Juggling trick

China’s 60th anniversary National Day parade on October 1 was an exercise in extravagance: Scores of floats made their way past Tiananmen accompanied by tens of thousands of participants. Some floats depicted the country’s many achievements; others showed future goals. One, dedicated to clean energy and environmental protection, was a reminder of China’s green aspirations.

But any green solution will have to address problems in old, dirty industries as much as carve out opportunities in new, clean ones. The vanguards of heavy industry – steel, cement and chemicals – must be dragged toward energy efficiency, but without sacrificing economic growth.

"In order to maintain a balance between economic growth, urbanization, industry and environment, China should use more new energies, including nuclear power, while at the same time continue to boost energy efficiency in the industrial sector," said Shi Lei, assistant professor at Tsinghua University’s department of environmental science and engineering.

According to the Carnegie Endowment, China’s primary commercial energy consumption in 2007 amounted to 2,580 metric tons of coal, 340 mt of crude oil, and 67.3 billion cubic meters of natural gas. The International Energy Agency says heavy industry makes up for 76% of China’s total energy consumption, against a world average of 52%.

Going urban

Standing in the way of the country’s energy efficiency ambitions is the seemingly unstoppable force of urbanization. McKinsey & Company projects that China will have 221 cities with more than 1 million inhabitants by 2025. This will see the construction of 40 billion square meters of new floor space, 5 billion sqm of road and 28,000 kilometers of metro rail.

Long-term demand for construction materials will indeed be strong – as will the demand for energy to build these metropolises and then keep the lights on. McKinsey says China will need to bring online 700-900 gigawatts of coal-fired power between 2005 and 2025.

China’s 11th Five-Year Plan included the formidable goal of reducing energy intensity, or energy consumption per unit of gross domestic product, by 20% between 2005 and 2010.

"No one has really reported how much China has paid to fulfill this commitment," said Li Lailai, Asia center director and deputy director at the Stockholm Environment Institute. "The cost is so high that you have to ask whether it can afford to make similar targets for the next five years."

Government crackdown

Since 2006, this has been supplemented by an energy-saving program targeted at the country’s 1,000 highest energy-consuming state-owned firms. These players consumed 33% of national and 47% of industrial energy used in 2004, according to a report by the Lawrence Berkeley National Laboratory (LBNL).

In addition, Beijing has closed down thousands of cement, steel, aluminum and glass plants deemed inefficient, and placed restrictions on bank lending to energy-intensive industries, especially those reaching overcapacity. These efforts coincide with ongoing heavy industry restructuring and consolidation programs.

To increase energy efficiency, some of China’s biggest polluters have introduced energy audits, hired energy managers, and installed energy-management software to monitor consumption and emissions. On the shop floor, enterprises have also been phasing out obsolete, energy-guzzling manufacturing equipment, as well as retrofitting some projects and renovating hardware and machinery, according to LBNL, which has advised the Top-1,000 program since its inception.

Total energy conservation investment is estimated at US$146 billion for the entire period of the 11th Five-Year Plan.

Shi Dan, an energy researcher at the Chinese Academy of Social Sciences, noted that US$29 billion of China’s US$586 billion stimulus package was directed at energy efficiency, and more could be funneled through to meet standards set by schemes like the Top-1,000 program.

"Considering China’s decision to massively reduce carbon dioxide emissions, it is possible that yet more incentives for heavy industry to reduce emissions will be introduced," she said.

So is it working? Although absolute power consumption continues to rise, state figures show that energy intensity is indeed falling. According to the National Development and Reform Commission (NDRC), energy intensity decreased by 3.35% in the first half of 2009 versus a 2.88% fall from the same period last year. This puts the total contraction since the start of 2006 at 13.43%, which means China has to knock off a further 6.57% over the next 18 months to meet its target.

However, the glowing figures of the first half came largely due to a 10.3 percentage-point drop in energy-intensive industry output as the domestic economy struggled to stay afloat.

A big ask

Xie Zhenhua, NDRC vice minister, has been keen to play down the achievement, perhaps conscious of the exceptional circumstances. He said recently that, while it is possible to reduce energy intensity by 5% this year, "arduous tasks remain to fulfill the pledge of a 20% cut by 2010."

Most arduous may be the implementation of guidelines at a local level, where some officials prefer to follow their own priorities rather than those set by Beijing.

"We have shut down many small power plants, but the question is, how did they get there in the first place? The main driver is the local economy," said Chen Dongmei, director of the WWF’s climate change and energy program in China. "If you keep economic growth as the main indicator for local government, then they have to find ways to meet these targets like local coal power plants and local steel manufacturers… They want as much as possible for their own cities."

While there are some incentives in place to bring heavy industry to a higher level of energy efficiency, penalties for major infringements are rare and often inconsequential to the firms being punished. In many cases, the worst offenders face problems in other areas – they may be close to bankruptcy or under severe competitive pressure – and so environmental concerns simply fall by the wayside.

"There is the carrot and the stick… The stick isn’t very big in China right now," said Christopher Hazen, Asia director at WSP Environment & Energy. "Shutdowns of factories are becoming an increasingly credible threat, but that is a challenging long-term enforcement strategy… For one, you lose a lot of payroll, putting people out of work."

William Chandler and Holly Gwin of the Carnegie Endowment conceded in a recent paper that the disparity between what Beijing says and what is actually implemented on the ground remains a significant stumbling block to greater energy efficiency. They recommended that "the central government could work with provincial leaders to take decisive action to encourage clean energy investment."

Convincing governments and industries that environmentally efficient does not mean more expensive remains a barrier, said Hazen from WSP, but one that doesn’t have to exist.

"The idea that clean energy is always more expensive than dirty energy is simply ignoring the facts from a broader perspective," he said. "They are more challenging to measure, but the consensus is growing that they are very real costs and it’s just a matter of who is going to pay."