Energy and Greenhouse Gas Emissions in China: Growth, Transition, and Institutional Change By Fredrich James Kahrl A dissertation submitted in partial satisfaction of the requirements for the degree of Doctor of Philosophy in Energy and Resources in the Graduate Division of the University of California, Berkeley Committee in charge: Professor David Zilberman, Chair Professor Arpad Horvath Professor Daniel M. Kammen Professor David Roland-Holst Professor James H. Williams Fall 2011 Abstract Energy and Greenhouse Gas Emissions in China: Growth, Transition, and Institutional Change by Fredrich James Kahrl Doctor of Philosophy in Energy and Resources University of California, Berkeley Professor David Zilberman, Chair Global energy markets and climate change in the twenty first century depend, to an extraordinary extent, on China. China is now, or will soon be, the world’s largest energy consumer. Since 2007, China has been the world’s largest emitter of greenhouse gases (GHGs). Despite its large and rapidly expanding influence on global energy markets and the global atmosphere, on a per capita basis energy consumption and GHG emissions in China are low relative to developed countries. The Chinese economy, and with it energy use and GHG emissions, are expected to grow vigorously for at least the next two decades, raising a question of critical historical significance: How can China’s economic growth imperative be meaningfully reconciled with its goals of greater energy security and a lower carbon economy? Most scholars, governments, and practitioners have looked to technology — energy efficiency, nuclear power, carbon capture and storage — for answers to this question. Alternatively, this study seeks to root China’s future energy and emissions trajectory in the political economy of its multiple transitions, from a centrally planned to a market economy and from an agrarian to a post-industrial society. The study draws on five case studies, each a dedicated chapter, which are organized around three perspectives on energy and GHG emissions: the macroeconomy; electricity supply and demand; and nitrogen fertilizer production and use. Chapters 2 and 3 examine how growth and structural change in China’s macroeconomy have shaped energy demand, finding that most of the dramatic growth in the country’s energy use over the 2000s was driven by an acceleration of its investment-dominated, energy-intensive growth model, rather than from structural change. Chapters 4 and 5 examine efforts to improve energy efficiency and increase the share of renewable generation in the electric power sector, concluding that China’s power system lacks the flexibility in generation, pricing, and demand to support further improvements in efficiency and scale up renewable generation at an acceptable level of cost and reliability. Chapter 6 examines energy use and GHG emissions from nitrogen fertilizer use, arguing that energy use and GHG emissions from nitrogen fertilizer use in China 1 are high relative to other countries because of China’s historical support for small and medium- sized enterprises using domestic technology; its continued provision of energy subsidies to fertilizer producers; and its lack of a well-functioning agricultural extension system. The case studies illustrate the limits of energy and climate policy in China without institutional reform. China’s leaders have historically relied on economic growth to defer the difficult changes in political economy that accompany economic and social transition. However, many of the challenges of energy and climate policy require political decisions that reallocate resources among stakeholders. For instance, restructuring the Chinese economy away from heavy industrial investment and toward a higher GDP share of consumption will require financial sector reforms, such as interest rate liberalization or higher dividend payments for state-owned enterprises, that reallocate income from the industrial sector to households. Increasing power system flexibility will require price reforms that reallocate revenues and costs among generators, between generators and the grid companies, between producers and ratepayers, among ratepayer classes, and between and among provinces. Strong public interest institutions are needed to make these changes, which suggests that China’s energy and GHG emissions trajectories will be determined, to a large extent, by the politics of institutional reform. 2 ACKNOWLEDGMENTS This endeavor would never have been possible without the enduring love, support, patience, and faith of my wife Wendy Tao, who suffered me beyond all reason throughout my dissertation. My daughter, Kaia 睿蕾 Tao Kahrl, was conceived in the tail of the dissertation, and was an inimitable source of inspiration and motivation. I owe an enormous debt to my parents for their patient cultivation of my intellectual sensibilities. For that and their unconditional support I am forever grateful. I had the great fortune of having a large, diverse, and instructive dissertation committee: David Zilberman, my chair, from whom I learned the importance of doing the things you believe in; Arpad Horvath, from whom I learned the joy of peeling back just one more layer; Dan Kammen, from whom I learned the value of balance between academic and applied research; David Roland-Holst, from whom I learned the importance of adding color to life; and Jim Williams, from whom I learned that a dash of creativity is always worth more than a cubic meter of rote analytics. A number of other professors at UC Berkeley provided indispensable guidance, most notably: Alex Farrell, scholar sans frontiers, who taught me that the best way to tackle new subjects is to go buy the textbook; John Harte, who taught me how to practice democratic science; and Margaret Torn, from who I learned that the most important questions are always the most basic. Nothing has so forged my identity as the ERG community, to whom I owe an existential debt. ERG is now such a core part of my values and method that I find it hard to imagine myself before it. Over the course of my Ph.D I had the wonderful experience of working with staff at a joint Chinese Academy of Sciences – World Agroforestry Centre center in Kunming, China. For guidance and inspiration, I owe a debt of gratitude to Li Yunju, Su Yufang, Timm Tennigkeit, Horst Weyerhaeuser, and Xu Jianchu. I was also fortunate to work with staff at Energy and Environmental Economics, Inc., where I benefitted from the creativity of Ding Jianhua and the mentoring of Ren Orans, Snuller Price, and C.K. Woo. In understanding the Chinese, and indeed the U.S., electricity sector, Hu Junfeng has been a consummate colleague. In undertaking and completing major intellectual endeavors it is the innumerable ghosts of past, present, and future to whom the greatest cumulative debt is owed — to the faceless authors, both long deceased and extant, of materials that have shaped the ideas in this dissertation; and to the faceless children, humanity’s next generation, for whom the hope of a future more socially just and environmentally sustainable than our own has always been a tremendous, if amorphous, source of inspiration. i TABLE OF CONTENTS 1. INTRODUCTION 1 TRANSITION: CONCEPTS AND HISTORY 4 REFERENCES 16 2. GROWTH AND STRUCTURAL CHANGE IN CHINA’S ENERGY ECONOMY 19 DATA SOURCES AND ADJUSTMENTS 22 METHODS 26 RESULTS: GROWTH AND STRUCTURAL CHANGE 31 CONCLUDING THOUGHTS 37 REFERENCES 39 3. PAST AS PROLOGUE? UNDERSTANDING ENERGY USE IN POST-2002 CHINA 43 BACKGROUND 45 METHODS AND DATA 47 RESULTS 54 CONCLUSIONS AND DISCUSSION 63 APPENDIX: ADDITIONAL TABLES 68 REFERENCES 69 4. CHALLENGES TO CHINA’S TRANSITION TO A LOW CARBON ELECTRICITY SYSTEM 72 AN OVERVIEW OF CHINA’S CURRENT ELECTRICITY SYSTEM 73 DRIVERS OF CHANGE IN THE CHINESE POWER SYSTEM 80 DEVELOPING INSTITUTIONS TO ADDRESS NEW CHALLENGES 87 TOWARD A LOW CARBON ELECTRICITY SYSTEM IN CHINA 90 REFERENCES 91 5. THE POLITICAL ECONOMY OF ELECTRICITY DISPATCH REFORM IN CHINA 97 HISTORICAL OVERVIEW OF DISPATCH IN THE CHINESE POWER SYSTEM 97 DESCRIPTION OF THE POWER SECTOR IN GUANGXI ZHUANG AUTONOMOUS REGION 101 EQUAL SHARES AND ENERGY EFFICIENT DISPATCH IN GUANGXI 105 ENERGY EFFICIENT DISPATCH AND INCENTIVES FOR EFFICIENCY 113 CONCLUSIONS AND DISCUSSION 119 ii APPENDIX: SUPPORTING MATERIAL AND DISPATCH MODEL DOCUMENTATION 120 REFERENCES 137 6. GREENHOUSE GAS EMISSIONS FROM NITROGEN FERTILIZER USE IN CHINA 139 USE AND OVERUSE OF NITROGEN FERTILIZERS IN CHINA 139 ENERGY USE AND GHG EMISSIONS FROM N FERTILIZER APPLICATION IN CHINA 142 REDUCING GHG EMISSIONS FROM N FERTILIZER APPLICATION IN CHINA 144 FERTILIZER EFFICIENCY PROGRAM COST AND FINANCING 146 CONCLUSIONS 148 APPENDIX: METHODS FOR CALCULATING AMMONIA AND FERTILIZER EMISSION FACTORS 149 REFERENCES 161 7. CONCLUSIONS: 从扬汤止沸到釜底抽薪 166 THE ROOTS OF CHINA’S ENERGY AND GHG EMISSIONS TRAJECTORY IN TRANSITION 167 THE POLITICAL ECONOMY OF CHINA’S ENERGY AND CLIMATE POLICY 173 PROSPECTS FOR INSTITUTIONAL REFORM, AND IMPLICATIONS FOR INTERNATIONAL CLIMATE POLICY 174 REFERENCES 176 BIBLIOGRAPHY 178 iii Chapter 1 Introduction 发展才是硬道理 — 邓小平 Development is the only hard truth — Deng Xiaoping In February of 2011 China officially surpassed Japan to become the world’s second largest economy. The contrast with three decades prior could not have been more stark. In 1978, on the eve of reforms in agriculture that were to vault it into the modern world, China was a nation in economic, political, and social disarray, exhausted from a decade of violent revolution. In