Analysis of the Cooperation of New Energy Industry

Analysis of the cooperationof new energy industrybetween Korea and China[*]

Young Man Yoon[†] Chi Gong[‡]

University of Incheon Seoul National University

Tianguo Li[§]

Seoul National University

Corresponding author:

Chi Gong

Department of Economics,

Seoul National University,

Seoul, Korea, 151-742

Tel:+82-10-5843-0015

Emial:

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Analysis of the cooperationof new energy industrybetween Korea and China

Abstract

This study focuses on the development of the new energy industry as the basic foundation of green development.We analyze new energy industry cooperation between China and Korea, and forecast the economic effects of this cooperation. To evaluate the necessity of the cooperation, we utilize an intra-industry index to build a new index that can represent therelative gains of cooperators from improving energy efficiency. In the process, we emphasize the benefits of new energy cooperation. The vector autoregression model (VAR) helps us findsignificant relationships among energy cooperation index, trade relations, and GDP. Based on the results, we can quantify the economic effects of new energy industry cooperation between China and Korea.

Keywords: new energy industry cooperation, VAR, impulse response, variance decomposition

JEL: O19, Q27, Q43

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Ⅰ.Background

For more than two millennia, energy has been the primaryobstacletothe development of all countries. It is the main material and foundation ofthe human society. Along with rapid societal development, the fast consumption of traditional fossil energy and greenhouse gases is destroying the environment. The exploitation and use of new energy sources can optimize the structure of energy consumption, preserve the ecological environment, and guarantee energy safety.New energy sources also serve as the strategic choice for pulling domestic demands, fostering new growth fields, increasing job opportunities, and promoting sustainable development. However, most types of new energy sourcesare widely distributedand with low energy density, resulting in their inability to replace fossil energy in a short period. Therefore, the development of the new energy industry necessitates more investments in technique, capital, and management that emphasize the importance of international cooperation.

Under economic recession, positive changes haveemerged. Every country is now advocating a green economy through the efficient use of energy and resources, as well asthe change in the economic growth mode towardlower energy and resource consumption. New energy sources withunlimited potentialsserve as the basis of green economies.

Northeast Asia is one of the most dynamic regions in the world. South Korea, China, and Japan have been enjoying spectacular economic growth—accompanied byexplosive energy demands—for several decades. The consumption of all kinds of energy in these countries has remarkably risen. In particular,the growth rate in the region’s oil demand is much faster than that in any other region in the world. In this region, development must withstand strong pressures from the energy market. Although bilateral relations in the region link trade, investment, and finance, which have been increasing significantly, real regional energy cooperationremains questionable. The absence of regional cooperation has long beendiscussed, andterritorial disputes in the region have recently aggravated. Northeast Asia began to experience serious setbacks in its efforts toward economic prosperity due to the high environmental costs of energy. Hence, the region must convert to more environment-friendly energy systems.

Concerns over energy waste and energy security in Northeast Asian countriesfocus on sustainable development and green growth. In line with this focus, international cooperation issignificant.

Some research institutions and academics have explored the proposition of international energy cooperation. However, there are few empirical studies, and a better way to analyze the bilateral effectsof energy cooperation has not yet been developed. Our literature review is divided into two parts. First, we review some studies on energy cooperation inNortheast Asia. Second, we introduce several studies on the relationship between energy consumption and economic growth.

Wybrew-Bond and Stern (2002) analyzed international energy cooperation in Asia according to four themes: supply options, international relations and geopolitics, liberalization and competition in energy markets,and environmental considerations. They concluded that the future of the natural gas industry in the depends on three factors: (1) the privatization and liberalization of the gas market; (2)the development of a transnational pipeline from Siberia and the outcome of the Sakhalin offshore gas project; and (3) the unification of the Korean peninsula, which will allow the Siberian pipeline to run across N. Korea to the south. These factors can obviate the need to build an undersea pipeline. Zhao(2004) examined the concept of transformational leadership in energy cooperation. Accordingly,the most difficult problems lie along the strategic and political dimensions. Relations between Japan and China are persistently affected by two major factors:historical legacies and the American role in the region.

Paik (2005) asserted that given the geographical proximity of Russia and its desire to increase its energy exports to Northeast Asia, there is a huge potential for cooperation. This would require not only the development of intra-regional cooperation, but also the promotion of a common external policy with Russia within a wider multilateral framework. The European model could be useful for Northeast Asian countries as they start to draw up the roadmap for regional energy cooperation (Brigid Gavin & Sangsoo Lee,2007).The potential for sustainable development in the region would contribute to the global potential by, for instance, providing investment opportunities and enhanced environmental quality to nations outside the region (Lee SG,2003).

Veenstra(2008) suggested that establishing energy cooperation among Northeast Asian countries should start bottom-up, although top-down cooperation should also be targeted at the same time. The region should first focus on some more concrete topics. Thereafter, cooperation can be established on the basis of these topics. These topics include the transfer of technology on energy efficiency, joint stockpiling, transportation safety, and external policy to enhance bargaining power over supplier states. EU experiences reveal that cooperation will most likely be established on topics beyond security issues. Therefore, technological transfer could play a vital role in establishing energy cooperation in Northeast Asia.

Hippel, Savage, and Hayes(2009) provided a description of the current situation of energy demand and supply in Northeast Asia, and summarized the recent trends of the “drivers” of energy supply and demand, which underlie energy consumption in the region. They also presented energy consumption projections and the key impacts of energy consumption, such as greenhouse gas emissions. Other impacts of the persistent increase in energy supply and demand in the region were also reviewed qualitatively.

Various studieshave focused on the relationship between energy consumption and economic growth using different independent variables. However, the empirical findings of these studies are inconsistent, and no consensus has been reached.More importantly, a better way to analyze the bilateral effects of energy cooperation has not been developed. The findings vary not only across countries, but also across methodologies within the same country (Soytas and Sari, 2003)

Kraft and Kraft(1978) studied the relationship between energy consumption and income for the first time. They provided evidence supportingthe unidirectional causality running from income to energy consumption using 1947–1974 US data. Accordingly, there is no need to worry about the economic side effects of implementing energy conservation. Abosedra and Baghestani (1989) supportedthese findings.

Yu and Hwang (1984) used annual data to confirm the absence of any causality between energy consumption and income over the sample period 1947–1979.Yu and Choi (1985), and Erol and Yu (1987) reached similar conclusions inthe United States, but their resultsdiffered in the cases of South Korea and the Philippines.

Stern (1993) examined the relationship between energy use and GDP in the United States. He employed a multivariate vector autoregressive (VAR) analysis. A weighting index of energy quality, instead of a measure of total energy use, was also utilized. Moreover, energy use was shifted from low-quality energy (e.g., coal) to high-quality energy (e.g., electricity). He found that results vary according to different energy measures.Cheng (1995) used bivariate and multivariate analyses, and found no causal relationship between energy use and GNP.

Masih and Masih (1996) tested the cointegration between total energy consumption and real income in six Asian economies. They found a cointegration between energy and GDP in India, Pakistan, and Indonesia, but no cointegration in Malaysia, Singapore,and the Philippines. Using a vector error correction model (VECM), they showed that energy consumption is causal to income in India, income is causal to energy consumption in Indonesia, and bi-directional causality exists in Pakistan. They further applied an ordinary VAR model for the rest of the three non-cointegrated countries but no significant causality as found.

Pao (2009) used cointegration and error-correction models to investigate the relationship between electric consumption (EL) and economic growth. Taiwan data from 1980 to 2007 were utilized. The results indicated the cointegration of EL and real GDP. Moreover, a new error-correction state space model (ECSTSP) was proposed. The model includes an error-correction term (ECT) in its state vector to forecast both EL and real GDP simultaneously. In contrast, ECM is not included in the state vector of the classical state space model (STSP). For long-term predictions, Pao (2009) asserted ECSTSP as the best model because it takes into account the cointegration of real GDP and EL.

Ozturk (2010) used panel data onthe energy consumption (EC) and economic growth (GDP) of 51 countries covering the period 1971–2005.The relationship between energy consumption and economic growth was investigated throughthe panel cointegration method. The studyfound no strong relationship between energy consumption and economic growth across all identified income groups. These findings have important policy implications and implythe need for further research.

There are still debateson the causal relationship between energy consumption and economic growth. Meanwhile, we should be cautious in interpreting empirical results. When applying the Granger causality analysis, results should beexplained carefully.

In sum, few studies have explored the proposition of international energy cooperation, and a better way to analyze the bilateral effects of cooperation has not yet been developed. In this paper, we aim to explore and compare the economic impacts of international new energy industry cooperation between China and Korea. We explain why China and Korea should engage in cooperation. In particular, we build a new index that can evaluate the economic effects of energy efficiency on both countries.

Section 2 of this paper summarizes new energy development in Northeast Asia. Section 3 briefly explains the trade structures of and trade relations between China and Korea. Section 4 discusses the economic impacts of bilateral cooperation between China and Korea. These impacts are analyzed quantitatively using a VAR model. Section 5 concludes this paper.

Ⅱ. New energy development in Northeast Asia

Northeast Asia has drawn increasing attention from the international community. China has a fast-growing economy with an even greater potential in the future. Japan has the second largest economy in the world, with massive capital and advanced technology. Korea, which has quickly recovered from the most recent global economic crisis, has a highly dynamic economy. As one of the world’s major economic regions, Northeast Asia (China, Japan, and Korea)accounts for one fifth of the world’s total GDP. Despite political, economic, and historical differencesacross the region, economic interdependence among the three countries has been substantially improving. Table 1 showsimportant information on the economies of the three countries.

Table 1 Economic indices of Korea, China, and Japan (2009)

Source: 2009 World Factbook

The overall speed of the economic growthof China, Japan, and Korea is faster than the global average.Table 2 shows general information on three regionsin the world. The Northeast Asian region has about 1.5 billion people (22.41% of the global population), and it accounts for 16.79% of the world GDP and 15.3% percent of the world trade volume. New energy development in this region plays a very important role in the global green growth.

Table 2 Comparison between Northeast Asia, European Union, and the United States (2008)

Source: World Development Indicators

Undoubtedly, high energy-consuming countries, suchas China, Japan, and South Korea, are exposed toenergy security threats. Hence, there have been efforts to forge a foundation and framework for regional energy security cooperation since 2004. However, the efforts have only been partially successful due to the lackof consensus.

Although countries in the region have expressed their support for general energy cooperation and energy security cooperation, these kinds of cooperation do not effectively promote regional energy cooperation. In regionalenergytransactions, every country’s roles and needsareunique. In addition, each country’s stage of development is also distinctly characterized byspecificpatterns. Countries still prefer to act according to their own minds, either unilaterally or bilaterally. They focus on nurturing relationships with a lone regional energy supplier.

Mutual benefits and reciprocities are the bases of economic cooperation and the preconditions of guaranteeing coordinated and sustainable development.Naturally, energy economics and technological cooperation can promote collaboration in other fields among countries.

Table 3 Global new energy resources potential(Trillion TOE/year)

Source: Internet news

China exploits a considerable amount of natural resources. Nevertheless, the country’senergy resource per capita is still comparatively very low. China is also the biggest exporter of new energy and renewable energy sources in Northeast Asia. China’s exploitation techniquescannot yetreach global levels because of the lackof investment in R&D.Korea, on the other hand,is advanced in terms of technical development, research, and manufacturing ability in new energy development. Meanwhile, Japan is the global leader in many areas of new energy technology. Given this scenario and considering 2007 data from the UN Comtrade, Japan will be reluctant to share its technology andto cooperate with China and Korea in new energy development, evenif the profits show great promise. From this point, we focus on analyzing cooperation between China and Korea.

Does the development of the new energy industry have a bright future? Table 3 presents the potential of new energy sources in the world. The table reveals that the potential of new energy sources is higherthan that oftraditional sources. The globaltraditional energy consumption in 2008 was just 11,294.9 million TOE. By implication, many kinds of usable new energy reserves are almost several thousand times the globaltraditional energy consumption in 2008. If they are developed well enough, the economy could not be nagged by energy shortage.

In Northeast Asia, shortage in natural resources prompted Japan todevelopmany kinds of new energy, such as solar energy. Japan, the second largest economy in the world, relies on its technical advantage to attain a dominant position in new energy development. This explains why Japan will be reluctant to share its technology or to cooperate with others.

Like Japan, Korea suffers from insufficient natural resources. Korea imports almost all traditional energy sources, such as oil, LPG, and coal. Following the most recent global financial crisis, the Korean government announced the “Green Growth National Strategy” in 2009. Under the strategy, the government will invest 107 trillion Korean won to develop a green economy, enhance the penetration rate of renewable energy from 2.1% in 2007 to 11% in 2030, and increase the output value of renewable energy from$0.5 billion in 2007 to$130 billion in 2030. When these objectives are met, Korea may become a powerful energy nation in the world.

China is the largest CO2-emitting country, the second largest energy consumer, and the third largest oil importer in the world. China’s government has supported the new energy industry since the 1980s, making China the second largest wind power producer and the largest solar cell producer in the world. However, due to insufficient investment in R&D, key technologies in China cannotyet realizelarger breakthroughs.

According to the International Energy Agency (IEA), new energy can be mainly divided into tencategories. Japan’s energy from waste is greater than that of the other two countries. In terms of recycled energy from primary solid biomass, Japan produces 15,757gwh,6.82 times that of China and 630.28 times that of Korea. Korea covers six new energy fields, except geothermal energy. Meanwhile, China has a high consumption of solid biomass energy and wind energy. The three countries have comparative advantages in the use of new energy.

We compare new energy consumption per capita across the three countries to gauge differences in technical skill levels. Japan’s new energy consumption per capita is thehighest among the three countries which records 22.593Gwh/thousand person.In the cases of Korea and China, the corresponding values are 2.125Gwh/thousand person. and 0.838Gwh/thousand person, respectively. The figures show that Korea and China are lagging far behindJapan’s new energy technology. This reality may make Japan reluctant to share its technology and to cooperate with the other two countries.