After years of leaving the lights on, China is finally facing up to a steep electricity bill. Energy use per dollar of GDP shot up 3.2% in the first quarter, and China is scrambling to find a way to reach its ambitious goal of cutting energy intensity to 20% of 2006 levels by the end of the year.
The rise comes after the country’s energy intensity fell 14.38% between 2005 and 2009. Up until the most recent quarter, Beijing heralded the figures as proof of its great success, although efficiency gains were aided by a slowing global economy. Now, as demand picks up, China is pursuing all avenues in order to close the gap in the final three quarters of 2010.
As head of the country’s new National Energy Commission (NEC), Premier Wen Jiabao’s reputation is tied in many ways to the success or failure of the country’s energy policy. Wen hosted a global warming forum in May to demonstrate China’s green credentials, but the release of the energy intensity numbers has removed some of the gloss.
In response, Wen has vowed to use an "iron hand" to achieve the energy intensity goals, holding local officials accountable for their efficiency targets.
First on the list of targets will be energy-intensive industries. China will raise the power tariff surcharges 50-100% on cement, steel, and aluminum producers. Punitive tariffs will also be handed down to firms exceeding set lim-its, with the goal of ending local preferential energy policies. Ten gigawatts of outdated small coal-fired plants are also marked for elimination as the country works toward reducing its carbon intensity – its carbon emissions per unit of GDP – by 40-45% before 2020.
Forcing companies to become accountable is a step forward for China’s energy regulation. However, pushing up the costs of heavy industry and closing factories will raise prices across the raw materials sector. These will eventually be passed onto domestic consumers.
In all likelihood, China will fail to reach its goals this year, even as it earmarks US$12 billion of government funding for improved energy efficiency and pollution reduction projects. "Fixing" the numbers is one option, but Beijing certainly recognizes that any creative accounting undermines its global commitments.
The long-term solution will not simply be a matter of an "iron hand." China is already experimenting with the concept of "ecological compensation" – using markets to punish those introducing pollution and rewarding those preserving the environment. Further market-based methods offer an alternative to simply issuing mandates from above.
China has made enormous progress with little regard for the environmental consequences. Now that the world is watching, holding officials accountable is just as important as providing the means through which firms can succeed by going green. Let the "iron hand" be the stick, and the invisible hand be the carrot.