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.