EU Energy Policy Blog

In promising on a unilateral level to reduce the energy intensity of its economy by more than 40% from 2005 levels by 2020, China has positioned itself among the political leaders in the debate about climate change. Is China’s target ambitious and achievable?

China had already taken steps forward a few years ago, since in March 2006, China’s government set a target for reducing its energy intensity by 20% by 2010 compared to the 2005 value. This represents a 4% yearly decrease in China’s energy intensity. This first objective is likely to be achieved. It is important to point out that no developing country in economic history other than post-Mao China has cut its energy-related greenhouse gas emissions growth so deeply for so long and has set quantitative targets, all the while reinforcing – even accelerating – its strategic and technological interests.

Is the project ambitious enough?

In the wake of China’s commitment to reduce its energy intensity by 40% from 2005 levels by 2020, many comments have been made, asserting Chinese targets were not ambitious enough. Is it really relevant?

Unlike Europe or the USA, China has only set goals of reducing their emissions by GDP unit. This allows the country – which heavily depends on coal (coal represents 70% of its production of electricity) and whose shares of low-carbon energies make up for only 4% of Chinese overall output -, not to sacrifice its economic growth. According to the British laboratory E3G, the current emissions, instead of doubling in the business-as-usual scenario, will increase by around 50%. Others, like Frank Jotzo of the Climate Change Institute at the Australian National University are less optimistic. According to him, if we take into account China’s annual growth over the last few years (from 8% to 12%), the emissions will double.

Another approach consists in focusing on the “energy-GDP elasticity”. This number is commonly between 1 and 1.5 for developing countries (throughout economic history developing countries have typically increased energy use faster than GDP). As already mentioned, over the recent past China’s carbon intensity decreased on average by 4% per year. Thus, if we consider that the volume of carbon emissions and the energy mix remain constant, an 8% increase in annual GDP for the next decade will require an elasticity of 0.5 for the next decade. However, if GDP growth is only 6%, then the elasticity must be as little as 0.33. China’s target is politically risky because it is independent of GDP growth, and a slow growth rate would make it harder to reach. Thus, according to Dr. Lu Xuedu (deputy director of the Chinese government’s office of global environmental affairs), the range of 40%-45% represents the absolute highest range researchers thought were possible to achieve.

As underlined by the Chief economist at the International Energy Agency, Fatih Birol, China’s pledge on greenhouse gases means it would shoulder more than a quarter of the CO2 emissions cuts needed to limit planetary warming to 2°C. The world thus needs to decrease the emissions by 3.8 gigatons, and China would cut by around one gigaton (China would be responsible for more than 25% of the necessary reductions). Thus, with a 10% annual increase in GDP, a 45% cut in carbon intensity would multiply China’s emissions by a factor of 1.6, which corresponds to E3G’s evaluations.

So it is clearly important to consider China’s pledge as an ambitious goal.

Is China’s commitment achievable?

The second important issue is to wonder whether this ambitious goal can be taken into account seriously or whether it is just cheap talk.

This target is compatible with the process of national industrial modernization hoped for by the Communist Party. China sets ambitious goals putting pressure on the United States. According to China, the US must in turn go all out in their efforts (one of the points of tension during the Summit in Copenhagen).

In the first decade of this new millennium, China is about to meet the target of reduction of energy intensity by 20% from 2005 levels by 2010, and this has required to undertake “draconian political measures” – such as shutting down tens of thousands of factories and power plants because they were not efficient enough -, which would have not been possible in Western countries such as the US.

China will have to maintain a 4%-reduction in its energy intensity This corresponds to the average reduction rate over the last 10 years. To achieve its target, China will at least need to mobilize at least three levies.

First of all, the effect of the announcement will accelerate the flagship programs for the government advanced by the state-owned giants: modernization, rationalization and concentration of sectors such as the motor industry, the coal mines (as mentioned previously, closure of tens of thousands of factories and acquisition of thousands of others by national giants), acceleration of civil nuclear cooperation (new agreements of construction of nuclear plants have been concluded with AREVA on December, and on February with Ukraine)… Note that China has already become the global leader in terms of investments in renewable technologies (34.5 billion dollars in 2009).

The second levy is a call for enhanced technological transfer and cooperation. The vice-minister Xie Zhenhua, recently laid the emphasis on the fact that the 40%-target will be very difficult to meet if China has to work on its own, suggesting that if developed countries decide to support China, this goal is more likely to be achieved. This is a clear allusion to industrialized countries’ historical responsibilities, and China expects them to help developing countries mitigate and adapt to climate change, especially through technological transfer. This kind of cooperation is not new. EU-China initiatives have existed for several years. For instance, in 2005, as part of the EU-China Partnership on Climate change, the joint UK-China Near Zero Emissions coal (NZEC) research initiative has adressed the challenge of increasing energy production from coal in China and the need to tackle growing carbon dioxide.

The third levy aims to ease demographic transition in the future. With the competition between new “workshops of the world” in the poorest countries, China will likely have to progress within its economy to expanding the service sector and being less an emitter of CO2.

Last but not least, an argument which could be very lucrative for China. The carbon market which amounts to more than 120 million dollars in China is likely to increase significantly at the moment when the USA enters into some form of commitment, but especially if you look at the development of derivative assets. No matter how significant the growth will be, the carbon markets will re-structure and will be essential in the creation of the “low energy intensive” economy. With all the projects under way in China, Shanghai is without doubt going to be one of the most expanding carbon stock market.

In our opinion the crux of the matter is not to wonder whether China has the means for meeting its targets, but to understand why China came up with such an action plan. What is at stake for China is actually to remain the global leader of emerging economies. By formulating quantitative objectives, but by refusing in the meantime restricting targets, China upped the ante on international climate negotiations, imposed its conditions and structured the debate with Europeans and Americans, and paved the way for the defense of emerging nations’ interests.

China has clearly understood how well-conducted economic diplomacy can serve its industrial development model!

Marc Horovitz and François Lévêque, Mines ParisTech

This entry was posted on Wednesday, May 19th, 2010 at 8:22 am and is filed under Climate Change. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.