulsory goal to reduce industrial pollutants by 2 percent in the same five-year plan. Yet, the record in the first half of 2006 showed an increase of 3-4 percent, making it impossible for China’s industries to reach the target for the year . This increase in pollutants was largely due to the rapid rate of unregulated economic growth; from January to September last year, Chinese industries grew by 17.2 percent, while heavy industries increased by 18.2 percent .
Administrative Measures Unable to Beat the Market
In the past year, the central government attempted to curb pollution and encourage energy conservation by implementing a number of top-down measures:
March 2006 – Accompanying the announcement of energy intensity targets, the National People’s Congress began to draft the Energy Conservation Law.
April 2006 – Multiple government agencies launched a conservation campaign in 1,000 enterprises belonging to major high-energy consuming industrial sectors.
May 2006 – Beijing announced an ambitious plan to conserve and better utilize energy in nearly 1,000 categories.
June 2006 – Relevant government agencies set the unit GDP energy consumption standards for all provinces.
July 2006 – The National Development and Reform Commission (NDRC) held a national energy conservation conference, signing energy target responsibility agreements with local governments.
August 2006 – The State Council issued a new directive for strengthening energy conservation.
October 2006 – China Coal Industry Association held a conservation conference.
November 2006 – NDRC distributed provincial quotas for energy conservation targets in the 11th Five Year Program.
Such extensive administrative regulations and guidance have produced notable achievements. Shandong Province, for example, has implemented 100 large conservation projects. Hebei Province, ranking second nationwide in heavy industrial energy consumption, has added “energy conservation” as a category in its cadre performance evaluation. Ningbao, a major industrial city in the eastern part of China, has reported the reduction of energy intensity in all of its industries by over 10 percent in 2006 .
These are nonetheless isolated achievements. For most of the country, conservation remains a low priority. Many of the administrative announcements and measures are lost in the convoluted bureaucracy. Even for those local governments wanting to do more, concrete directions from the central government are unclear. Moreover, the market still favors traditional (and unclean) sources of energy, such as coal, and for many, achieving high GDP numbers through large-scale investments in energy, construction and other heavy industrial sectors remains the priority.
External Energy Relations as Sources of Diversification
China’s domestic efforts in conservation have also extended into the foreign energy policy area. For years, Beijing has called on its major energy and resource companies to engage in a “go-out” strategy. Chinese firms have traveled around the world searching for oil and gas fields, securing exploration rights and purchasing multi-year contracted supplies. Under this plan, Africa has quickly become a major provider, supplying nearly a third of China’s imports last year (AFP, June 20, 2006). Large Chinese oil majors have negotiated $70 billion in energy exploration deals with Iran, purchased large assets in Kazakhstan and sealed multi-billion dollar, multi-year natural gas supply commitments from Australia.
Recently, though, there are some indications that the Chinese are looking beyond their borders in acquiring and developing conservation technologies and strategies. At a World Bank workshop with China’s State Council last June (at which this author was a part of the World Bank expert team), the consensus after two days of closed-door discussions was that China could not sustain itself if it continued to consume energy at the same rates as advanced industrialized countries. Neither the Chinese environment nor the world ecosystem is capable of supporting massive large-scale waste or pollution related to energy consumption. The workshop called for China to pursue innovative technologies, develop alternative and renewable energy sources and ultimately use “technology leapfrogging” to solve China’s future energy requirements. For that purpose, the Chinese government is eager to examine, evaluate and import advanced technologies from abroad.
Sino-Japanese relations offer an example of China’s changing priorities in international energy cooperation. Until last fall, Sino-Japanese relations were in a deep chill due to former Japanese Prime Minister Junichiro Koizumi’s insistence on visiting the Yasukuni Shrine. At the time, Beijing and Tokyo were also engaged in a bitter dispute over the potential oil and gas deposits in the East China Sea. Yet, when the NDRC organized an energy conservation and environment forum in Kyoto in May 2006, it attracted 900 participants, far exceeding initial expectations. Even Shinzo Abe, then Chief Cabinet Secretary and a contender to replace Koizumi, attended the conference. When Abe became the new Prime Minister in September, he made improving Japan’s relations with China a top priority and proactively propositioned to the Chinese leaders that both countries establish a “reciprocal relationship based on mutual strategic interests.” When asked to elaborate on his comments, Abe explained that the core of such a reciprocal relationship would consist of cooperation on environmental concerns and energy conservation, a message that rang sweetly in Beijing’s ears (Asahi Shimbun, October 9, 2006). While Beijing remains concerned with Abe’s nationalist tendencies on a range of defense-related issues, it is willing to engage Tokyo on projects of “mutual strategic interests.”
China has also exhibited its willingness to work in multilateral settings as demonstrated by the recent second annual East Asia Summit. On January 15, the ten ASEAN countries as well as China, Japan, South Korea, India, Australia and New Zealand gathered in the Philippines to sign an energy security pact. The 16-nation group called for decreasing the dependency on oil; reduction of greenhouse gas emissions; promotion of bio fuels, hydropower or nuclear power; and enhanced cooperation among the participating parties for energy conservation and efficiency . Although the meeting did not produce any hard targets in terms of emission reductions, it was nevertheless a good start for a region containing half of the world’s population and many major energy-consuming powers.
It will be a welcoming sign if China makes the decisive shift in its global quest for energy security from focusing on traditional energy supplies to seeking alternative and renewable energy sources as well as new technologies from other countries. This would enable China to greatly improve its domestic efforts in conservation and environment protection. In that regard, the United States, other advanced industrialized countries and the international community may play positive roles in encouraging China’s move in the direction of becoming a greener energy consumer.
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