China S Energy-Related Challenges

Remarks at Climate Workshop on Bingaman-Specter Discussion Draft Senate Energy Committee Hearing Room

Friday, March 2, 2007

Kelly Sims Gallagher, Ph.D.1 Director, Energy Technology Innovation Project Belfer Center for Science & International Affairs John F. Kennedy School of Government Harvard University

I direct the Energy Technology Innovation Project at Harvard University’s John F. Kennedy School of Government in the Belfer Center for Science & International Affairs. In our research group, we aim to analyze, inform, and shape energy policy in the United States, China, and India, and we particularly focus on how to accelerate the development and deployment of advanced energy technologies in these three countries. Much of my own research since 1998 has been on energy and transportation in China, and I recently published a book, China Shifts Gears: Automakers, Oil, Pollution, and Development (The MIT Press, 2006). We have a number of current research projects in China in collaboration with Chinese partners.

I’ve been asked to focus my remarks on the role of China in addressing global climate change. My time is short, so I will first state the main points that I would like to leave you with, then review the Chinese context for reducing CO2 emissions, and finally, elaborate my main points with my remaining time.

Main Points:

 The Chinese government is well aware that China will soon be the world's largest greenhouse-gas emitter.  China has already taken important steps to moderate future growth in greenhouse- gas emissions there, but there is more to be done.  It is unrealistic to think that China would move in lock-step with the United States for a variety of reasons.  Symbolically, the United States should be the first to commit to slow, stop, and reverse CO2 emissions, but my judgment is that it is likely that China would quickly follow the U.S. lead, adapting policies to its own national circumstances.  The longer the United States delays, the longer China will delay, and we cannot afford to wait any longer in either country if we wish to avoid a 2°C (3.6° F) global average temperature increase.  By using the cheapest technologies currently available, China is rapidly locking into high greenhouse-gas-emitting industrial facilities and power plants for decades.  The United States should immediately launch an international effort to encourage and assist China and other major developing countries to reduce the growth in their greenhouse-gas emissions in the near-term, and I will make two specific proposals in this respect.

1 [email protected]

1 Chinese Context

China’s energy-related challenges are many, including the:

 Need for energy to sustain economic growth  Increasing foreign dependency for oil and gas  Provision of modern forms of energy to China’s poor  Increasingly severe urban air pollution  Already massive acid deposition  Growing concerns about global climate change  Access to advanced energy technologies to address all of the above challenges

China’s long term energy security, in my opinion, is not only dependent on having sufficient supplies of energy to sustain its incredible rate of economic growth, but it will be equally dependent on its ability to manage the growth in energy demand without causing intolerable environmental damage.

Only with development and deployment of improved energy technologies can China achieve its targets for development and economic growth.

Greenhouse-gas emissions

According to the latest official data available, China currently emits about 15% of the world’s total carbon dioxide emissions from fossil fuel burning, as compared with 22% in the United States. China’s per-capita emissions are one-sixth that of the United States. So, currently, the United States is the largest emitter in the world in aggregate and per capita terms, but China is catching up quickly in terms of aggregate emissions, but not in per capita terms. The International Energy Agency’s World Energy Outlook 2006 projects that China’s greenhouse gas emissions will surpass the United States in 2009, but the U.S. Energy Information Administration’s latest projection is that China’s emissions will exceed those of the United States around 2015.2

Most of China’s emissions come from the industrial and electricity sectors. As of 2000, electricity accounted for 52% of CO2 emissions (and 75% of China’s electricity is consumed by industry3), cement accounts for 28%, iron and steel for 9%, and transportation for 8%.4

In terms of energy comparisons, China:

 Consumes two-thirds as much commercial energy as the United States does;  Consumes one-third as much oil as the United States does;  Imports one-third as much oil as the United States, although growth rate in oil imports has been much faster in recent years;  Uses two-thirds as much electricity as the United States does;  Consumes almost twice as much coal as the United States;

2 International Energy Agency, World Energy Outlook 2006, OECD/IEA, Paris, 2006 and Energy Information Administration, International Energy Outlook 2006, U.S. Department of Energy, Washington, DC, 2006. 3 China Energy Database, Lawrence Berkeley National Laboratory. 4 Center for Clean Air Policy, “Greenhouse Gas Mitigation in China,” November 2006.

2  Has only 13% of the world’s coal reserves compared with 27% for the United States, but coal is China’s main domestic energy resource.

Energy

Coal accounts for three-quarters of commercial energy supply in China and it also 5 accounts for approximately 80% of China’s CO2 emissions.

More than half of China’s power plants are smaller than 300 MW. In fact there are more than 5,000 plants that are smaller than 100 MW (24% of total capacity), resulting in very poor energy efficiency. There are a handful of supercritical plants, and the first ultra- supercritical pulverized coal plant came on line in November 2006 (Huaneng Group Yu- Huan plant). Thirty-four more ultra-supercritical plants are under construction.6

So far, transportation is not a big consumer of energy in China, accounting for only 8 percent overall.7

Impacts of Climate Change on China

The possible impacts of climate change on China are not as well studied as they have been in the United States, but it is clear that there could be very adverse impacts with respect to water supply, agriculture, and sea-level rise.

 Precipitation decreased 50-120 mm/year along the northern Yellow River between 1956 and 2000. Precipitation increased by 60-130 mm/year along the southern Yangtze River from 1956-2000.  The mountain glaciers on the Tibetan plateau are receding rapidly, with major implications for fresh water supply in already water-stressed northern China. The glacier which is the source of the Urumchi river on the Tianshan mountain shrank 11.3% between 1962 and 2001.  A sea level rise of 30 cm would cause massive coastal inundation, which is projected to cause 56 billion RMB in economic losses to the Pearl River Delta area, 9.6 billion RMB in losses for the Yangtze Delta area, and 52 billion RMB in losses for the Yellow River delta, including the Gulf of Bohai.8

Elaboration of Main Points:

 The Chinese government is well aware that China will soon be the world's largest greenhouse-gas emitter. It is also well aware of the projected impacts of climate change in China, and has expressed concern about these impacts.

 China has already taken important steps to moderate future growth in greenhouse- gas emissions there, largely through energy efficiency and renewable energy measures, but there is more to be done. -

5 Energy Information Administration, International Energy Outlook, U.S. Department of Energy, 2006. 6 Lifeng ZHAO, “Progress and Development of Clean Coal Technology in China,” Presentation at Energy Technology Innovation Project seminar, Harvard University, February 13, 2007. 7National Bureau of Statistics, Statistical Yearbook of China, Chapter 7: Energy, 2005. 8 LIN, Erda and Ji ZOU, “Climate Change Impacts and its Economics in China,” Stern Review on the Economics of Climate Change, HM Treasury, UK, January 2007.

3 - Energy intensity (amount of energy used to generate economic activity – usually expressed as energy use divided by GDP) dramatically declined in China from 1980-2004, which indicates that China’s overall energy efficiency got much better. This means that China reduced the growth its greenhouse gas emissions by becoming more energy efficient. But, overall, China’s energy efficiency is considerably worse than the United States’ and, unfortunately, it appears to have worsened in the last 2 years. - China has very aggressive energy efficiency targets for the coming years. The 11th 5-Year Plan (2006-2010) calls for a 20% reduction in energy intensity by 2010. This will be very hard to achieve. - If you include small hydropower, China has twice as much installed renewable power capacity than the United States.9 In fact, China leads the world in terms of total installed capacity of renewable energy at 42 GW (compared with 23 GW in the United States) as of 2005. China accounts for 63% of the solar hot water capacity in the world (the United States has 1.8%). As of 2005, China had installed 1.3 GW of wind capacity (the United States had 9 GW). - China passed a Renewable Energy Law in 2005 that requires grid operators to purchase electricity from renewable generators, and China set a target of having 10% of its electric power generation capacity come from renewable energy sources by 2010 (not including large hydro). - China passed its first fuel efficiency standards for passenger cars in 2005, and they will be strengthened in 2008. The 2008 standards are more stringent than existing fuel-efficiency standards in the United States. China also implemented vehicle excise taxes so that if you purchase a car or SUV with a big engine, you will pay a much higher tax than if you purchase a car with a small energy-efficient engine. - The Chinese government is investing in advanced energy technologies. During the Eleventh Five-Year Plan (starting Sept. 2006) the Ministry of Science and Technology’s (MOST) budget authority for energy research, development, & demonstration is about 3.5 billion RMB (approx. $425 million). Budget authority for advanced coal technology is about 0.7 billion RMB (approx. $85 million). This accounts for 21 percent of the total energy budget. Five coal co-production and gasification demonstration projects are planned for the next 5 years, in collaboration with Chinese industry.

 It is unrealistic to think that China would move in lock-step with the United States for a variety of reasons.

- 135 million Chinese still live in absolute poverty (less than $1/day) and millions more just above that arbitrary poverty line, so there is a tremendous imperative to foster economic development and high economic growth rates there; - China has a gigantic population of more than 1.3 billion people; and, - China’s only significant domestic energy resource is coal, which is the most greenhouse-gas intensive fuel

 By using the cheapest technologies currently available, China is rapidly locking into high greenhouse-gas-emitting industrial facilities and power plants for decades.

9 Renewable Energy Policy Network, Martinot, Eric (Lead Author), “Renewables 2006 Global Status Report,” Washington, DC: Worldwatch Institute, 2006.

4 - Coal use in China’s industrial and electric power sectors is growing very rapidly, and many of the plants and facilities that are being built will last for multiple decades. In the last year alone, China installed 101 GW of new coal-fired power, 90 GW of which was coal-fired power. To put that number in perspective, India’s entire electricity system is 131 GW (2004 data).10 Only 1 GW of that new capacity was high-efficiency coal (ultra- supercritical technology). None of it was integrated combined cycle coal gasification (IGCC), which lends itself well to carbon capture and storage. - The lifetime CO2 emissions from the coal-fired power plants projected to be built worldwide in the next two decades will be equivalent to all the CO2 emissions from coal-fired power plants from 1751-2000.11 According to the reference case of the International Energy Agency’s World Energy Outlook, 55% of the incremental coal-fired electricity generation between 2004- 2030 will take place in China. Together, China and India are projected to account for 60% of the increase in global carbon dioxide emissions from 12 electricity by 2030. CO2 emissions from Chinese coal-fired power plants alone are expected to be 5450 MMT CO2 in 2030, business as usual (equivalent to 13% of global emissions in that year.13 - By using the cheapest technologies available at the current time for its power plants and industrial facilities (which is perfectly rational in strict economic terms), China is effectively locking itself and the world into high greenhouse-gas-emitting technologies because they are neither energy efficient nor capable of easily capturing and storing the carbon dioxide. This is happening in the United States too, of course, but at a slower rate of growth. - The rapid growth in energy-related plants and infrastructure in China is expected to continue during the next few years, so “leapfrogging” to lower- carbon technologies in the near term is absolutely critical. This point must be underlined. If we wait to address the character of the growth in China’s energy infrastructure, it really could be too late. Will all these new power plants utilize best-available low-carbon technologies, or conventional high- carbon technologies? The United States’ entire electricity system is 992 GW, so at China’s recent growth rate, they will have installed the same amount of electricity capacity as the United States in 5-10 years, and virtually all of it will be coal-fired power. One cannot imagine that China will pre-maturely retire their power plants or factories (just as the United States would not). - But, the leapfrogging will not be automatic. You need to either have policies in place that effectively require the use of low-carbon technologies (e.g. CO2 performance standards or carbon taxes), or you need to have incentive programs that make the use of low-carbon technologies financially attractive (e.g. coal gasification loan guarantee program), or you need to mandate the use of certain technologies.

10 Energy Information Administration, India Country Analysis Brief, U.S. Department of Energy, Washington, DC, January 2007. 11 As calculated by David Hawkins, Natural Resources Defense Council. 12 International Energy Agency, World Energy Outlook 2006, OECD/IEA, Paris, 2006. 13 International Energy Agency, World Energy Outlook 2006, OECD/IEA, Paris, 2006.

5  The longer the United States delays, the longer China will delay, and we cannot afford to wait any longer in either country if we wish to avoid a 2°C (3.6° F) global average temperature increase.14

- The Scientific Expert Group Report on Climate Change and Sustainable Development released earlier this week states that to confine global- average temperature increases to 2°C to 2.5°C above the 1750 value, the entire world would have to be on a declining trajectory of total emissions by 2020 to 2025.15

 Symbolically, the United States should be the first to commit to slow, stop, and reverse CO2 emissions, but my judgment is that it is likely that China would quickly follow the U.S. lead, adapting policies to its own national circumstances.

- The United States has had more than a century to industrialize and develop, and during this process, it has emitted much of the greenhouse gases that are already up in the atmosphere. Also, the United States ratified the UN Framework Convention on Climate Change, which explicitly states that “the developed countries should take the lead in combating climate change and the adverse effects thereof.” For these reasons, among others, I believe that the United States needs to take the symbolic “first step” in committing to mandatory measures to reduce emissions of greenhouse gases. - U.S. policy is influential in China, both in terms of policies (or lack thereof) to manage carbon dioxide and in terms of policies to promote innovation in energy technologies. They have modeled many of their energy R&D programs on U.S. government programs, for example,. - As soon as China becomes the largest emitter in the world, it will face tremendous pressure to act, but the pressure will be even more intense if the United States has already committed to slow, stop, and reverse emissions of greenhouse gases. To avoid the damages from climate change, the embarrassment of being the world’s largest polluter, to alleviate conventional air pollution, and to improve energy security, China is likely to take many steps to reduce its emissions beyond what it has already done.

 The United States should immediately launch an international effort to encourage and assist China and other major developing countries to reduce the growth in their greenhouse-gas emissions in the near-term, and I will make two specific proposals in this respect.

- Although I already stated that the United States needs to take the symbolic first step, we cannot afford to wait to engage China and other rapidly- industrializing countries in a meaningful way because of the problems I have already articulated. - First, I propose the creation of an international low-carbon investment fund that would pay for the incremental costs for installing low-carbon

14 See Intergovernmental Panel on Climate Change, Working Group I, “Summary for Policymakers,” Paris, February 2007. 15 Scientific Expert Group Report on Climate Change and Sustainable Development, Confronting Climate Change: Avoiding the Unmanageable and Managing the Unavoidable, Prepared for the 15th Session of the Commission on Sustainable Development, February 2007.

6 technologies in China, India, Brazil, and Mexico. China and the other major developing countries should contribute to the fund along with other OECD countries, and then the developing countries should be obliged to use the fund whenever making major investments such as new coal-fired power plants and industrial facilities. Corporations could also donate to the fund as a matter of public service. • The Montreal Protocol on Substances that Deplete the Ozone Layer has such a fund attached to it that has worked extremely well, the Multilateral Fund for Ozone Depletion. • Although I support the Clean Development Mechanism in principle, it is simply not getting the job done at the scale that needs to be achieved. A simpler, much more aggressive financing tool is needed. - Second, the United States and other OECD countries should embark on several high-priority energy-technology research and development initiatives together with China and the other major developing countries. Two examples would be large-scale demonstration projects of geologic storage of carbon dioxide and joint R&D on advanced solar technologies. - Both initiatives would be good for American jobs and technology because until or unless the major developing countries have developed the advanced low-carbon technologies, they would be sourced from the existing technology providers, many of which are based in the United States.