Download PDF Energy Efficiency June 1, 2009 Volume 39 Issue 2 Summer 2009 Bridge V-39-2 Energy Efficiency The Greening of the Middle Kingdom: The Story of Energy Efficiency in China Monday, June 1, 2009 Author: Mark D. Levine, Nan Zhou, and Lynn Price China’s remarkable history of energy savings has been inconsistent but effective overall. The dominant image of China’s energy system is of billowing smokestacks from the combustion of coal. More heavily dependent on coal than any other major country, China uses coal for about 70 percent of its energy (NBS, 2008). Furthermore, until recently, China had very few environmental controls on emissions from coal combustion; recent efforts to control sulfur dioxide emissions appear to be meeting with some success (Economy, 2007, 2009). Figure 1 shows the dominant use of coal in China’s energy system from 1950 to 1980 (NBS, various years). However, this is just one side of China’s energy story. FIGURE 1 Coal dominates energy consumption in China. Source: NBS, various years. Figure 2 illustrates the other side, and what may be the most important part of the story—China’s energy system since 1980, shortly after Deng Xiaoping assumed full leadership. This figure compares the trends in energy consumption and gross domestic product (GDP) by indexing both values to 100 in 1980. The upper line shows what energy consumption in China would have been if it had grown at the same rate as GDP, since energy consumption usually increases in lockstep with GDP in an industrializing, developing country, at least until it reaches a high economic level. The lower line in Figure 2 shows China’s actual energy consumption, also indexed to 1980. The striking difference between the lines shows that GDP in China grew much faster than energy demand from 1980 to 2007, except during the 2002 to 2005 period when energy consumption grew much faster than GDP. Overall, by 2007 energy and energy-related carbon dioxide (CO2) emissions were approximately 33 percent of what they would have been if energy and GDP had grown in tandem. In this paper, we describe and assess three significant periods in China’s remarkable energy history, beginning with a brief review of the three decades prior to 1980. FIGURE 2 Actual energy demand in China is very much lower than energy demand at constant energy intensity, 1980–2006. Source: NBS, various years. From the beginning of the Communist regime in 1949 until the ascendancy of Deng Xiaoping in 1979, China’s energy policy and the system it created followed the Soviet model—rapid increases in energy supply, low energy prices, centralized energy allocation to provide energy to heavy industry, and a disregard for environmental effects. The result of this policy was one of the fastest growing and least efficient energy systems in the world, on both the supply side and the demand side (Figure 3a). The “Classic” Period of Energy Efficiency: 1980 through 2002 In 1980, in response to serious concerns in the academic community about Chinese energy policy, Deng Xiaoping adopted a strategy of reducing energy intensity. His stated goal was to quadruple GDP while only doubling energy consumption over a 20-year period, 1980 to 2000 (Lu, 1993). China exceeded this goal both in the increase in GDP and the reduction of energy intensity (Figure 3b). This was achieved through a variety of innovative policies and programs, many of which were developed by the Chinese without significant knowledge of what other countries had done to promote energy efficiency. Not until a decade after China had embarked on its program to reduce the energy intensity of its entire economy did officials begin to establish ties with the energy-efficiency community outside its borders. Two of these policies—one on investment in energy efficiency and the other on establishing centers of expertise in energy efficiency throughout the nation—were far ahead of their time. To this day, no other country has implemented such policies as pervasively and effectively. FIGURE 3 a. Energy demand grew twice as fast as GDP from 1952 to 1980. b. Energy demand grew 50 percent faster than GDP from 1952 to 1980, albeit from a very low level. Source: NBS, various years. As shown in Figure 4, investment in energy effi-ciency accounted for more than 10 percent of total energy investment in 1981, the first year of Deng Xiaoping’s program.1 Investment later increased to 12 percent before slowly declining to a sustainable level of 5 to 6 percent. In the early and mid-1980s, energy efficiency could be achieved inexpensively by fixing leaky pipes, inefficient boilers, and other equipment and by changing sloppy energy-management practices. Thus a 10 percent investment led to a much larger reduction in the increase in energy demand than a comparable investment led to increased energy supply. The investment program alone—which was just one of a number of energy-efficiency policies—achieved a significant portion of Deng Xiaoping’s goals.2 FIGURE 4 Investment in energy efficiency became a significant part of total energy investment in 1981. Source: NBS, various years. The investment program spurred the development of new institutions, such as the China Energy Conser-vation Investment Corporation, which developed branches throughout the country to channel investments into energy efficiency and co-generation (strongly supported by the Chinese government). At the national level, the Chinese created the Bureau of Energy-Saving and Comprehensive Energy Utilization in the State Planning Commission (SPC). Today, after various restructurings, SPC has become the National Development and Reform Commission (NDRC). NDRC and its forerunner commissions are half a level above ministries in the Chinese hierarchy. All major requests to the State Council from ministries are supposed to—and often do—flow through NDRC. The very existence in the 1980s of a bureau for energy efficiency at this level indicates its importance. This bureau created a variety of programs to promote energy conservation (a term for energy efficiency that is still often used in China). One of the most significant of these new policies was the establishment of energy-conservation service centers throughout the country. At their peak, there were more than 200 of these centers, employing more than 7,000 people across China. For a more complete description of institutional reforms to promote energy efficiency see Sinton and Levine (1998). It is instructive to ask what might have happened if China had not embarked on such an aggressive and innovative policy. As Figure 2 shows, Chinese actions going back to 1980 enabled the country to avoid a situation in which global energy-related CO2 emissions in 2007 would be three times higher than they are. This would have resulted in global emissions in 2007 at levels projected by the International Energy Agency for 2025 (IEA, 2008).3 Out-of-Control Growth in Energy Demand: 2002 through 2005 In spite of the slower increase in energy demand compared to GDP, there were signs in the late 1990s that energy efficiency was becoming less important to Chinese policy makers. Funding for government efforts to gather and analyze energy data was reduced significantly throughout the decade; as a result, data were not only less comprehensive, but also less accurate. China’s system for gathering data on energy consumption, which had been one of the best among developing nations, was much weakened by the end of the 1990s. However, data on energy supply, which comes from a small number of energy-supply companies and are relatively easy to track, remained plentiful. By the turn of the century, little attention was paid to energy efficiency at the industrial-enterprise level, even though, by law, all key industries (i.e., industries that consume more than 10,000 metric tons of coal equivalent per year) were required to have an energy manager. By 2000, many large enterprises had energy managers in name only, if at all. This meant that the enterprises consuming the most energy had lost the expertise (and often the data) to assess and improve their energy efficiency. Other signs that energy efficiency had a lower priority included the decline of many of the energy conservation centers; a dispirited bureaucracy in the bureau and division responsible for energy efficiency at the central government level; reduction in budgets for energy efficiency; and most important, the lack of authority and/or willingness in national, provincial, municipal, and local government bodies to enforce laws and regulations intended to save energy.4 At the same time the Chinese government lost its focus on energy efficiency, China’s accession to the World Trade Organization (WTO) had the inadvertent effect of undermining more than two decades of efforts to reduce energy intensity. Beginning in the early 2000s, and coinciding with China’s membership in WTO, there was a very rapid increase in exports, supported by rapid growth in industry to feed the export markets, which were heavily weighted toward energy-intensive products (i.e., products whose manufacture requires large amounts of energy and results in substantial CO2 emissions) (Andrews-Speed, 2009). In addition, China’s internal demand for energy-intensive commodities like cement and steel to build infrastructure and cities to serve its rapidly urbanizing population outpaced the growth of less energy-intensive industries. This also contributed to the increase in overall energy use and energy-related CO2 emissions. These and other factors that contributed to the enormous output of energy-intensive industries in China resulted in energy demand that increased at breakneck speed and far exceeded the trajectory that would achieve the goal of quadrupling GDP while doubling energy demand from 2000 to 2020 (Figure 5). From 2002 to 2005, just three years, the construction of power plants increased to 100 gigawatts per year, and newly constructed plants had a capacity of more than 30 percent of total electricity-generation capacity in the United States. FIGURE 5 Beginning in 2002, increasing energy demand was on a trajectory to dramatically exceed the energy-reduction goals for 2020. Source: Lin et al., 2007. Thus, as China developed its infrastructure, urbanized, and became the supplier of countless products to the world, its CO2 emissions increased rapidly and dramatically. Clearly, this increase was partially due to demand in nations that imported products manufactured in China. But the commonly accepted system of accounting for greenhouse gas emissions (i.e., the convention used to assess compliance with the Kyoto Treaty of Annex I countries) attributes emissions to the country that produces products rather than to the country that imports them. Indeed, changing the attribution of greenhouse gas emissions from production to consumption would be difficult because of considerable uncertainties in assessing embodied energy in products. In fact, in this three-year period, China’s energy-related CO2 emissions—which were 60 percent of those of the United States in 2002—approached the U.S. level by 2005 and surpassed it in 2006 (Figure 6). Previous forecasts as late as 2004 by Chinese government research institutes, international agencies, and mainstream analysts from various countries had predicted that China was unlikely to overtake the United States in energy-related CO2 emissions until 2015, or even 2020 (Levine and Aden, 2008). However, development from 2002 to 2005 resulted in this wholly unexpected (and undesired) result for China. FIGURE 6 With the enormous increase in energy demand from 2002 to 2005, China became a larger emitter of energy-related CO2 than the United States. Source: Levine and Aden, 2008. How did this dramatic change come about, and what can the Chinese do about it? In brief, there were four major factors behind the dramatic rise in energy consumption in China: a gradual decline in the gathering of information on energy demand and in regulating demand by government institutions a rapid increase in the production of energy-intensive products for export as a result of China’s membership in WTO increasing wealth and prosperity of a large portion of China (especially in the eastern provinces) and the associated construction of buildings and infrastructure, including transportation corridors (e.g., highways and canals for shipping freight and moving water) to serve this population ongoing rapid migration of people from rural areas, where they had consumed little energy, to urban areas, where energy consumption is much higher One of the most dramatic indicators of this energy-intensive period is the increase in the production of cement. Figure 7 shows that China produces 50 percent of the cement produced worldwide (USGS, 2009). Although this is a startling statistic, it logically reflects the extraordinary pace of construction in China, which is a substantial portion of total worldwide construction. FIGURE 7 Cement production in China is 50 percent of world production. Source: USGS, 2009. A Modern Re-enactment of the Early Days: 2005 to the Present By 2005, officials at senior levels in the Chinese government had recognized that the rapid increase in energy demand presented serious problems and was unsustainable. The rate of construction of energy-supply infrastructure—hydroelectric facilities and power plants—was putting great pressure on China’s industrial system and creating difficult problems with the safety and reliability of these complex systems. As measured in investment cost per unit of industrial output, energy supply is one of the most capital-intensive industrial activities. Demand for capital to build new energy-supply and conversion systems necessarily competes with the demand for capital to promote balanced economic and social development. In addition, senior leaders of the Chinese government and party were becoming increasingly concerned about the negative environmental effects of the rapid increase in energy supply to meet burgeoning demand. In November 2005, the Politburo issued a highly unusual statement setting a mandatory 20-percent reduction by 2010 in energy intensity (measured as energy consumption per RMB¥ of GDP).5 The Polit-buro typically addresses broad issues and sets quantitative goals for the Chinese economy as a whole; setting goals for specific industry sectors is usually the purview of the government, rather than the party. Clearly, the Politburo’s announcement of a 20-percent decrease in energy-intensity production indicated that the senior leaders perceived the energy problem to be extremely serious. The level of activity that followed resembled the energy-efficiency initiatives of the early days that had led to the creative energy-conservation goals in the 6th Five-Year Plan and the intense activities that followed: legislation, regulations, government reorganization, and the creation of new institutions at the national, provincial, and municipal levels. Nevertheless, there were important differences between the situation in 1980 and the situation in 2005. The economy in 2005 was approximately 10 times larger than in 1980 and was, therefore, much more difficult to manage. In 1980, most major energy-supply enterprises were government owned, while in 2005, although the government still exerted influence and retained some control over them, it did not own them.6 The key difference, however, was on the demand side. By 2005, the government’s ability to shape or restrain or, in many cases, even influence the demand for products, buildings, and services and the concomitant demand for energy services, was greatly limited. In spite of these differences, the intensity and creativity of policy development for energy efficiency resembled the activity in China in the early 1980s, as well as the activity that followed the oil embargo in the United States and other industrialized countries. By 1975, three years after the embargo, many affected countries had enacted and were enforcing a variety of laws and regulations requiring or promoting energy efficiency in automobiles, buildings, and industry. The United States, Japan, and major economies in Europe had created new institutions in both the public and private sectors to carry out these laws and regulations and, for the first time, had provided government funding to promote energy efficiency. Table 1 summarizes some of the key laws, regulations, and programs put into place in China since the Politburo directive of November 2005. These policies include the Top 1,000 Energy-Consuming Enterprises Program (Top 1,000 Program); the Ten Key Projects; allocations of government funds to support private investment in energy efficiency and pollution abatement; the creation of new government organizations and the strengthening of existing ones responsible for the design and implementation of energy-efficiency measures; and a variety of laws, regulations, and tax incentives.7 Many of these efforts are associated with the 11th Five-Year Plan, but some go well beyond it. Three of the most important policies are briefly described below.8 Ten Key Projects In preparation for the intense focus on energy-efficiency policy that began with the November 2005 announcement by the Politburo, in 2004 NDRC initiated the “Ten Key Projects,” and in 2005, the “Ten Key Projects” was incorporated into the 11th Five Year Plan. The four most significant of these projects are: the renovation of coal-fired industrial boilers; district-level combined heat and power projects; oil conservation and substitution; and energy efficiency and conservation in buildings. The expected impact of these four projects is a savings of up to 250 million metric tons carbon equivalent per year, about 40 percent of the 2010 target for energy intensity in China (NDRC, 2004).9 Twenty provincial energy-conservation centers received financial support from the central government to assist in the implementation of these projects.10 Top 1,000 Energy-Consuming Enterprises Program Launched in April 2006, the Top 1,000 Program was designed to improve industrial energy efficiency by targeting China’s highest energy-consuming enterprises, which account for almost 50 percent of total industrial-sector energy consumption and 30 percent of total energy consumption in China. The Top 1,000 enterprises are in nine sectors: iron and steel, petroleum and petrochemicals, chemicals, electric power, nonferrous metals, coal mining, construction materials, textiles, and paper. During the summer of 2006, all participating enterprises signed energy-conservation agreements with local governments committing themselves to reaching the energy-savings target by 2010. In addition, the energy-saving target was added to the provincial government cadre-evaluation system. Preliminary data indicate that the large majority of Top1,000 enterprises are meeting their interim targets (Price et al., 2009). Government Funding for Private Investment In 2007, the Chinese government allocated 23.5B RMB¥ (about $3 billion at that time) to projects for improving energy efficiency and reducing pollution (MOF, 2008). This funding supported the launch of the Ten Key Projects (described above), the elimination of inefficient facilities, and the installation of measures to protect the environment. These funds are also being used to award 200 to 250 RMB¥ ($26 to $33) for every metric ton of coal equivalent an enterprise saves through the implementation of five of the Ten Key Projects in energy-intensive industries, coal-fired industrial boilers, district heating using cogeneration systems, and buildings (Jiang, 2006; Lu, 2006). In 2008, the total allocation for energy conservation, emissions reduction, and ecological improvement was doubled to 42B RMB¥ (about $6 billion) (MOF, 2008). This funding includes 7.5B RMB¥ ($1 billion) for awards for the Ten Key Projects and 4B RMB¥ ($0.6 billion) for phasing out inefficient industrial plants. Overall Results In 2006, the energy intensity of the Chinese econ-omy decreased by 1.7 percent, the first decrease in this measure since 2001 (Zhou et al., 2009). Although this was a significant achievement, the reduction was well below the trajectory needed to achieve the goal of a 20-percent reduction by 2010. In 2007, however, energy intensity declined by 3.7 percent, and in 2008, it was reduced by 4.6 percent (Zhou et al., 2009). In the first quarter of 2009, preliminary data indicate an even greater reduction (China View, 2009). Although the impact of the world economic crisis on energy intensity in China is difficult to predict, it now appears that China is likely to meet its 20-percent energy-intensity reduction target for 2010. These savings would represent a decrease of 1.5 billion metric tons of CO2 (Lin et al., 2007), a very large number by any measure. References Andrews-Speed, P. 2009. China’s on-going energy efficiency drive: origins, progress, and prospects. Energy Policy 37(4): 1331–1344. China View. 2009. China’s energy intensity down 2.9% in Q1: statistics office. Available online at http://news.xinhuanet.com/english/2009-04/29/content. April 29. Economy, E.C. 2007. The Great Leap Backward. Foreign Affairs 86(5): 38–59. Economy, E.C. 2009. Personal communication, May 4, 2009. IEA (International Energy Agency). 2003. Energy Balances of non-OECD Countries. Paris: IEA. IEA. 2008. World Energy Outlook. Paris: IEA. Jiang, Y. 2006. Personal communication with Jiang Yun, China Energy Conservation Association, November 6, 2006. Levine, M., and N. Aden. 2008. Global Carbon Emissions in the Coming Decades: The Case of China. Pp. 19–38 in Annual Review of Environment and Resources, Vol. 33. Palo Alto, Calif.: Annual Reviews. Lin, J. 2005. Trends in Energy Efficiency Investments in China and the United States. LBNL-576921. Berkeley, Calif.: Lawrence Berkeley National Laboratory. Lin, J., N. Zhou, M. Levine, and D. Fridley. 2007. Taking out 1 billion tons of CO2: the magic of China’s 11th Five-Year Plan? LBNL-62886. Berkeley, Calif.: Lawrence Berkeley National Laboratory. Lu, Y. 1993. Fueling One Billion: An Insider’s View. London, U.K.: Paragon Press. Lu, X. 2006. Personal communication with Lu Xinming, director, Department of Environment and Resources Conservation, National Development and Reform Commission, September 9, 2006. MOF (Ministry of Finance). 2008. Ministry of Finance sets aside 27 Billion RMB¥ for supporting energy saving and emission reduction. Available on line at http://www.mof.gov.cn/caizhengbuzhuzhan/zhengwuxinxi/ caizhen gxinwen/200805/t20080519_29017.html. NBS (National Bureau of Statistics). 2008, and various years. China Statistical Yearbook. Beijing, China: China Statistics Press. Price, L., W. Xuejun, and Y. Jiang. 2009. The challenge of reducing energy consumption of the top 1,000 largest industrial enterprises in China. Energy Policy (special issue). In press. Available online at http://www.sciencedirect.com/science/article/B6V2W-4W329GD- 1/2/a7612e71ef7f84b4cade01abbd34106b. Sinton, J., and M. Levine. 1998. Energy efficiency in China: accomplishments and challenges. Energy Policy 26(11): 813–829. USGS (U.S. Geological Survey). 2009. Mineral Commodity Summaries: Cement. Washington, D.C.: USGS. Zhou, N., M. Levine, and L. Price. 2009. Overview of Current Energy Efficiency Policies in China. Submitted to Energy Policy. FOOTNOTES 1 Data on investment in energy efficiency prior to 1981 are not available, but investments during these years were undoubtedly much smaller than the 10 percent figure of 1981. 2 If one assumes a two-year payback on the investments in energy efficiency, then the investment level was sufficient to achieve more than half of the decrease in energy intensity sought by Deng. 3 This is based on forecasted growth of energy-related CO2 emissions by IEA (2008). 4 These statements are based on a large number of interviews by the lead author of this paper with government officials, researchers, industrialists, and academics during the 1990s and early 2000s. 5 RMB¥ is the Chinese currency, valued at 6.8RMB¥ per $U.S. 6 Many of the energy-supply enterprises were still under the control of the state, either directly as state-owned enterprises or indirectly through the positions of their leaders in government (e.g., the heads of the national oil companies are officially government ministers, even though the companies are mostly privately owned). 7 Another interesting policy is the responsibility system (also called the “one vote veto”) in which a government official or manager of a state-owned enterprise cannot advance without meeting an energy-intensity target. Thus an individual may meet all of the criteria except the energy-intensity target with very high marks and still flunk the performance evaluation, with significant adverse consequences (Zhou et al., 2009). 8 For a detailed review of energy-efficiency policies initiated during the 11th Five-Year Plan and after the announcement of the 20-percent intensity goal, see Lin et al., 2007. 9 The other six have relatively small impacts. 10 In 2006, financial support from the government for this purpose was ~64M RMB¥ (~$8 million). The United Nations Development Program/Global Environmental Facility added about ~8M RMB¥ ($1 million) to the total (Jiang, 2006). This is based on a currency conversion of $1 = 8.00419 RMB¥ (average rate of June 2006). About the Author:Mark Levine is a senior scientist and leader, China Energy Group, Lawrence Berkeley National Laboratory, who specializes in the analysis of energy-efficiency policy. Nan Zhou is a principal research analyst with the China Energy Group who specializes in energy-efficiency issues and energy-demand modeling. Lynn Price is a staff scientist with the China Energy Group who specializes in energy efficiency in industry, most recently the cement industry.