Leaders Face Energy Woes

China's outgoing government leaves problems unresolved.
An analysis by Michael Lelyveld
A Chinese driver refuels his car at a gas station in Xianyang city, northwest China's Shaanxi province, Feb. 20, 2011.

China has raised hopes for major energy reforms to reduce environmental damage, but more modest measures seem likely in a year of political change.

In recent statements, government leaders and agencies have pledged to curb pollution by cutting energy subsidies and pricing resources to reflect market costs.

"Controlling energy use and straightening out the energy pricing structure are key to energy conservation and reducing pollution," said Premier Wen Jiabao in his work report to the National People's Congress (NPC) on March 5, according to the official English-language China Daily.

At an NPC press briefing, National Development and Reform Commission (NDRC) director Zhang Ping blamed China's energy-intensive growth for failures in environmental goals.

"Energy conservation and emissions reduction are crucial to China's drive to shift its economic development pattern towards sustainable growth, environmental protection and international efforts in tackling climate change," the official Xinhua news agency cited Zhang as saying.

Days earlier, Xinhua raised expectations that China would "reform its energy and resource pricing system this year," citing comments by Zhou Wangjun, deputy chief of the NDRC's pricing department.

Charging real market costs for energy has long been considered the only way to encourage conservation by ending distortions between supply and demand.

That point was stressed by a joint "China 2030" study, released on Feb. 27 by the World Bank and the State Council's Development Research Center.

"This is the most urgent reform so that prices reflect not only the market scarcity, but also as much as possible the external hazards on environment and health in the process of mining, producing and utilizing these resource commodities," the study said.

But while officials and experts agree on the principles, the government has been reluctant to abandon price controls over fuel, gas, coal, power and water, fearing complaints over price hikes and social unrest.

The results have been excess consumption, energy shortages, rising pollution and supplier losses. Failure to deal with the problems led to a string of dismal reports at the NPC meeting this month.

Missed targets

In his briefing, Zhang conceded the government had missed its energy efficiency targets by a wide margin last year, reducing energy use per unit of GDP by two percent compared with a 3.5-percent goal. Total energy consumption climbed seven percent, driven by a 9.7-percent increase in coal use, the National Bureau of Statistics (NBS) said.

Sulphur dioxide emissions fell 2.2 percent compared with a 2.9-percent goal, while nitrogen oxide releases soared 5.7 percent despite a targeted decline of 1.5 percent.

While the multiple failures should spur pricing changes, there is little expectation of sweeping reforms as Premier Wen and President Hu Jintao prepare to cede power to new leaders this year.

"I would be surprised if they undertake a wholesale revamping of the system and then suddenly everything is in international prices," said Philip Andrews-Speed, a China energy expert at the German Marshall Fund of the United States.

"Regardless of the fact that we'll see a change of government soon, I think China is not a place for radical initiatives on pricing," Andrews-Speed told RFA. "But certainly, they could put in staged measures that would be implemented over the next two or three years."

At a press conference in Beijing, World Bank president Robert Zoellick also saw little chance of a "big bang" approach to reducing the state's role in the economy, a goal outlined in the "China 2030" study.

"What I expect you'll see with the next generation of leaders is an experimentation with these ideas," Zoellick said, according to The Wall Street Journal. "I don't see a big bang reform, but I see process of trying to evolve."

Exposing the public to world market prices for energy and resources would be sensitive in a year when the government has targeted a relatively low GDP growth rate of 7.5 percent, the slowest pace in eight years.

But the calls for new price formulas may mean that change is coming with new leadership.

"I think this is just saying, watch out, the game is going to change," said Andrews-Speed. "Particularly in the cities, in the richer parts, people are going to have to pay the full price for their energy."

Net importer

Changes in pricing are likely because China's wasteful consumption has now spread its influence to world markets, widening the gap between suppliers' costs and what they can charge under state price controls.

While China was largely self-sufficient in energy a decade ago, it is now a net importer of oil, gas and coal. Energy imports in each category have set records year after year.

"The longer they leave it, the worse it's going to be, unless you believe that suddenly world energy prices are going to go down, but I don't think many people are betting on that," said Andrews-Speed.

Some experts have called for opening up competition in China's fuel sector, which is now dominated by two state-controlled giants. But Andrews-Speed argued that price reforms must come first, because only state companies have been willing to sell fuel at a loss.

"Once you start to have market pricing, your need to have state-owned oil companies is actually reduced because they no longer have the function of providing a social benefit," he said.

Competition could ease China's problems with energy shortages and conservation at the same time. "But you can't do that without doing the pricing reform," Andrews-Speed said.


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Mar 14, 2012 07:07 AM

Sustainable growth does not exist. Sooner or later, any growth will stop (and is therefore not sustainable). This world is made of cycles. What we need is a design of cycles that enables sustainable welfare for as many (not only human) beings as possible.