China's Energy Policy: Coal, Oil, and Sino-American Relations

Introduction

The production and use of energy in China experienced fundamental changes and dramatic increases during the 20th century. These trends transformed China — which was one of the poorest countries in the world in the 1930s, with electricity generation capacity far below that of neighbors such as Japan — into one of the world's largest economies. This transformation began in large part following the Communist takeover in 1949, and momentum in China's energy sector grew steadily thereafter (Qing & Sullivan, 1999). By the 1980s, however, China's rapid economic growth introduced new demands for energy resources, and the country experienced significant shortages that adversely affected its ability to sustain that pace of progress (Wu, 2004). Heavily reliant on coal as its primary energy source, China's policies at that time focused on increasing production at the local level; by the closing decade of the 20th century, however, the focus of energy policy shifted toward the development and improvement of the electricity sector (Wu, 2004).

These efforts were facilitated by various policies adopted by the Chinese leadership during this formative period. One of the most significant changes during the 1980s was the opening of China's energy market to private enterprises (World Bank, 2000). By the mid-1980s, the build-operate-transfer (BOT) model had been adopted, and by 1999, approximately $15 billion in private funds had been invested in China's energy sector (World Bank, 2000). These shifts in energy policy resulted in an enormous expansion of electricity generation capacity (Wu, 2004). As Campbell notes, "China is the world's most populous country with over 1.3 billion people. It has experienced tremendous economic growth over the last three decades with an annual average increase in gross domestic product of 9.8% during that period. This has led to an increasing demand for energy, spurring China to add an average of 53 gigawatts (GW) of electric capacity each year over the last ten years to its power generation capabilities" (2010, p. 2).

By the late 1990s, China's electricity supply was almost sufficient to satisfy the country's rapidly increasing demand; in fact, some regions were capable of generating a surplus (Wu, 2004). During the past decade, China also increased its oil imports and domestic production of natural gas, so that currently its energy sector is characterized by: (a) oversupply of coal, (b) rapidly growing electricity-generating capacity, (c) a net oil-importing industry, and (d) an expanding natural gas sector. These developments, combined with China's entry into the World Trade Organization, will inevitably affect China's energy policy well into the 21st century (Wu, 2004).

In sharp contrast to the developmental policies that dominated much of the 20th century, China's energy policies today are focused on ambitious, environmentally sustainable approaches. In 2006, China's leadership stated that by 2010 the nation would decrease energy intensity by 20% compared to 2005 levels; in 2009, leaders further committed to reducing carbon intensity by 40% from 2005 levels by 2020 (CIA World Factbook, 2010). To accomplish these goals, the Chinese government intends to expand energy production from sources beyond coal and oil, focusing on nuclear and other alternative energy development initiatives (CIA World Factbook, 2010). As Bradsher notes, however, "even as China has set ambitious goals for itself in clean-energy production and reduction of global warming gases, the country's surging demand for power from oil and coal has led to the largest six-month increase in the tonnage of human-generated greenhouse gases ever recorded by a single country" (2010, p. 2).

According to Gregson (2005), China is currently consuming more than six million barrels of oil each day, and that demand continues to increase. While China remains an important oil producer, approximately 40% of its demand is dependent on imports, which increased by almost one-third in 2004 alone to nearly three million barrels per day (Gregson, 2005). Based on these trends and the most recent energy projections, increases in oil consumption in China are expected to remain above 10% annually for the foreseeable future (Gregson, 2005). These trends have compelled the Chinese leadership to identify opportunities to satisfy demand in sustainable ways, but the issues are multifaceted and complex. A recent special cabinet meeting revealed that coal-fired electricity and oil sales each increased by almost one-quarter (24%) during the first quarter of 2010 compared to the same period a year earlier, following comparable increases in the fourth quarter of 2009 (Bradsher, 2010). These trends indicate that past projections of energy demand may have been understated, and China's ambitious goals will require reevaluation if the country is to continue on its current path of economic development.

The purpose of this study was three-fold:

1. Determine China's current energy reliance on coal, and why this is changing.

2. Identify viable energy options for China in the future — including oil, nuclear, and renewables — and examine the likelihood that oil, gas, and nuclear will be the most likely candidates for replacing coal.

3. Assess what these trends might mean for Sino-American trade relations given the global placement of oil reserves and uranium deposits.

According to Gee, Zhu, and Li (2007), the economic growth of the People's Republic of China will undoubtedly be one of the most significant events of the 21st century for the entire world. China is already undertaking the most ambitious construction schedule in modern times, and the country's demand for energy to drive its economy and industrial revolution is without historical precedent (Gee et al., 2007). During the past two decades alone, China's economy has grown by an average of almost 10% annually, and it "consumes half [of] the world's cement, a quarter of all steel, and two-fifths of all copper. Currently, it is the second largest oil consumer in the world and the third largest oil importer . . . [Its] oil demand growth has accounted for nearly one-third of the world's total oil demand growth during the past decade, and is adding the equivalent of a medium-size country to world oil demand each year" (Gee et al., 2007, p. 421).

Although still a major oil producer, domestic production in China has stagnated and oil imports have assumed new importance as an economic reality in recent years (Prakash & Hart, 2000). According to these authorities, "this represents a fundamental reorientation of China's emphasis on oil self-sufficiency, a legacy of the Maoist era when the Daqing oilfield was held up as a model for national emulation" (Prakash & Hart, 2000, p. 53). Despite the fact that oil imports remained relatively inexpensive throughout the 1990s, China's increasing demand for energy has resulted in growing reliance on foreign supplies, raising concerns among the Chinese leadership about what this dependency means for national security (Prakash & Hart, 2000). Research concerning Chinese foreign policy has therefore focused on the potentially destabilizing impact of this increasing reliance on imported oil, with a number of researchers citing the South China Sea as a potential region for future conflict based on competing resource claims — particularly oil and natural gas reserves — where affected international actors may resort to military methods to prosecute their respective claims (Prakash & Hart, 2000).

Review of Related Literature: China's Reliance on Coal

According to Schmidt (2002), more than half a century ago, Chairman Mao Zedong introduced a Five-Year Plan for the Chinese economy founded on the Soviet model of rapid heavy industrialization. At that point in China's history, the economy was almost entirely agrarian, with just a smattering of factories in the northeast constructed by the Japanese during their World War II occupation. In the succeeding years, enormous state-owned factories were built throughout the country without any significant pollution controls (Schmidt, 2002). As Schmidt emphasizes, "the fuel that powered this industrial makeover — that still powers nearly 70% of Chinese industry — is coal, one of the country's most abundant resources and the world's dirtiest source of energy. By the 1960s, China was among the most polluted nations on earth, its rivers and groundwater fouled by industrial chemicals and the air in its cities blackened with soot" (2002, p. 516).

Following the Five-Year Plan, the Four Modernizations framework was introduced in the 1960s, establishing the foundation for transforming the country's emphasis on self-reliance to include the acceptance of foreign loans and economic interactions as tools for achieving economic development — though still on China's own terms (Montgomery & Rondinelli, 1999). This framework also provided the basis for more significant market-oriented reforms that would follow during the 1970s (Montgomery & Rondinelli, 1999). As these authors note, "under the socialist market economy paradigm, not only foreign loans but foreign direct investment became acceptable policies to party officials and government leaders in China" (Montgomery & Rondinelli, 1999, p. 233). It was during this period that the groundwork for China's current energy policies was established. Montgomery and Rondinelli further report that:

"Paradigm shifts also created new perceptions among government policy makers in China of the relationships between economic development and environmental protection that helped to advance energy conservation policies. The emergence of the sustainable development paradigm during the 1980s and its culmination in the United Nations-sponsored Summit Meeting on the Environment and Development in Brazil in 1992 provided a conceptual framework for China's advocates of energy conservation and environmental protection" (1999, p. 233).

This conceptual framework would have a profound effect on environmental advisors in China concerning the country's future directions, resulting in policies focused on identifying environmentally sustainable energy practices for the early 21st century (Montgomery & Rondinelli, 1999).

Notwithstanding its environmental problems, the results of these fundamental shifts in China's approach to economic development — balanced by increasing concern for sustainable energy resources — have been highly influential on current energy policy and economic development. The People's Republic has consistently delivered impressive economic growth over the past 30 years; however, much of the country remains desperately poor (Ma, 2010). Approximately 150 million citizens continue to live below the poverty line, and it has only been relatively recently that China's per capita GDP exceeded $3,000 (Ma, 2010). While the range of temperatures in China is roughly comparable to that of the United States, the average Chinese consumer uses just 3% of the energy consumed by the average American, and an estimated 100 million Chinese live entirely without electricity (Chasek, 2000). During 2009, when China's GDP officially grew by a robust 8.7%, the National Bureau of Statistics reported that the annual per capita net income for rural households was less than $750, compared to $2,500 for urban dwellers (Ma, 2010). As Ma notes, "to the Chinese leadership, economic growth is the only way to raise living standards, bolster employment, and drag China into the modern world of the 21st century" (2010, p. 28).

China's drive for economic development and modernization has taken place during a period of growing international pressure for collective action on carbon emissions and climate change. Ma reports that "in the world's prevailing climate change narrative, human use of fossil fuels — such as coal, fuel oil, and natural gas — causes the release of heat-trapping greenhouse gases — mainly carbon dioxide, methane, nitrous oxide, and fluorinated gases — that ultimately contribute to global warming and its associated effects, including melting ice caps, rising sea levels, and extreme weather phenomena" (2010, p. 28). Because China's economic development remains inextricably tied to coal, these issues have assumed new urgency as the Chinese leadership seeks more environmentally sustainable approaches to its energy needs. Ma emphasizes that "as global consciousness and obsession with climate change rose, China increasingly stood out as a key culprit. Notably, coal, the key 'dirty' energy that contributes to global warming, ferociously fuels China's raging economic development" (2010, p. 28). Despite consuming more energy in absolute terms, the United States has taken a backseat to China in terms of environmental impact. As Ma adds, "China leads the world in coal production and consumption and relies on coal for approximately 70% of its energy. As a result, China emits an enormous amount of carbon dioxide, and in 2007, it overtook the United States as the largest carbon emitter in the world" (2010, p. 29).

To its credit, the Chinese leadership has recognized these trends and taken steps to address them. In June 2007, China released its National Climate Change Program, which sets forth activities intended to reduce greenhouse gas emissions and steps needed to respond to the potential effects of climate change on the country's future economic development. Like most other recent Chinese initiatives, this program is ambitious, and some observers suggest the country may struggle to achieve its stated goals. Leggett, Logan, and Mackey note that "within the Program, perhaps most challenging is China's goal to lower energy intensity 20% by 2010. The country fell short of its annual milestones, set in energy policies, in both 2006 and 2007" (2008, p. 3). In July 2008, Premier Wen Jiabao and the State Council cautioned that reaching the stated goals of the National Climate Change Program "remained an arduous task" — which may be an understatement, given the concomitant goals of increasing renewable energy resources by 200% by 2020, expanding nuclear power programs, closing inefficient factories, improving energy efficiency in buildings and appliances, and expanding forest coverage by one-fifth (Leggett et al., 2008).

In an attempt to achieve its energy efficiency goals, Premier Wen Jiabao recently committed the country to more aggressive energy conservation policies, including a ban on government approval of new projects by companies that failed to eliminate inefficient capacity (Bradsher, 2010). The Chinese premier stated the country's commitment plainly: "We can never break our pledge, stagger our resolution or weaken our efforts, no matter how difficult it is" (quoted in Bradsher, 2010, p. 4). Analysts in the West acknowledge that the goals are unprecedented in human history. Jonathan Sinton, the China program manager at the International Energy Agency in Paris, observed: "No country of this size has seen energy demand grow this fast before in absolute terms, and those who are most concerned about this are the Chinese themselves. China has been the world's largest emitter of greenhouse gases each year since 2006, leading the United States by an ever-widening margin" (quoted in Bradsher, 2010, p. 5). The consequences of failure are severe: "A failure by China to meet its own energy efficiency targets would be a big setback for international efforts to limit such emissions. Such a failure would also be a potential diplomatic embarrassment for the Chinese government, which promised the world just before the Copenhagen climate summit meeting in December that it would improve energy efficiency" (Bradsher, 2010, p. 5).

Given the enormity of the Chinese economy, the outcomes of these initiatives hold significant implications for global energy markets (Bradsher, 2010). The transformation of China's economic base from light industrial to more energy-intensive heavy industries such as cement and steel — needed for its growing domestic market — remains an issue with profound global consequences, both in terms of competition for increasingly scarce energy resources and the effects its current production methods are having on the global climate (Bradsher, 2010). Bradsher notes that "almost all urban households in China now have a washing machine, a refrigerator and an air-conditioner, according to government statistics. Rural ownership of appliances is now soaring as well because of new government subsidies for their purchase since late 2008. Car ownership is rising rapidly in the cities, while bicycle ownership is actually falling in rural areas as more families buy motorcycles and light trucks" (2010, p. 6).

In early 2010, General Motors reported that its automobile sales in China increased 41% compared to 2009, with almost all vehicles manufactured in China due to inordinately high import taxes (Bradsher, 2010). A representative of China's National Energy Administration reported in mid-2010 that fossil fuel consumption would most probably continue to increase during 2010 based on rising automobile ownership, the use of diesel fuels for the increasingly mechanized agricultural sector, and the energy demands of the Shanghai Expo (Bradsher, 2010). Taken together, these trends have challenged the Chinese leadership in its stated goals of promoting alternative energy sources and improving the efficiency of its current energy infrastructure (Bradsher, 2010).

Despite recent market reforms, the Chinese national government continues to own or control much of the nation's industries and enterprises, and it establishes corresponding goals for economic development through periodically promulgated Five-Year Plans (Bradsher, 2010). International observers therefore believe that state-controlled industries will likely attempt to reach the ambitious energy efficiency goals that have been set (Bradsher, 2010). Other indicators also suggest China is making progress toward developing sustainable alternative energy sources. Bradsher notes that "China has set ambitious targets for developing its non-hydropower renewable energy resources with a major push of laws, policies, and incentives in the last few years. The wind power sector is illustrative of China's accomplishments, as installed wind power capacity has gone from 0.567 GW in 2003 to 12.2 GW in 2008" (2010, p. 6).

China has plans to increase wind power capacity to 100 GW by 2020, and comparable objectives are in place to expand the solar photovoltaic sector from 0.14 GW as of 2009 to more than 1.8 GW by 2020 (Campbell, 2010). The Chinese leadership has clearly determined that these efforts are in the country's best interests — both for satisfying increased domestic demand and for further expanding its export-driven economic base (Campbell, 2010). Despite these ambitious goals and the progress made to date, much more remains to be done. The increase in oil- and coal-fired electricity consumption during the first quarter of 2010 was double the rate of economic growth, a clear indication that increases in domestic energy consumption are driven by rapid economic growth as well as fundamental changes in the types of industries fueling that growth (Bradsher, 2010).

In November 2009, President Hu Jintao committed the country to reducing its greenhouse gas emissions by significantly improving the energy efficiency of its industrial base; however, the leadership has adamantly refused international monitoring of its progress, making independent confirmation of the country's efforts problematic (Bradsher, 2010). Bradsher notes that "China's current five-year plan, from 2006 to 2010, already sets an efficiency target that the country may now be less likely to meet. The plan calls for the energy needed for each unit of economic output to decline by 20% in 2010 compared to 2005" (2010, p. 7). China appeared to be making some progress: the Ministry of Industry and Information Technology reported that energy efficiency increased by almost 15% during the period 2005 to 2009; however, this efficiency subsequently decreased by 3.2% in the first quarter of 2010, making it less likely that China will reach its ambitious goals for the coming years (Bradsher, 2010).

Besides the lack of international monitoring, there are other constraints to confirming how well China is meeting its energy efficiency goals. China's National Bureau of Statistics initiated a complete overhaul of the nation's energy statistics for the past decade, revising them to reflect the types of data typically provided by other countries (Bradsher, 2010). Analysts in the West anticipate that once these revisions are completed, the data will show that China has been consuming more energy and generating more greenhouse gas emissions than current reports indicate; depending on how these estimates are revised, China may be able to claim success in achieving its energy efficiency goals without having actually done so (Bradsher, 2010).

There are nonetheless clear signs of progress. China managed to double its wind energy resources in the first quarter of 2010 alone compared to 2009, and the country has emerged as the largest manufacturer and installer of wind turbines in the world (Bradsher, 2010). Despite this progress, wind power accounts for only between 1 and 2% of China's electricity capacity (Bradsher, 2010).

At the same time, output from energy-intensive heavy industrial applications increased 22% during the first quarter of 2010 compared to 2009, and output from light industry increased by 14% (Bradsher, 2010). Rajendra K. Pachauri, chairman of the Intergovernmental Panel on Climate Change, suggested that China was committed to achieving its energy-efficiency goals, even if for pragmatic reasons: "There is a growing realization within Chinese society that major reductions in greenhouse gas emissions would be of overall benefit to China. This is important not only for global reasons, because China is now responsible for the highest emissions of greenhouse gases, but also because its per capita emissions are increasing at a rapid rate" (Bradsher, 2010, p. 7).

In some respects, China's current high energy consumption levels may contribute to lower greenhouse gas emissions in the future. China used 200 million tons of cement for the construction of railroad lines in 2009, compared to just 93 million tons for the entire U.S. economy (Bradsher, 2010). As Bradsher notes, "although production of that cement raised energy use and emissions of global warming gases, it also expanded a rail system that is among the most energy-efficient in the world. China currently moves only 55% of its coal by rail, for example, which is down from 80% a decade ago, as many coal users have been forced by inadequate rail capacity to haul coal in trucks instead" (2010, p. 7). Trains are ten times as energy-efficient as trucks for transporting coal, and the introduction of high-speed passenger trains is allowing older rail lines to be repurposed for freight, potentially further reducing greenhouse gas emissions in the future (Bradsher, 2010). It should be noted, however, that China's energy policy is also influenced by increasing domestic consumption, which may offset some of these improvements (Wu, 2004).

Potential Viable Energy Options for China in the Future

In order to determine likely future directions for China's energy policies, an examination of the current status of its various energy sources is necessary. China's major energy sources — coal, oil, electricity, and natural gas — have each followed distinct pricing and regulatory trajectories.

Coal: China is the world's largest coal producer, with output of 1.1 billion tons in 2001 (State Statistical Bureau, 2002). Coal production has been significantly affected by pricing practices over the past decades. A "dual-track" pricing system introduced between 1983 and 1990 replaced complete government price control, allowing unplanned coal prices to range from 80 yuan per ton in 1987 to 136 yuan per ton in 1991, while controlled prices ranged from 36 to 61 yuan per ton during the same period (APERC, 2000). From 1993 onward, complete price liberalization was initially trialed in eastern China and then introduced nationally, making coal prices market-driven. This liberalization led to a reduction in government subsidies to the coal sector and improvements in management and energy efficiency (Wu, 2004).

Oil: The prices of oil and petroleum products in China remain highly regulated by the government, with the market mechanism playing only a limited role under the dual-track price system introduced in the early 1980s. That system allowed producers to sell above-quota products at market prices and permitted regions to import petroleum products using their own foreign exchange reserves. The resulting large gap between domestic and world prices led to excessive imports in some regions and a surge of speculative and smuggling activities. On 1 May 1994, the dual-track pricing system was abandoned and the central government reasserted tight control over price-setting and imports. Major reform in June 1998 resulted in the domestic price of crude oil being set in accordance with world prices, while regional prices of refined oil products are set by the central government according to prices in the Singaporean oil market (Wu, 2004).

Electricity: Electricity prices have been regulated by the government but have risen rapidly in recent years. Due to electricity shortages in the 1980s, investment-recovery pricing was introduced, resulting in high prices at some plants. During the 1990s, the government removed subsidies to electricity consumption in the agricultural sector, increasing electricity prices in rural areas. As supply and demand conditions changed in the late 1990s, the Chinese government moved to deregulate the electricity sector, focusing reforms on separating regulation from business functions and separating generation from transmission (State Development Planning Commission, 2002).

Natural Gas: The natural gas industry has been highly regulated by the government, reflecting its historically marginal status as an energy option in China. For a long time, natural gas was reserved mainly for fertilizer producers and prices were kept artificially low. For example, in 1995, the price of natural gas in Sichuan varied from 470 yuan per thousand cubic meters for fertilizer factories to 670 yuan for commercial users. With the removal of subsidies, prices have increased but remain below international levels. As the LNG project in Guangdong proceeds and the West-East Gas Pipeline is actively pursued, further liberalization in the natural gas sector is expected (Wu, 2004).

Currently, China's energy prices remain largely state-controlled; however, significant changes have taken place in energy pricing practices. These changes were initiated following the introduction of dual-track pricing during the 1980s and have since expanded to include more comprehensive liberalization across coal, oil, electricity, and natural gas sectors (Wu, 2004).

Other initiatives have improved the likelihood that China will at least partially achieve its energy-related goals. The World Bank implemented a Clean Coal Program in China addressing the country's coal use from mining through transportation to end use (Zhang, 1997). As Zhang notes, "because the low efficiency of coal-power stations is partly due to the lack of coal processing, coal washing could increase efficiency by more than 1%" (1997, p. 291). Given the country's enormous population, even modest improvements can yield major gains. Zhang adds that "domestic and industrial coal use can be reduced by 20% if briquette use is introduced everywhere. Replacing coal use in households with briquette use eliminated 25 million tons of CO₂ during 1997–2020, at a cost of $15/t CO₂, and doing likewise in industry eliminated 70 million tons of CO₂, at a cost of $25/t CO₂" (1997, p. 291). Other steps include closing or retrofitting energy-inefficient facilities, though there are diminishing returns on how much carbon can be eliminated from coal-based energy resources (Wu, 2004).

There are a number of other areas where China can realize improvements in energy efficiency. Compared to more energy-efficient Japan, China consumes five times as much energy per unit of output — a disparity attributable in part to remaining energy-inefficient industrial plants but also to deficiencies in the energy infrastructure itself (Gregson, 2005). As Gregson notes, "with China's centrally planned economy, oil consumption is more closely linked to the power sector than elsewhere; in addition, although coal-fired power stations provide for most of electricity generation, the existing infrastructure is not up to meeting rapidly growing demand" (2005, p. 9). Inadequate coal production and transportation resources remain a problem and were largely responsible for the power shortages experienced in 2004 (Gregson, 2005). In some regions, the problem has become severe enough that power-sensitive industries and affluent Chinese consumers have installed diesel-powered generators as a safeguard against disruptions in electrical supply (Gregson, 2005). These interim measures have further exacerbated the country's reliance on imported energy sources, although current initiatives may reduce the need for such measures in the foreseeable future (Gregson, 2005).