By Julian Wong Jun.2.2010
In: energy efficiency
1 comment

Reversal of Energy Intensity Trend Ilicits Iron Resolve

State Council presses for accountability for urgent energy conservation measure; NDRC issues 12-point circular to deepen economic reform.

If China is to achieve its 20 percent reduction in energy intensity in the current five year period, it will have to undertake some drastic actions in the months that remain.

And drastic action is just what the Premier has ordered.

Last month, the central government announced that energy intensity for the first quarter of this year rose 3.2 percent (from what baseline is not clear, although the press is saying its from Q1’09 rather than Q4’09).  This represents a reversal of a downward trend-the first time since first half of 2006 that energy intensity has actually risen.  This news also comes in a month after it was announced that China’s first quarter GDP grew by a remarkable 11.9% year-on-year, signaling that a recovery from the financial crisis is in full swing and stoking fears of inflation.

At the end of 2009, the government reported that China had achieved a 14.38 percent reduction in energy intensity from 2005 levels, putting it slightly behind pace (16 percent) to achieve its 2010 target of 20 percent.  That said, no one I’ve spoken to about China’s energy intensity numbers understands how the government arrives at its statistics.  Recall previous guest post on this issue, and this more recent reflection.  At best, China is at 8 percent energy intensity reduction, folks tell me.  But whether its 8 percent or 14 percent, the admission by the government that energy intensity has started to go up means that it will be extremely difficult under any circumstance to hit that cherished 2010 target.

The rise in energy intensity is attributed to the resurgent heavy industry sectors that were the beneficiaries of the economic stimulus program.  So much for all that hype about China having the greenest stimulus in the world.  (As I recently pointed out, the reality about China’s “green stimulus” is much more complicated.)

But now, Premier Wen and the State Council have apparently had enough.  In a nationally televised videoconference, Premier Wen used very strong language, saying that energy conservation is a “fundamental national policy” that concerns the “survival and development of the Chinese people.”  Government communications have gone on to attribute Premier Wen as using the vivid metaphor of needing to use an “iron hand” (“采取铁的手腕“) to eliminate backward heavy industrial production capacity.

Wen went on to describe seven broad points of urgent action (in Chinese).  These seven points were a subset of 14 points outlined by the State Council (in Chinese), which consist of the following headings:

  1. Strengthen the sense of urgency and responsibility for energy conservation.
  2. Strengthen the sense of responsibility to achieve energy conservation targets
  3. Step up the elimination of backward industrial production capacity (including numerical targets for 2010 in the thermal power, iron, steel, cement, electrolytic aluminum, glass and paper industries)
  4. Strictly control the growth of energy-intensive and pollution-intensive industries.
  5. Accelerate the implementation of key energy saving projects (83.3 billion yuan, or $12.2 billion will be invested in the ten key energy conservation projects; special mention of the role of energy service companies, or ESCOs)
  6. Strengthen the management of energy resources (including use of demand side management; provincial governments to conduct energy audits and implement punitive measures for noncompliance)
  7. Strengthen the management of energy consumption at the enterprise level
  8. Promote energy conservation and emissions reduction at the sectoral level   (specifying by name sectors such as the usual heavy industries, building efficiency, public bus transportation and military)
  9. Vigorously promote energy-saving technologies and products (specifically mentions new energy vehicles [and look what was just announced this week], energy efficient lighting, energy efficiency labeling and government procurement policies)
  10. Improve energy conservation economic policy (through energy price reform, environmental fees and taxes, etc.-more on this later)
  11. Accelerate improvement of regulations and standards (including review policies of fixed asset investments, and standards for energy efficiency of buildings and various products and buildings)
  12. Intensify supervision and monitoring (calling for formation of energy monitoring organizations to carry out inspections and for violators to be held accountable)
  13. Deepen citizen actions on energy conservation and emission reductions (through various educational efforts)
  14. Implement early warning controls for energy conservation and emission reductions (paying attention to regions that appear to be falling short of meeting their energy conservation targets).

What Stands Out

The notice is rich in detail and I recommend investing some time to understand the scope of the recommendations.  A lot of these measures are a repackaging of policies that are already on the books.  But for me, what stands out from the State Council notice and Premier Wen’s address is the increased emphasis on responsibility and accountability.  Points #2 and #12 of the notice, and to some extent #6 and #14 as well, have strong and explicit language emphasizing the need for every level of government and the business sector to be accountable for meeting is energy conservation targets.  There is also good language on the need to report progress, monitor and conduct audits and enforce standards.  Point #13 also calls for the media to play a monitoring role, a point specifically repeated by Premier Wen in eloquent terms (“新闻媒体要定期公布各地方节能减排进展和能耗情况,报道先进经验,曝光反面典型,弘扬节约光荣、浪费可耻的社会风尚。”)

Vice-Chairman of the National Development and Reform Commission Xie Zhenhua recently reiterated the government’s stance, saying that enterprises that exceed local on national benchmarks for energy consumption will be penalized financially.  Xie’s warning is consistent with a recent government notice issued by the NDRC (see point #4).

President Wen also discusses the role of data accuracy.  Glad he is tackling this issue directly, for who can trust China’s economic data, let alone energy or emissions data?  He explicitly calls for those who are found to report false data to be “firmly dealt with seriously” (“要坚决严肃处理”).

One hopes that the recently conceived joint statement between the United States and China coming out of the Strategic & Economic Dialogue in Beijing in late May that, among other things, promises cooperation on energy data issues can be productive and bear fruit quickly, but a closer look at the language suggests that there will be a lot more talking about cooperation before actual cooperation (emphasis in italics added):

The United States and China recognize our common interests in improving energy market transparency and market stability, enhancing mutual understanding of national and global energy issues and strengthening bilateral collaboration, seek to establish a working group to make formal arrangements for cooperation between the U.S. Energy Information Administration and China’s National Energy Administration, including information sharing and technical assistance, the collection of energy production data (conventional and unconventional) and end-use consumption data through surveys, short- or medium-term forecasting methods, and strategies for the dissemination and analysis of energy information.

So it looks like before EIA and NEA get down to talking about the hard issues of data collection and analysis, a working group to thresh out the scope of cooperation will be a necessary intermediate step.

Giddy-up, working group!

The Root of the Problem

The Chinese government realizes that the root of its impending energy and environmental crisis does not necessarily lie in its large population, high levels of energy use, or even the fact that its energy structure is dominated by coal.  Rather, it’s the very structure of its entire economy, geared towards heavy industry, that lies at the heart of its resource challenges.

The present reality of an economy heavily skewed towards secondary industry is coupled by two scary future trends: accelerating urbanization and a rising middle class.  Both means increase demand for stuff, particularly carbon-intensive stuff such as homes (glass and steel and cement), appliances (petroleum, power), automobiles (steel, oil) and everything else you can think of that falls under the rubric of modern urban life.  In the near term, the overwhelming majority of all that stuff is going to be made in China.  That spell enormous domestic resource challenges.

Its not like the leadership does not see the writing on the wall.  Since 2004, Premier Wen has been advocating for structural readjustment of the Chinese economy, but there has been little success in achieving  this.  A newly released report by the Lawrence Berkeley National Labs points out that limited progress has been made in achieving structural readjustment of the economy in the first three years of the current 11th Five Year Plan (see also their preliminary findings reported in this earlier GLF post).

On the heels of Premier Wen’s and the State Councils’ fiery exhortations, the National Development and Reform Commission released just last week a 12-point circular (《关于2010年深化经济体制改革重点工作的意见》) hammering home the urgent measures needed to reform China’s economy.  The circular touches on a diverse range of issues, from financial regulatory reform to the broadening of social safety nets, but it should come to no surprise that energy and the environment garners important attention.

Point #4 in the circular spells out three important areas: (1) energy price reform, involving electricity (including a step-ladder system for residential power; cost-sharing mechanisms to promote renewable energy supply; and removal of preferential pricing for energy-intensive industries as a recent NDRC circular has directed), natural gas and oil prices) [we have seen just earlier this week how gasoline and diesel prices have been adjusted downwards to reflect international crude oil price trends while wellhead prices for natural gas have been hiked nearly 25%], (2) water price reform to promote conservation, and (3) levy fees and penalties for water pollution, garbage and medical waste treatment and  launch pilot schemes for emission trading.

Additionally, Point #5 mentions the role of natural resource and environmental taxes (see what Xinjiang province just did).  This is noteworthy considering the speculation in recent weeks about the possibility of carbon emissions taxes as early as 2014.  Despite the buzz surrounding a prospective carbon tax, I would caution overexcitement as all that has happened so far is a conclusion of a study by the Ministry of Finance and a government think tank.    Make no mistake about it, though the discussion of carbon taxes go far back for a number of years, and I’ve blogged about it in 2008 and 2009.  Before a carbon tax can become legislative reality, behind-the-scenes turf wars among different ministries and powerful State-Owned Enterprises will unfold.  If I find the time (big if?), I’ll do an in-depth blog post about the latest thinking on carbon taxes in China.

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