Guest blogger Tristan Edmondson (right), partner at Mint Research, a clean tech consultancy, describes China’s growing Energy Service Company (ESCO) industry.

China has one of the worst ratios of energy use to GDP in the world, two and a half times the world average. This undoubtedly creates investment opportunities for a country that is awash in capital. But despite the huge potential of China’s ESCO industry, it has yet to approach the size of the ESCO industry in the US where it is an industry worth six billion dollars a year.

What is an ESCO?

Under an energy performance contract, ESCOs install energy saving technologies and methodologies and then share the resulting savings with the customer, so paying off the capital investment.  Here are some examples:

• Honeywell International, acting as an ESCO, helped Asahi’s Shenzhen brewery become more energy efficient. Energy saving methods included upgrades to heat recovery, cooling and control systems, with the resulting energy cost savings shared between the Honeywell and Asahi. After the energy performance contract expires Asahi will continue to enjoy reduced energy bills at no additional cost.

• The production of electricity using energy that would otherwise be discarded is also organised along ESCO lines. Dongying Shengdong EMC Ltd (DSE) installs electricity-producing boilers that burn waste gases, such as coal mine methane or waste gas from coking plants. Clients of DSE provide waste gas free of charge to act as a feedstock, and buy the on-site electricity from DSE at a lower cost than grid electricity. Revenue-sharing arrangements usually lasting 10 years enable DSE to recoup its capital in about two years, and then maintain a profitable operation and maintenance relationship for the rest of the contract.

• Beijing PowerU is a provider of chilled water cool storage technologies that save energy. The company has installed solutions under energy performance contracts for a variety of customers including Shanghai’s Pudong Airport, LG Philips’ electronics factories, semiconductor manufacturing plants, five-star hotels and other large-scale air conditioning users.

Although energy is relatively cheap and often subsidized in China, the sheer scale of energy inefficiency means there are a considerable number of commercially viable ESCO projects. Recent increases in energy costs have created even more potential for energy efficiency projects but many hurdles exist that hold back the development of the ESCO industry.

Dr. Stephane Grand, managing partner at SJ Grand, a financial advisory firm, is a fan of the ESCO model. “China’s growing ESCO sector is a fascinating industry, not just because of the commercial opportunities, but because of the many economic, legal, technology and policy issues that impact on the industry’s development. Every ESCO project is a real test of whether China’s legal structures can stand up to such complex contracting. Whereas the market seems extremely promising, the structural issues can be daunting for a foreign player”

The World Bank created China’s first ESCO companies back in 1997 and since then together with its commercial arm, the International Finance Corporation, has lent hundreds of millions of dollars to the energy efficiency industry. According to China’s Energy Management Association EMCA, set up by the World Bank to promote the interests of the industry, there are now over 400 ESCO companies in China. The Asian Development Bank, agencies of the UN, and development agencies from various nations contribute expertise and capital to China’s ESCO industry. Chinese government subsidies also aid companies implementing energy performance contracts.

Challenges in Implementing the ESCO Model

The support and subsidies that the Chinese ESCO industry currently enjoys are necessary to overcome the cultural and institutional barriers that inhibit the kind of growth the industry is capable of. The concept of utilising energy efficiency in order to create a ‘savings stream’ runs contrary to China’s prevailing business culture of quick returns based on expansion and finding new markets. Chinese Banks are often unwilling to lend for energy efficiency projects because the benefits appear non-tangible and therefore risky. The size of typical ESCO loans is often too small for Chinese banks to be worthwhile appraising, loan amounts usually range from $1m to $6m, much smaller than the large infrastructure projects and production expansion loans that loan officers typically appraise. Instead ESCOs must lend their own money, or find investment funds elsewhere, often difficult for smaller Chinese firms with little financial expertise.

Insufficient energy measurement standards affect enterprises’ efforts to save energy. Currently, energy efficiency improvement in China is mainly calculated using a variety of metrics, such as an enterprise’s consumed electricity, gas or oil or their production volumes, rather than a single standard metric such as British Thermal Units (BTUs) as is used in the West..The problem of energy management, added to the nascent character of China’s legal apparatus, means that ESCO contracts are much riskier than in other countries.

Chinese ESCO development is also dependent on domestic ESCO capability. If the appropriate energy efficiency technologies, methodologies and management expertise are not available in China then the huge energy savings potential will not be realised. Chinese ESCOs are currently typically small operations and are often dependent on one technology, such as energy efficient lighting, rather than a full suite of energy saving methodologies.

A report from the Carnegie Endowment, Financing Energy Efficiency in China, argues that various policy contradictions inadvertently inhibit the development of the Chinese ESCO industry.

• The 10 percent tax on interest payments means that any company borrowing money for implementing an energy efficiency project must pay 10 percent of the interest payments it makes on the loan to the central government.

• The restrictions on lending to steel and cement companies in order to check overcapacity made ESCO lending difficult. Energy efficiency projects are often suspected as a way to avoid investment controls.

• Chinese laws concerning the Clean Development Mechanism (CDM) inhibit energy efficiency financing. They do not permit developers to give a discount to a foreign buyer of carbon credits in return for an advance payment which could release capital for ESCO funding.

• Perhaps the most damaging government policy to the ESCO industry is a cap on interest rates that discourages “risk-based” lending to energy efficiency projects. Banks are generally not permitted to lend money above [an interest rate of around 8 percent, far below what is necessary to cover the risk. This prevents Chinese bank staff from starting to learn about complex project financing since they could never loan on such a project in the first place.  What makes this regulatory quirk a missed opportunity is that high risk notwithstanding, ESCO projects can have an investment return of more thatn 50 percent per year with pay back periods of less than two years.

Overcoming the Hurdles

Development institutions have sought to ameliorate these problems through loan guarantees, financial and technical assistance to banks and ESCO companies, as well as help to bundle up ESCO projects to reduce loan transaction costs.

• A US$200 million World Bank loan together with a US$13 million Global Environment Facility (GEF) grant is the basis for a program to train Chinese banks for ESCO lending and partly guarantee ESCO loans.

• The Pollution Prevention and Energy Efficiency ("P2E2") environmental financing program is joint effort between the US Environmental Protection Agency and the Chinese State Environmental Protection Administration is helping Hong Kong-based ESCOs pursue opportunities in Mainland China through loan guarantees from the Asian Development Bank.

• IFC China Utility-based Energy Efficiency Finance program (CHUEE) is designed to reduce greenhouse gas emissions by creating a sustainable financing mechanism that provides financial support to energy efficiency and renewable energy projects. IFC offers risk sharing for energy efficiency loans by China's commercial banks and provides advice on marketing, engineering, project development, and equipment financing services to banks, project developers, and suppliers of energy efficiency products and services.

The efforts of development institutions have resulted in a growing ESCO industry in China, but one that is not yet fully independent of this development aid.

China's ESCO market is at a critical moment in its history.  It has all the potential of huge energy inefficiencies and a large pool of waiting capital and yet arranged against ESCO development are serious structural problems. From talking to Chinese and international ESCOs, it has become apparent to me that in many cases, the traditional full service ESCO model of providing a facility-wide reduction in energy usage using one hundred percent third party financing is not appropriate in China. Instead a localised version of energy performance contracting would stand a better chance of success. Much more commitment is needed from customers than in countries where financing is readily available - for instance rather than approach reluctant banks, ESCO customers could guarantee energy efficiency loans, or provide partial financing for projects. Since much of the legal and technical apparatus for energy performance contracts is missing in China, trust between companies is much more important. It is therefore difficult for ESCOs to approach a customer and initiate a successful energy performance contract without having worked with the customer before.

China's ESCO market is a useful proxy for China's economic and social development. Whether it will take off depends on the extent to which China can develop sophisticated market institutions and capabilities, Chinese companies can capture the full-service capabilities of their American and European counterparts, such policy instruments can be aligned with China's goals for energy efficiency and environmental protection, and finally, ESCOs can adjust their contracting methodologies for the Chinese market. To a large extent, the likelihood that China can develop from a low-cost manufacturing economy to a high technology and knowledge based economy depends on many of these same factors.

Mint Research and SJ Grand are jointly writing an academic study of China's ESCO industry. If you want to contribute or find out more, email tedmondson [at] mintresearch.cn

There have been mixed messages lately about whether China will soon adopt a carbon emissions trading scheme.  On the eve of President Hu Jintao’s speech at the UN Climate Summit in New York last month, Times Online ran a sensationally misleading story suggesting that China would adopt a carbon emissions trading scheme that would “for the first time, place limits on the amount of greenhouse gases Chinese industries are allowed to emit.”  The article went on to say:

A delegation from the China Beijing Environmental Exchange (CBEEX), a government-backed platform for trading environmental equity, will outline the details in New York this week at a UN conference on climate change.

Obviously, this turned out to be a complete non-event.  CBEEX is just one of a handful of private entities (see previous post “Tianjin to Win the Environmental Exchange Race?“) seeking to be launch pilot pollution credit trading platforms.  The truth is that they are no where near to launching the kind of economy-wide carbon emissions trading scheme that Times Online suggests.  China does not even have a mandatory cap on emissions, without which a “cap-and-trade” system would be meaningless.

Yes, CBEEX and their new French partner, Blue Next, did make a showing at the UN climate summit, but only at the sidelines, and merely to promote their own efforts to develop their own standard for voluntary carbon offsets, kitschily called the “Panda Standard“.  Nothing about a mandatory trading scheme, and certainly nothing even in the nature of a liquid secondary market of emissions trading–the fact that the Panda Standard speaks to voluntary carbon offsets indicate they are only considering the primary market.  (For a distinction between primary and secondary carbon markets, see previous post “China Carbon Forum 2008 Review.”)

CBEEX made the news in August when it announced that it had brokered the first ever domestic voluntary carbon offset transaction.  A “green commuting” campaign launched during the Beijing Olympic Games last year generated 8,026 tons of carbon credits, and they were bought by the Shanghai-based Tianping Auto Insurance at $5 per ton.  One carbon analyst I spoke to observed that the current effort to develop a voluntary offset standard is a reaction to the criticism that the transaction received for lack of transparency and lack of, particularly, conformity to established standards.  With intentions to participate in more voluntary offset transactions, it is probably a good idea that CBEEX establishes some sort of standard.

Simply Not Ready

The CEO of CBEEX, Mei Dewen, himself, has lamented to Reuters that the lack of sophistication of China’s financial markets stands in the way of creating a vibrant carbon trading market in China:

It is like a farmer selling eggs just after China began to ‘reform and open up’ [in 1978 as part of economic and social reforms initiated by Deng Xiaoping]…He doesn’t know who to sell to. He doesn’t know at what price he should sell, or who, in fact, is the most reliable buyer.

According to Mei, says Reuters, the Chinese government has “already rejected proposals to create a secondary CO2 market, saying it was not appropriate given China’s role as a supplier rather than a buyer of CERs.”  (CERs stand for “certified emissions reductions,” which are carbon credits generated through a global primary carbon market created under the Kyoto Protocol called the clean development mechanism, or CDM.)

So just when can we expect the Panda Standard to be finalized so China can at least get the voluntary offset market moving more quickly?  Unfortunately they are just beginning.  Mei Dewen was actually in Washington, D.C. on Sept 26 to say a few words about the Panda Standard where I herd him equivocate between next year and the year after as the target date for completion.

Pilot Schemes for Next Five Year Plan?

While any semblance of an economy-wide carbon emissions trading systems seems way off the cards, the door is still open to experiments at the pilot phase.  In fact, the Ministry of Environmental Protection recently circulated a statement at a news conference in Beijing about two weeks ago that included “Carry out trial work on trading emission and pollution permits, and ecological transformation” as one of its priorities for the next five year plan.  As this Emma Graham-Harrison notes, officials have been coy about commenting whether these pilot schemes would involve greenhouse gases.

We’ll just have to see. My hunch is that these pilot schemes are more likely to cover SO2 and COD (chemical oxygen demand, a measure of water pollution), for which there already exist nationwide caps at absolute levels in the current five year plan. On the other hand, if the pilot schemes are limited in scope and scale, the lack of a nation-wide cap on CO2 may not be a stumbling block to enact a demonstration emissions trading systems for CO2, say for a certain specific sector in a specific geographic area, e.g. iron smelters in Shanxi province.  Still, given that the central government has only very recently started to consider directly managing carbon emissions (see previous post “China’s Carbon Intensity Plan and its Impact on Climate Progress“), one might imagine prevailing political sensitivities around launching into a CO2 emissions trading scheme.

What about a Carbon Tax?

In thinking of alternatives to cap-and-trade type systems to manage carbon, one also has to consider the viability of a carbon tax.  It seems like there’s a ways to go for China on this one as well.   I reported almost a full year ago that (see last paragraph of previous post “China Carbon Forum 2008 Review“) carbon taxes were on the table.  Last month, regulators from various ministries were considering a proposal for emissions taxation from the the Energy Resources Institute, a government think tank affiliated with the mighty NDRC.

Jiang Kejun a researcher of ERI said it would be another four to five years before a tax of greenhouse gas emissions could be implemented. Again, it was a matter of not putting the cart before the horse-other resource taxes have yet to be launched, so until China gains experience in implementing those, a carbon tax would be premature.

So what can China do now?

So if its too early to enact carbon taxes or implement carbon trading, what are some actionable step China can take now?  Well, in a sense, it has already started to mitigate carbon emissions growth through its efforts in energy intensity reduction and renewable energy deployment.  But another key policy tool at the central government’s disposal is energy price reform.  At the G20 in Pittsburgh last month, the leaders agreed to phase out subsidies to fossil fuels in the “medium term.”  The impact of such a plan, if implemented, is projected to reduce greenhouse gas emissions by 10 percent by 2050.

Beijing has already attempted to do its part with fuel pricing.  Since middle of last year, it has started to move the pricing of gasoline (see previous posts “China Announces Dramatic Energy Price Reforms” and “More Petroleum Price Reforms: Move towards the Market and Higher Fuel Tax“), which has traditionally been kept artificially low, towards market prices through a somewhat complicated pricing formula.  Retail prices still do not fully reflect market prices of crude oil so as to allow some level of price cushioning when oil prices exceed $80 per barrel.  According to a recent explanation:

China would adjust domestic fuel prices when global crude prices reported a daily fluctuation band of more than 4 percent for 22 working days in a row.

The commission [NRDC] said refiners would enjoy “normal” profit when global crude prices are below 80 U.S. dollars per barrel, but would face narrower profit margins when the crude prices rise above 80 U.S. dollars per barrel.

However, fuel prices would not go further up, or only be raised by a small margin, when crude prices rise above 130 U.S. dollars per barrel, and fiscal and tax tools would be used to ensure supplies

So while the government continues to maintain control over fuel prices to maintain relative affordability and minimize social disruption, it is at least more responsive to global oil prices.  Even with recently heightened fuel taxes, gasoline prices remain lower to that of major oil importing countries, although it is currently higher that that of the United States.

Progress must also be made on electricity price reform.  That process has already started (again, see previous post “China Announces Dramatic Energy Price Reforms“) but utilities need to be better able to pass down its costs to end-users (current law allow it to pass down 70 percent of cost chnages, but this is not always followed).  As mentioned before, a key feature of the draft comprehensive energy law under consideration is the reform of energy prices towards more market-oriented mechanisms, a transformation that would be a boon to efforts in promoting energy efficiency and renewable energy in China.

Picture Credit: Who is Tom Stack

The clean-energy float at the 60th Anniversary celebrations on October 1st in Beijing.  (Photo credit: Xinhua/Li Gang)

This week [October 1st] marks the 60th anniversary of the People’s Republic of China. The first 30-year phase was one of revolution, marked by one bloody internal purge after another, but the next 30-year phase was one of pragmatism, which underpinned economic and social reform leading to unrivaled rates of economic growth.

China now finds itself at a crossroads. As the country struggles to come to terms with its imminent status as a global superpower, it is staring in the face of vast, systemic resource challenges. China faces a triple threat to its energy, water, and food security, and there is one common thread: climate change.

In the case of energy, an overexploitation of coal—and increasingly oil—to fuel its economic expansion is the root cause of rapid growth of greenhouse gas emissions. The resulting change in climate is in turn altering precipitation patterns, leading to flash floods in some areas but exacerbating droughts in large parts of others, an urgent predicament for a many land-locked regions that are already water-scarce. Such water scarcity, together with noxious acid rain caused by fossil fuel combustion, will in turn choke off agricultural productivity, threatening future food supplies.

This food-water-energy “trilemma” will threaten physical security and disrupt economic and social stability, which is the very foundation of the China Communist Party’s authority. Beijing fully grasps these implications and has turned its stance from one of climate denier to that of an emerging frontrunner in climate action in just a few years. Few noticed in 2007 when President Hu Jintao espoused the goal of creating an “ecological civilization” that strikes harmony between man and nature. It would be easy to chalk this up as just another example of the central government’s colorful slogans. Yet, action has followed rhetoric.

China has embarked on some of the world’s most aggressive energy efficiency, renewable energy development and reforestation programs through its landmark National Climate Change Program of 2007. Over the five-year period ending 2010, it plans to reduce its energy consumption per unit of its gross domestic product by 20 percent, obtain 10 percent of its primary energy from non-fossil fuel sources such as wind, solar, and hydropower, and bulk up its carbon sinks by increasing forest cover to 20 percent.

What’s more, President Hu has just announced intentions for China to reduce carbon emissions per unit of GDP from 2005 levels by a “notable margin” by 2020. Recognizing the strategic job-creating opportunities of innovating, manufacturing, deploying and disseminating the clean-energy technologies of the future, President Hu also pledged to transform China into a “green economy, low-carbon economy and circular economy.”

China’s tide of Western-style development will still be difficult to stem. When I visited Beijing earlier this month with a delegation from the Center for American Progress, both State Councilor Dai Bingguo and Vice Chairman Xie Zhenhua of the National Reform and Development Commission assured us that China would not take the traditional energy-intensive development path. Yet even with its lofty green goals, it is difficult to imagine how it has not already.

China is already the world’s biggest market for building construction and automobile sales. This situation is unlikely to change. China is witnessing the largest scale of human migration in the history of civilization, with 350 million rural residents moving to the city by 2030. And this urbanization is coming with a shift in emphasis from exports to domestic consumption as an engine of future economic growth.

China will have to take at least three major steps to truly develop a green, low-carbon and circular economy:

1. Show bold, visionary leadership to set China on a long-term path to reduce absolute emissions, not just emissions per unit of GDP.

China believes that the West needs to take the lead to solve the problem that it created when it comes to climate change and emissions reductions. This position is understandable, but China must acknowledge that in reality it cannot wait for others to look out for what is in its own interests. World leaders continue to work out the complex structures for international climate financing and technology transfer, while the science urgently requires a collective reduction in emissions as soon as possible. If China is serious about its July commitment to limit global temperature rise to 2°C, it has to follow up on recent indications of willingness to act by accordingly fixing a future date and level at which its carbon emissions peak and subsequently decline.

2. Develop tools to help the country achieve this bold new vision.

China needs to continue to strengthen its accountability mechanisms and create channels for increased information flow to ensure that its national plans are implemented locally. The government can meaningfully engage and mobilize civil society groups as partners, rather than treat them as annoyances, to facilitate the measurable, reportable, and verifiable implementation of government actions. Such partnerships might include crafting purposeful campaigns targeted at the business community and citizens to educate them about the comprehensive benefits of creating a clean energy economy. The central government has already demonstrated progress in these areas by, for instance, increasing penalties for false statistical reporting and enacting a law on open government information, but it can do more.

3. Collaborate with the international community in a comprehensive manner.

Cooperation with the international community should not focus merely on joint research, development, and deployment on important carbon abatement technologies. China and the United States, for instance, can enhance trading relationships and unlock vast, lucrative markets for technology commercialization in both countries by coordinating on reducing barriers to market access, such as high tariffs on clean-energy technologies and restrictive foreign investment policies. Jointly building capacity for real-time emissions, monitoring and reporting, and enhancing efforts in energy modeling and simulation can greatly inform energy and climate policymakers. Climate collaboration opportunities exist even on the military-to-military level—coordination in disaster relief activities and in addressing other non-traditional security threats posed by climate change can yield mutually beneficial learning and capacity-building results.

Addressing climate change will be the fundamental challenge for China over its next 60 years. It will give China an opportunity to combine central elements of its historical development—a new low-carbon vision that is revolutionary in its transformation, but also pragmatic in its approach to enable a real and measurable low-carbon reform. The best birthday gift the international community can give to China is to walk with it hand-in-hand down this low-carbon path through the adoption of robust domestic climate measures and by forging ahead to build consensus on a sound global climate deal at the United Nations climate change conference in Copenhagen and beyond.

Chinese translation courtesy of China Dialogue:

中国生日之愿

这周，中华人民共和国迎来她60周年的生日庆典。如果说前30年是一部革命史，中国经历了一个又一个血淋淋的内部斗争，那么后30年则明显可以看出实用主义的痕迹。这场经济和社会的改革，为中国创造了前所未有的经济增长成果。

然而今天，中国走到了十字路口。国家历尽千辛走上了全球超级大国的地位，随之而的却是巨大的、结构性的资源危机。中国正面临着能源、水和粮食安全的三重挑战，而气候变化正是三者共同的关键词。

以能源为例，中国巨大经济成就的背后，依靠的是对煤炭的过度开采和石油需求的不断扩张，而这同时也导致了温室气体排放的大幅上升。气候变化改变了降水模 式， 致使一些区域洪灾不断，另一大部分地区却极度干旱。许多内陆地区不仅面临着水资源缺乏问题，还要承受矿物燃料燃烧带来的酸雨。农业生产力严重受挫，也因此 对未来的粮食供应构成威胁。

食物，水和能源的三重矛盾危及人民的人身安全，阻碍经济发展，破坏社会稳定，而这些因素都是中国共产党执政的基础。北京政府充分展现了其对气候变化产生影 响的重视，短短几年间，中国从消极对待气候问题一跃成为气候行动的先驱。或许鲜有人注意到，早在2007 年，国家主席胡锦涛就提出要打建人与自然和谐相处的生态文明。如果这个倡议只是美化中央政府形象的一句口号则另当别论，但我们看到，中国确实在行动。

自2007年发表里程碑式的《气候变化国家方案》 起，中国在全球最炙手可热的能源效益、可再生能源开发和再造林项目取得了卓越成就。在2006至2010年的五年之间，中国计划减少百分之二十的国内生产 总值单位耗能；非矿石燃料占主要能源的比例将提升百分之十，其中包括风能、太阳能和水电资源。同时，提高百分之二十的森林覆盖率，以更好的吸收碳排放。

此外，胡锦涛主席刚刚宣布了新的目标，即中国将争取到2020年每单位国内生产总值的二氧化碳排放，比2005年有“显著下降”。意识到能源战略在未来能为清洁能源的创新，生产，部署和宣传创造大量机会，胡锦涛主席还承诺将为中国打造“绿色经济、低碳经济、循环经济”。

中国西方模式的发展势头是难以遏制的。本月初访问北京的时候，我代表美国进步中心会见了两位人大代表戴秉国和解振华，后者同时身兼国家发改委副主席。他们 明确地告诉我，中国不会走传统的能源密集型发展道路。有卓见的绿色目标固然是好事，但我们还没看到中国真正将之贯彻落实。

中国目前已成为世界最大的建筑和汽车销售市场，这样的发展态势不会逆转。在中国，3.5亿的农村居民将在2030年前转移到城市，这是人类文明史上最大规模的人口迁徙。城市化将带动国内消费增长，同时伴随着未来经济发展以出口为重的转型。

要真正实现绿色、低碳和循环经济，中国将至少需要完成以下三个主要步骤：

其一，展现具有魄力，富有远见的领导力，设计长期、切实的减排目标，而不仅仅着眼于每单位国内生产总值二氧化碳排放量的下降。

中国认为，西方国家需要带头解决最早由他们制造的气候变化和碳排放问题。这一立场虽在情理之中，但中国必须意识到，没有时间再等待别的国家为自身利益举棋 不定了。诚然世界各国的领导人会继续想方设法，为国际气候资金和技术的转移找一条出路，但当务之急是要尽早达成集体性的减排协议。假设中国在七月做出的限 制全球温度上升2摄氏度的承诺是真诚的，那么他就必须遵循诺言，为减排制定有明确期限和标准的碳排放峰值目标。

其二，完善有助国家实现宏伟目标的机制。

中国需要继续完善问责机制，为信息流通开辟渠道，以确保其国家计划能在地方得到执行。政府可以有意识的加强与民间团体的合作，动员他们携手参与，而不要把 他们看作障碍。如此一来，政府的执行力度则能达到“可测量、可报告和可核查”的要求。这种合作可以从以商业人士和市民为主的民间活动发起，提升这些群体对 清洁能源综合经济效益的认识。中央政府已经在这些领域取得了进展，如严惩上报虚假统计数据，制定政府信息公开法规等。然而仅此还不能服众，他们还能做的更多。

其三，加强与国际社会的全面合作。

与国际社会合作不应只强调共同研究、开发和部署重要的碳减排技术。以中美关系为例，两国应加强贸易关系，为各自技术市场开拓更广阔的商业前景。比如降低市 场准入门槛，尤其是针对清洁能源技术的高关税及对外国投资的限制政策。携手打造实时碳排放容量机制，监测并报告，同时努力共建能广泛被能源和气候政策制定 者接受的能源模式和方案。气候合作的机会甚至还存在于军事领域，协调救灾活动，处理其他由气候变化引发的非传统安全问题等。合作能让彼此互相学习，自我强 化，最终实现双赢。

应对气候变化是中国未来60年将面对的最重要挑战。它能在这场历史性改革中集合关键因素，帮助中国完成低碳经济的转型。它同时也代表了推动真实并更可测的 低碳改革方针的实用精神。国际社会能赠予中国最好的生日礼物，莫过于一道采取有力措施应对气候变化，与之携手走向低碳之路，在哥本哈根联合国气候变化会议 上，以开拓进取的精神，就建设完善的全球气候协议达成共识。

President Hu Jintao (pictured right) of China announced that China will build on existing domestic climate change policies as embodied in its National Climate Change Programme and current Five Year Plan to step up its efforts on energy efficiency, development of low-carbon energy such as renewables and nuclear, and increase of forestry cover. [For a transcript of President Hu's speech, click here]

Most noteworthy was president Hu’s introduction of a new goal to reduce carbon dioxide emissions per unit of gross domestic product from 2005 levels by 2020 by a “notable margin.” No specific numbers were provided, but this should not be surprising as such a far-reaching national policy must undergo various necessary legislative steps before it can become domestically binding. However, China’s willingness to translate its existing domestic energy conservation goals, often discussed in terms of amount of energy consumed, into a metric that is consistent with the language of international climate policy, i.e. carbon emissions, is the clearest signal yet that China is willing to take on responsibilities that are commensurate with its resources and global emissions impact.

This policy has at least three important implications. First, it would undoubtedly set China on a path to slow down its carbon emissions growth. How quickly such a deceleration leads to a peaking of China’s total emissions depends on the specific carbon intensity targets, but senior Chinese officials have recently given public assurance of China’s desire to peak its emissions “as early as possible.”

Second, a shift of focus from energy intensity to carbon intensity will help accelerate China’s transition to a low-carbon economy. The current energy intensity standard does not distinguish between energy derived from high-carbon fossil fuels and low-carbon renewables or nuclear. By framing China’s efficiency goals in terms of carbon emissions, low-carbon sources of energy will be favoured. A carbon intensity policy would thus not only encourage more efficient use of fossil fuels, as the current energy intensity goal does, but also amplify China’s already ambitious targets on renewable energy deployment.

Third, the policy implicitly commits China to measure, report and verify (MRV) carbon emissions on an ongoing basis. It remains to be seen whether this process will meet the standards transparency that the international community seeks. But contrary to popular wisdom, fairly sophisticated mechanisms for MRV already exist for many of China’s major energy and environmental policies, as a recent study from the World Resources Institute reveals.

The significance of president Hu’s announcements are best understood in the context of other very recent Chinese policy developments. In August, China’s State Council, led by premier Wen Jiabao, set the objective of incorporating climate change considerations into the medium- and long-term development strategies and plans of the Chinese government at every level. Later the same month, the standing committee of the National People’s Congress, essentially the inner circle of China’s main legislative body, adopted a resolution on climate change action that explicitly calls for the strengthening of domestic climate legislation while giving assurance that it will be a constructive player in the international climate process.

Taken together, China is sending a strong message that it is serious about tackling climate change and is shaping a comprehensive approach that begins to meet the expectations that the international community has of China. This should serve not only as an indication to the developed countries of China’s good faith on climate action, but also as a catalyst to other developing countries to formulate their own robust low-carbon strategies.

(This piece was originally published at China Dialogue)

Post-script:  The carbon intensity target was huge step forward, but did anyone catch the apparent back-track on the 2020 renewables target????    This is what President Hu said:

…we will vigorously develop renewable energy and nuclear energy. We will endeavour to increase the share of non-fossil fuels in primary energy consumption to around 15% by 2020.

So now he’s lumping nuclear with renewables, and turning what used to be the renewable energy target of 15% of primary energy consumption by 2020, to a low-carbon standard?  This would certainly make the 15% easier to meet, what with China’s aggressive plans to increase nuke capacity ten-fold by 2020, and suggest it would now need less new renewables-based electricity to meet this 15% standard than originally thought.  My genuine hope is that this was a case of President Hu’s speechwriters being a little loose with their terminology rather than a signal of a substantive policy change.  Stay tuned for updates.

Alos, courtesy of EE News (subscription required), here are some reactions to President Hu’s speech by U.S. legislators:

Evan Bayh (D-IN)
Sen. Evan Bayh (D-IN) said he had not yet seen the details. “But that’s a step in the right direction,” he said. “Clearly, the major economies are going to need to do this in concert. And it’ll be difficult for us to act unless the Chinese and the Indians are willing to make commitments that will actually solve this problem. So it’s a good sign. I’ll be interested to know the magnitude of it and whether it suggests further progress or whether it’s just symbolic.”

Kit Bond (R-MO)
“I want to see what the details are. It’s a target. Is it enforceable? These are ministers, vice ministers and the commerce and environmental protection agency. They said they’re not going to do anything that’s going to stifle the growth of the economy — that they need to put all the people back to work.”

Barbara Boxer (D-CA)
“The more that other countries pledge to cut their carbon and to protect their own people from pollution, it helps us greatly.”

Lindsey Graham (R-SC)
That’s encouraging. That will help us make decisions on our emission problems.”

Ted Kaufman (D-DE)
Sen. Ted Kaufman (D-Del.), a member of Kerry’s Foreign Relations Committee, said China’s decision was a clear signal to U.S. businesses. “The difference here is, they’ve figured out it’s in their economic interest to be involved in this,” Kaufman said. “This is one pledge that they’re going to deliver on.”

John Kerry (D-MA)
“I think anything China does, if it’s constructive and fixed and measurable, and ascertainable, it’ll be very helpful, absolutely.”

John McCain (R-AR)
On China: “We’ll see the details. They’ve made similar commitments in the past but haven’t kept them.”

Chinese version of original China Dialogue piece (without the post-script), courtesy of China Dialogue staff:

中国国家主席胡锦涛宣布，中国将在现行国内气候变化政策的基础上，进一步履行《应对气候变化国家方案》及现阶段的五年计划。其中包括加强能源使用效率，促进含可再生能源及核能在内的低碳能源的发展，以及提高森林覆盖率。

最引人注意的当属胡锦涛主席提出的新目标，中国将争取到2020年每单位国内生产总值的二氧化碳排放，比2005年有“显着下降”。尽管没有提到具体的数 据， 但我们理解一项如此深远的国家政策，无疑必须经过一系列繁复的立法程序才能在全国普遍推行。不过这表示中国愿意依据国际气候政策通用的测量方式来解释该国 现行的能源节省目标，也就是通常我们所说的能源消耗总量。承诺减排就充分说明中国愿意承担与其资源和影响力相符的义务。

这一政策至少包含三个重要意义。首先，中国肯定将减缓二氧化碳排放的增长。减排速度取决于具体的碳排放强度目标，也将决定中国何时达到碳排放总量的峰值。不过中国官方高级官员最近向公众承诺，中国希望尽早达到排放峰值。

其次，从能源强度转向碳排放强度，这一重心的转移将加速中国低碳经济的发展。目前，中国的能源强度标准还未对碳化石燃料的高碳消耗和可再生能源或核能的低 碳消耗做出区分。通过制定碳排放的效能目标，低碳能源显然将更受青睐。鉴于目前能源强度目标的要求，碳排放强度政策不仅将促进化石燃料的使用效率，也进一 步推动了中国发展可再生能源。

第三，该政策暗示性的承诺中国将长期坚持碳排放可测量、可报告及可查证机制（MRV机制）。这一表态是否符合国际社会所期待的透明度还有待观察。但与我们 过往认知不同的是，根据世界资源研究所最近的一份报告显示，中国主要的能源和环境政策中已经涉及相当成熟的MRV机制。

把胡锦涛主席的讲话和中国最近其他政策的动态联系起来看，我们能发现更多问题。今年8月,中国国务院总理温家宝将气候变化问题纳入中国政府各项中、长期发展战略的考量范围。8月底，全国人民代表大会常务委员会（中国最高国家权力机关的内部核心）审议通过了一项应对气候变化的策略，进一步明确并巩固国内对气候问题的相关立法，同时确保了其在国际气候谈判进程道路上发挥的建设性作用。

综合来看, 这是中国向世界发送的强烈信号——中国将认真严肃地对待气候变化，并正努力探讨更全面的措施，以满足国际社会对中国的期许。 这不仅是中国向发达国家展现的对抗气候变化的诚意之举，也将势必推动其他发展中国家制定符合自身行之有效的低碳战略。

(p.s. not sure what the first visual on “a new direction for Hong Kong” means!)

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I suspect there may be some questions regarding my remarks about what percentage of China’s economic stimulus is being allocated to green projects.   I have given the figure of 5 to 6 percent, which is based on a reported statement by Zhang Ping, Minister of the National Development and Reform Commission, after the announced reallocations of the whole stimulus package this March (see also pie chart below).   Of the 4 trillion yuan economic stimulus package, 210 billion yuan is earmarked for “sustainable environment.”  This calculation is a far cry from the “almost 40 percent” figure that many media articles are reporting.  The “almost 40 percent” claim originates from a flawed report from HSBC, which includes all rail and grid infrastructure as “green.” The best discussion of this can be found at China Environmental Law Blog.

That said, I am still very bullish about China’s commitment to this sector.  You might argue about the details of its execution (see Forbe’s “Weaknesses in Chinese Wind Power“), but as I argued in my previous post (”Peaking Duck: Beijng’s growing appetite for climate action“), we should not doubt its intent and resolve.  We should also be expecting some major announcements in the coming months about a revised comprehsive new energy plan and and a greener five year plan (for 2011-2015).

China’s climate change envoy, Yu Qingtai, made headlines when he declared in a news conference earlier this month that “there is no one in the world who is more keen than us to see China reach its emissions peak as early as possible.”

Now all eyes are focused on the United States and China—the two biggest greenhouse gas emitters—with just four months to go to the U.N. summit on climate change in Copenhagen, where nations will negotiate a successor treaty to the Kyoto Protocol, which expires in 2012. Attendees at the most recent round of U.N. climate talks in Bonn, Germany may have left the meetings with a pessimistic sense that we’re a long way off from a global agreement. But interesting developments are unfolding in China outside of these U.N. meetings that bring a more hopeful message.

China already committed in a declaration last month with 15 other large emitting countries at the Major Economies Forum on Energy and Climate in Italy to peak global and national emissions “as soon as possible.” That provision lacks a precise timetable and is laden with the caveat that of the “overriding priorities of developing countries,” but it is the statement of intent that the Chinese are clearly taking seriously.

Then just last week, a panel of climate policy experts from various Chinese government think tanks, published an extensive 900-page report that has gained notable attention in both the Chinese and Western press for advocating the notion that China can feasibly aim to peak its carbon emissions by 2030. The report is advisory in nature and by no means represents official policy, but it is the latest in a series of overtures by prominent Chinese academicians to set emissions peaking pathways. Hu Angang, a public policy professor at Tsinghua University in Beijing and a prominent policy adviser for the Chinese government, has also advocated for China to aim for peaking carbon emissions in 2030. He Jiankun, deputy head of the State Council’s Expert Panel on Climate Change Policy, has projected that China’s emissions are more likely to peak at 2035. Additionally, a different report released earlier this year by the Chinese Academy of Sciences, another prominent government think tank, called for peaking between 2030 and 2040.

Setting the timing of emissions peaking alone without considering the trajectory of the emissions pathway—especially the height of the peak—may not be helpful in determining whether such measures go as far as the climate science requires. But the broader significance of such discussions at the top-levels of the Chinese government, especially at this critical juncture in the run up to Copenhagen, should not be missed. China’s willingness to be a constructive player in the international climate change negotiation process is there; it just needs to be acknowledged and encouraged.

China’s willingness is not just talk, but is backed up by concrete actions. We have discussed previously many of the actions China is taking, including its current five-year plan that boasts some of the most ambitious energy efficiency and renewable energy targets in the world. And today, the Climate Group has launched a report entitled “China’s Clean Revolution II: Opportunities for a Low Carbon Future” that provides a similarly compelling narrative of how China, despite the current global economic downturn, is making hefty investments to accelerate a tectonic shift from grey to green in sectors such as transportation, industrial energy efficiency, wind, solar, geothermal, and urban design. The transition won’t be easy, nor will it happen overnight, but there should be little doubt about the Chinese leadership’s intent and resolve to reorient its carbon-intensive economy toward a more sustainable path.

China may announce its next five-year plan as early as this year, and many expect that it will contain even stronger commitments and perhaps incorporate some measure of carbon reductions in the form of benchmarks for reducing carbon intensity. China’s State Council, led by Premier Wen Jiabao, last week laid down the objective of incorporating climate change considerations into “the medium and long-term development strategies and plans of government at every level.” Also, Sun Qin, the vice chief of the National Energy Administration said he expects the government to complete a comprehensive plan for new and low-carbon energy development by the end of the year. A low-carbon strategy will be a central thread in China’s ongoing economic development strategy.

China is also hinting at increased flexibility in the negotiation process. Su Wei, director-general of the climate change office within the National Development and Reform Commission, China’s main economic planning agency, has signaled a change in tone, saying, “China will not continue growing emissions without limit or insist that all nations must have the same per-capita emissions. If we did that, this earth would be ruined.” China maintains its hard line that developed countries are historically responsible for climate change, but climate envoy Yu has also backed off somewhat from China’s previous demands that all developed countries commit to 40 percent reductions in carbon emissions by 2020, saying that, “[a] concrete figure has to be decided by the negotiations; we will get a result in Copenhagen.”

All these developments in China are encouraging considering also that South Korea and Mexico, two other non-Annex I countries—developing countries as defined in the U.N. climate treaty process—recently indicated a willingness to enact carbon emissions caps for 2020. This underscores the need for reciprocal action from the United States.

The United States Congress must first move swiftly to enact comprehensive energy and climate legislation to show its own commitment to climate action. We should also properly acknowledge the progress that China and other countries have made in mitigating climate change. One way which we at the Center for American Progress have articulated before is the “carbon caps equivalents” approach, which would quantify the unilateral domestic green measures undertaken by, for example, China, in terms of the effective emissions reductions that such measures yield, and then aggregate those reductions into a single figure that can be compared to proposed emissions reductions targets of other countries

The United States must build upon the modest but significant milestones of U.S. Secretary of Energy Steven Chu’s visit to Beijing, where the foundations for a joint research center on clean energy were laid, and the recent Strategic & Economic Dialogue in Washington, D.C., where both countries agreed formally for the first time to engage each other on climate change.

The United States must muster political and financial resources to engage China on the joint acceleration of clean-energy technology development and deployment. Such a bilateral effort will send a message to the rest of the world that the two largest emitters are ready to rise to the challenge and lead the way forward towards a global agreement in Copenhagen.

Guest blogger John Romankiewicz  a/k/a Sustainable John (pictured right), a carbon markets analyst at New Energy Finance and director of the China’s Green Beat video blog, questions the consistency of NRDC’s announced progress on energy intensity reductions with his own calculations using NBS data.

China’s energy intensity target is perennially referred to by Chinese negotiators in international talks, but also regularly mistaken by the foreign press as some carbon emissions reduction target. Here’s the low down on what it is, progress to date, including the most recent announcement, and exploration of some curious inconsistencies.

What is China’s energy intensity target?

From 1980 to 2000, China led itself down a path of increasing energy efficiency and concern for the bottom line by introducing market incentives and competition such that by 2000, GDP output required two-thirds less energy than it did in 1978. From 2001-2005 however, China – with a realization of its new found wealth – went to a tremendous building boom. Industry could not keep its eye on such rising demand and energy efficiency improvements at the same time, so energy efficiency took the back seat. The government, realizing this in 2005, set a plan in the 11^th Five Year Plan to once again improve on energy efficiency. Specifically, the headline target was to reduce energy intensity (the amount of primary energy consumed per unit of GDP produced) by 20% from 2006 to end of 2010. Using energy intensity as the cursor of progress leaves room for GDP to grow as it will even as energy efficiency is being improved.

Two of the most noteworthy programs have been the shutting down of old, inefficient coal-fired capacity and the Top 1000 Energy-Consuming Enterprises program. Additionally, many industrial enterprises have been installing waste heat and gas recovery equipment at their facilities. There are plenty of other smaller initiatives like putting in CFL’s, motor system improvements in manufacturing, and efficiency standards for appliances. It is no doubt that these initiatives are all contributing to China’s improvement in energy efficiency. I only question how much China’s energy efficiency has actually improved.

Announced versus calculated progress to date

According to the National Development & Reform Commission (NDRC), energy intensity has decreased by roughly 10% in the three year period 2006-2008. They have just announced another 3.35% year-on-year reduction for H1 2009 in comparison to H1 2008.

I have analyzed National Bureau of Statistics (NBS) data from 2004-2008 which is summarized in the charts below. The two sources of my GDP (in nominal terms), GDP growth rate (in real terms), and primary energy consumption data are the 2007 and 2008 official economic and social development statistics reports off the NBS website.

You’ll note that I have no idea about H1 2009 energy consumption because the figure has not been reported to my knowledge. Only the percentage drop in energy intensity has been reported. We’ll come back to this in the next section.

I decided to perform an analysis of my own, using these data to calculate energy intensity over the years. For each year, energy consumption is divided by GDP. However, I did not simply take the nominal GDP numbers for each year, but instead, converted the GDP for each year into real terms (i.e. 2005 renminbi) by applying to each nominal GDP figure the applicable GDP growth rate, which was already expressed in real terms. The result is the following:

Given these figures, which are calculated using NBS data, the energy intensity drop for the three year period 2006-2008 is only 7.7%, not the 10% commonly reported. It looks like they still have a long way to go to reach their goal. One of the main discrepancies I have found is with the release of 2008 data. The NDRC announced a 4% increase in energy consumption in 2008 (2.85btce), and coordinated with a 9% increase in GDP, this led to a 4.2% drop in energy intensity. However, if you use 2007 and 2008’s numbers for energy consumption off the NBS website, the increase in energy consumption is actually 7.4% which leads to only a 1.5% drop in energy intensity. Maybe the NDRC and NBS should talk more. Or maybe it’s just a politically sensitive subject.

Latest announcement of progress

As mentioned above, the NDRC has just announced a 3.35% year-on-year reduction for H1 2009 in comparison to H1 2008. According to the NDRC’s News Center, energy intensities for specific sectors have fallen, notably: 1.5% for power sector, 1.7% for steel sector, and 7.7% for cement sector. Meanwhile, GDP continues to grow at 7.1% year-on-year. Data for total primary energy consumption cannot be found (please notify me if you find it), but power consumption is down 1.7%. NBS has released a special report (news coverage in English, Chinese report) explaining just how on earth power consumption could shrink while GDP still continue to grow, defying nearly all energy economics knowledge to date. Here are some summary points for what they came up with.

First, they begin by explaining how primary (think agriculture), secondary (think mining, manufacturing, and power), and tertiary (think banking, consulting, and commerce) industries are using different amounts of electricity per GDP output: respectively, 400kWh/10000RMB, 2460kWh/10000RMB, and 370kWh/10000RMB. Value added index (a proxy for GDP, but why they refer to “Value added index” instead of GDP escapes me) and electricity consumption went up in tandem (one-for-one) in both primary and tertiary industries. Secondary industry is the “culprit” then, as value added index went up 5.2% while electricity consumption fell 5.9%. They explain a lot of statistics magic about why things are the way they are, which honestly doesn’t leave any impression on the reader. The most concrete reasons I could pick out were:

They explain a lot of statistics magic about why things are the way they are, which honestly doesn’t leave any impression on the reader. The most concrete reasons I could pick out were

• Industry is consuming 29TWh of electricity they made themselves from waste heat recovery power facilities, which are not tracked by electricity companies. That’s 2.5% of all electricity they consumed.
• Small scale industry reduced their electricity consumption by a whopping 48.9%.
• Of 44 energy intensive products, 30 of them reduced their electricity consumption/product value which had a net effect of reducing electricity consumption by 1.5%.

They end with a very tired explanation, saying that power elasticity is simply constantly changing from year to year, which they provide data for shown in the chart below. Power elasticity is the percent change in power consumption per percent change in GDP. So if power consumption increases 4% and GDP increases 5%, then the power elasticity is 0.8.

Certainly, China’s power elasticity is all over the place. And power elasticities of less than 1 are very common during times of efficiency build out. But, the NBS failed to address the basic fact that in H1 2009, the power elasticity has gone negative to -0.24 (-1.7%/7.1%). This is something never seen before in China’s history, and as far as I’m aware not seen before in world economic history. The bullet points mentioned above in the NBS report would lead to a lower elasticity, but not a negative one.

So, what’s the deal?

Multiple news outlets have been reporting that yesterday’s news conference with China’s top climate change ambassador, Yu Qingtai, marked a significant departure from China’s established attitudes toward climate change. He also expressed a degree flexibility regarding China’s previous demands that developed nations pledge to reduce their carbon emissions 40% by 2020 from 1990 levels at Copenhagen this December.

It’s true: Wednesday’s conference provided a more explicit explanation of China’s position on climate change than had been offered previously. Yu reaffirmed China’s commitment to eventually reducing its carbon emissions while giving more specific details as to China’s position on the Copenhagen talks.

Great quotes like “there is no one in the world who is more keen than us to see China reach its emissions peak as early as possible” may have caused a stir among the western media, but this is not really news.

Influential Chinese scholars have been pushing for a peaking pathway for some time now. Hu Angang, a public policy professor at Tsinghua University in Beijing and a prominent policy adviser for the Chinese government, has advocated for China to aim for a peaking of carbon emissions in 2030, while He Jiankun, deputy head of the State Council’s Expert Panel on Climate Change Policy has projected that China’s emissions are more likely to peak at 2035.  Similarly, a report (executive summary in Chinese only) by one of the most influential Chinese government think tanks, the Chinese Academy of Sciences, has called for peaking between 2030 and 2040.

And just last month, China officially committed itself to establish a pathway for peaking by signing off on the July 9^th Declaration of the Leaders of the Major Economies Forum on Energy and Climate, which stated that “The peaking of global and national emissions should take place as soon as possible.” While the relevant provision lacks a timetable and is laden with the caveat of the “overriding priorities in developing countries”, the MEF declaration provides precedent for Yu’s comments on emissions peaking.

So, what are the practical implications of China’s new climate-engaged rhetoric? While they’re opening two new coal plants per week, the Chinese are using the low energy demand caused by the recent recession as an opportunity to shut down their less efficient coal plants and replace them with some of the most efficient in the industry. Meanwhile, China has been making sincere investment and policy efforts to support clean energy technologies (see “China Begins Its Transition to a Clean-Energy Economy”).

Yu stopped short of explicitly recanting China’s previous demands for developed countries to cut 40% of their emissions by 2020:

Asked whether China had abandoned a demand for a 40 percent cut in rich nation emissions by 2020, Yu said that a target for developed countries should be agreed in the talks.

“As the developed countries have a historical responsibility for climate change, they should continue to implement large emissions cuts after 2012,” Yu said.

“A concrete figure has to be decided by the negotiations; we will get a result in Copenhagen,” he said, but added Beijing still considered the 40 percent sought by developing countries in previous talks a “fair and rational” target.

So while Yu maintained the developing world’s rhetorical virulence against the historical climate injustices committed by the developed world, it seems clear that China’s push for a real climate deal by the end of the year is to be taken seriously.

What is interesting about these new statements by Yu, which portray an increased willingness to engage in the international climate process, is how they coincide with recent actions of two fellow non-Annex I (or “developing”) countries.  Earlier this week, South Korea surprised the world by pledging to set a 2020 carbon emissions target, while Mexico announced that it will offer a substantive plan to cut greenhouse gases for developing countries at Copenhagen (see previous post).  As the first non-Annex I countries endorsing a capping of emissions, South Korea and Mexico show that the developing world is paying attention to climate change even when many in America prefer not to.

The media has missed a broader story — The shift in tenure of these major non-Annex I countries, as reflected in these announcements, should offer pause to the pessimists who think that the impasse between the developed and the developing world in reaching a global deal in Copenhagen is insurmountable.

Photo credit: Xinhua

South Korea may not be outdoing the United States’ clean energy commitments yet, but it has just announced intentions to adopt a 2020 emissions cap, the first developing (non-Annex I) country to do so. Reuters explains:

The government said it would choose a target this year from three options: an 8 percent increase from 2005 levels by 2020, unchanged from 2005, or 4 percent below 2005. Its emissions doubled from 1990 to 2005, the fastest growth in the OECD….  Officials said they marked a big commitment to head off an estimated 30 percent rise in emissions that would result if no action were taken.

One might argue if South Korea is really a developing country—it is considered one under the United Nations Framework Convention on Climate Change (UNFCCC), which was adopted in 1992, but was in 1996 subsequently admitted to the OECD, which is usually thought of as a club of the rich countries.

One might also question the choice of a 2005 baseline rather than 1990, which all the targets in the Kyoto Protocol are keyed to.  The reasoning behind the choice of a 2005 baseline is obvious from the quote above, which explains that South Korea’s emissions have risen steeply in the years since 1990.  The result is that none of the three choices will result in reductions from a 1990 level.

Nevertheless, the symbolic significance of the announcement cannot be overstated–South Korea is the first non-Annex I country to indicate that it will adopt quantifiable emissions targets for 2020.  While the article notes that South Korea’s commitment could be “voluntary,” the 2020 timeframe suggests that the country may be open to a binding emissions cap in the December round of international climate talks in Copenhagen, where a successor to the Kyoto Protocol, which expires in 2012, will be negotiated and likely to cover the period of 2013 through 2020.

Why is South Korea doing this?

There are at least three reasons why South Korea is being proactive on climate action.  First, there is an economic stimulus motivation.  This announcement comes on the heels of a recently reported “Green New Deal” that South Korea’s President Lee Myung-Bak has been campaigning for. That effort will spend $85 Billion, or nearly 2 percent of Korea’s GDP, over the next five years on initiatives that will encourage energy efficiency, renewable energy including solar and wind power, carbon credit trading, hybrid cars and biofuels.   The desired outcome, according to FT, is that this spending will create 1.56 to 1.81 million new jobs, and “for South Korea to become the world’s seventh most competitive country by 2020 in terms of energy efficiency.”

Second is energy security.  South Korea is the world’s second largest LNG importer, and the world’s sixth largest petroleum importer. Given the country’s heavy reliance on such fossil fiels it has also embraced several innovative technologies to achieve such a transition:

It also aims to increase use of hybrid cars, renewable and nuclear energy consumption, energy efficiency with light-emitting diodes and smart grids to achieve the target, which will cost 0.3 to 0.5 percent of GDP.

Third, the Reuters article mentions Korea’s fear of ‘climate tariffs’ as one reason it has embraced this policy (See here):

But the government on Tuesday pointed to the future risk of border tariffs on South Korean exports. In a statement, the government said the European Union and other developed countries might punish some exporting nations that do not adopt tough greenhouse gas reduction targets.

South Korea, as the world’s fifth-largest automaker, is heavily dependent on exports of manufactured goods and petroleum products to drive its economy.

Implications for Copenhagen

South Korea’s announcement has several implications for international climate negotiations.  It suggests that the increasingly artificial distinction between Annex I and non-Annex I countries may be starting to break down.  At the very least, it points to the notion that a purely binary categorization between the “developed” and “developing” countries is starting to evolve into a framework that can differentiate between various degrees of development.

Just as importantly, South Korea’s plan creates a model for how more industrialized developing countries might commit to global climate action—setting a pathway for a slow down in growth of emissions that eventually peaks at some future point, and then declines.

This adds pressure to the likes of Mexico, which like South Korea, is classified as a non-Annex I country under the UNFCCC, but was subsequently admitted to the OECD in 1994.  Indeed, Reuters is separately reporting that a senior Mexican environmental policy maker has indicated plans for Mexico to “put a detailed offer to cut the growth of its own greenhouse gas emissions on the negotiating table … in Copenhagen this year.”  Mexico has already previously announced voluntary goals to reduce carbon emissions by 8% by 2012 from 2002 levels, and to launch a carbon emissions trading scheme by 2012, so there is good reason to believe in Mexico’s stated intentions.

If South Korea and Mexico are the first non-Annex I countries which decide to play ball, which other transition economies will start to feel the heat to follow suit?  Costa Rica has made some overtures to becoming “carbon neutral” (thought what that means and how serious they are is uncertain) by 2021.  What about Singapore?  Or South Africa?  If we go down the list of relatively industrialized “developing” countries, how far down do we have to go before we reach Brazil or China?

In addition to asking which other non-Annex I countries are “gettable” for a global deal, we should hone in on the question of how we are going to “get” them.  To what extent can the same combination of economic opportunity, energy security benefits and fear of carbon tariffs be used as leverage to encourage other non-Annex I countries to commit to emissions targets?  What about highlighting the co-benefits to public health of reducing other harmful air pollution like SOx and NOx in addition to CO2 reduction?

It is certainly the case that developing countries would likely want to act on each of these different drivers for climate action, but stop short of wanting to frame those actions in terms of hard targets for quantified emissions reductions.  China, with its ambitious commitments to energy efficiency and renewable energy is just such a country that sees the value in diversifying energy supply, creating new innovative industries and improving both the bottom line and public health through more efficient use of fossil energy, but is unwilling to commit to absolute carbon emissions to solve a problem it genuinely and understandably sees as being caused by the West.

Perhaps an approach that quantifies the unilateral domestic green actions of developing countries in terms of effective emissions reductions, and that aggregates those reductions into a single figure that serves as a virtual “cap” that can be compared to caps from Annex I countries is one way to “get” the other non-Annex I countries on board.  The Center for American Progress has previously described such a concept as the “carbon cap equivalents” approach, which could be just the mechanism the world needs to accelerate the shift away from a binary understanding of developed-versus-developing countries that is outdated and divorced from the reality, and that acknowledges the far greater diversity of development amongst the world’s nations and their corresponding capacity to address climate change.

Such a shift does not only not repudiate the concept of “common but differentiated responsibilities,” but adds depth to its meaning because we are effectively calling for increased differentiation amongst countries, especially in the non-Annex I block.

It is a big pity that Reuters has chosen to sensationalize the report, cherry-pick one relatively unremarkable finding, and brandishing it as a headline–”Emissions of 3 big China power firms exceed UK“–as if China represented an ecological apocolypse.  Guardian brandishes a very similar headline.  No doubt, China’s energy structure is heavily reliant on coal and is the world’s largest producer and consumer of that black stuff, but we’ve known this for a while.   But to say that “greenhouse gas emissions from the three biggest Chinese power firms in 2008 were higher than those of the entire United Kingdom” is rather meaningless without context.  We need to ask–how big are these firms?  We are not saying that China’s biggest three power plants are matching the entire UK in carbon emissions, but that China’s three biggest utility companies, with fleets of hundreds and hundreds of power plants accountable for 30% of the entire power supply for China and its 1.3 billion people (30% x 1.3 billion = 390 million), is matching the carbon emissions output of the entire economy of the UK and its 61 million citizens.   Viewed in that context, Reuters headline is decidedly unremarkable, and in fact makes China look good!  [The explanation is, of course, a large segment of China's population remains in energy poverty, and that we are comparing carbon missions for 3 chinese companies from the power sector against all the sectors of the UK economy]

This is not to say that we should let the Chinese power sector off the hook.  The report underscores some alarming findings and trends:

• environmental and public health impacts of coal burning by the ten biggest power companies is estimated to be RMB 87 billion (US$12.7 billion) in 2008;
• on a per kilowatt-hour basis, the ten biggest power companies still emit more carbon dioxide than in developed countries (20% more than the U.S. average, and 80% more than the Japan average);
• five of the ten biggest power companies obtain less than 7% of their share of electricity production from renewable sources, making them potential laggards in the context of China’s national goal of achieving 10% of its energy from renewable sources by 2010)
• eight of the ten biggest power companies are not yet half way to meeting its mandatory renewable (non-hydro) energy obligation of 3% by 2010, casting doubt that these targets will be met by 2010.

Yet, there are positives to be taken away from the report:

• All of the ten power companeis have already met their 2010 target of reducing coal consmption to 355 grams per kWh of coal power generation, ahead of schedule.
• Since 2006, as part of its “Program of Large Subsituting for Small,” China has shut down 54 GW worth of small, inefficient coal plants and plans to shut a further 31 GW in the next three years (see my related post on The Work Room);
• three of the ten biggest power companies have already reached a 10% or more share of electricity from renewable sources, and one (Guodian) has met its mandatory non-hydro renewable energy obligation of 3%, in both cases ahead of the 2010 deadline.

The result of the program of large substituting for small and relentless pursuit of the goal of reducing coal combustion per Kwh  has spurred China’s power sector to build some of the most efficient coal plants in the industry, so much so that

China’s improvements are starting to have an effect on climate models. In its latest annual report last November, the I.E.A. cut its forecast of the annual increase in Chinese emissions of global warming gases, to 3 percent from 3.2 percent, in response to technological gains, particularly in the coal sector, even as the agency raised slightly its forecast for Chinese economic growth.

The overarching trend points to a clear policy direction–China is using more coal, yes, but it is using it in an increasingly efficient way.  Greenpeace seeks to accelearate a decarbonization of China’s power sector with a half a dozen recommendations.  I take slight issue with the first recommendation, which calls on China to introduce a price signal through an energy tax and environmental tax on coal.  This is not a bad idea in and of itself, but would spells a lose-lose strategy right now beacause utilities are unable to fully pass down the prices increase of coal to their end-users.  For any sort of tax mechanism to be effective, energy price reform in the electricity sector is hugely wanting (see also pevious post “China’s Coal Industry-MIT Report Challenges the Myths“).