Cameron Hillprofessor Palmiter

Cameron HillProfessor Palmiter

Energy Law, Fall 2011

China’s Super “Powers”

Abstract

The energy policy for any country is a critical element for future economic growth and energy security. With dwindling resources and the threat of rapid climate change due to the use of fossil fuels, a sound energy policy that incorporates efficiency, renewable energy requirements, and protective environmental laws will help shape the future of the world's next super powers. This Paper focuses on what is arguably the United States biggest energy competitor, China, and how this country is developing an ever-evolving energy strategy that, if successful, will allow the country to become the world's next super power. China's energy policy is becoming a model for other countries looking to secure a clean, energy-efficient future without the need to rely on CO2-emitting fuels. China's energy policy encourages investment into new infrastructure, new energy sources, and calls for a decrease in the use of coal, which makes up a large majority of China's energy consumption. In order to stay competitive against China's energy model and environmental policy, the United States must increase investment into renewable energy resources, decrease demand of CO2 heavy fuels, and maintain investment incentives in the form of cash grants and tax credits so that these renewable energy generators remain a profitable venture for private investors. Renewable Portfolio Standards and feed-in tariffs will supplement these goals.

Introduction

The polar ice caps are melting, carbon dioxide emissions have increased dramatically over the last century, and the once-non-existent term “energy security” is now ubiquitous throughout the world. In times of need, Americans are probably used to turning to their own country for world-wide solutions. But just as the earth’s climate is changing, the trend to turn to the world’s current superpowers is also in flux. Ten years ago, the chances were slim that any person would suggest turning to China for answers on how to run an energy-reliant economy, how to operate an environmental legal system, or how to be one of the most innovative renewable energy countries in the world. However, over the past decade, China has emerged as a world leader in energy consumption, environmental innovation, and future energy and environmental planning. It is only a matter of time before China’s super powers provide a medium for the country to become a super power itself. China recently became the world leader in energy consumption and is currently the highest-producing country for CO2 emissions. While these factors in themselves are not indications of world dominance, it is China’s response to these trends that gives credence to the claim that China’s lead is the one to follow.

This Paper will discuss the new implications of China’s developing status as the leading energy consumer in the world and how China’s response to these developments should be admired, followed, and, ideally, considered a competitive threat for other nations; a threat in need of a response. Part I will briefly address China’s history and the latest status of the country’s development as an economic power. Part II will cover the energy demand of the growing Chinese population and economy and some of the problems that coincide with such growth. Part III will discuss China’s response to environmental concerns and energy demand problems. Part IV will discuss what the US has done in response to similar problems and what the US needs to do in the future to be a world leader in renewable energy investment and energy security.

I. A Brief Look Into China’s Past

While China’s population growth—attributed most directly to Chairman Mao Zedong—has been significant over the past 60 years, China’s adoption of Communism was anything but a signal of a growing economic threat. The threat of a Russian Communist neighbor created high tensions between the two nations. China’s state-centralized economy did not allow private individuals to own a business, and quotas and production methods were strictly regulated. It was not until 1978 and the push from Deng Xiaoping toward a market-based, private-party economy that the China known today truly began its quest toward a developed world power.

Since the implementation of the new economic policy, China’s economy has grown 90 fold, with a GDP growth rate averaging over 10% per year. China is currently the world’s fastest growing economy, and, as of recently, China surpassed Japan in terms of annual GDP. This rapid growth has had both positive and negative effects. Some of the more notable improvements include a higher literacy rate—which allows China to capitalize on its human equity—and China’s poverty rate has dropped markedly over the past decades due to the influx of wealth from the market economy. However, despite these improvements, China’s demand for energy to fuel this growth has had a huge impact on China and the rest of the world.

II. Energy and China

With this growth comes a corresponding growth in the demand for energy. Over the summer of 2010, China became the largest consumer of energy, surpassing the United States. When compared to the US in terms of oil equivalent energy sources (meaning an aggregate of energy consumed including crude oil, coal, nuclear power, renewable resources, and natural gas), China consumed over 2.25 billion tons of oil equivalent in 2009, an amount 4% higher than the United States. The United States held the “Highest Energy Consumer” title since the beginning of the 1900’s. Most surprising, however, is not that China overcame the US in this metric; rather, China’s accomplishment occurred swiftly—the country’s consumption of energy doubled in less than 10 years. This growth can be attributed to, mostly, the energy-intensive growth of heavy industry and infrastructure, which, in 2006, accounted for nearly 70% of all of China's energy consumption and sulfur dioxide emissions.

The most significant problem with the newly-generated supply of energy is the energy’s source—coal. China derives a little over 70% of all of its energy from the burning of coal. As of 2009, this amounted to 7.71 billion metric tons of CO2 emissions, an increase of over 267% from just 10 years earlier. According to the Energy Information Administration, China’s significant output of CO2 contributes to over 25.3% of the total global CO2 emissions. Not surprisingly, 16 of the world’s 20 most-polluted cities are in China.

China’s CO2 Emissions Compared to the US and the World (kt)

III. China’s Response to Energy Demands

China’s responses to the effects of energy are multi-faceted. China’s plans include aspects of regulation, efficiency, and alternative-source production. The combination of these three facets will dramatically reduce the carbon footprint of China and, ideally, lead to a renewable energy portfolio that will become a model for other developing, and even developed, countries.

A.Efficiency

Typically, increased energy demand correlates with an increase in consumer demand; however, a significant portion of China’s increased demand for energy comes from China’s need to improve its infrastructure and develop its heavy industry. A useful metric in determining how efficient a country is relative to its energy use is the “energy intensity” calculation. By dividing the GDP of China by units of energy consumed by the country (set to a constant 2005 Price Purchasing Power dollar per kg of oil equivalent), China’s energy intensity equal $3.60 USD per kg of oil equivalent. This is below the world average, and compared to some members of the Organization for Economic Cooperation and Development ("OECD"), for example, the US and the UK, which have an energy efficiency of $5.90 and $10 USD, respectively, the amount of units of energy China uses to produce a unit of economic output is quite low.

Energy Intensity by Country

2005 Price Purchasing Power Dollar per kg of Oil Equivalent

China's National Development and Reform Commission and several other government agencies announced the General Work Plan for Energy Conservation and Pollutant Discharge Reduction. This plan was announced after China failed to reach its goal of reducing energy consumption per unit of GDP by 4% in 2006. Coupled with China's increased energy demand in electricity, steel, nonferrous metals, construction materials, oil processing, and chemicals, all of which "grew excessively fast" in the first quarter of 2007, the failure to reduce energy consumption by 4% per unit of GDP led to several sweeping changes.

China’s first step, and the main goal of the Work Plan, is to reduce the total energy consumption per unit of GDP by 20% before 2010. While data is currently unavailable from China's Climate Policy Initiative, 2009 data indicates that China was well on its way to meet the reduction in energy consumption. Part of this progress has been attributed to energy efficiency found in hydro-electric and solar power facilities. These facilities are being constructed because of a renewable energy plan, discussed below, that spurs development of such renewable energy generators. The plan also encourages the construction of more efficient power plants. An increase in efficiency means the amount of energy required for a unit of GDP will conversely decrease.

Second, the plan also holds company and government leaders accountable for not meeting energy efficiency requirements. The plan emphasizes energy efficiency and pollutant discharge indices as important variables in the leaders' evaluations. These factors are so important, in fact, that the leader will receive a negative performance review if he fails to reach his goals; effectively rendering all other areas of the evaluation moot, even if performance in those other areas is exceptional.

B.Environmental Law and Policy

In March of 2011, the National People's Congress approved the latest 5-year plan ("5YP"), the 12th 5YP implemented since Mao ZeDong first implemented the 5YP strategy. This latest 5YP includes seven key investment areas, three of which are focused primarily on energy—clean energy, energy conservation, and clean energy cars. China, similar to the last 5YP, set ambitious goals to achieve by 2015.

1. Policy

One of China's goals is to again reduce energy intensity by 16% before 2015. China also plans to reduce carbon emissions 17% by 2015; this step comports with China's goal to reduce carbon intensity (based upon carbon units emitted per unit of GDP) by 40-45% by the year 2020 from 2005 levels. This energy-intensity element will be supported by the production of more energy efficient power generators, including wind, hydro-electric, nuclear and more efficient coal-powered plants. In fact, China has an additional goal to acquire at least 15% of its energy use from non-fossil fuel sources by 2020, with a goal in the interim of 11.4% by 2015. Another method, consolidation, is being used to make energy production more efficient. By consolidating China's coal companies, China hopes to achieve upstream energy efficiency at the production level.

China also outlined an extensive, investment-heavy plan to revitalize its energy distribution and generation capabilities. In the next ten years, China plans to invest 11.1 trillion RMB ($1.745 trillion USD) into its power industry. Between 2011 and 2015, approximately 5.3 trillion RMB (equivalent to $833 billion USD) will be spent on the construction and modification of China’s power infrastructure, with 2.55 trillion RMB of this initial investment going toward the improvement of China's power grid. The remaining 2.75 trillion RMB will go to the construction of new power plants, mainly nuclear and hydropower. Currently, China has 14 nuclear power plants in operation and another 25 under construction. Earlier this year, China suspended construction of its power plants due to Japan’s Fukushima accident. However, following an inspection by Chinese safety personnel, China’s nuclear power plants received an all-clear safety analysis, allowing China to pursue another ambitious goal—100 nuclear power reactors by 2020. Additionally, China plans to construct large-scale hydropower plants in Southern China, effectively reaching 284 gigawatts of pure hydro-power capacity by 2015 and up to 330 gigawatts by 2020.

1. Law

As discussed, China is the largest emitter of carbon dioxide in the world. In 2009, China contributed 25.3% of worldwide CO2 emissions. In response to this large contribution, China recently considered implementing a carbon cap-and-trade regime by 2015 to limit the emissions of CO2 from specific industries. Part of China's plan to reduce carbon intensity will help China reach its goal of a 40-45% reduction by 2020, but the carbon cap will be a regulatory requirement that will put significant pressure on certain emitters. China's National Development and Reform Commission indicated that it plans to implement mandatory regional cap-and-trade programs by 2013.Some claim that this plan is too ambitious without immediate, drastic action given China's exceedingly high reliance on coal and China's increased demand for electricity.

World CO2 Emissions by Country (2008)

China has a multitude of laws that regulate environmental concerns. These laws include the Prevention and Control of Atmospheric Pollution, Prevention and Control of Environmental Pollution by Solid Waste, and Prevention and Control of Water Pollution. While most of these laws are not groundbreaking, there is a significant, arguably drastic, implication for emitters of pollution. By applying Article 115 of China's Criminal Code to a violation of an environmental law, it is possible for a person found liable for polluting to also be found guilty of violating China's Criminal Code because the Article makes it criminal for a person to “spread[] poison.” The punishment for violating Article 115 can include long jail sentences and even death. In 2009, a China-based company, Biaoxin Chemical, was found to be responsible for polluting part of Yancheng, Jiangsu Province's water supply. Hu Wenbiao, Biaoxin's chairman, was charged with and found guilty of "spreading poison" under Article 115, and he was sentenced to 11 years in prison.

C.Renewable Energy Law, Policy, and Industry

China's most admirable contribution to the development of climate change policy can be found in its initiatives to develop renewable energy. China's growth in this sector is outpacing even developed countries, and this policy is one of the key strategic advantages China will be able to capitalize on in the future. China already plans to have 15% of its entire energy consumption produced by renewable energy resources, and China has incorporated the development of these resources into its economic stimulus plan.

Comparison of China’s 2008 Energy Sources to United States’ 2010 Energy Sources

1. Law and Policy

Becoming effective in 2005, China's Renewable Energy Law will require China to reach the 15% renewable energy consumption goal by 2020. This will require China to produce 137 gigawatts of renewable power generation, and this renewable energy must be composed of at least 15% vehicle fuel. Further plans were adopted by China's National Development and Reform Commission ("NDRC") in 2007. The NDRC plan requires renewable energy sources to attain the following levels of production:

• Small hydropower – 75 GW
• Wind – 30 GW
• Biomass – 30 GW
• Solar – 1.8 GW

In order to help reach these long-term goals, China will mandate several requirements. First, the costs of the renewable sources will be funded by “taxpayers” nation-wide, with a significant contribution coming from current utilities in the form of feed-in tariffs. Second, renewable sources have industry-specific mandates. For example, China's windmill industry—an industry that produces over 3% of all of the world's windmills—must derive at least 70% of the parts and resources in each windmill from Chinese-based producers. China also encourages wind power production by implementing wind concession programs to developers to spur investment.

1. Industry

In 2009, China, now the world leader in renewable energy investments, invested over $34.6 billion USD in renewable energies. This was almost twice as much as the United States, trailing in second (and a distant second at that) with $18.6 billion. Adding to the disparity between these top two investors is the fact that the $34.6 billion USD China invested in 2009 does not include China’s government’s contribution—the money came from only private investors. It has been estimated that this investment will be almost $50 billion by 2014. This projection also estimates that the US and Canada, combined, will not reach this level of investment until 2020.

China's wind and solar industries have seen significant growth over the past decade thanks to heavy investment by the Chinese government and its renewable energy policies. Aside from an abundant supply of wind resources, China is the world's largest windmill turbine manufacturer, supplying 3% of the world’s turbines.[is this right?] China also supplies a large portion of its own windmill use, with over 40% of in-use windmills originating from China-based companies. It has been estimated that demand for China's wind turbines will increase to 13% of all global demand by 2013. Coupled with China's renewable energy policy, China's extensive investment in wind technology will help China continue to reduce its energy and carbon intensities, maintain its position as the number one windmill turbine manufacturer in the world, and, as some researchers anticipate, lead China into an age where wind power replaces coal use.

China's solar industry has seen similar success. In 2010, China accounted for at least half of the world's solar cell production. China's three biggest power companies—Suntech Power, Yingli Green Energy, and Trina Solar—all had increases in sales of between 33 and 63% over the prior year's figures. China's dominance, however, is being challenged. Recently, many US firms alleged that China is dumping solar products or selling them below costs. The companies allege that China's subsidies of solar production allow the Chinese companies to undercut the prices of the US firms, putting them out of business, which has happened to several prominent US firms. Very recently, the Commerce Department said it was considering an anti-dumping tariff on Chinese solar panels. These tariffs could be between 50 and 250%.