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Start | US-China Trade and Economic Relationship | China's Security-Related Activities | China's Energy and Environmental Policies and Activities | China In Asia | China's Media and Information Controls Conclusions | Additional Views | Appendices

Chapter 3 China’s Energy and Environmental Policies and Activities

Section 1: China’s Energy Policy, Demand, and Supply

‘‘The Commission shall investigate and report on—

‘‘ENERGY—The effect of the large and growing economy of the People’s Republic of China on world energy supplies and the role the United States can play (including joint research and development efforts and technological assistance), in influencing the energy policy of the People’s Republic of China.’’

Energy Policymaking in China

China’s rapid economic development and its rising energy demand are interrelated; energy fuels the country’s production, and domestic consumption drives its need for energy. Given energy’s intrinsic link to economic development, the Chinese government has highlighted this issue as a priority of government policy, and until recently has kept the majority of the energy market under government control. While the success of China’s economic reforms occurred as a result of the decentralization of government control over the market, the decentralization of energy policymaking to local officials has not produced a comparably positive outcome. Instead, it has resulted in a fragmented energy policy that lacks both the coordination and the capacity for consistent implementation of national policies.[1]

China has no Ministry of Energy at present. In June 2006, the World Bank and the Development Research Center of the State Council recommended the establishment of an energy ministry to coordinate energy policy at the cabinet level, but China has not acted on this recommendation.[2] Currently, the Energy Bureau of the National Development and Reform Council (NDRC) holds primary responsibility for energy policy coordination within the Chinese government. The Energy Bureau must approve significant energy-related projects such as the construction of power plants, and its internal departments have control over pricing of fuels and electricity as well as regulating industrial energy use.[3] In addition to the NDRC, the Energy Leading Group and the State Energy Office, created in 2005 by the State Council led by Premier Wen Jiabao, play significant roles in China’s energy policymaking. The Energy Leading Group issues ‘‘guiding principles’’ about the direction of energy policy. The State Energy Office, led by Ma Kai, minister of NDRC, reports directly to the State Council, but has little political power and an unclear mandate.[4] It is said to focus mainly on energy-related academic matters.[5]

This central government structure and the decentralization of policy implementation to local levels have created an unclear distribution of responsibilities. They have created a system that is easily influenced by local concerns for economic development. Local governments often prioritize these concerns over energy efficiency policies and environmental controls that—if implemented—could slow the pace of growth. Moreover, the flight of policymakers to the private sector has led to a loss of policymaking expertise, and an increase in the relative influence of China’s energy companies. As Dr. Erica Downs of the Brookings Institution writes in her paper, ‘‘The Brookings Foreign Policy Studies Energy Security Series: China,’’ ‘‘ . . . the Chinese government relies on the energy companies for manpower and for their knowledge and experience.’’ [6] The Energy Bureau of NDRC and the State Energy Office lack the capacity and expertise to gather the statistical information needed to construct and implement effective energy policies, and this situation gives energy companies unwarranted influence over energy sector data and policy.

According to Dr. Downs, ‘‘The country’s fractured energy bureaucracy has impeded formulation of a long-term national energy strategy accepted by all stakeholders.’’ The lack of a clear bureaucratic infrastructure over energy policy, the lack of clear, detailed information, and the fear of disrupting the economy with a rapid policy change have to date prevented improvements in the development, coordination, and implementation of energy policy in China.[7] Instead, Chinese energy policy has been created with ‘‘. . . a reactive management style, which approaches energy challenges by ‘treating the head when the head hurts, treating the foot when the foot hurts.’ ’’ [8]

The ad hoc reforms China has instituted in the energy sector have been at least in part a response to the pressure created by market reforms in other economic areas. As Mr. David Helvey, Country Director for China, Taiwan, and Mongolia at the U.S. Department of Defense, stated in testimony before the Commission, these pressures have created tension between the ‘‘dynamic elements of China’s increasingly market-based economy’’ and ‘‘the Chinese Communist Party’s desire to retain its monopoly on political power and control [of] its strategic industries and sectors of the economy including energy.’’ [9] Moreover, as incomes rise and a middle class develops, the Chinese people are beginning to apply pressure on the government to improve the environment and reduce industrial pollution, thus creating another energy-related concern for the government to consider.[10]

The central government has tried to balance these competing tensions by combining socialist and market-based principles in its energy policies. Mr. Saad Rahim, Manager of the Country Strategies Group at PFC Energy, described this approach as attempting ‘‘to capture most of the efficiency gains that come from reliance upon markets, while preserving much of the political stability made possible by an authoritarian state.’’ [11] He argued that the government’s approach to energy is a microcosm of China’s larger development strategy, in which continued, rapid economic growth is perceived as necessary for maintaining the credibility of the Chinese Communist Party leadership and for preserving social stability. In his testimony he stated, ‘‘Chinese officials realize that it is in their own best interests to limit future energy demand, and thus are amenable to pragmatic solutions as long as they do not perceive a direct economic threat from adopting them.’’ [12]

Preserving an adequate supply of energy for China’s rising demand—at a price that will not impose a significant burden on producers—is a vital prescription for maintaining an environment conducive to economic growth. For this reason, China defines ‘‘energy security’’ operationally as ensuring it has access to a stable supply of energy by controlling sources of production and the supply chain. As this relates to oil, consumption of which is rapidly growing in China, the government appears to distrust the international market to deliver reliable supplies because it fears China may at some point be denied access to the oil it needs, so it prefers long-term supply contracts for access to supplies in nations abroad with which China has developed bilateral political relationships. If a disruption to global supply occurs, other nations are concerned that Chinese companies will ship equity oil back to China and not add it to the global oil supply.

Given its perception of the global oil market, China has encouraged a ‘‘going out’’ strategy for its national oil companies whereby they seek equity oil assets in order to own the sources of production abroad. However, Assistant Secretary of Energy for Policy and International Affairs Karen Harbert testified that China will not be able to own enough of these resources to meet either its current or its future oil demand,[13] implying that China, at least in part, will have to rely on the global market in order to fulfill its petroleum needs.

Faced with questions on the secure and reliable supply of energy as well as growing negative consequences of air and water pollution, China is beginning to adopt a strategy that diversifies fuel supplies and pursues clean energy alternatives. China’s 11th Five Year Plan highlights energy as a priority policy area for development, with a focus on conservation and energy efficiency to stem demand. The plan contains only two quantitative targets: the first is for GDP growth, and the second is for increased energy efficiency.[14] China announced that it plans by 2010 to reduce energy consumption per unit of GDP by 20 percent.[15] Even though it has succeeded in slowing the trajectory of its energy consumption growth, it has fallen short of the annual reduction targets necessary to meet its 2010 goal. China’s National Bureau of Statistics reported that in 2006 China missed its announced target of a four percent reduction, and instead reduced consumption per unit of GDP by only 1.33 percent.[16] However, the government has made several public statements about its continued commitment to reduce consumption. Additionally, China aims to increase the proportion of its energy needs met by renewable energy to 16 percent by 2020.

In June 2007, China announced a policy for addressing global climate change, in line with its obligations under the U.N. Frame work on Climate Change. This plan acknowledges the problem of global climate change and China’s contributions to the rising levels of greenhouse gases. The report highlights domestic policies that China will follow to address climate change, such as supporting research and development of energy technology, raising public awareness about energy conservation, increasing forest coverage, and addressing water shortages through more effective allocation of water resources.[17] China does not accept the imposition of emissions caps on developing countries (a category in which it places itself for this purpose), arguing that such caps may restrict economic development. Nor will it accept the standards imposed on industrialized nations such as the United States. This plan nonetheless represents an attempt to participate in the international discussion on climate change and to ensure that China has a role in crafting the global response.

In addition, China is in the process of drafting an energy law to provide a legal framework for the development of energy policymaking and enforcement of related regulations.[18] The draft of the law is expected to be completed by the end of 2007.[19] While the effect of these two new initiatives is yet to be determined, these goals and policies reflect a change in rhetoric and suggest that China recognizes the need to mitigate unbridled energy demand growth and environmental pollution due to energy consumption trends.

Trends in China’s Energy Demand

From China’s initial implementation of economic reforms in the 1980s until today, its energy demand growth has averaged 3.9 percent per year, while its GDP grew an average of 9.8 percent per year.[20] However, in the past five years energy demand has grown at 13 percent per year, more than three percentage points above the average GDP growth.[21]

Figure 3.1 China’s Primary Energy Consumption 1996–2006

Mr. Trevor Houser, Visiting Fellow at the Colin Powell Center for Policy Studies at the City College of New York, and a Director of China Strategic Advisory LLC, explained that the growth in energy consumption has occurred due to provincial economic policies that focus on development of heavy industries such as steel and cement. These industries, which support China’s urban development and exports abroad, are more energy intensive than light manufacturing industries. Given the decentralization of economic policy, the central government has little control over the economic practices of the provinces that are driving this industry growth, and heavy industries receive protection from provincial leadership because of their profitability.[22]

As a result, industrial energy demand now equals 70 percent of China’s total energy demand. The iron and steel industries alone account for 16 percent of that demand.[23] Incentives such as low environmental compliance standards, inexpensive land prices, and access to capital support the continued pursuit of these profitable heavy industries.[24] Consequently, industrial energy demand is expected to grow at a rate of 4.1 percent per year,[25] complicating Beijing’s goals for energy efficiency and conservation.

While heavy industry growth is considered China’s current energy challenge, the country’s future energy challenge is consumption-led growth.[26] Rapid urbanization and rising urban incomes will lead to increased energy demand for residential and commercial and also for urban transportation needs. In the coming years, transportation-related energy demand is expected to grow more rapidly than any other area of energy use.[27] Dr. Lee Schipper, Director of Research for the EMBARQ program at the World Resources Institute,[28] argues that unsustainable development of China’s transportation systems and an increase of vehicle ownership will be responsible for this increased demand.[29] A lack of urban planning has resulted in the unrestricted sprawl of many urban areas, and this pattern of development increases the population’s reliance on cars to move around the cities. China’s vehicle ownership is projected to increase from 25 million in 2007 to 140 million in 2020.[30] This increase will have significant consequences for urban use of space, energy consumption, and urban air quality.

Trends in China’s Energy Consumption and Supply Energy Consumption Trends

If current trends continue, both China’s energy consumption and its share of global energy consumption will increase further in the future. In 2004, China consumed 40 percent less energy than the United States, but the U.S. Department of Energy predicts that by 2030 it will consume 11 percent more energy than the United States. Coal is expected to supply 65 percent of China’s energy needs in 2030; oil will supply 22 percent; natural gas will supply 6 percent; renewable energy sources will supply 5 percent; and nuclear energy will supply 2 percent.[31]

A key obstacle to addressing consumption trends is China’s poor energy efficiency relative to other countries. As Deputy Assistant Secretary of Energy for International Energy Cooperation David Pumphrey testified, ‘‘According to the National Development and Reform Commission (NDRC), the level of energy efficiency in China is about 10 percentage points below that of more advanced countries.’’ [32] In practical terms, this means that for every U.S. dollar’s worth of GDP, ‘‘Chinese producers consume 4.3 times more energy than their counterparts in the U.S., 7.7 times more than Germany or France, and 11.5 times more than Japan.’’ [33]

Another obstacle to reducing its energy consumption is a lack of publicly-available data, particularly at provincial or local levels. In his testimony, Mr. Rahim noted that ‘‘[m]easuring energy use—like measuring economic activity—in an emerging economy such as China is always a challenge. In China, in particular, energy use can be politically sensitive—especially as relates to reporting between different level governments.’’

Coal

Coal currently provides two-thirds of China’s energy supply. China is both the world’s largest consumer and the world’s largest producer of coal. China’s consumption of coal amounts to nearly one-third of all coal consumed worldwide,[34] and it has the world’s third largest proven reserves of coal, totaling 114.5 billion tons, or 13 percent of global coal reserves.[35] Last year, China’s coal production equaled 2.33 billion tons, and the National Development and Reform Commission announced that annual coal production will be capped at 2.6 billion tons by 2010.[36] China has approximately 30,000 coal mines, 80 percent of which are small mines.[37]

While China sets the price of its domestically-mined coal at a level comparable to the international price, that price nonetheless is lower than the prices of other fuels in China, and coal remains the cheapest source of energy for most areas.[38] This is the primary reason that its share in China’s energy consumption picture is not predicted to decline absent government intervention or the deployment of strong market incentives to reduce its use.

Coal is primarily used for electricity generation, industrial power supply, and chemical feedstocks. Nearly 80 percent of China’s electricity needs are generated by coal-fired power plants, and—paralleling China’s economic growth—its electricity generation capacity has grown more than 11 percent each year since 2003, even as it has experienced power shortages. The Massachusetts Institute of Technology (MIT) study on The Future of Coal notes, ‘‘At this rate, China is adding the equivalent of nearly the entire UK power grid each year.’’ [39] Another comparison provided in testimony by Mr. Houser is that China’s addition last year of 100 gigawatts of new coal-fired capacity was more than the installed base of Africa.[40]

Coal-based power will account for at least 400 gigawatts of the 600 gigawatts of new capacity that China will build between now and 2020.[41] The International Energy Agency (IEA) reports that every week China installs a new coal-fired power plant.[42] China plans to build 562 new coal-fired power stations by 2012.[43] China’s current construction of coal-burning plants and its plans for constructing others strongly suggest that the proportion of energy China derives from coal will not diminish significantly in the future absent substantial policy changes. According to the U.S. Department of Energy, China’s coal consumption for electric power is projected to grow at an average of 3.5 percent per year between 2004 and 2030.[44] Although China has a plentiful coal supply—sufficient to meet its needs and also to export coal to other nations—various transportation impediments have resulted in China importing considerable amounts of coal. Transportation costs make domestically-mined coal prohibitively expensive in some areas of China, such as Guangdong province, and in these areas it is cheaper to import coal or natural gas. In January 2007, tight rail capacity and transportation bottlenecks caused the government to conclude that it was much cheaper to import coal to coastal provinces than to transport coal to those areas by rail from the inland coal-producing provinces. Although this is not expected to be a permanent situation, it has caused China to become a net importer of coal, with imports coming primarily from Indonesia and Australia.[45] These imports, however, will not significantly change China’s coal consumption or dependence.

Oil

Oil provides approximately 20 percent of China’s energy supply. In 1993, China became a net oil importer, and in just fourteen years has grown to become the second largest oil consumer after the United States. In 2006, China’s oil demand grew to 7.4 million barrels per day, of which it imports 3.6 million barrels per day.[46] The International Energy Agency estimates that by 2030 China’s oil consumption will increase to 15 million barrels per day, equivalent to 13 percent of projected world oil demand.[47] Even with China’s consumption at that level, the United States is projected to remain the largest consumer of oil—consuming 26.9 million barrels of oil in 2030.[48]

While China’s rapidly escalating consumption of oil has forced it to increase its oil imports in the past several years, the country is, in fact, the fourth largest petroleum producing country outside the Middle East and produces more than 50 percent of the oil it consumes. In 2006, the U.S. Energy Information Administration estimated that China produced 3.8 million barrels per day.[49] China recently discovered an oilfield in Bohai Bay in northeastern China, and China National Petroleum Corporation (CNPC) announced that the field holds about 7.35 billion barrels.[50]

Although this discovery does not significantly affect China’s energy security, it indicates that domestic exploration and production can assist in securing the amount of oil China needs. Despite this discovery, however, China’s domestic production capacity has peaked or is declining, thereby suggesting that China’s reliance on oil imports will grow in the future. China’s two largest suppliers of oil imports are Angola and Saudi Arabia, supplying an average of 525,000 barrels per day and 465,000 barrels per day, respectively.[51] China’s joint venture holdings in Sudan produce approximately 350,000 barrels per day, although only 140,000 barrels per day of this equity oil are under the control of the China National Petroleum Company.[52] While China is dependent on Middle Eastern oil, China also seeks imports from Africa, Central Asia, Latin America, and North America. China’s oil imports are predicted to increase from approximately 3 million barrels per day in 2005 to between 6 million and 11 million barrels per day by 2020.[53] By 2030, China is expected to rely on oil imports for 69 percent of its oil supply.[54]

Consistent with China’s definition of energy security—which supports ownership of resources ‘‘in the ground’’—China’s equity oil production has been increasing in recent years. Chinese oil companies have equity contracts and operations in more than 30 countries.[55] The Chinese government and its state-owned oil companies do not officially publish figures about how much equity oil is derived from overseas investments and whether it is transported to China.[56] However, Mr. Houser estimated in his testimony that last year China’s three largest national oil companies produced 690,000 barrels of equity oil per day,[57] compared to approximately 370,000 barrels of equity oil per day in 2004.[58] Mr. Houser also testified, based on Customs statistics, that approximately 250,000 barrels of oil produced abroad by China’s oil companies are transported to China for use there, and the remaining quantity is sold into the global market.[59] For example, a Eurasia Group report commissioned in 2006 by the Commission noted that while China has investments in Syrian oil production, available customs data on oil imports by China do not show any imports in recent years from Syria. The deduction from this observation of the report is that the oil produced by Chinese joint ventures in Syria is being sold and used elsewhere rather than being transported to and consumed in China.[60]

In pursuit of equity production, China’s national oil companies are aggressively entering the global oil market and working in countries where international oil companies have not invested due to conflict, political instability, or human rights concerns. Most national oil companies do not rely on capital from the government to fund equity investments, and Mr. Rahim noted that the ‘‘going out’’ strategy of foreign exploration and production is not viewed by China’s oil companies as a guarantor of energy security, but rather is seen as an opportunity to gain experience in the global market and make a profit.[61] Several witnesses testified to the Commission that it appears China’s state-owned oil companies made equity investment decisions for commercial and profitability reasons, but it is unclear to what degree these investments also are motivated by government policies. It is known that China’s national oil companies are not subject to many of the government-imposed conditions, limitations, and mandates imposed on multinational oil companies by Western governments.[62] (See Chapter 3, Section 3 for further discussion of equity oil investments.)

China National Petroleum Corporation (CNPC) is China’s largest upstream oil company with equity production of 329,810 barrels per day in 2004.[63] The nations in which Chinese equity production is greatest are Sudan and Kazakhstan.[64] Equity production in Sudan equals about 140,000 barrels per day, in oil fields partially controlled by CNPC.[65] CNPC also owns assets in Kazakhstan that produced approximately 200,000 barrels per day in 2007.[66] It is expected that oil imports from Kazakhstan will increase to 400,000 barrels per day in the next few years, as China continues to invest in oil production there.[67] Additionally, in June 2007, CNPC purchased the rights to explore and develop a Canadian oil sands field, which is estimated to hold two million barrels.[68]

While Chinese companies are actively seeking foreign oil assets, the majority of China’s oil imports originate from the ‘‘spot market’’—the international open market. Not surprisingly, China’s domestic oil pricing system is dependent on world crude oil prices. The government, however, controls downstream prices of gasoline and other refined products, and their artificially controlled prices foster consumption and increased energy demand. The controlled prices also can reduce production and transportation costs for manufactured goods—which lowers the price of exports and effectively subsidizes them.

Given the artificial ceilings placed on downstream petroleum products, refiners are caught in a major non-market economic squeeze. Messrs. Houser and Daniel Rosen of China Strategic Advisory LLC write, ‘‘As the price China paid for its imported crude doubled between 2004 and 2006, refiners . . . lost money with each barrel processed. In 2006 the refining industry as a whole lost over $5 billion.’’ [69] Since 2003, China has increased prices for refined oil products 12 times, but in January 2007 lowered the prices of gasoline and kerosene to correspond with fluctuations in international oil prices.[70]

Also in January 2007, China opened the wholesale oil market to foreign-owned oil companies, and issued regulations on the distribution, storage, and sale of retail products.[71] While certain restrictions apply to such investment, this change represents a positive step toward improving China’s energy infrastructure, as private foreign companies will seek to invest in the development of China’s oil retail market and distribution infrastructure.

Natural Gas

Natural gas historically has not been an important energy source for China, comprising only about three percent of its energy supply. China has limited domestic natural gas reserves and limited domestic production offshore and in inland provinces.[72] Therefore, in the future China will rely on imports to meet more than 40 percent of its natural gas demand.[73] China already imports natural gas from Australia into Guangdong province.[74] Additional terminals are being constructed in Fujian province and in Shanghai. Shanghai began constructing a terminal in January 2007 for receiving liquefied natural gas, and it is expected to begin operations in 2009. The terminal will be supplied through a 25-year contract with Petronas, a Malaysian oil company.[75]

In June 2007, China began regulating imports of natural gas in order to reduce domestic competition among its oil companies. According to the Ministry of Commerce, the competition between CNPC, China Petroleum and Chemical Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC) in purchasing natural gas on the international market enabled exporters to raise prices for Chinese imports. The effect of the new regulations in ‘‘[b]ringing gas imports under unified control will be conducive to increasing the influence of major Chinese buyers on the market.’’ [76] This move reflects China’s distrust of international oil markets, and demonstrates its willingness to interfere with the operation of its national oil companies in order to protect China’s larger interests.

The NDRC Energy Bureau controls natural gas prices in the Chinese market, but these prices may vary by province.[77] Beijing has lowered natural gas prices specifically for power generation in an attempt to encourage the use of gas instead of coal, but power producers have not dramatically increased their use of natural gas.[78] Barriers to expanded natural gas use include a limited distribution infrastructure, high investment costs for building that infrastructure, and a price structure that still leaves the price of coal lower than the price of gas.[79] Indeed, Mr. Rahim testified that natural gas is the most underexploited source of energy in China.[80]

As long as coal remains a cheaper source of fuel, consumers will be inclined to choose it rather than more expensive natural gas.[81] Nonetheless, growing costs for coal transportation, the environmental costs of coal burning that increasingly are being recognized and protested in China, and improvements in the infrastructure for natural gas distribution facilitate the emergence of natural gas as a competitor. The U.S. Energy Information Administration estimates that China’s natural gas consumption will increase by an average of 6.8 percent each year between 2003 and 2030, to comprise six percent of China’s energy supply.[82] Although this will not alter China’s energy fuel mix significantly, it will provide more options for provinces, especially coastal provinces, to improve their energy security and their air quality simultaneously.

Nuclear

As China struggles to lower high levels of emissions from coal-fired power plants, nuclear energy has emerged as an important option for diversifying China’s energy supply, moving it away from dependence on coal. Nuclear energy provides only about one percent of China’s current energy supply, but by 2020, China’s nuclear capacity is expected to expand five times from the current 8,000 megawatts to 40,000 megawatts.[83] The majority of this expansion will occur in coastal provinces where coal transportation costs are highest. Although nuclear power still will constitute a small share of China’s total generated power—approximately three to four percent,[84] this reflects a shift in the government’s energy supply strategy. This strategy calls for increasing nuclear energy output, but this will not appreciably alter the current percentage of China’s total consumption attributable to nuclear power.

The China National Nuclear Corporation and China Guangdong Nuclear Power Holding Company operate China’s existing nuclear reactors. In May 2007, the State Nuclear Power Technology Company was created by the State Council and four state-owned enterprises to lead efforts to sign contracts to construct third-generation nuclear power facilities. China’s nuclear power companies will benefit from the transfer of technology that will improve China’s current second-generation nuclear energy capabilities. The State Council financed 60 percent, or 2.4 billion renminbi, of the registered capital of the company.[85]

The Administration and the U.S. nuclear power industry have been actively working in concert to help jump-start China’s nuclear energy expansion. Secretary of Energy Samuel Bodman and NDRC Minister Ma signed a Memorandum of Understanding concerning nuclear energy cooperation that restates U.S. approval to export third-generation nuclear technology to China.[86] GE-Westinghouse Electric Company and China’s State Nuclear Power Technology Corporation signed an agreement in March 2007 to build four third-generation pressurized water reactors—two in Sanmen, Zhejiang Province, and two in Haiyang, Shandong Province—with Westinghouse’s AP1000 technology. Westinghouse outbid France’s Areva and Russia’s Atomstroiexport in a negotiation that began in 2004. Both parties agreed that a formal contract would be signed before the end of May 2007. In mid-May, three Chinese nuclear power companies signed a Memorandum of Understanding with Westinghouse and the Shaw Group, again stating their intention to develop a contract for this sale,[87] and the final contract was signed in July 2007.[88] This project will introduce the first AP1000 reactors to be built in China and is estimated to be worth $5.3 billion.[89] According to Deputy Assistant Secretary Pumphrey, ‘‘The AP1000 Westinghouse design adopts passive safety features and simplified design for enhanced safety and cost effective construction.’’ [90] The U.S. Nuclear Regulatory Commission certified this technology complies with nonproliferation safeguards for use and sale abroad.[91] Nonetheless, given concerns about China’s proliferation history, questions remain about the possible impacts of these sales. China’s interest in nuclear power is extending in a number of directions. According to Xinhua news agency, ‘‘The Chinese government . . . expected the new company [State Nuclear Power Technology Company] to develop self-owned, third-generation nuclear power technologies using technologies imported from Westinghouse, to build a fifth plant.’’ [92] China has joined the Generation IV Forum, a multilateral research initiative to develop a fourth-generation nuclear technology with higher safeguards.[93]

Renewable Energy

In recent years, China has expanded its use of renewable energy as part of its diversification strategy. China is now the eighth largest wind power producer in the world.[94] China’s wind power generation capacity increased 165 percent last year to equal 1,330 megawatts.[95] China’s planned wind power target is 20,000 megawatts by 2020.[96] Currently wind power is mainly concentrated in Xinjiang, Inner Mongolia, and Guangdong. During the April 2007 visit of a Commission delegation to China, the delegation visited a General Electric wind turbine factory located in Shenyang. According to GE representatives, demand for wind turbines is increasing in China as the government seeks to diversify its energy resources. GE faces competition from local manufacturers, primarily because the local firms are able to source their components domestically. The more components that American firms must import, the more expensive the assembly of turbines becomes. For this reason, firms are being forced to localize the supply of their parts in order to remain competitive in the Chinese market.

China also has ambitious plans for expanding its solar power capacity. Beijing aims to install three megawatts of solar power for the 2008 Olympics. By 2010, China plans to consume 300 megawatts of solar energy, even though last year China’s solar power consumption was less than 10 megawatts. China has patented solar water-heater technology that lessens its reliance on imported solar technology. However, China does rely on imports of polycrystalline silicon, or polysilicon, that is required for solar cell production. China’s solar power efforts face a significant economic hurdle because traditional energy sources usually are less expensive and the majority of people in China do not have large amounts of disposable income. Primarily as a result of this situation, China currently exports 90 percent of its solar cell production.[97]

Additionally, China is the largest consumer of hydroelectric power in the world, and with new projects coming online, this capacity is expected to expand. China currently has 86,000 dams, 22,000 of which are considered large dams.[98] Hydroelectric power provided approximately 16 percent of China’s electricity needs in 2005.[99] In numerical terms, China plans to expand capacity from 120 gigawatts to 300 gigawatts by 2020. As Mr. Houser testified, this would require China to construct a new Three Gorges-sized dam every year for the next 13 years to meet this target[100]—a seemingly unattainable goal, the achievement of which also would have significant impacts on China’s water supply and environment.

Dr. Elizabeth Economy, C.V. Starr Fellow at the Council on Foreign Relations, stated in written testimony for the Commission that although hydropower has the significant virtue of not contributing airborne pollutants or carbon dioxide, it is a very mixed blessing. The dams and reservoirs required to produce hydropower have caused declines in biodiversity, soil erosion, water pollution, loss of cultural sites, and the necessity to resettle entire towns and villages.[101]

The government has taken steps to encourage the use of renewable energy, expand U.S.-China cooperation in this field, and support the introduction of renewable energy technologies in the market. In 2005, the National People’s Congress passed the Law on Renewable Sources that went into effect in 2006. This law is intended to expand use of renewable energy in order to meet the goals set by the 11th Five-Year Plan. Among the new law’s provisions is a requirement that ‘‘power grid operators . . . purchase ‘in full amounts’ resources from registered renewable energy producers.’’ [102] These operators must purchase renewable energy— such as solar power, wind power, or hydropower—at prices controlled by the government. The law also provides financial incentives such as tax breaks for renewable energy projects.[103]

Despite these efforts, barriers to the use of renewable energy still exist. Wind turbines and solar panels require a significant investment, and state-controlled prices for electricity reduce the incentive to make the investments needed to diversify power production. In addition, many American firms, including some with whose representatives the Commission delegation met during its trip to China in 2007, are concerned about the theft of intellectual property, given the high research and development costs for new technology.[104] Foreign manufacturers face competition from local companies that do not face the same transportation costs for components. This situation requires companies to localize supply chains in China in order to be price competitive, which supports the overall development of the renewable energy industry but also significantly raises the risk of intellectual property rights violations as well as the risk that the enterprises established by foreign firms will never recover their initial investments, much less produce profits.

Conclusions

• The lack of policy coordination and implementation between the central government and local or provincial levels of government is hindering China from achieving greater gains in energy efficiency, promoting greater use of alternative fuels, and mitigating the environmental consequences that result from China’s dependence on coal. If this structure is not reformed, the Chinese government will not have, for the foreseeable future, the administrative tools necessary to reform China’s domestic energy consumption patterns, and also will be limited in its ability to address global energy problems proactively.
• As incomes rise in China and the economy becomes more consumption-oriented, effective conservation programs will be essential if energy demand growth is to be limited. China will have to pay close attention to mitigating the effects of energy-intensive and heavily polluting consumer items such as automobiles and air conditioners, which will require government regulation or market-based incentives that influence consumer choices on such items. Changing consumer demand also will affect the composition of China’s fuel needs, likely increasing China’s use of oil and natural gas, which will increase global demand for both.
• China is pursuing an energy diversification strategy that seeks to find cleaner alternatives to coal. However, as long as the environmental costs of burning coal are not built into coal’s price, the degree of diversification into natural gas, nuclear power, and renewable energy sources will have little impact on the complexion of the fuel supply, and China will continue to rely on coal as its primary energy source and increase its reliance on oil. This has long-term negative environmental and strategic consequences for the United States, but also raises opportunities for U.S.-China collaboration on clean coal technologies.

Section 2: China’s Environmental Situation

‘‘The Commission shall investigate and report on—

‘‘ENERGY—The effect of the large and growing economy of the People’s Republic of China on world energy supplies and the role the United States can play (including joint research and development efforts and technological assistance), in influencing the energy policy of the People’s Republic of China.’’

The Environmental Effects of China’s Energy Consumption on China and the United States

Burning carbon fuels to produce energy yields byproducts that pollute the atmosphere and also have the potential to affect water supplies. While this process certainly is not unique to China, the patterns of China’s energy consumption, and the ways in which the government has viewed and addressed environmental consequences of that consumption, have produced and are continuing to produce severe immediate and long-term environmental consequences that have large economic and social costs.

The primary contributor to energy-related pollution is coal burning for electricity generation. Coal-fired plants emit carbon dioxide, sulfur dioxide, nitrous oxide, mercury, and black carbon dust. It is estimated that China’s coal consumption is responsible for 25 percent of global mercury and 12 percent of global carbon dioxide emissions.[105] China’s State Environmental Protection Administration (SEPA) has estimated that China’s sulfur dioxide emissions— the main component of acid rain—have increased 30 percent since 2000.[106] U.S. Environmental Protection Agency (EPA) Assistant Administrator for International Affairs Judith Ayres noted in her testimony to the Commission that the average concentration of fine-particle pollution in Beijing is seven times higher than the air quality standards set by the U.S. EPA.[107]

Coal produces more carbon dioxide per unit of energy than any other fossil fuel. Although the Chinese government has not released official statistics on carbon dioxide or mercury emissions since 2001, Assistant Secretary of Energy for Policy and International Affairs Karen Harbert testified that China will overtake the United States as the world’s largest emitter of carbon dioxide before 2010.[108] Other estimates are that China will reach that point much sooner, and by some calculations it already has done so. A Netherlands-based environmental research group reported in June 2007 that ‘‘China overtook the U.S. in emissions of [carbon dioxide] by about 7.5 percent in 2006.’’ [109] Although China disputed this report, there is a broad consensus in the global scientific community that China either already is, or soon will become, the world’s largest emitter of greenhouse gases. By 2030 China is projected to account for 26 percent of the world’s carbon dioxide emissions and 48 percent of all coal-related emissions.[110]

China’s air pollution includes pollution generated by transportation vehicles and indoor air pollution. Due to the dramatic rise in the number of vehicles in use in China (described in Chapter 3, Section 1), byproducts of fuel combustion by transportation vehicles are contributing significantly to urban air pollution.[111] Nitrogen oxide from motor vehicles generates ozone.[112] Although trucks and cars are the most prolific vehicle pollution sources, rail transport and shipping also contribute to urban air pollution. During a Commission delegation’s trip to China and Hong Kong in April 2007, environmentalists with whom the delegation met in Hong Kong noted the impact of shipping-related pollution on Hong Kong’s local air quality. Because ships are unable to link to shoreline power there, they burn fuel continuously while docked, producing emissions that are concentrated at ground level. The U.S. EPA has identified this as a problem in the United States and is working with the shipping industry to reduce port pollution.[113]

Indoor air pollution caused by burning solid fuels—such as coal briquettes and biomass—for household heating and cooking contributes to nearly 400,000 deaths in China annually, according to the World Health Organization.[114] The World Health Organization’s report Indoor Air Pollution: National Burden of Disease Estimates states, ‘‘Exposure to indoor air pollution from solid fuels has been linked to many diseases, including acute and chronic respiratory diseases, tuberculosis, asthma, cardiovascular disease, and perinatal health outcomes.’’ [115] It reported that 80 percent of the population in China uses solid fuels,[116] indicating that a high percentage of the population is exposed to these risks. The full effects of this pollution are not yet understood because environmental data within China are meager and often exist only as aggregate data across many jurisdictions.[117]

The effects of the pollution China generates by no means are limited to China, although China suffers most from them. As one example, high levels of mercury traced to emissions in China threaten watersheds and wildlife in Oregon.[118] Assistant Administrator Ayres noted in her testimony that the ability of aerosols—airborne microscopic particles—to travel great distances is well documented. The difficulty typically is to trace a pollutant to its source. However, Dr. Jane Long, Associate Director of the Energy and Environmental Directorate at Lawrence Livermore National Laboratory, testified that the Laboratory has conducted a study tracing the path of aerosols from China, which it recently submitted for publication. This study concludes that 40 percent of the aerosols in the Sierra Nevada Mountains of California are attributable to China.[119] While this study did not chemically match the aerosols it studied to aerosols produced in China, a mechanical analysis of airstream data was conducted by the researchers, leading to their conclusions about the geographical sources of the aerosols they identified.[120]

The situation with aerosol pollution traveling to the United States from China is not an isolated case. Additional studies reported in U.S. media confirm that satellites have observed dust, soot, ozone, and nitrous oxide as they are blown across the Pacific at high altitudes. Dr. Dan Jaffe, from the University of Washington-Bothell, is involved with these studies. In a media interview he stated, ‘‘By looking at the ratios of different pollutants, particularly carbon monoxide and mercury, we can actually say the ratio of these pollutants we are seeing . . . matches the ratio of pollutants coming right out of China.’’ [121]

The Chinese government has enacted laws and regulations placing caps on sulfur emissions and requiring coal-fired power plants to reduce pollution, but only a small fraction of the plants subject to those laws and regulations have installed flue gas desulfurization (FGD) technology to capture sulfur dioxide from emissions.[122] Dr. Mun S. Ho, Visiting Scholar at Resources for the Future, testified, ‘‘These systems use about two percent of the electricity generated, i.e. the gross revenues of the utility [are] reduced by about two percent as a result of this rule.’’ [123] In his opinion, this cost creates a strong incentive for businesses to cheat on environmental pollution controls.

Regrettably, China’s weak environmental regulatory and enforcement system does very little to prevent or effectively penalize those who ignore or skirt the laws and regulations. Indeed, the primary obstacle to improving emissions control in China is not a lack of access to effective technologies and equipment; instead, it is the inability or unwillingness of the central government to monitor, appropriately incentivize, and compel environmental compliance at the local level.

Dr. Jennifer Turner, China Environment Forum Coordinator and Senior Project Associate at the Woodrow Wilson International Center for Scholars, testified about the ominous implications: ‘‘The expansion of China’s power plants alone could nullify the cuts required under the Kyoto Protocol from industrialized countries.’’ [124] Within the United States, there is concern that China’s transboundary air pollution may more than offset the progress that California, Washington, and Oregon are making toward pollution reduction targets set by the Clean Air Act.[125]

According to Dr. Ng Chonam, a professor at Hong Kong University who focuses on environmental impact assessments and with whom Commissioners met in Hong Kong in May, China’s unimpeded energy consumption, especially by its industries, results not only in air pollution but also in water shortages and water pollution.

Water pollution caused by the byproducts of fuel combustion is not the only threat to China’s water quality. Dumping of the toxic wastes from manufacturing and agricultural operations; disposal of untreated or inadequately treated sewage; return to rivers of wastewater resulting from washing coal and other mining operations; and runoff of agricultural chemicals and animal waste also have resulted in distressing water pollution. Increasingly, water conditions in many of China’s lakes and rivers threaten human health or are truly deadly. Surface water pollution often does not confine itself to the surface. Polluted water frequently finds its way into underground aquifers. Polluted groundwater, which often is used as a source of well water by individuals or even entire communities, can be just as harmful to human and other life as polluted surface water; and once polluted, aquifers are far more challenging and expensive targets for pollution mitigation efforts than surface water. Water shortages brought about by the inefficient use and over-consumption of water resources often result in salinization of freshwater resources. When the water in freshwater rivers is so depleted by overuse that river flows into the ocean cease or are substantially curtailed, a seawater surge is often the result, resulting in saline pollution of surrounding riverbanks and other ecological harm.

Pollution from Coal Mining

Air pollution is not the only environmental consequence of China’s dependence on coal as a primary fuel source. Coal mining produces air, land, and water pollution. The country has approximately 30,000 coal mines, and the cumulative effect of China’s mining practices has devastating environmental consequences. These consequences include methane emissions, toxic wastewater, dangerously polluted wasteland inhospitable to human and animal habitation, and land collapse.[126] Methane is a greenhouse gas that is 23 times more effective in trapping heat in the atmosphere than carbon dioxide,[127] and China is the largest emitter of coal mine methane in the world.[128] Coal mining pollutes surface and groundwater when wastewater is discharged from mines without any treatment. This polluted water can affect agricultural production as well as public health.[129] Additional health effects from coal mine pollution include lung disease, hearing loss, neuromuscular disorders, and rheumatism among mine workers.[130] In 2002, 70,000 Chinese miners suffered from black lung disease, and over 2,000 died from the disease.[131] Dr. Jennifer Turner illustrated the effects of coal mine pollution on a local population in her testimony to the Commission:

Linfen—a major coal mining city in Shanxi Province—has been dubbed the most polluted city in the world by the World Bank. The coal industry has greatly boosted the city’s economic development; however, it has led to the dramatic deterioration of the environment and a rise in major health problems. Crops are covered in [gray] dust and considered toxic, and the coal pollution dust is so great cars must use headlights during the day. City residents suffer from respiratory illnesses from the severe pollution generated by dozens of coal mines surrounding the city.[132]

The Economic and Social Impacts of China’s Environmental Degradation

China is finding that environmental degradation has costs—both economic and social. According to Assistant Administrator Ayres, ‘‘It has become abundantly clear to the Chinese that a poor environment is affecting their economy and that the damage they have done and the degradation that they now must suffer and attempt to remediate is having economic consequences.’’ [133] Last year, the Chinese government officially estimated the cost of environmental damage as three percent of gross domestic product (GDP).[134] However, Ms. Ayres testified that China’s State Environmental Protection Administration, in contrast, estimates that environmental degradation costs China eight to 13 percent of GDP annually. She noted that air pollution alone costs two to four percent of GDP.[135] In 2007 the PRC National Bureau of Statistics declined to release information about the cost of pollution relative to GDP, noting that ‘‘the study has prove[n] to be too sensitive to continue, and it has been suspended.’’ [136]

Pollution due to China’s energy consumption not only has a macroeconomic impact, but also affects the basic productivity of China’s cities and provinces. Black carbon soot blocks sunlight and is estimated to be lowering crop yields by 30 percent for grain crops in China.[137] The Worldwatch Institute estimates that acid rain and smog produced from coal burning cost China $13 billion per year in damages to crops, forests, and human health.[138] The World Health Organization found that over half the damage caused by acid rain in China occurs in three provinces: Guangdong, Zhejiang, and Jiangsu. Almost half the acid rain damage to crops in China occurs in Hebei, Hunan, and Shandong provinces.[139]

Air pollution also affects China’s investment climate. International investors such as Merrill Lynch have called air pollution produced in Guangdong province a risk to Hong Kong’s competitiveness because it reduces Hong Kong’s appeal as an investment location and commercial hub.[140] China has 16 of the 20 most polluted cities in the world, according to the World Health Organization, and the population in those cities faces increased health risks due to elevated levels of sulfur dioxide and nitrogen oxide.[141] International investors are reluctant to risk the health of their employees or damage to their investments by locating in highly polluted areas.

Air pollution has been linked to premature mortality and chronic respiratory problems.[142] Dr. Ho testified that, based on his studies of the economic costs of air pollution, he conservatively estimates that 94,000 Chinese die prematurely every year due to severe air pollution. Other estimates indicate that air pollution contributes to 400,000 premature deaths per year.[143] Further, 1.4 million cases of chronic bronchitis and 1.3 billion lost work days are associated with air pollution.[144] Both air and water pollution have been linked to increased rates of cancer in both rural and urban areas,[145] which results in increased morbidity, losses in labor productivity, and strain on the health care system. In her statement to the Commission, Dr. Elizabeth Economy of the Council on Foreign Relations noted that the impact on public health from coal-based pollution alone is projected to cost China $39 billion in 2020.[146] These troubling public health status and health care cost trends are not expected to improve in the future.

Along these lines, the Chinese government’s recent decision to refuse to release two reports quantifying the impact of air pollution on public health and the cost of China’s pollution to its gross domestic product (GDP) is not a fortuitous indicator.[147] Without public information detailing and quantifying the costs of pollution to China and the Chinese people, it will be more difficult for the government to take the steps necessary to reduce pollution, establish monitoring baselines, and motivate the public to participate in energy conservation and environmental awareness efforts.

The cumulative effects of pollution could have political ramifications for Beijing. The growing middle class in China is increasingly aware of and attentive to quality-of-life issues, including the environment in which they live.[148]

Protests in Xiamen in June against the construction of a chemical plant were reported in the press as the ‘‘nation’s largest middle-class rally in years.’’ [149] Xiamen residents organized two days of demonstrations through the use of instant text messages on cell phones despite the efforts of Public Security Bureau technicians to block these transmissions.[150] Police arrested and denied bail to at least four residents who attended the protests.[151] Days following the Xiamen demonstrations, Beijing residents protested against the construction of a waste incinerator in northwest Beijing.[152] In both these cases, residents protested the lack of public information about the environmental risks that these projects posed to the local population, and forced officials to reconsider and delay the projects, demonstrating the potential for public involvement in matters with environmental impacts.[153]

In July 2007 Zhou Shenxian, the leading minister of the State Environmental Protection Administration, publicly blamed the increasing instability across the country—reflected in riots, protests, and petitions—on the public’s anger toward the country’s polluted environment.[154] He chided local officials for not standing up to environmental polluters whom he labeled as the cause for a rising number of ‘‘mass incidents.’’ [155] These incidents demonstrate the potential for Chinese citizens to become involved on a local level in environmental monitoring and enforcement. But it is not yet certain whether the Chinese government is willing to accept this participation on a large scale, and will provide the policy tools by which members of the public can channel their participation in ways the government will accept, but that also yield positive changes. Without comprehensively addressing energy-related environmental pollution, the government is likely to face increased protest and challenges to the political system, especially directed toward local officials who protect industrial polluters.

Conclusions

• China’s national leaders recognize that a failure to enforce environmental controls on pollution has significant economic and social costs. However, the government has not yet taken steps to ascribe value to environmental compliance that equals or exceeds the value placed on economic growth. Continued lax enforcement may have consequences for the sustainability of China’s economic growth.
• If China’s underlying environmental problems are not addressed effectively, this could become another source of unrest that could challenge the Chinese Communist Party’s control of the country.
• China soon will overtake the United States as the largest emitter of greenhouse gases in the world, if it has not already done so. China currently is the largest national source of coal mine methane and is poised to become the largest national source of carbon dioxide. Global climate change initiatives will not work without China’s participation.
• The effects of China’s energy-related pollution are far-reaching, extending to the United States and beyond. China lacks adequate data and public information to assess accurately changes in its energy consumption and resulting environmental consequences, especially at the provincial and local levels. Greater availability and transparency of data can improve the central government’s ability to make and implement sound energy policy, and assist the United States in understanding more clearly the mutual energy and environmental challenges facing both countries. Additionally, more accurate data can facilitate deployment of green energy technology, much of which is developed in the United States.

Section 3: The Geostrategic Impact of China’s Energy Policies and Activities

‘‘The Commission shall investigate and report on—

‘‘ENERGY—The effect of the large and growing economy of the People’s Republic of China on world energy supplies and the role the United States can play (including joint research and development efforts and technological assistance), in influencing the energy policy of the People’s Republic of China.’’

China’s Search for Energy Security and the Impact of Pursuing Equity Oil

China’s concern over access to resources including oil has become an important influence on its strategic behavior.[156] Mr. David Helvey, Country Director for China, Taiwan, and Mongolia for the U.S. Department of Defense, testified to the Commission that ‘‘China’s response to its energy needs has led Beijing to finance energy projects that have uncertain prospects for a positive return on investment, to ignore political risk that is prohibitive to private commerce, and to establish closer relations with problem states that are rich in energy but that defy international norms.’’ [157] These steps entail significant risks, confirming the great importance China’s leadership attaches to pursuing a sufficient energy supply.

China’s energy-related actions reflect its distrust of international oil markets—which it sees as primarily dominated by the United States—and call attention to the motivations behind China’s national ‘‘going-out’’ strategy described in Chapter 3, Section 1. In order to ensure an adequate petroleum supply for its domestic consumption needs, China has chosen to establish long-term supply contracts to purchase oil produced in other nations, rather than relying on the market-based acquisition mechanisms of the international oil market; and to encourage its companies to pursue ownership of oil production in overseas fields. This approach, based on what essentially is a zero-sum perspective of the global oil market, challenges the current multilateral perspective on energy cooperation.[158]

This policy has political and security consequences for China. The ‘‘going-out’’ strategy supports the expansion of China’s oil companies into overseas oil production and the acquisition of equity oil contracts to develop and produce new resources (see Chapter 3, Section 1). Congruent with this policy is China’s overall foreign policy approach that seeks to expand China’s influence around the world and promote a perception that China is willing to offer aid and development assistance to developing nations while not interfering in their internal affairs. Thus, in the past, China’s search for equity oil often has been supported by the development of official political relationships.

Witnesses testified to the Commission that China’s national oil companies—while majority state-owned—may have begun to act independent from the government in their pursuit of the ‘‘going out’’ strategy, and make investment decisions based on projected commercial returns rather than national policy (see Chapter 3, Section 1). Messrs. Daniel Rosen and Trevor Houser write in their paper ‘‘China Energy: A Guide for the Perplexed,’’ ‘‘[China National Petroleum Corporation] (CNPC), [China Petroleum and Chemical Corporation] (Sinopec), and [China National Offshore Oil Corporation] (CNOOC) have used political clout to get supportive high-level state visits, access to subsidized capital, or development assistance money designated for infrastructure projects. This sometimes contradicts Beijing’s desire to sink additional investment into mature, less profitable fields at home in order to prop up declining domestic production.’’ [159] Mr. Mikkal Herberg, Research Director of the Asian Energy Security Program at the National Bureau of Asian Research, testified that the energy firms’ actions, contradicting government preferences, may be linked to the companies’ competitiveness. As the companies become more competitive internationally, they seek to be more independent from the government’s influence. Moreover, their interests may diverge from the state’s interests.[160]

When the practices or actions of China’s oil companies operating in other countries engender local discontent or international concern, Beijing must seek to repair relationships not only with the countries in which the problems have occurred, but also with international organizations and other nations that promote responsible activity by companies investing in developing countries.

Sometimes local antipathy to Chinese investments and activities endangers those investments and Chinese personnel who are implementing them. For example, in September 2006 Sinopec was ordered to halt all exploration operations in Gabon after it was discovered that the company was operating in a national park without having received approval from Gabon’s Environment Ministry for its environmental impact study. ‘‘Sinopec was accused of dynamiting and polluting Loango National Park, tearing up the forest to create roads, and generally destroying the habitat . . .’’ [161]

In January 2007 Nigerian gunmen kidnapped nine Chinese employees of CNPC working in the southern state of Bayelsa and demanded ransom.[162] In April 2007 rebels attacked a Chinese-run oil field in Ethiopia, killing nine Chinese workers and kidnapping seven.[163] Although the Chinese workers were not directly targeted by the rebels, the Ogaden National Liberation Front released a message stating, ‘‘We will not allow the mineral resources of our people to be exploited by this regime or any firm [with which] it enters into an illegal contract.’’ In 2007 China conducted several exercises aimed at simulating hostage situations. Although these exercises generally were conducted within the context of counter-terrorism and preparation for the 2008 Olympic Games, it is important to note that these skills could be applied by Chinese special forces and People’s Armed Police in any hostage situation that Chinese workers abroad might face.[164]

In particular, China’s relationships with Iran, Burma, and Sudan have resulted in criticism from Western countries that prohibit their oil companies from operating in these countries for political and human rights reasons. China has resisted taking steps to resolve the political and human rights conflicts in Iran and Burma. It has supported some U.N. resolutions addressing Iran’s nuclear program, but has not reduced its investments or activities pertaining to Iran’s petroleum supplies. It has not supported U.N. resolutions addressing human rights problems in Burma or taken any other discernible action to seek a responsible solution there.

In Sudan, China recently has taken minimal steps to encourage the Khartoum government to accept the U.N.-African Union peacekeeping force and to discuss ways to address the genocide in Darfur. China has voted in favor of U.N. Security Council Resolution 1769, which established a U.N.-African Union hybrid peacekeeping force in Darfur (UNAMID) consisting of 19,555 military personnel.[165] China also has made statements that support peace in Sudan. The press reported that China’s President Hu Jintao discussed the Darfur crisis with Sudanese President Omar al-Bashir during President Hu’s visit to Sudan in January 2007.[166] And in May 2007 China appointed a special envoy to Sudan to convey its desires for the conflict there to be resolved responsibly, and publicly encouraged the government in Khartoum to accept U.N. and African Union peacekeepers. In October 2007 the government announced that the People’s Liberation Army (PLA) was preparing to send a combat engineer battalion of 315 soldiers to provide engineering support to the U.N. peacekeeping mission in Darfur.[167]

China, however, has not been willing to risk its investment in Sudan in order to increase pressure on the Sudanese government to halt the genocide. It even has increased its aid for infrastructure projects in Sudan. For example, during the same visit in January 2007, President Hu offered an interest-free loan to Khartoum to build a new presidential palace. He cancelled $80 million of debt, and announced a plan to invest in the construction of a new railroad.[168] China also has invested an estimated $2 billion in the construction of the Merowe Dam, which is expected to supply all of Sudan’s energy needs.[169] Further, China has continued to sell arms to the Khartoum government.

China’s ‘‘hands off’’ approach to these nations rests ostensibly on its objections to interference in the internal affairs of one nation by another. It is likely that China’s actions also are motivated by a desire to protect its investments and access to energy in those nations, as well as build relationships there. Whatever its explanation or motivation, China at best has failed to help resolve these matters in a manner acceptable to the world community, and at worst has acted as an ‘‘enabler’’ to the abusive regimes in these nations while stymieing or at least complicating international efforts to resolve the political conflicts, humanitarian crises, and rights violations occurring there.

Mr. Herberg testified that there are signs that China is changing its approach, although it is premature to conclude that has occurred. The influence of public awareness campaigns that encourage the Chinese government to divest itself of its investments in Sudan, and have linked this issue to the 2008 Olympics in Beijing, has created a policy conundrum for China.[170] China’s passive approach to addressing its activities in Sudan and their implications could have an economic impact. In May 2007 Fidelity Investments reduced its stake by 91 percent in PetroChina Co., CNPC’s listed subsidiary on the New York Stock Exchange. (CNPC is the Chinese oil company with investments in Sudan.)[171] China’s passive approach to this issue also is affecting the way in which China is perceived around the globe.

China must balance its desire to maintain its investments in Sudan’s oil production, one of its largest overseas sources of equity oil, with its desire to be perceived as a responsible international power that at the very least condemns genocide. Although witnesses testified to the Commission that China most likely will not divest its holdings in Sudan, they expressed the belief it will become more active in urging Khartoum to pursue a more reasonable course and to obtain a resolution to the violence in Darfur.[172] As noted above, China has taken a few, limited steps that suggest this view is correct. Global Security Implications Three primary concerns dominate discussions about the strategic consequences of China’s energy consumption, and all three relate to China’s access to and consumption of oil. First, China’s strategy of acquiring equity oil overseas is an attempt to lock up supplies that, in a time of crisis, could significantly affect the global oil market and, subsequently, the United States’ ability to acquire oil. Second, China increasingly is willing to expend political capital through its foreign relations and commercial relationships to protect its access to energy supplies. And third, China has expressed and demonstrated willingness to designate military resources to ensure that the transit to China of oil it has produced or obtained in other nations is protected.

The Role of Energy Security in China’s Naval Modernization

China has openly expressed the intention to protect its investments abroad, especially its energy supplies. In December 2006, when meeting with representatives of the PLA Navy at the Chinese Communist Party’s national congress, President Hu called for a navy capable of defending China’s maritime interests and rights.[173] In July 2007, Commander of the PLA Navy Wu Shengli and then-Political Commissar of the Navy Hu Yanlin, wrote:

Our nation is an oceanic nation that owns more than 18,000 kilometer[s] of oceanic coastline, more than 6,500 islands that are larger than 500 square meters, more than three million square kilometers of oceanic area with sovereignty and jurisdiction, and international exclusive exploitation right for 75,000 square kilometers at the bottom of the Pacific. In the oceanic area of our nation, there exist huge strategic interests along with various contradictions and threats. . . . In order to . . . maintain the safety of oceanic transportation and the strategic passageway for energy and resources, ensure the jurisdiction of our nation to neighboring areas, continental shelf, and exclusive economic zones, and effectively safeguard our national maritime rights, we must build a powerful navy.[174]

PLA military officers at the Academy of Military Sciences reaffirmed this perspective during discussions with the Commission’s delegation to Beijing in April 2007.

Because the majority of China’s oil imports transits through the Malacca Strait, Beijing views protection of the sea lines of communication (SLOCs) through this area as a priority for its energy security. Dr. James Holmes, Associate Professor at the Naval War College, testified to the Commission:

From the perspective of international strategy, the Strait of Malacca is without question a crucial sea route. . . . It is no exaggeration to say that whoever controls the Strait of Malacca will also have a stranglehold on the energy route of China. Excessive reliance on this strait has brought an important potential threat to China’s energy security.[175]

Currently, the United States is the primary guarantor of the sea lines in the Strait of Malacca. In this respect, Dr. Holmes noted that ‘‘China is increasingly reluctant to entrust the security of shipping and thus its economic development to what it sees as the uncertain goodwill of the United States.’’ [176]

China does not have the naval capability to assume responsibility for protecting its SLOCs through the Malacca Strait or, were it to see a need to do so, to challenge the U.S. naval presence in that area.[177] This relative weakness is the motivation for a range of steps China is taking to increase its military and nonmilitary options and to decrease its dependence on the Strait.

Dr. Holmes stated in his testimony that in addition to preparing for a possible conflict over Taiwan, resource security is a primary motivation for China’s naval modernization. He cited Chinese scholars Liu Xinhua and Qi Yi, who wrote, ‘‘Ocean power has permanent meaning to the trade of coastal countries, and the backup of a country’s ocean power is its navy. Therefore, the long term approach toward ensuring [open] sea lanes and [access to] potential ocean resources is to [develop] a modern ocean-going navy.’’ [178] As discussed in Chapter 2, Section 1 on China’s military modernization, over the long term it appears China may be moving beyond a concentration on developing littoral naval forces and may be beginning to build a blue-water navy that can engage in long-range missions and power projection.

DoD’s 2007 Annual Report to Congress on the Military Power of the People’s Republic of China reports that China’s concern about this strategic weakness has prompted Beijing to pursue capabilities that ‘‘would help it ensure the safe passage of resources through international waterways.’’ [179] Mr. Helvey noted several related military developments in his testimony, including:

1. New missile units outfitted with conventional theater-range missiles at various locations in China could be used for anti-access/area denial in a variety of regional contingencies.

2. Airborne early warning and control and aerial-refueling programs could permit extended-range offensive air operations into the South China Sea.

3. Advanced destroyers and submarines equipped for anti-air, anti-surface, and undersea warfare could enable Beijing to protect and advance its maritime interests.

4. New equipment, better unit-level tactics, and greater coordination of joint operations are improving China’s emergent expeditionary forces—at present, three airborne divisions, two amphibious infantry divisions, two marine brigades, about seven special operations groups, and one regimental-sized reconnaissance element in the Second Artillery.

5. Investment in command, control, communications, computers, surveillance, intelligence, and reconnaissance (C4ISR) capabilities, including space-based and over-the-horizon sensors, could improve identification, tracking, and targeting of foreign military activities deep into the western Pacific Ocean.

6. Extended long-range patrolling into the Indian Ocean is providing increased opportunities for PLA Navy crews to become familiar with the traditional sea lanes upon which their oil is shipped. China has conducted two multi-ship forays into the Indian Ocean this year, including one to participate in a multilateral naval exercise hosted by Pakistan, and the other to call on St. Petersburg, Russia.[180]

Dr. Toshi Yoshihara, Associate Professor of the Naval War College, stated in his testimony that a benchmark for measuring Chinese change or progress in the development of these capabilities is to gauge the ability of China to conduct long-range maritime reconnaissance or replenishment operations.[181]

How China Applies Soft Power to Aid Its Energy Security Efforts

In the meantime, as these capabilities develop, China faces an ‘‘ambition-credibility gap,’’ as described by Mr. Helvey. To lessen the gap while undergoing military modernization, China is building a reservoir of soft power within Asia. Dr. Yoshihara referred in his testimony to Dr. Joseph Nye’s definition of soft power, which is having ‘‘an appealing culture or political institutions [that engender] goodwill elsewhere in the world, helping a state’s political leaders initiate collaborative actions involving other states.’’ [182] The use of soft power, including aid and investments, allows China to expand its presence and influence throughout Asia through cultural and political collaborations that seek to influence other countries’ perceptions of China and dispel fears about China’s military expansion.

For example, China has been negotiating basing rights along the coastline of South and Southeastern Asia, which has been termed its ‘‘string of pearls’’ strategy. According to Dr. Holmes, this strategy is allowing China to ‘‘[lay] the foundations of a strategic maritime infrastructure that would enhance both its economic prospects and its military access to the Indian Ocean.’’ [183] This strategy has produced concern among China’s neighbors about its intentions. During the Commission delegation’s visit to India in August 2007, Commissioners were told that Indian policymakers view the ‘‘string of pearls’’ strategy as an attempt to expand Chinese economic, military, and political influence, while at the same time limit India’s role in the region. (See Chapter 4, Section 2 for elaboration.)

One pearl in the string in which China has invested is construction of the Port of Gwadar in Pakistan. This port is located strategically near the Strait of Hormuz, through which oil shipments leaving the Persian Gulf must transit. In the event the United States blocked China-bound ships from passing through the Malacca Strait, oil from the Persian Gulf or Africa could be offloaded from ships and transported overland from Gwadar to China. Dr. Holmes concluded, ‘‘Beijing might find the high price of such an alternative worth paying for assured energy supplies in the face of a U.S.-imposed embargo.’’ [184] Also, this port could serve as a future launching base for a Chinese presence in the Persian Gulf.[185] Although Dr. Holmes noted in his testimony that the Port of Gwadar is no ‘‘trump card’’ for China—given its geographical vulnerabilities and the capabilities of the U.S. Navy—he said that implementation of the ‘‘string of pearls’’ strategy will help China project power and influence well beyond the East and South China Seas and the Taiwan Strait.

Acquisition of new naval capabilities also may assist China in asserting territorial claims that have energy implications. China claims sovereignty over territory in the East and South China Seas involving areas contested by Japan, Taiwan, Brunei, Indonesia, Malaysia, Philippines, and Vietnam.[186] While these territories are not rich in resources above the surface, experts believe the areas contain significant amounts of oil beneath the ocean floor. This has been a motivating factor in China’s assertion of sovereignty over the disputed areas—which, according to Mr. Helvey, has contributed to regional tensions.[187] Tighter energy supplies and higher oil prices could motivate China to act more aggressively toward these claims. This could prompt other nations in the region to build up their own naval forces. The Malabar naval exercise in September 2007 that included the navies of the United States, India, Japan, Australia, and Singapore is an example of expanded military cooperation in the region. Previously, the exercise included only the United States and India.[188] Continued naval buildup may have the potential to increase regional tensions further. Mr. Helvey noted, however, that all parties involved in territorial disputes in the region currently appear to remain focused on resolving them diplomatically.[189]

China is able to emphasize a diplomatic approach toward this situation primarily because it has invested heavily in expanding its soft power influence in Asia. Dr. Yoshihara explained China’s motivations for such behavior:

First, Beijing evidently hopes to allay suspicions in Asian countries wary of its great-power ambitions, forestalling U.S. or Asian opposition to its bid for sea power. Second, by assuaging regional anxieties about China’s rise, Beijing is seeking to foster perceptions that the nation’s return to the nautical area . . . is not to be feared but rather embraced.[190]

Moreover, Dr. Yoshihara argued that, in conducting this soft power campaign, China is attempting to persuade other Asian nations that its mastery of the seas is preferable to mastery by the United States, the self-appointed guarantor of the Asian sea lanes and [in China’s opinion] the heir to the imperialist legacy. Thus, China promotes its naval ambitions by framing its actions in terms of ‘‘commerce and discovery’’ in contrast to the ambitions of the United States, which it implies emanate from Western powers’ history of ‘‘imperial conquest and exploitation.’’ [191] It does this in a variety of ways that seek to increase China’s cultural appeal, create favorable perceptions of China’s economic development model, and strengthen kinship ties to overseas Chinese in the region.[192]

Nonetheless, many Asian countries remain unconvinced that China’s motivations and aspirations in the region are benevolent—or even benign. This opinion was reiterated in meetings the Commission delegation had in New Delhi with Indian security analysts and academics.

China’s Efforts to Diversify Its Acquisition of Energy Supplies

Another component of China’s energy acquisition and security strategy is establishment of land-based routes for transporting energy supplies from their sources to China. These routes will enable China both to diversify its energy supply sources throughout Central Asia and also to import energy via a route that does not pass through the Malacca Strait. Although these routes could not supply China with all its import needs, they could contribute to China’s energy security in the event that the Malacca Strait was blocked. ‘‘China has worked assiduously over the past decade to establish closer energy and diplomatic ties with Russia and the key Central Asian energy-rich states.’’ [193] China has formally entered a Strategic Energy Alliance with Kazakhstan. China’s investment in Kazakhstan currently provides it with 200,000 barrels of oil per day and the plan is to increase delivery up to 400,000 barrels per day in the next few years.[194] China signed an agreement in July 2007 with Turkmenistan for long-term supply of natural gas through a new pipeline that will connect the two nations. The terms of that agreement are unavailable publicly, and the volume of natural gas delivery for which it provides is not yet known.[195]

In addition, China has been attempting to improve its relationship with Russia, from which it has been receiving approximately 250,000 barrels per day of crude oil by rail, and with which it has been pursuing construction of pipelines to China—although this effort has not progressed at the pace China had hoped. Mr. Herberg noted in his testimony that the reason for this lag is that the bilateral relationship has been ‘‘fraught with cross-currents of competition, suspicion, and Russian energy policy paralysis. . . .’’ [196] Regardless, he concluded that over the long term it is likely that the volume of oil and gas exports from Russia to China will increase.[197]

In Central Asia, China’s diplomacy, including its establishment of and involvement in the Shanghai Cooperation Organization (SCO), is key to implementation of its energy policy. Given the cost and difficulty of constructing an oil pipeline, an oil-producing nation must have a secure contract to make such construction financially justifiable. Establishing strong bilateral and multilateral relations is a prerequisite to engendering trust that China will be a long-term customer for oil and gas in this region. Furthermore, establishing these economic interests with its neighbors to the west necessitates protection of those assets if they become threatened. The multilateral military exercises conducted by the SCO,[198] as well as the PLA deployment exercises in China’s western Xinjiang province,[199] imply that China could employ military force to protect its energy assets in Central Asia.

An Emergency Oil Supply

While building up its military power and expanding its soft power influence, China also is taking steps to respond to future supply disruptions by establishing national petroleum reserves. During the period of the 10th Five-Year Plan (2001–2005), the Chinese government decided to establish a strategic petroleum reserve (SPR) and identified four sites for storage: Zhenhai, Dalian, Zhoushan, and Huangdao. By 2008, the first phase will be completed and China will have reserves equal to 25 days of net oil imports.[200] By the completion of the second phase, China will have reserves equal to 42 days of net oil imports, or 200 million barrels.[201] When completed, these two facilities combined will have a capacity of 390 million barrels.[202] In March 2007 China announced that it may build a fifth storage tank in Lanzhou to hold crude oil imported from Kazakhstan.[203] China already has stored more than 37 million barrels in the Zhenhai tanks.[204] The Zhoushan storage terminal on the Aoshan Islands in Zhejiang province began accepting deliveries of crude in May 2007.[205]

Dr. Erica Downs of the Brookings Institution noted in a monograph on China’s energy security that as of the end of 2006, China has not delineated its policies for using its strategic reserves.[206] Management of the SPR falls under the State Oil Stockpiling Office and State Oil Stockpiling Center that are subordinate to the National Reform and Development Commission, but the nature of this bureaucracy and its relation to the operation of the SPR is unclear.[207] Furthermore, it has been reported that the government increasingly is involving some of its major oil companies in the SPR activities and operations. For example, CNPC and Sinopec have been put in charge of constructing the SPR sites,[208] and The Economist reports that Sinopec has been given control over a third of the storage capacity at the Zhenhai storage facility.[209]

The lack of transparency in SPR operational policies and the involvement of China’s oil companies in their operation have fueled concerns that Beijing may use its stockpiled oil to manipulate international prices. This has caused concern that one of China’s considerations in deciding when to release reserves may be maximizing profits for its state-owned energy companies.[210] It also is possible, however, that the oil companies’ involvement is nothing more than the government looking to its national energy companies to provide technical expertise its own bureaucratic organizations may lack.

In the 2006 U.S.-China Energy Policy Dialogue, U.S. officials emphasized the importance to the global petroleum market of using strategic reserves only during severe market disruptions and not to control domestic market prices.[211] Assistant Secretary of Energy for Policy and International Affairs Karen Harbert testified that at a meeting of energy ministers in December 2006, China expressed its intention to use its strategic reserves to ease adjustment to supply disruptions and not as a ‘‘market management tool.’’ Regardless, the U.S. Department of Energy is urging China to make a public commitment to coordinate draw-down of its strategic reserves with other nations and in coordination with the International Energy Agency.[212] Implications for the United States

The implications for the United States of China’s strategy for energy security are multifaceted. First, China relies on the United States to secure the sea lanes through which its energy supplies are shipped, and does not contribute to this effort. Essentially, China is able to be a free rider—receiving the benefit of U.S. protection of the sea lanes through which its energy supplies transit— while it simultaneously funnels available naval funds into a modernization program to develop a blue-water fleet.

Additionally, China’s allegiance to an oil equity ownership policy runs contrary to the approach of industrialized nations that rely on the free market to ensure an efficient distribution of oil supplies, and it reduces the ability of the market to respond quickly to political and natural disruptions in the global oil supply.

The relationships China forms and maintains with oil-producing countries such as Iran and Sudan in order to obtain oil supplies from them do not serve the interests of global peace and security or human rights. Mr. Helvey testified that ‘‘[a]n immediate consequence of this behavior is the negative impact that this has on U.S. goals favoring the spread of democracy, as well as priorities for the promotion of human rights and the rule of law, confronting the threat of terrorism, and non-proliferation.’’ [213] Oil revenue received from China props up these regimes and thwarts multilateral efforts to get the leaders of these nations to comply with international standards of behavior.[214]

Improvements in the U.S.-China Strategic Energy Relationship

Witnesses testified that China is starting to conclude that its approach to energy security will not provide the level of security Beijing desires.[215] China knows, of course, that it cannot meet its energy needs through domestic supplies of coal, natural gas, and oil, and thus must import energy sources. China’s equity petroleum assets abroad currently are sufficient to supply only a very small portion of its overall demand for imports, and China will not be able to meet its needs through this strategy alone.[216]

Mr. Herberg noted that China is beginning to see the pragmatic appeal of a multilateral approach to energy security, and to change its strategy for pursuing energy security. He also told the Commission that China’s demand is rising too quickly to be addressed effectively through equity investments, and that policy advisors in Beijing are starting to suggest that the government instead focus on the stability of the market. Additionally, he testified that:

[T]here is a growing sense in Beijing that the investment interests of China’s [national oil companies, or] NOCs in expanding abroad are not necessarily synonymous with China’s national energy security interests. . . . There is growing discussion that, while China should have strong, globally competitive national oil companies commensurate with other global powers, China’s energy security interests do not require heavy state support or unnecessarily controversial financial and diplomatic support for [its] NOCs.[217]

Moreover, he noted that China is beginning to focus on the patterns of its domestic energy consumption and promote energy conservation, energy efficiency, and demand-side reforms that open the door to international cooperation.[218]

This change could affect the U.S.-China strategic energy relationship because it allows the relationship to be predicated upon mutual interests such as sea lane security, global oil market stability, and climate change. To this end, Assistant Secretary Harbert testified, ‘‘As two major energy consumers and economies in the world, the United States and China have been cooperating to address energy security and climate change issues. . . . Over the course of recent years, the two countries have come to recognize how interdependent our economic prosperities and energy security have become.’’ [219] Deputy Assistant Secretary of Energy for International Energy Cooperation David Pumphrey further noted, ‘‘This is a process that we take one step at a time, and based upon the progress we have achieved thus far, I believe there are even greater benefits down this road for both nations in terms of energy security and a clean energy future.’’ [220]

Conclusions

• China’s pursuit of equity oil acquisitions is contrary to international commercial practices related to energy that support use of the market, and allocation of available petroleum supplies through international cooperation in the event of an emergency.
• In pursuing some of its global energy interests, China aids regimes operating contrary to U.S. foreign policy interests, such as the genocidal government in Sudan and Iran’s government that is attempting to develop its own nuclear capability.
• The bilateral relationships China is building around the world— many if not most of them largely motivated by its quest for energy supplies and other resources—have resulted in an increase of its global economic, political, diplomatic, and cultural influence that has the potential to challenge U.S. interests.
• China’s naval modernization is targeted not only on a Taiwan scenario but also on protecting China’s economic resource supply chains. As Chinese overseas investment grows, the government will have a greater stake in protecting these investments and the ability to transport to China the resources the investments are producing and its economy requires. This is a major determinant of China’s naval modernization.

Section 4: Prospects For Addressing the Effects of China’s Energy Consumption

‘‘The Commission shall investigate and report on—

‘‘ENERGY—The effect of the large and growing economy of the People’s Republic of China on world energy supplies and the role the United States can play (including joint research and development efforts and technological assistance), in influencing the energy policy of the People’s Republic of China.

‘‘UNITED STATES-CHINA BILATERAL PROGRAMS—Science and technology programs, the degree of non-compliance by the People’s Republic of China with agreements between the United States and the People’s Republic of China on prison labor imports and intellectual property rights, and United States enforcement policies with respect to such agreements.’’

Energy Policymaking Reform

In May 2007 a study by the McKinsey Global Institute concluded, ‘‘Developing countries could contribute more to improving energy productivity, largely because they tend to start at a lower base than developed economies. Their faster growth also creates opportunities to adopt the latest, energy-efficiency technologies in a cost effective way. The choices they make will therefore be critical to the future trajectory of energy demand growth. China, as in so many other respects, will be crucial because of its size and rapidly growing weight in the world economy.’’ [221] The environmental consequences and strategic effects of China’s energy consumption will have dramatic consequences for China and the world. For this reason it is very important to encourage China to find options that limit demand, and allow China to improve its energy security and environmental quality. Successfully addressing this issue will be crucial not only for the continued health of the Chinese economy but also, given the nature of the globalized economy, for the continued health of the American economy. To succeed in increasing energy efficiency and conservation, and in adopting cleaner energy technologies, China will need to address the structural weaknesses within its energy policymaking and enforcement apparatus and establish policies that provide economic incentives for choosing cleaner energy alternatives. U.S. Environmental Protection Agency (EPA) Assistant Administrator for International Affairs Judith Ayres testified to the Commission that ‘‘. . . the heart of a successful regulatory regime is compliance and enforcement. . . .’’ [222] Yet, as mentioned in Chapter 3, Section 1, China’s energy policy structure places responsibility for implementing most energy use policies on local and provincial governments. This decentralization results in a potpourri of approaches rather than a cohesive national policy intended to curb emissions and improve energy efficiency. For example, Ms. Barbara Finamore, Senior Attorney and Director of the China Clean Energy Program at the Natural Resources Defense Council, testified that the 11th Five-Year Plan (2006–2010) calls for the implementation of building efficiency standards that require energy savings of 50 percent for new buildings and 65 percent for buildings in Beijing, Shanghai, Tianjin, and Chongqing. However, only 10 percent of newly constructed commercial buildings and 15 percent of new residential buildings are in compliance.[223]

Assistant Secretary of Energy for Policy and International Affairs Karen Harbert noted in her testimony that the solution to this failure is not ‘‘upping the mandate,’’ but rather is clearly delineating responsibilities and providing policy tools that enable officials to implement the law.[224] Mr. Saad Rahim of PFC Energy testified that China currently has an opportunity to put a new framework in place to resolve the existing system’s problems, but if China delays, then the political, economic, and environmental costs associated with its existing energy consumption will rise exponentially.[225]

China’s State Environmental Protection Administration (SEPA) recognizes this situation and has taken a crucial step to strengthen its capability to prescribe and enforce regulations pertaining to energy use by creating six regional offices. Typically, provincial and local governments in China establish agency structures mirroring the structure of the central government, but the provincial and local agencies do not coordinate directly with the central government counterpart agencies.[226] Also, funding for provincial and local government agencies usually is collected at the local level, establishing a strong incentive for local officials to be responsive to local interests. However, in SEPA’s initiative, its regional offices will report directly to it and will not be subservient to local economic interests. SEPA hopes this structure will increase its ability to monitor air pollution and enforce air quality regulations.[227] Importantly, SEPA has sought assistance from the Asian Development Bank and the U.S. Environmental Protection Agency in developing this new regional system and in engaging stakeholders outside the national government.[228] Seeking structural examples from other nations in the process of determining how China will address its internal challenges is a positive step, and offers a reason to be hopeful that China’s government also will be willing to engage cooperatively with the United States and other nations to address environmental challenges and to share environmental data.

Along these lines, the Chinese government’s recent decision to refuse to release two reports quantifying the impact of air pollution on public health and the cost of China’s pollution on its gross domestic product (GDP) is not a fortuitous indicator.[229] Without public information detailing the costs of pollution to China and the Chinese people, it will be more difficult for the government to take the steps necessary to reduce pollution, establish monitoring baselines, and motivate the public to participate in energy conservation and environmental awareness efforts.

Assistant Secretary Harbert noted in her testimony that, with an increasingly market-oriented economy, China now is starting to realize that it must incentivize action, rather than mandate it.[230] Policies can provide either positive incentives (to encourage a certain behavior) or negative incentives (to discourage a behavior). For example, pursuing a policy of demand-side management would provide a positive incentive because it would promote consumer conservation of energy by internalizing the costs of energy efficient technologies in power production. Essentially, investment in energy efficient technology by power producers and government administrators would result in ‘‘avoided demand.’’ [231] China has tested this policy in Jiangsu Province, and has adopted Jiangsu’s program as a national model for other provinces.[232]

Following a large benzene spill in the Songhua River in Heilongjiang Province in 2005, China passed regulations that criminalized failure to report the spill of dangerous pollutants.[233] Attaching criminal penalties to the reporting requirement is an example of a negative incentive—in this case applied to local officials.

To assist it in bringing energy and environmental problems to the public sphere, and thereby enhancing its enforcement capability, SEPA has been encouraging nongovernmental organizations (NGOs) to investigate and report local environmental problems. Dr. Jennifer Turner of the China Environment Forum at the Woodrow Wilson International Center for Scholars testified, ‘‘Chinese environmental NGOs have begun to take on more sensitive issues such as [conducting] a national campaign to demand more transparency in dam-building decision-making and assisting pollution victims in class action court cases.’’ [234] Essentially, SEPA is beginning to employ NGOs to help extend the reach of the central government’s enforcement capability for environmental laws and regulations to the provincial and local levels.

Stimulating Commercial Investment in Clean Energy Technology

Altering the existing financial incentives pertaining to pollution so that Chinese firms perceive negative economic costs tied to industrial pollution, and see pollution prevention as being in their self-interest, will be key to achieving pollution reduction objectives. Mr. Wayne Rogers, a Partner at Sonnenschein, Nath & Rosenthal, testified, ‘‘China recognizes that there are technology choices to protect the environment and to reduce atmospheric pollution; however, these are perceived as ‘costs,’ not ‘benefits.’ ’’ [235] Re-framing the private sector’s perception of costs and benefits in the market will be crucial to persuading businesses to invest in the application of cleaner technologies.

In his testimony to the Commission, Dr. Mun S. Ho, a Visiting Scholar at Resources for the Future, suggested one means of altering market forces to favor reducing pollution: establishing a ‘‘green tax.’’

Pollution is a ‘‘negative externality,’’ i.e. the factory owner does not bear the cost of the health and material damages [of pollution] . . . A pollution tax [or ‘‘green tax’’] would ‘‘internalize’’ this externality, if producers are charged a fee for every ton of SO2 [sulfur dioxide] they produce: then they would: (a) find ways to reduce SO2 emissions, (b) raise the price of their output leading consumers to use less of this environmentally-unfriendly good, leading to lower output and lower fuel use. The level of this fee should thus be set in a manner that balances these costs on producers and consumers with the health benefits.[236]

Chinese firms do not have to bear the environmental costs of producing and consuming energy.[237] A green tax, such as a carbon tax,[238] would encourage energy producers to seek energy production methods that produce the least pollution. Given that producers pass on some of their costs to consumers, energy consumers would be encouraged to choose environmentally friendly energy producers. Consumers of manufactured products would have an incentive to choose products from manufacturers whose processes are the most environmentally friendly, because the cost of their products would be lower. This policy would not necessitate a dramatic decline in national output as it promotes a shift toward environmentally sustainable production and energy use.

Foreign direct investment and venture capital also can be instruments to promote and facilitate the use of clean energy sources and technologies. Dr. Kelly Sims Gallagher, Director of Energy Technology Innovation Policy at Harvard University’s Kennedy School of Government, testified that ‘‘. . . foreign direct investment can be a highly effective mechanism for the transfer of technology, but technology transfer (especially clean technology transfer) does not happen automatically. . . . There must be incentives in place to elicit clean technology transfer because the private companies do not find it in their interest to develop, transfer, and install cleaner technologies on their own.’’ Such incentives could include requiring private joint ventures to meet higher standards for pollution controls and to transfer clean energy technologies among the venture partners.[239]

Given that China soon will become the world’s largest energy market, venture capital can provide seed funding for development of new energy technologies to meet China’s demand. Expansion of venture capital in China will be challenged by pervasive violation of intellectual property rights, as venture capitalists will be averse to the risk of losing control to pirates of firms’ newly developed technologies.[240] Addressing intellectual property enforcement could facilitate the development and distribution of clean energy and energy efficient technologies.

China is one of the world’s largest markets for the Kyoto Protocol’s Clean Development Mechanism that allows companies in industrialized nations to invest in clean energy projects in developing countries in order to meet their Kyoto compliance obligations. China’s involvement in this mechanism brings international companies into the country and ‘‘allows the gap to be closed between higher costs of green energy and the market cost of brown energy.’’ [241] The United States is not a party to the Kyoto Protocol and thus is not engaged in this initiative. However, witnesses recommended establishing bilateral or multilateral mechanisms to encourage private sector investment—such as the creation of an investment fund to accelerate adoption of low-carbon technology in China.[242]

U.S.-China Cooperation on Energy

Central findings from the Commission’s hearings and research this year are that China cannot address its energy and environmental problems adequately without international cooperation, and that the United States, both because it is the world’s biggest consumer of energy and because it possesses some of the most advanced energy efficiency and clean energy technologies, should play an active role in providing assistance to China. Assistant Secretary Harbert declared, ‘‘It is incumbent upon us to engage much more aggressively with China, to help them understand the benefits of participating in a world market.’’ [243] Dr. Elizabeth Economy of the Council on Foreign Relations warned that ‘‘[r]eal cooperation on climate change and energy and the environment is every bit as difficult as that on arms proliferation, market access, or human rights.’’ [244] Nonetheless, the costs of failure would be so high to both nations that the United States needs to do all it can do to help China recognize the benefits of implementing energy efficiency and conservation measures, and removing the man-made causes of global climate change.

The U.S. Department of Energy (DOE), the U.S. EPA, and U.S. universities and nongovernmental organizations have been actively pursuing cooperative activities on a number of levels. Deputy Assistant Secretary of Energy David Pumphrey testified, ‘‘DOE engages China in energy policy, energy security, fossil energy, energy efficiency, renewable energy, and nuclear energy and nonproliferation. The primary mechanisms include the U.S.-China Energy Policy Dialogue (EPD), technical cooperation under the auspices of the U.S.-China Science and Technology Agreement, the U.S.-China Peaceful Uses of Nuclear Technology Agreement, the Oil and Gas Industry Forum, and the recently established Strategic Economic Dialogue (SED).’’ [245] Another mechanism is the Asia Pacific Partnership for Clean Development and Climate that involves Australia, China, India, Japan, the Republic of Korea, and the United States. These partners ‘‘have agreed to work together and with private sector partners to meet goals for energy security, national air pollution reduction, and climate change in ways that promote sustainable economic growth and poverty reduction.’’ [246]

In addition, the United States has actively engaged China on the development of nuclear energy technology, as was mentioned in Section 1 of this chapter. However, this cooperation has been expanded beyond only the sale of nuclear technology to China—to include cooperation on nuclear security and the expansion of peaceful nuclear energy. In May 2007 at the fourth meeting of the Joint Coordinating Committee of the Peaceful Uses of Nuclear Technology Agreement, the United States and China created a new working group on ‘‘nuclear emergency management; a new sub-group on radiological source security in the nuclear security, emergency management, and safety working group; and the inclusion of export control technical cooperation to jointly develop Chinese language nuclear commodity guides to aid in China’s export licensing and enforcement.’’ [247] Also, China has expressed interest in joining the Global Nuclear Energy Partnership (GNEP) that seeks to expand access to nuclear energy technology for peaceful purposes while reducing the risk of nuclear proliferation. The State Council in China has not finally determined if China will participate.[248]

The FutureGen project has the greatest potential to curb China’s emissions in ways other than requiring China to reduce its coal consumption. FutureGen Alliance Chief Executive Officer Michael Mudd testified, ‘‘The FutureGen Project is a global public-private partnership formed to determine the technical and economic feasibilities of generating electricity from coal with near-zero emissions, including carbon dioxide [CO2].’’ FutureGen will cost an estimated $1.5 billion when estimated revenue offsets are included.[249] The U.S. Department of Energy is funding 74 percent of the project, and China, India, and South Korea are co-funding it; [250] China is expected to pay $10 million.[251] This project is designed to demonstrate the feasibility of constructing and operating a power plant that will rely on an Integrated Gasification Combined Cycle (IGCC) technology, and then capture and sequester carbon dioxide so it will be nearly free of emissions.[252]

The China Huaneng Group, one of China’s largest energy companies, is a private partner in the FutureGen Alliance along with some of the United States’ largest power companies. Of note, the Alliance is a non-profit organization and members like Huaneng are not entitled to receive financial gain or intellectual property associated with the FutureGen project.[253] Given the extent of China’s coal-related environmental problems, successful development of FutureGen that enables application of this technology to power production elsewhere in China should be warmly welcomed by Beijing.

The U.S. EPA has engaged China in ‘‘agency-to-Ministry agreements, multilateral efforts such as the Asian Pacific Partnership on Clean Development and Climate,’’ and SED discussions.[254] Assistant Administrator Ayres testified that many of the EPA’s programs are conducted within the framework of a 2003 Memorandum of Understanding with SEPA that allows the two agencies to coordinate activities. Current projects include working with SEPA and Beijing’s EPA to retrofit diesel buses in Beijing with emissions control equipment in advance of the 2008 Olympic Games, and working in rural areas to decrease indoor air pollution by providing alternative home heating and cooking energy sources.[255]

The EPA’s Integrated Environmental Strategies Program (IES) was identified in testimony before the Commission as a very successful program for U.S.-China cooperation.[256] The IES Program seeks to reduce greenhouse gases on a global level and air pollution on a local level through the implementation of integrated policies and measures. The EPA’s China program, initiated in 1999, is composed of three parts: ‘‘(1) assessment of energy options and health benefits in Shanghai; (2) analysis of energy and transport programs in Beijing; and (3) a national assessment of GHG [greenhouse gases] mitigation potential and expected health benefits of several air pollution control policies.’’ [257] One of the outcomes of this collaboration is that Shanghai changed its 10th Five-Year Plan (2001– 2005) to focus more on energy and investment in cleaner energy alternatives for the city.[258]

The EPA also has engaged China in the work of the multilateral Methane to Markets Partnership that seeks to promote ‘‘cost-effective, near-term methane recovery and use as a clean energy source.’’ [259] As China is the world’s largest emitter of coal mine methane, its participation in this effort has significant implications for reducing greenhouse gas emissions. Also, China will host the Methane to Markets Expo in 2007 to showcase the partnership.

In addition to activities directly sponsored and implemented by the U.S. government, U.S. universities and NGOs have actively pursued cooperation with China on energy and environmental issues, often with government funding. Two university projects— the U.S./China Energy and Environmental Technology Center (EETC) at Tulane University and the China Environmental Health Project at Western Kentucky University—were examined by the Commission in its hearings.

The EETC works with U.S. government agencies to expand the collaboration and transfer of clean energy technologies, and has centers in the United States at Tulane and in China at Tsinghua University. According to EETC Director Dr. S.T. Hsieh, ‘‘[t]he center’s major goal is to enhance the competitiveness and adoption of U.S. clean energy and environment technology, especially clean coal technology for power generation, transmission, and emissions reductions supported by DOE [the Department of Energy].’’ [260] The EETC seeks to accomplish this by enhancing U.S. industry partnerships in China that focus on small- and medium-sized businesses; through involvement of public and private stakeholders; and through industry education and training in China addressing the financial and technical aspects of employing new technology.[261] In practical terms, EETC’s projects benefit U.S. businesses by increasing U.S. technology exports—as a function of promoting the transfer of coal gasification technology, coal liquefaction technology, and flue gas desulfurization technology to Chinese companies and organizations. The EETC currently is pursuing projects on nitrogen oxide emissions reduction; retrofitting small industrial boilers in Beijing to make them more efficient; carbon capture and sequestration; and capturing coal mine methane and coal bed methane and supplying it to local townships.[262] All these projects fulfill goals for cooperation identified by the U.S. DOE. They also involve U.S. businesses by matching American technology with energy-related opportunities in China.

At Western Kentucky University, Dr. Wei-Ping Pan leads the clean coal technology component of the China Environmental Health Program, funded by the U.S. Agency for International Development. In this program, Dr. Pan cooperates with Anhui University of Science and Technology in Huainan City. This city has a strong interest in the project because it has coal reserves of 44.4 billion tons or 19 percent of China’s total national reserves. The China Environmental Health Program seeks to improve air quality monitoring and control in Huainan City; to train Chinese researchers in the latest environmental protection technologies; and to assist Anhui University researchers in studying the impact of coal emissions on community health.[263] This project combines data collection with environmental impact studies and meets two crucial needs within China: first, compiling accurate emissions data and information at a local level about how applied technology can reduce emissions; and second, collecting accurate information on how coal emissions are affecting local health and productivity.

Prospects for Future Cooperation

Based upon an analytical review of the testimony before the Commission, three important aspects of U.S.-China energy cooperation emerge. First, Administration witnesses noted that frequent high-level ministerial dialogue on energy and the environment is important for raising consciousness on these issues, demonstrating government commitment to resolving energy security and environmental concerns, and establishing the matters addressed as priorities for the subordinate bureaucracies that must carry out the programs’ activities. Assistant Secretary Harbert testified that the Department of Energy has conducted ten senior-level visits to China in the past two years. This interaction signals that energy security and energy cooperation are high priorities for the United States, and that the United States prefers to resolve mutual concerns through cooperation rather than conflict.

The Strategic Economic Dialogue (SED) has been an important mechanism for demonstrating high-level interest in various issues including energy and environmental matters, and for cooperatively addressing mutual concerns. Although the general impression is that the SED has not produced significant accomplishments, it has provided a forum in which both the United States and China have expressed like-minded ideas about a number of energy and related issues. During the December 2006 meeting of the SED, Secretary of Energy Samuel W. Bodman and NDRC Chairman Ma Kai signed the U.S.-China Energy Efficiency and Renewable Energy Protocol. This agreement builds on prior initiatives to advance the use of renewable energy technologies in China and the commercialization of solar, wind, biomass, geothermal, and hydrogen energy.[264] At the SED in May 2007, ‘‘Secretary Bodman led discussions on the urgency for investment in the energy sector, the importance of a diversified energy mix, and the power of scientific innovation in addressing climate change issues’’—all issues on which China and the United States have similar views. Both countries agreed to develop up to 15 large-scale coal mine methane projects in China, agreed to reduce cost barriers to the full commercialization of advanced coal technologies, and signed a Memorandum of Cooperation on Nuclear Security.[265]

Assistant Administrator Ayres noted that during the SED the U.S. EPA and China agreed to conduct a Joint Economic Study to evaluate the environmental, economic, and health costs of policy approaches for saving energy and controlling emissions. The two nations also agreed to explore harmonizing the U.S. program for energy efficiency labeling for consumer products with China’s Standard Certification Center (CSC) to improve the energy efficiency of Chinese products and reduce energy intensity.[266]

The second aspect of U.S.-China energy cooperation brought out in testimony to the Commission is that addressing China’s coal consumption will be necessary in order to address U.S. and Chinese energy security and environmental pollution. Without strong intervention by Beijing, China’s dependence on coal likely will not diminish, even as the environmental costs grow. The quantities of pollutants emitted from China’s coal combustion affect other portions of the world including the United States, and, of course, the entire planet is subject to the climate change to which China’s greenhouse gas emissions now are a major and growing contributor.

As long as coal remains a major energy source for China, development and commercialization of carbon capture and sequestration (CCS) technology will be critically important. Before such technology can be commercially viable, large-scale underground pilot tests must be conducted and the cost of obtaining carbon to conduct such tests must be reduced substantially.[267] Witnesses before the Commission suggested that the U.S. government should support these demonstration projects—both within the United States and in China—and the development of a viable business model for employing this technology.[268] Before CCS can be implemented on a large scale, sites in China that are geologically and geographically suited to be reservoirs must be identified.[269] Ultimately, the technology must be applied both to new power plants that will be constructed and to existing plants that must be retrofitted to capture carbon—an expensive proposition.[270] While the former in most cases will be less expensive, the number and emissions volume of existing plants makes the latter essential, despite the high cost, in any scheme intended to achieve major reductions in China’s carbon emissions. Already China is collaborating with other Asia Pacific Partnership nations on CCS under that Partnership’s auspices, but Dr. Jeffrey Logan, Senior Associate at the World Resources Institute, argued that the United States should strongly encourage and further assist China to pursue a broader and more aggressive effort.[271]

Finally, witnesses testified that U.S.-China cooperation on energy and the environment should be predicated on U.S. leadership and action on these issues to address U.S. domestic energy and climate concerns. Dr. Logan made the following case:

The most important thing the U.S. can do to mitigate the impacts of China’s recent enormous growth in energy demand is to lead by example. The U.S. must demonstrate that it can address energy security and climate change simultaneously within a thriving economic context. . . . Without this leadership, no incremental shift in technical assistance or policy dialogue will get the traction it needs to help move China onto a fundamentally different course.[272]

His testimony, echoed in statements by Governor Brian Schweitzer of Montana, argued that the United States has the ability to encourage and affect change in China’s energy strategy and consumption patterns by demonstrating the feasibility of energy conservation and energy efficiency in the United States, moving substantially toward energy independence, and significantly reducing U.S.-generated carbon dioxide emissions. Such steps can yield new ideas, techniques, policies, and technologies that the United States can share with China, and identify new stakeholders to involve in addressing global climate change.[273]

Conclusions

• Success in addressing China’s energy challenges will require the Chinese government to focus on correcting the structural weaknesses within its energy policymaking apparatus.
• Cooperative projects that promote and support the collection and reporting of sufficiently detailed energy and environmental data will contribute substantially to China’s ability to address challenges in these fields and to the ability of the United States and other nations to provide real encouragement and targeted assistance to those efforts.
• U.S.-China cooperation on energy and the environment is a crucial component for addressing the energy challenges that both countries face.
• China presents an opportunity to develop and apply U.S. energy technologies on a large commercial scale that will increase the viability of these technologies on the market.

Recommendations

China’s Energy Policy, Demand, and Supply

1. The Commission recommends that Congress encourage the Administration to seek greater cooperation with China in collecting and reporting energy-related data and to assist China to improve the bureaucratic framework and governance of its energy policymaking bodies.
2. The Commission recommends that Congress urge the Administration to engage China to address global climate change/environmental degradation and identify opportunities for further U.S.-China cooperation.

China’s Environmental Situation

1. The Commission recommends that Congress urge the Administration to increase its monitoring of air quality in the western United States and its support for efforts to determine the pollution in the United States that can be traced to China.
2. The Commissio