Spineless policy

Energy usage is at the heart of China’s growth prospects. Between 1980 and 2000, the country achieved a near miracle: The economy quadrupled in size while energy usage merely doubled. Beijing believed it had discovered a unique development model and pledged to continue in the same vein.

What the planners did not take into account was the radical shift toward heavy industry that moved into full gear at the start of the current decade. They were delighted when GDP growth far exceeded the 8% annual target between 2000 and 2005, but shocked at the enormous energy cost. Growth in energy use for the period had averaged more than 12%. On this basis, a four-fold expansion in the economy would require a six-fold hike in energy consumption.

The conclusion was stark: Escalating energy usage was threatening to derail China’s GDP growth program. The cost of growth would be too high for the country to sustain.

A new frugality

In response to what was rightly seen as a crisis, there was a flurry of administrative activity devoted to energy conservation in 2006 and 2007. The aim was to return to the golden years of the 1990s, quadrupling the economy every 20 years while only doubling the use of energy.

To achieve this ambitious goal, a full slate of modern and innovative legislation was adopted. Efforts were made to modernize the energy industries and introduce market pricing. A major industrial restructuring program was initiated to eliminate wasteful and outmoded industrial investments, with closer monitoring to ensure energy reduction requirements were met at the company level. Finally, local officials were told that future advancement would be based on reaching energy and resource waste-reduction targets.

As we reach the end of 2009, what has been the effect of these programs? Energy consumption is now growing at the same rate as GDP, rather than 50% faster. But this is largely a result of the economic downturn and normal shifts in industrial structure. There is no indication that the massive legislation program and the related industrial-level regulations have had any significant impact on the behavior of businesses or consumers in China.

Why is this? Beijing’s planners have discovered what their US, European and Japanese counterparts learned long ago: It is easy to promulgate ambitious targets and draft policies, but it is very, very difficult to make them work.

Even a cursory reading shows that the Chinese laws and regulations are a simple statement of goals. Take, for example, the Circular Economy Law or the Renewable Energy Law. These statutes are merely short statements of high level policies and objectives. They are altogether lacking  in any of the hard decisions and political commitments that would allow such legislation to actually have an impact. They lack numeric standards, identification of specific technologies, monetary and tax incentives, funding sources or penalties for failure to comply. As a result, the entire program envisioned by these ambitious statutes is essentially being ignored.

Insatiable hunger

The recent cuts in energy intensity achieved during a period of economic crisis are unlikely to be maintained when the Chinese industrial economy begins operating again at full capacity. For example, recent reports indicate that China-wide energy production for September has increased by 10% compared with 2008.

Even if energy consumption can grow at parity with the economy, it is unlikely to drop to half its pace, as Beijing desires. The temptation to fabricate data – going high on growth and low on energy consumption – must be great indeed. It will be interesting to see the full-year figures for 2009.

For the next several decades, it appears likely that the "price" of every 1% increase in China’s GDP will be at least a corresponding 1% increase in the consumption of energy. This means that if the Chinese economy quadruples in size from 2010 to 2030, as is expected, energy demand will also quadruple. The country would be by far the largest consumer of energy on the planet, and probably the most wasteful.

This scenario can only be avoided through either a decline in GDP growth or the miraculous discovery of a renewable energy source that can fuel a developing industrial economy like that of China. But that is another story.