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China’s New National Energy Commission and Energy Policy
Jianjun Tu
3/30/2008

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The long-anticipated plan for Beijing to undertake major structural reforms to the energy sector by merging a number of central-level ministries, commissions and departments to form a so-called energy “super-ministry" or "super-commission" passed, albeit with some tweaks to satisfy the powerful vested interests that dominate the sector. The conclusion of the 11th National People's Congress revealed that, however much needed in Zhongnanhai, government consolidation and reform, will be a drawn out process especially for the energy sector. For instance, the newly created National Energy Commission lacks jurisdiction over the three state oil and gas monopolies and other government-controlled energy and electricity conglomerates (China Brief, March 14). Nevertheless, Beijing's efforts signal a step in the right direction and Zhang Guobao, the newly appointed director of the National Energy Bureau, will have to implement the policies set forth by Beijing in its white paper on national energy strategy.

After China’s official coal statistics was distorted in the late 1990s, Beijing gradually lost control of its energy industry and it has tried with marginal success to pick up the pieces ever since. Spiking oil prices, widespread blackout, greenhouse gas (GHG) championship, deteriorating air quality and undisciplined oil companies all made energy policy a major headache for Beijing. After numerous legislation efforts in recent years, the white paper that was issued by China's Information Office of the State Council on December 26, 2007 finally addressed China's energy circumstances and policy, which was the first of its kind. The white paper comprehensively laid out the National Energy Commission's work for the years to come [1].

China’s Energy Predicament

Since Beijing lost its cherished status of energy self-reliance in 1993, China’s primary energy consumption increased rapidly at six percent annually, and China is the world's second-largest energy producer and consumer. In 2006, China burned 2,392 million tons of coal, accounting for 39 percent of the world total [2]. In the same year, China connected 104.8 GW to the electric grid, almost the capacity of the entire African continent [3]. Between 2001 and 2006, China’s oil imports surged from 91 Mt to 195 Mt, which represents 27 percent of world oil imports expansion [4]. Rapid growth, however, does not necessarily translate to success, especially when environmental quality and energy security need to be taken into consideration.

With relatively limited petroleum reserves, Beijing has to count on China’s own abundant resources of coal for its industrialization ambition. Three decades after Deng Xiaoping opened up China’s economy, coal still represents 69.4 percent of China’s primary energy consumption, compared to the similar share of 71.3 percent in 1979. The heavy reliance on coal makes China the leading polluter of air contaminants and GHGs. As early as 1995, China’s sulphur dioxide (SO2) emissions ranked the worst in the world, accounting for 24.2 percent of the world total. Since then—while United States, the second-largest emitter, successfully lowered its emissions by 19 percent in 2005—70 percent of Chinese thermal power plants have still not installed sulphur scrubbers, and China’s SO2 emissions increased steadily from 23.7 Mt in 1995 to 25.5 Mt in 2005 [5]. Moreover, a preliminary estimate by the Netherlands Environment Assessment Agency reveals that China has overtaken the United States as the world’s biggest producer of carbon dioxide (CO2) in 2006, which increases anxiety about China’s growing role in driving man-made climate change (Guardian, June 19, 2007). Some Chinese pundits argue that the CO2 coefficient of average Chinese coal used to prepare China’s National Communication on Climate Change is much lower than the IPCC (International Panel on Climate Change) default coal emissions factor used by the Dutch agency; China’s 2006 energy statistics used for the estimate is only preliminary. In actuality, however, China used IPCC default factors to calculate the baseline emissions intensity of coal-generated electricity under the Clean Development Mechanism [6]; and the heavy tolls paid for the recent botched coal statistics make Beijing unlikely to play with the coal statistical report against rising CO2 emissions.

Beside the risks of choking on smoke and other environmental side effects, China also faces enormous risks from potential energy supply disruption. In 2007, China’s coal output reached a record high of 2,523 Mt, a 6.3 percent spike on a year-over-year basis, but it still could not keep pace with China’s booming economy [7]. As a result, China became a net importer of coal since January 2007, and maintained the status for most of 2007. Mass volume of coal supply coupled with the long distance amongst China’s major energy consuming centers and coal supply regions put tremendous strain on China’s transport infrastructure. Moreover, during the first 10 months of 2007, China's dependency on imported oil has risen to 49 percent of its demand (China Securities Journal, November 23, 2007), and the International Energy Agency (IEA) projects that this ratio will increase to 80 percent in 2030 along with rapid growth of natural gas import [8]. China's heavy reliance on foreign fuel combined with the unstable geopolitics of major oil-producing regions stir national security concerns, so Beijing reorganized most state-owned oil and gas assets into two vertically integrated firms in 1998: the China National Petroleum Corporation (CNPC) and the China Petroleum and Chemical Corporation (Sinopec). Beijing’s attempts at reform have so far produced only mixed results. While major Chinese oil companies made relative success in terms of overseas acquisition and record high profit in recent years, their monopoly over power in stifling domestic competition and their suspicious role in the recent oil shortage events were much criticized by the media.

China's per-capita energy consumption is still very low. In 2006, China’s per capita consumption of oil, gas and electricity only reached 39 percent, five percent and 37 percent of rest of the world average, respectively. Compared with the United States, the similar ratios dropped sharply to eight percent, two percent and 15 percent [9]. As average Chinese become wealthier, it is hard to imagine they will not be interested in a more luxurious and thus energy-intensive life style—e.g. overseas travel, cars, etc.—enjoyed by those in the developed world. To address the aforementioned challenges, and to “realize the coordinated and sustained development of all energy resources to the fullest possible extent,” Beijing increasingly regards energy-related issues as a higher policy priority, which culminated in the release of China's first energy white paper at the end of 2007.

Alleviating China’s Energy Predicament

China’s energy white paper emphasizes the importance of energy conservation in terms of attaining sustainable development. Beijing started energy conservation efforts in early 1980s, and achieved the goal of quadrupling economic growth while only doubling energy consumption by the late 1990s. Starting from 1997, Beijing’s unsuccessful campaign to close small coal mines seriously distorted official energy statistics; moreover, the lack of open discussion has worsened the whole situation, and the chaos lasted too long (China Brief, October 25, 2006). When the stated value of China’s energy conservation in the late 1990s seemed overly impressive, the posted energy consumption spike during the early 2000s inevitably resulted in unnecessary pressure on China’s energy sector and distrust between the government and the industries. As a result, Beijing’s energy conservation campaign did not regain momentum and credibility until the National Bureau of Statistics and the Energy Bureau jointly revised China’s energy balance tables in 2007.

The second remedy prescribed by the white paper is the expansion of energy supply capacity. China has primarily relied on domestic energy resources to develop its economy, and the rate of self-sufficiency has been above 90 percent, much higher than that in most developed countries. As the bad memory of the Cold War and the possibility of confronting the United States in the Taiwan Strait made China’s decision makers nostalgic for the era of energy self-reliance, Beijing is determined “to rely mainly on domestic energy resources, give priority to optimizing its energy mix, and work hard to increase its energy supply capacity in the process of building a moderately prosperous society.” The white paper even echoed an unrealistic goal set by China’s 11th Five-Year Plan (2006-2010), which states that China’s energy supply will meet the demands of national economic and social development by 2010. Ignoring the fact, however, that China will inevitably increase its petroleum-dependence to fuel its booming economy and alleviate environmental degradation, Beijing risks the possibility of burning too much coal than otherwise it should under an optimized fuel mixture scenario.

In 2005, China promulgated the Outline of the National Plan for Medium- and Long-term Scientific and Technological Development (2006-2010), and the white paper confirms that the top priority will be continuously given to the development of energy technology in the fields of energy conservation, fuel substitution, recycling and pollution control. Nevertheless, China’s overemphasis on the "localization rate of technical equipment" might act as a deterrent for introducing much-needed overseas technology into the domestic market. Moreover, the loopholes of China’s intellectual property protection system not only hurt foreign companies but also reduce the incentive of Chinese enterprises to invest in research and development of advanced technologies. Furthermore, Beijing needs to be aware of the risk of being too technologically aggressive. In August 2004, Shenhua Group, China’s largest coal producer, started the construction of China’s first industrial scale direct coal liquefaction plant in Inner Mongolia, which would eventually process 15 Mt of coal to produce five Mt of oil products (Financial Journal, November 8, 2007). Since Shenhua’s engineering adventure has not gone through the same rigorous scaling up experiments practiced by most Western companies, the affirmative support by the Chinese government for such types of projects is debatable, especially when a national coal-to-oil strategy directly contradicts with Beijing’s energy conservation goal.

While coordinating energy and environment development is highlighted as one of the key development policies, it is worthwhile to note that climate change has been given unprecedented emphasis. The white paper not only defends China’s position of not accepting legally binding GHG emissions targets with a lengthy paragraph, but also places “comprehensive control of GHG emissions” as the highest environmental priority ahead of “fighting ecological destruction and environmental pollution” for the first time. After China released its much-anticipated National Climate Change Strategy on June 4, 2007, the recent change of Beijing’s environmental priority clearly demonstrates that China will act proactively to address the increasing pressure from the international community on this global environmental issue (China Brief, June 27, 2007). Ironically, the rejection of the Kyoto Protocol by the United States provided a perfect opportunity for China to excuse itself from a more concrete commitment other than harnessing auxiliary benefits from energy intensity-based reduction initiatives. In comparison, the white paper promises that China will introduce regulation that is more stringent accompanied by enforcement for fighting local environmental issues such as ecological destruction, air/water contamination, vehicle emissions and energy project development.

Deepening energy system reform is considered an intrinsic requirement of China’s energy development. China started to deregulate its energy industry in the late 1990s, but major state energy companies today are still too powerful to be tamed by regulators. For instance, historically, CNPC had focused mainly on oil and gas exploration and production while Sinopec had primarily engaged in downstream activities such as refining and distribution. Beijing always needed to subsidize at least one of them when oil prices were tightly regulated, so one objective of restructuring these companies is to reduce the heavy subsidy by the government. However, while both CNPC and Sinopec enjoy the monopoly status of their upstream operations and earned record-high profit in recent years, they still cut production of their refineries to minimize economic losses whenever they perceive that the price limit of oil products set by the government is too low. Unsurprisingly, the hard lessons learned from recent diesel oil shortages clearly suggest that China has an urgent need to 1) introduce more competition to the energy industry; and 2) advance price mechanism reform to make the operations of state energy companies subject to market rules.

International Energy Cooperation

The white paper states that China regards strengthening international cooperation a key component of its energy reform, and expresses the intention to further open its energy industry by forging closer ties with the rest of world. Nevertheless, to prosper in the Chinese market, foreign companies should memorize the caveat: China’s primary intention is to introduce foreign advanced technology, management experience and people of technical expertise. While China increasingly relies on international trade to fuel its booming economy, its support for major state energy companies’ direct overseas investment will be further strengthened according to the white paper. Moreover, realizing the importance of regional stability for global energy security, China calls the international community to work collaboratively with China to maintain regional stability, especially in the oil producing and exporting countries.

Smoothly merging China’s energy industry into the global market imposes a major challenge for China’s decision makers, and accommodating China’s increasing presence is also unlikely an easy task for the outside world. To deal with China’s emergence as a major energy player, two views dominate the policy debate: one, a hostile attitude, which is evident in the U.S. Congress’ vehement objection to China’s unsuccessful Unocal bid; and two, engaging China. While continuous hostility toward China certainly guarantees retaliation sooner or later, the resulting backfire is likely to become intolerable even for countries like the United States as China quickly gains political clout in the international sphere through multilevel engagement with third-country suppliers. Therefore, cooperating with China should serve the interests of the international community better; a good example is the IEA’s continuous dialogue with China on energy-related issues.

In the process of building a prosperous society that benefits all Chinese, energy has a significant bearing on China's sustainable development. To address its tremendous energy challenges, Beijing is actively investing in any global solution. Similarly, understanding China’s unique energy circumstances is the first step to engaging China on international cooperation to ensure China plays by the rules. Finally, though China’s national energy strategy has been laid out in its first energy white paper, it is in China’s best interest to continuously refine its energy policy in the years to come, ideally, with substantial help from the international community.

Notes

1. Full text available at http://www.10thnpc.org.cn/english/environment/236955.htm.
2. National Bureau of Statistics, China Statistical Yearbook 2007.
3. China Electricity Council, 2006 Statistical Report of China’s Electricity Industry, available at http://www.cec.org.cn/news/showc.asp?id=92985.
4. National Bureau of Statistics, China Statistical Yearbook 2007; British Petroleum, World Energy Statistical Review 2007.
5. U.S. EPA, Air Emissions Summary through 2005, available at http://www.epa.gov/airtrends/2006/emissions_summary_2005.html; State Environmental Protection Administration (various years) China Environment Yearbook.
6. See http://cdm.ccchina.gov.cn/WebSite/CDM/UpFile/File1358.xls.
7. China Coal Industry Association, available at http://www.china.com.cn/economic/txt/2008-02/29/content_11167488.htm
8. International Energy Agency, World Energy Outlook 2007.
9. National Bureau of Statistics, China Statistical Yearbook 2007; British Petroleum, World Energy Statistical Review 2007; World Bank, World Development Indicators online.

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