China’s New Energy Policy has Global Implications

About three months ago I attended an event with Fatih Birol, the Chief Economist for the International Energy Agency, at the Council on Foreign Relations.  During his remarks, he said that there were five places he was concerned with regarding demand for energy and carbon emissions, “China, China, China, India, and the Middle East.”  Birol’s comments highlight the fact that China’s announcement last week that it is setting targets for energy intensity and CO2 emissions per unit of economic output and putting a cap total on total energy consumption by 2015 is not just important for China but has global implications for energy markets and the environment.

This announcement comes at a time when Chinese policy makers are demonstrating that they are increasingly willing to sacrifice some economic growth in exchange for meeting other goals.  The recently released five year economic program specifically calls for increasing household incomes and domestic consumption while setting lower targets for GDP expansion.  There is a healthy debate amongst analysts regarding the reasons for China’s energy targets.  Energy security is a major concern for China as 80% percent of China’s imported oil flows through the straits of Malacca, an area where the U.S. currently enjoys naval superiority.  China is also the world’s largest importer of coal, which like oil is vulnerable to price shocks such as occurred during recent floods in Australia.  Their economy’s reliance on coal and energy intensive heavy industry has serious environmental consequences including choking pollution and the degradation of water supplies.  Also, energy security and environmental damage are linked to concerns about social unrest in the eyes of the Chinese leadership.

China obviously does not have to deal with the kind of democratic debate that takes place in the U.S. regarding energy policy but it is interesting to compare the reasons mentioned for China’s policy with the discourse in the United States. China’s focus on energy security and non-climate change related environmental issues sounds very similar to former California Governor and long-shot candidate for Energy Secretary Arnold Schwarzenegger’s recommendation at the recent ARPA-E conference that the U.S. can best formulate an intelligent energy policy and meet ambitious greenhouse gas targets by re-framing the debate in  terms everyone can agree on.

Hopefully, China’s willingness to take energy policy and carbon emissions seriously will remove some of the excuses that other developed nations have used to avoid making hard choices.  The U.S. has tended to argue that without strong action from China and India global coordination on emission targets will not be meaningful.  Now China has taken an important first step in this direction.  Also, increasing China’s energy security through a reduction in demand or by any other means is good for the energy security of the rest of world.  Increasing transparency around expectations of China’s future consumption can help stabilize energy commodity prices which are set in a global marketplace.  Even though energy security is not a zero sum game, perhaps a sense of competition between nations will push some countries that have been sitting on the fence towards a race to the top in terms of developing meaningful energy policies.

Chinese Cleantech: Cooperation and Competition

Global energy innovation is not a zero sum game.  A technology that improves the efficiency of solar panels can be deployed anywhere regardless of who holds the patent and a country that can produce cheaper wind turbines means that more wind power can be installed globally for the same amount of money.  Despite the fact that everyone can benefit from global innovation, the spoils are clearly not divided evenly and there are winners and losers at the local level.  No country inspires more fear right now regarding who will reap most of the benefits of new developments in clean technology than China, which is clearly playing by some different rules than other countries.  Almost every day there is a new report in the U.S. press about how China is unfairly stealing intellectual property (IP) from other countries and using the appropriated technology to compete against the same international companies that gave them these ideas.  According to a recent Wall Street Journal article, appropriating foreign IP may actually be part of a coordinated state policy.  So how should we think about China’s role in the development of clean energy?

James Fallow presents a fascinating model in the Atlantic Monthly about how the U.S. and China have formed a mutually beneficial relationship regarding innovation in the energy sector.  Fallow focuses on “clean coal”, which he argues needs to be a focus of anyone serious about arresting climate change given the facts that the U.S. and China are both the largest emitters of greenhouse gases and the largest consumers of coal.  His basic argument is that although a lot of the best innovations are still coming from the U.S., America simply isn’t constructing that many new power plants compared to China.  American innovators benefit by having someone actually apply their ideas in a real world context on a meaningful scale and China is the perfect place to do that given the rapid rate at which they are building new sources of power of every kind.  The Chinese turn American experiments into real world applications, refine the idea, and the U.S. learns the ins and outs of the new ideas it has developed more rapidly than it would otherwise.  Everybody wins.

What makes people more nervous is when China comes up with the big ideas themselves.  It was recently announced at a Chinese Academy of Sciences meeting that their government is undertaking a program to build the world’s first thorium-fueled molten-salt nuclear reactors, which many refer to as “clean nuclear” power.  Although much of the initial research on generating energy from thorium was conducted at Oak Ridge National Laboratory in Tennessee during the 60s and 70s, the work was largely abandoned in favor of pursuing research on nuclear energy based on uranium.  If the Chinese are the first to create working power plants from this technology America could find itself importing much of the technology for clean nuclear in the future from China and paying Chinese companies to use their patents.

Regardless of the degree to which policy makers see China as a competitor or an opportunity, the best response is clear.  Continuing to push the envelope of innovation will benefit both individual countries and global energy consumers overall.  As one Japanese executive is quoted in the Financial Times as saying, “When we install a new process in China we know that some technical details will inevitably leak out to rivals. So we always have to make sure that when we introduce the latest generation of technology in an overseas plant we are working away on the next generation in our research laboratories in Japan.”  Whatever else is done to protect countries’ and companies’ intellectual property, the only way to stay ahead of the game is for everyone to do all they can to continue coming up with new ideas and technologies.