- NBR - The National Bureau of Asian Research

Forging a New Energy and Environmental Balance: Conclusions and Implications for the Asia-Pacific

Mikkal E. Herberg

The essays, discussion, and analysis that emerged from the National Bureau of Asian Research’s 2014 Energy Security Program provide rich insight into China’s many energy challenges and the domestic and regional impact of the country’s rising energy demand. China’s emergence as the world’s single largest energy consumer over the past two decades and the country’s phenomenal growth mean that these issues are now a question not just of how supply can meet demand but of what role China will play in the global arena as it adapts to its emerging role as an energy superpower. Growing reliance on imported oil and gas over the past two decades has catalyzed a far more active energy diplomacy that is accelerating China’s emergence as a global power. This trend has been further magnified by the environmental impact of China’s rising coal and oil consumption, which has led to an enormous increase in global carbon emissions and thrust China uncomfortably to the center of the global climate change debate. Altogether, Beijing’s energy choices and strategies reverberate through global energy markets, creating numerous geopolitical and environmental challenges.

The analysis and discussion of the program converged around several major themes that will go a long way toward determining China’s future impacts on global energy and environmental outlooks. First, discussants overwhelmingly agreed that China is in the midst of a historic and extremely difficult domestic energy transition. The two-decade surge in consumption has become the source of new and more complex challenges for the country’s energy policy, energy infrastructure development, and environmental policy. In particular, both the authors of this report and the discussants at the June workshop noted that dramatically rising air pollution is forcing the leadership to move more decisively on addressing the negative environmental and public health consequences of the country’s clearly unsustainable energy mix. Beijing is simultaneously struggling to, on the one hand, slow the pace of economic growth in order to reduce the dominance of heavy, energy-intensive industries and, on the other hand, reduce the enormous amount of energy required to sustain the current model of economic growth. Hence, the sheer scale of China’s energy and environmental challenges is truly daunting. Beijing’s success in addressing these challenges will have significant implications not only for China but for the environmental, economic, and geostrategic outlook for Asia and the world.

With the goal of addressing these concerns, China’s current government has continued or launched a number of major policy initiatives that aim to reshape the country’s energy portfolio. These initiatives include efforts to reduce energy intensity, reduce carbon emissions and air pollution, reform state-owned enterprises, and reform the pricing systems for energy products. As Philip Andrews-Speed’s insightful analysis aptly highlights, different energy policies in China emerge from different contexts that shape their potential for success or failure. As a result, some of China’s extant energy reforms are more likely to succeed, while others are more likely to fail based on expectations derived from past efforts. Participants at the June workshop concurred that overall progress is likely to be slow, with prospects for success varying tremendously across a range of key policy initiatives. For example, efforts to address energy-related air pollution in major Chinese cities have a reasonably good chance of near-term progress. Air pollution has become a major concern for the leadership, and a comprehensive program of reforms to limit coal use, slow the rapid expansion of motorization in large cities, and improve tailpipe emissions, among other measures, has strong support from the central government. On the other hand, progress on introducing carbon markets—another important government initiative—is likely to be slow due to the complexity of the issue, local opposition, and industry resistance. Reform of the monopoly power of state energy enterprises also seems likely to be very slow due to industry resistance and low leadership commitment. Overall, a mixed picture emerges in China of gradual but variable progress toward meeting many of its energy transition challenges. In most cases, delays are caused by resistance from existing state enterprises, opposition from local and provincial interests, and inconsistent and episodic leadership attention.

A second theme that emerged focused on the geopolitical implications of China’s expanding global and regional energy presence as a result of its search to secure oil and gas supplies. As I noted in my essay for this report, rising dependence on oil imports is at the core of China’s energy security anxieties and has shaped the country’s strategies to increase control of overseas oil supplies and transport routes. As a result, China has pursued a “go out” strategy focused on the rapid international expansion of its national oil companies (NOC), supported by a wide-reaching energy and financial diplomacy. The NOCs’ equity investments, negotiation of long-term supply contracts, construction of new oil pipelines, and employment of Chinese nationals have boosted China’s economic and diplomatic presence across the key energy-exporting regions, including the Middle East, Central Asia, Africa, and Latin America. Looking ahead, virtually all forecasts suggest that Chinese oil demand will continue to grow strongly, and with China’s reliance on imported oil. This is likely to drive the continued expansion of the country’s energy interests globally and reinforce its emergence as a global diplomatic player.

At the same time, China’s global energy and diplomatic presence will be further strengthened by its rapidly expanding investments in overseas natural gas and negotiation of long-term contracts to secure regional gas imports. China has discovered natural gas as a cleaner fuel than coal and has begun a huge drive to expand gas use—a “dash for gas.” New government targets calling for gas demand growth to quadruple from 2010 to 2020 mean that large imports of gas will be needed. This strategy is boosting China’s diplomatic and economic footprint across the Eurasian landmass and into South and Southeast Asia. For example, China has developed a very diversified portfolio of overland pipelines to import gas, including large pipelines from Central Asia and Myanmar, and concluded a deal with Russia in May 2014 to build a large new gas pipeline from East Siberia (and possibly a second pipeline from West Siberia). China is also investing in new receiving terminals along the coast to increase its capacity to import liquefied natural gas (LNG).

Yet workshop participants were mindful that a critical challenge for China is addressing its longstanding dependence on coal. A third key theme that emerged from the workshop revolved around the prospects for limiting and possibly reducing China’s coal use, which currently accounts for one-half of all the coal burned every day globally. As several discussants noted, China’s leadership recognizes that it must reduce the enormous growth and dominance of coal in the country’s energy mix in order to tackle critical air pollution and climate goals. In his essay for this report, Li Zhidong makes the case that China could cap its coal consumption by around 2017 with the implementation of a new range of policies on coal and electricity use along with ongoing economic changes. He argues that this initiative will be driven by a strong new “national consensus on the urgent need to address the challenges of air pollution and climate change,” a theme that is echoed by Andrews-Speed and Benjamin Shobert. Many observers now agree that such a consensus is officially driving fundamental changes in electricity demand and coal use. Yet key to this effort will be continually improving energy efficiency, reshaping the Chinese economy to become less energy-intensive and more consumer-driven and service-based, directly mandating reductions in coal burning in the major eastern cities, and substituting lower-carbon energy sources like natural gas and renewables for electricity generation. Li cites a long list of new policies to achieve these changes that have the strong backing of the Chinese leadership and discusses several studies that suggest that a cap on coal use is possible by 2020.

Discussants suggested that while Li’s scenario for capping coal use is plausible, many of the associated developments and policies required for this cap seem likely to progress slowly. For example, although the use of coal-generated electricity is being reduced around the highly polluted eastern cities, there are plans for large new coal-fired power-generation centers in the western half of China that would then move the power to the east via long-distance transmission lines. This would simply displace carbon emissions and pollution from east to west rather than reducing the overall levels. Although there are planned restrictions to reduce coal use in the east, the western provinces where coal burning is expected to grow have no such restrictions. Some discussants also cited the limited implementation and follow-through that often affects the success or failure of key energy policies. Although the workshop discussions on the whole raised hopes that China’s coal use could be capped in the relatively near future, a number of questions remain about the pace of progress. Many suspect it will take until 2025 or 2030 to cap China’s coal use.

Finally, a fourth and closely related theme focused directly on the growing air, water, and other pollution that is driving Beijing’s efforts to reduce carbon emissions. An important development is that Chinese leaders must increasingly respond to public pressure to address pollution problems and the worsening impact on public health. With daily updates on the Internet about the levels of air pollution in Beijing and other major cities and a long list of highly publicized cases of water pollution from chemical and industrial leaks, the leadership can no longer ignore these problems. The root causes of China’s worsening pollution include a weak and underfunded regulatory system, historically heavy reliance on coal, and the single-minded focus on high economic growth. Nonetheless, Benjamin Shobert’s essay suggests that there is progress in addressing all three causes. Furthermore, workshop discussions considered evidence that stronger Chinese efforts to reduce carbon emissions and craft a more responsible climate policy seem to be encouraging greater Sino-U.S. cooperation on climate change.

Ultimately, workshop participants noted that whether the issue at hand is analyzing the shifts in China’s traditional energy policy in light of its structural transitions or understanding the role of environmental politics, the growing geopolitical footprint of China’s energy policy has important implications for Sino-U.S. relations and China’s role in Asia and key energy-exporting regions. For participants, this in itself raised new questions. How will the United States and China manage their increasingly intersecting diplomacy and interests in these regions: cooperatively or competitively? In particular, can the United States and China find common ground on managing political challenges and political instability in the Middle East and Persian Gulf? Additionally, China’s growing dependence on maritime oil supplies will be a further multiplier in animating its drive to secure vital energy sea lanes from the Middle East to Asia and defend territorial claims in the South and East China Seas. Can the United States and China cooperate to secure the energy sea lanes that will be vital to China’s economic prosperity and that are also key to U.S. efforts to ensure stable prices through the reliable flow of oil to global markets? Will China participate in existing global energy governance institutions like the International Energy Agency, or will it choose to create alternative institutions with less Western and U.S. influence? And as the two largest emitters of carbon dioxide, can China and the United States strengthen their common leadership on environmental security—and could such engagement serve as a model for moving forward on other issues of strategic trust? These questions remain largely unanswered, yet will be critical to address if the two countries are to move forward collaboratively.

Overall, the essays in this report and the broader discussions during the 2014 Energy Security Program present a positive but mixed picture of China’s historic transition from an economy largely dominated by coal and plagued by worsening air pollution and carbon emissions to a more diversified, efficient, and environmentally sustainable energy future. China’s leaders increasingly recognize the unsustainable nature of the country’s recent economic and energy model and are moving gradually toward a new policy mix. Nevertheless, this transition is likely to be slow due to ingrained resistance to certain types of new policies, uncoordinated government initiatives, and inconsistent support from the leadership. But pressure from both the Chinese public and international community is growing in the face of daily reminders of the need for fundamental change, which bodes well for global climate change negotiations.

Mikkal E. Herberg is a Senior Lecturer in the Graduate School of International Relations and Pacific Studies at the University of California–San Diego and Research Director of the Energy Security Program at the National Bureau of Asian Research.