21st century shapes up to be the “Century of Asia” with China in the vanguard, it is becoming increasingly clear that the world’s finite supplies of fossil fuels will not be able to satisfy the growing demand from China and other rapidly developing nations such as Brazil and India. In fact, some scientists believe that peak oil will be reached by mid-century, and supplies will become even scarcer after that point. While scientists continue their quest for fission energy, other researchers are seeking alternative energy sources from other renewable sources such as solar, wind and biomass energy. The purpose of this study was to (a) determine China’s current energy reliance on coal, and why this is changing; (b) identify viable energy options for China in the future, including oil, nuclear, renewables, and examine the likelihood that oil, gas and nuclear will be the most likely candidates for replacing coal; and (c) assess what these trends might mean for Sino-American trade relations given the placement of oil reserves and uranium deposits in the world. This achieve this purpose, this study used a four-chapter format to achieve the above-stated research purpose. Chapter one introduced the topic under consideration, a statement of the problem, the purpose and importance of the study. Chapter two provides a critical review of the relevant and peer-reviewed literature, and chapter three is comprised of an analysis of the data developed during the research process. Finally, chapter four provides a summary of the research and conclusions.

Table of Contents

Chapter 1: Introduction

Statement of the Problem

Purpose of Study

Importance of Study

Overview of Study

Chapter 2: Review of Related Literature

Chapter 3: Data Analysis

Chapter 4: Summary and Conclusions and Recommendations

Current and Potential Future Energy Policies of the People’s Republic of China

Chapter 1: Introduction

The production and use of energy in China experienced fundamental changes and increases during the 20th century. These trends have transformed China, which was one of the poorest countries in the world in the 1930s with electricity generation capacity at a fraction of its neighbors such as Japan, to drive the country progress to the extent that China now boasts one of the world’s largest economies. This transformation began in large part following the Communist takeover of the nation in 1949, and the pace of progress in China’s energy sector gained momentum thereafter (Qing & Sullivan 1999). By the 1980s, though, China’s economic growth introduced new demands for energy resources and the country experienced significant shortages that adversely affected its ability to continue this dizzying pace of progress (Wu 2004). Heavily reliant on coal as a main source of energy, China’s policies at the time were focused on increasing production at the local level, but by the closing decade of the 20th century, the focus of energy policies in China has shifted to 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 in the country’s history, with one of the most significant changes during the 1980s being the ability of private enterprises to enter the energy market in China (World Bank 2000). By the mid-1980s, for example, the build-operate-transfer (BOT) model was 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 policies resulted in an enormous expansion in China’s electricity generation capacity (Wu 2004). In this regard, Campbell reports that, “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” (2010:2).

By the late 1990s, China’s electricity supply was almost sufficient to satisfy the country’s rapidly increasing demand; in fact, some regions of the country were capable of generating a surplus (Wu 2004). During the past decade, China has also increased its oil imports as well as domestic production of natural gas to the extent that currently, China’s 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 new developments combined with China’s recent entry into the World Trade Organization will inevitably affect China’s energy policy well into the 21st century (Wu 2004).

Statement of the Problem

In sharp contrast to the developmental policies that were in place during much of the 20th century, China’s energy policies today are focused on ambitious environmentally sustainable approaches. For example, in 2006, China’s leadership stated that by 2010, the nation would decrease energy intensity 20% compared to 2005 levels; in 2009, China’s leaders also emphasized that by 2020, the country would reduce carbon intensity 40% from their 2005 levels (China 2010). To accomplish these ambitious goals, the Chinese government intends to incorporate energy production capacity from sources besides coal and oil by focusing on nuclear and other alternative energy development initiatives (China, 2010). As a recent report from Bradsher points out, though, “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 by a single country” (2010:2). 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 China’s demand remains dependent on imports, which increased by almost one-third in 2004 alone to almost 3 million barrels per day (Gregson 2005). Based on these trends and the most recent energy projections for the country, increases in oil consumption in China will continue to remain above 10% annually for the foreseeable future (Gregson 2005). Not surprisingly, these trends have caused the Chinese leadership to focus their efforts on identifying opportunities to satisfy demand in sustainable ways, but the issues involved are multifaceted and complex. The results of a recent special cabinet meeting of the Chinese leadership showed that coal-fired electricity and oil sales each increased almost one-quarter (24%) during the first quarter of 2010 compared to a year earlier, following comparable increases in the fourth quarter of 2009 (Bradsher 2010). These trends indicate that past projections of energy demand in China may have been understated, and the ambitious goals established by the Chinese leadership will require some reevaluation and fine-tuning if the country is going to continue on its current path to economic development in the future, issues that directly relate to the purpose of this study which is discussed further below..

Purpose of Study

The purpose of this study was three-fold as follows:

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, 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 placement of oil reserves and uranium deposits in the world.

Importance of Study

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. Indeed, 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 2 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. 2007:421).

Although still a major oil producer, domestic production in China has stagnated and oil imports have assumed new importance as an economic reality in the country 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 2000:53). Despite the fact that oil imports remained relatively inexpensive throughout the 1990s, China’s increasing demand for energy has resulted in an increasing reliance on foreign supplies, resulting in concern on the part of the Chinese leadership about what this reliance on foreign countries means for its own security (Prakash & Hart 2000). The research concerning Chinese foreign policy to date have therefore focused on the potentially destabilizing impact of China’s increasing reliance on imported oil, with a number of researchers citing the South China Sea as a potential region that may experience clashes in the future based on competing claims for resources, especially oil and natural gas reserves, and the affected international actors may resort to military methods to prosecute their respective claims (Prakash & Hart 2000). Taken together, these issues hold a great deal of significance for China and by extension, the entire international community.

Overview of Study

This study used a four-chapter format to achieve the above-stated research purpose. Chapter one introduced the topic under consideration, a statement of the problem, the purpose and importance of the study. Chapter two provides a critical review of the relevant and peer-reviewed literature, and chapter three is comprised of an analysis of the data developed during the research process. Finally, chapter four provides a summary of the research and conclusions.

Chapter 2: Review of Related Literature

Current and Recent Trends in 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 that was founded on the Soviet model of rapid heavy industrialization. At that point in China’s history, the country’s economy was almost entirely agrarian based, the just a smattering of factories in the northeast that had been constructed by the Japanese during their World War II occupation; however, in the succeeding year, enormous state-owned factories were constructed that did not feature any significant pollution controls throughout the country (Schmidt 2002). In this regard, Schmidt emphasizes that, “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” (2002:516).

Following the Five-Year Plan, the Four Modernizations framework was introduced in the 1960s which served as the foundation for transforming the country’s emphasis on self-reliance to include the acceptance of foreign loans and economic interactions as methods for achieving economic development, but still on China’s own terms (Montgomery & Rondinelli 1999). This framework also established the basis for even more significant market-oriented reforms that would follow during the 1970s (Montgomery & Rondinelli 1999). According to these authors, “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 1999:233). It was during this period in China’s recent history that the groundwork for its current energy policies would be established. In this regard, Montgomery and Rondinelli 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 (1999:233).

The conceptual framework that emerged at the time would have a profound effect on the rationale of environmental advisors in China concerning the country’s future directions, resulting in the development of policies that focused on identifying environmentally sustainable energy practices for the early 21st century (Montgomery & Rondinelli 1999).

Notwithstanding the country’s environmental problems, the results of these fundamental shifts in China’s approach to economic development balanced by increasing concern over developing sustainable energy resources have been highly influential on current energy policies in China and its economic development. Indeed, the People’s Republic has consistently delivered impressive economic growth over the past 30 years by delivering double-digit annual economic growth; however, much of the country remains desperately poor (Ma 2010). There are some important caveats to this impressive economic development that relate to regional differences that exist throughout the country. For instance, the Chinese government emphasizes that about 150 million of its citizens continue to live below the poverty line and it has been only relatively recently that China’s per capita GDP exceeded $3,000 (Ma 2010). Indeed, while the range of high and low temperatures in China is approximately comparable to that experienced in the United States, the average consumer in China uses just 3% of the energy that used by the average American consumer, and an estimated 100 million Chinese live completely without electricity at all (Chasek 2000). Moreover, during 2009 when China’s GDP officially increased by a robust 8.7%, China’s National Bureau of Statistics noted that the annual per capita net income for rural households was less than $750 compared to $2,500 for urban dwellers (Ma 2010). Consequently, Ma points out that, “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” (2010:28).

Unfortunately, China’s drive for economic development and modernization has taken place during a period when demands for collective action concerning the impact of carbon emission on the earth’s climate have become pronounced. In this regard, 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 snow caps, rising sea levels, and extreme weather phenomena” (2010:28). Because China’s economic development remains inextricably tied to coal production and use, these issues have assumed new importance and relevance as the Chinese leadership seeks alternative and more environmentally sustainable approaches to its energy needs. Although the issues are global in nature, China stands out in the international community as being one of the most significant contributors to global warming by virtue of this heavy reliance on coal. For instance, 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” (2010:28). Despite using more energy, at least for the present, the United States has taken a backseat to China in terms of the impact of energy use on the environment. In this regard, Ma adds that, “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 of the world” (2010:29).

To its credit, the Chinese leadership has recognized these trends and has taken steps to address them. According to Leggett, Logan and Mackey, in June 2007, China released a plan to address climate change termed the National Climate Change Program. This initiative sets forth activities that are intended to reduce greenhouse gas emissions as well as steps needed to respond to the potential effects of climate change on the country’s economic development in the future. Like most other initiatives undertaken by China in recent years, this program is also ambitious and some observers suggest that the country may struggle to achieve its stated goals. For example, Leggett et al. 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” (2008:3). In July 2008, Premier Wen Jiabao and the State Council cautioned that reaching the stated goals of the National Climate Change Program in its energy intensity and emission reduction goals “remained an arduous task,” which may be an understatement given the concomitant goals of the initiative that include increasing renewable energy resources by 200% by 2020, expanding the Chinese nuclear power programs, closing inefficient factories, improving energy efficient of buildings and appliances, and expanding forest coverage throughout the country by one-fifth (Leggett et al. 2008).

In an attempt to achieve its stated goals of improving energy efficiency and developing alternatives to coal, the Chinese Premier Wen Jiabao recently committed the country to more aggressive energy conservation policies, including a ban on government approval of any new projects by companies that failed to eliminate inefficient capacity (Bradsher 2010). In addition, the Chinese leadership emphasized that the country must continue to press for ways to achieve the objectives of its current five-year plan to improve energy efficient by a full 20%. In response to these conditions, the Chinese premier emphasizes the country’s stalwart commitment to achieving these goals: “We can never break our pledge, stagger our resolution or weaken our efforts, no matter how difficult it is” (quoted in Bradsher 2010 at 4). Analysts in the West believe that despite these assertions, achieving these ambitious goals will be difficult but the Chinese leadership remains adamant that it can and will be done. According to Bradsher (2010), these goals are unprecedented in human history and cites Jonathan Sinton, the China program manager at the International Energy Agency in Paris thusly: “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 said. 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 at 5). The consequences of failing to achieve its stated goals in improving energy efficiency and reducing greenhouse gas emissions would be a double whammy for the Chinese leadership: “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 2010:5).

Given the enormity of the Chinese economy, the outcomes of these initiatives hold significant implications for both China as well as global energy markets (Bradsher 2010). In what Bradsher terms China’s “ravenous appetite for fossil fuels,” the transformation of the Chinese 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 the country’s competition for increasingly scarce energy resources as well as the effects its current production methods are having on the global climate (Bradsher 2010). In this regard, Bradsher emphasizes 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” (2010:6).

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

Despite the market reforms that have been made in recent years, the Chinese national government continues to own or control much of the nation’s industries and enterprises; moreover, the Chinese government also establishes corresponding goals for economic development in the Five-Year Plans that are promulgated periodically (Bradsher 2010). As a result, international observers believe that the state-controlled industries and enterprises in China will likely attempt to reach the stated ambitious goals for energy efficiency (Bradsher 2010). Other signs on the horizon also indicate that China is making progress towards reaching its goals of developing sustainable alternative energy sources to its current heavy reliance on coal. For example, 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” (2010:6).

Other signs indicate that progress is being made in achieving China’s ambitious energy-related goals. For instance, the country has plans to increase its wind power capacity to 100 GW by 2020 and comparable objectives are in place to expand the solar photovoltaic power sector from its generating capacity of 0.14 GW as of 2009 to more than 1.8 GW by 2020 (Campbell 2010). The market-savvy Chinese leadership has clearly determined that these efforts are in its best interests for a number of reasons, including helping to satisfy increased domestic demand for energy as well as the ability to further expand its export-driven economic base abroad (Campbell 2010). Despite these ambitious goals and the progress made to date in achieving them, much more remains to be done before the Chinese leadership can claim success. For instance, 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 the increases in domestic energy consumption are the result of rapid economic growth as well as fundamental changes in the types of economic activities that are driving this growth (Bradsher 2010).

In November 2009, Chinese President Hu Jintao committed the country to reduce its greenhouse gas emissions by significantly improving the energy efficiency of its industrial base, but the country’s leadership has been adamant in refusing international monitoring of its progress, making confirmation of the country’s efforts problematic (Bradsher 2010). On the one hand, 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” (Bradsher 2010:7). By some accounts, China appeared to be making progress towards reaching these goals. For example, the Chinese 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 2010, a trend that has made it less likely that China will be able to reach its ambitious goals for improving energy efficiency in the coming years (Bradsher 2010).

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

Despite these constraints to energy efficiency evaluations, there are some clear signs that progress is being made. Although greenhouse gas emissions remain a source of concern, China managed to double its wind energy resources during just the first quarter of 2010 compared to 2009, and the country has emerged as the largest manufacturer and installer of wind turbines in the entire world (Bradsher 2010). Despite this progress, wind power remains a miniscule resource, accounting for between just 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 2010 compared to 2009, and output from light industry increased by 14% (Bradsher 2010). The chairman of the Intergovernmental Panel on Climate Change, Rajendra K. Pachauri, a United Nations research unit, suggested that China was committed to achieving its energy-efficiency goals, even if for strictly 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 2010:7). In some ways, China’s higher current energy consumption levels might improve greenhouse gas emissions in the future. In this regard, 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). According to this authority, “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” (Bradsher 2010:7). Moreover, trains are ten times as energy efficient as trucks in terms of how much fuel is consumed to transport a ton of coal, and the introduction of high-speed passenger trains is making it possible for older rail lines to be used for coal transportation and other freight, potentially further reducing the country’s greenhouse gas emissions in the future (Bradsher 2010). It should be noted, though, 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 and these are set forth in Table 1 below.

Table 1

Current Major Energy Sources in China

Energy Source

Description

Coal

China is the world’s largest coal producer, with an output of 1.1 billion tons in 2001 (State Statistical Bureau 2002). Coal production has been severely affected by pricing practices in the past decades. As a result, coal pricing has been changing over time. It has gone through two stages:

Stage I (1983-90): A “dual-track” system was introduced to replace complete government price control before 1983. For example, the ‘unplanned’ coal price ranged from 80 yuan/ton in 1987 to 136 yuan/ton in 1991 while the controlled price ranged from 36 yuan/ton to 61 yuan/ton during the same time (APERC 2000). However, the ‘unplanned’ prices were used as references by the government to set the controlled prices. Thus the market was beginning to influence coal pricing.

Stage II (1993 onwards): With sufficient coal supply, complete price liberalization was initially trialed in eastern China and then introduced to the rest of the country. The coal price has since been market driven.

Coal price liberalization has led to (a) a reduction in government subsidies to the coal sector and (b) improvement in management (for producers) and energy efficiency (for end users).

Oil

The prices of oil and petroleum products in China are still highly regulated by the government. The market mechanism plays only a limited role under the ‘dual track’ price system introduced in the early 1980s. Under that system, producers were allowed to sell their above-quota products in the market and the regions could import petroleum products using their own foreign exchange reserves. As a result, both domestic production and imports expanded rapidly; however, the huge gap between the domestic and world prices led to excessive imports in some regions and a surge of speculative and smuggling activities. To overcome these problems, on 1 May 1994 the dual-track pricing system was abandoned and the central government again took tight control of price-setting and imports. As oil imports increased, though, and international competition grew, the demand for price liberalization became stronger, which resulted in major reform during June 1998. Since then, the domestic price of crude oil has been set according to the world price. In the meantime, the central government sets regional prices of refined oil products according to prices in the Singaporean oil market. A consequence of the 1998 reform is that regulated prices have moved very close to international prices. In addition, China National Offshore Oil Corporation products have been treated as imports and sold in the domestic market according to the world prices.

Electricity

The price of electricity has been regulated by the government but has risen rapidly in recent years. Several factors have contributed to this increase. Due to the shortage of electricity supply in the 1980s, investment-recovery pricing practice was introduced. As a result, the price of electricity in some plants was very high. Also, in the 1990s, the government removed its subsidies to electricity consumption in the agricultural sector, which led to an increase in electricity prices in the rural sector. As the supply and demand situations have changed since the late 1990s, the Chinese government is moving rapidly to deregulate the electricity sector. Currently, the focus of the reforms is to separate (a) regulation from business functions and (b) generation from transmission (State Development Planning Commission 2002). The first phase of deregulation will involve the regrouping of current power plants into four or five corporations and the formation of six grid companies (south, north, northeast, northwest, eastern and central). The second phase of deregulation will involve liberalizing supply prices from the generators. However, reform of the retailing sector has not yet been on the agenda.

Natural Gas

Among the energy sectors, the natural gas industry has been highly regulated by the government. This reflects to some extent the status of natural gas as an energy option in China. The natural gas sector has for a long time been ignored by Chinese authorities. The currently modest production of natural gas has been reserved mainly for fertilizer producers. As a result, the price of natural gas has for a long time been kept 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. Government subsidies were also provided to the residential sector. With the removal of subsidies recently, prices have increased but are still below international prices. As the LNG project in Guangdong is under way and the West-East Gas Pipeline is still being actively pursued, further liberalisation in the natural gas sector is to be expected.

Source: Wu 2004

Currently, China’s energy prices are still controlled by the state; however, significant changes have taken place in energy pricing practices. As noted in Table 1 above, these changes were initiated following the introduction of the so-called “dual-track” pricing regimens that were implemented during the 1980s. Based on this approach, it was permissible for a percentage of energy products to be marketed at higher prices in the free market; during the closing years of the 20th century, even more significant initiatives have been taken to liberalize energy prices across the board, including coal, oil, electricity and natural gas (Wu 2004).

Other initiatives have also improved the likelihood that China will achieve its energy-related goals, at least in part, in the coming years. For example, the World Bank implemented a Clean Coal Program in China; this initiative addresses the country’s coal use from start to finish, including mining, transportation, and end use (Zhang 1997). According to this authority, “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%” (Zhang 1997:291). Because of the country’s enormous population, even modest changes in these areas can result in major improvements in energy efficiency. For example, 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” (1997:291). Other steps being taken along these lines include closing or retrofitting existing energy-inefficient facilities but there is a diminishing return factors on just how much carbon can be eliminated from coal-based energy resources (Wu 2004).

Nevertheless, there are a number of other areas where China can realize improvements in its energy-efficiency. For example, compared to more energy-efficient Japan, China consumes five times as much energy per unit of output; this inordinately high energy consumption level is attributable in part to the remaining energy-inefficient industrial plants that are still in use, but the Chinese energy infrastructure is also responsible as well (Gregson 2005). According to this authority, “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” (Gregson 2005:9). In addition, inadequate coal production and transportation resources remain a problem and were responsible in large part for the power shortages the country experiences during 2004 (Gregson 2005). The problem has become severe in some regions of the country to the extent that many power-sensitive industries as well as Chinese consumers who are able to afford it have installed diesel-powered generators as a fail-safe against further disruptions in electrical production (Gregson 2005). These types of interim measures have further exacerbated the country’s reliance on imported energy sources, although current initiatives may eliminate the need in the foreseeable future (Gregson 2005). In the meantime, as well as in the future, China’s quest for energy independence and its continuing reliance on the global market for much of its energy resources will undoubtedly have significant implications for U.S.-Chinese relations, and these issues are discussed further below.

Implications of China’s Energy Policies for Sino-American Trade Relations

Despite some impressive progress in recent years, China’s power sector remains woefully inadequate for the country’s needs due in large part to a legacy of rapid industrialization with little regard for the environmental consequences that were involved (Gee et al. 2007). These inadequacies will have the inevitable effect of hampering China’s push for economic development, and the same processes that have taken place in other countries and regions of the world where energy was insufficient for continued economic progress may play out in China as well (Gee et al. 2007). For example, in 2004, China increased its oil imports by 800,000 billion barrels per day just to satisfy its domestic requirements; about 200 to 300 billion barrels of these total imports were needed to provide fuel oil and diesel backup for power generation requirements to prevent further power shortages resulting from an inadequate energy infrastructure that could deliver the power where it was needed (Gee et al. 2007). These forces are believed to have been responsible, at least in part, for skyrocketing global energy prices in recent years (Gee et al. 2007). To the extent that China is able to overcome these enormous problems and make progress along the entire spectrum of constraints it faces in developing alternative energy resources and improving energy efficiency of its existing infrastructure will likely be the extent to which it succeeds in achieving its goals. According to Gee et al., “China’s heightened sense of energy insecurity has already led it on a global quest for equity ownership of petroleum reserves as evidenced by its ‘Go Out Strategy’ for its three major national oil companies. Its vulnerabilities will only be magnified should it fail to manage its power sector, and global tensions will be exacerbated by policies that the world perceives are driven by insecurity and economic survival” (2007:422).

Despite being a major oil producer, by 1993, China was forced to import petroleum products to satisfy its energy requirements and has since emerged as the world’s second-largest consumer of oil, trailing only the United States (Zang 2009). This reliance on foreign sources for its energy needs holds special significance for Sino-American relationships in the future. In this regard, Zang emphasizes that, “Given its experience in the 1950s (a de facto embargo from the West) and the early 1960s (withdrawal of Soviet aid), China has long standing concerns about dependence on foreign oil. Internal debate on energy security intensified during the early 2000s” (2009:201). The findings of a study concerning the political debate over energy security that took place during the early 2000s indicates that “Chinese analysts consider oil price volatility and physical supply disruptions to be the main threats to energy security. They are especially concerned about the negative impact of oil price fluctuations on China’s economy and social stability” (Zang 2009:202).

The negative impact of such fluctuations is sufficiently severe that China will seek to avoid purchasing oil on the world markets to the maximum extent possible, particularly given the potential devastating effects that disruptions in supply could have on the country’s manufacturing output and economic development initiatives (Rashid and Saywell 1998). According to Prakash and Hart, “The sense of vulnerability does not have to translate into military action, however. Indeed, there is growing evidence that China has already chosen an alternative to military action by embarking on competition in the marketplace. Fortunately, the trend toward globalization and privatization has left room for China to satisfy its energy needs and ambitions in the international marketplace” (2000:233). These trends indicate that Chinese consumers may be forced to resort to other energy sources besides coal, but the country’s burgeoning middle class is believed to be economically capable of weathering this transition (Wu 2004). In this regard, Wu concludes that, “Many local authorities are confident that consumers can afford more price hikes, which helps the underlying changes in energy structure, i.e., the shift towards the use of cleaner energy, e.g., liquefied petroleum gas (LPG), liquefied natural gas (LNG) and natural gas (NG)” (Wu 2004:37).

Whatever eventualities result from current efforts to improve the country’s energy efficiency and reduce reliance on foreign imports, the fact remains that China and the United States will be competing for a finite amount of energy resources in the future, and this competition will undoubtedly affect Sino-American relations in substantive ways. To gain some additional insights into what is taking place in China’s energy sector, an analysis of historic energy use by type is provided in Chapter 3 below.

Chapter 3: Data Analysis

As shown in Figure 1 below, despite China’s ambitious goals for developing new forms of renewable energy, the country’s shift toward energy-intensive heavy industries in recent years has placed an ever-increasing demand on thermal power plants, almost all of which are fueled by coal.

Figure 1. Thermal energy production in China: 2005-2010

Source: Sanjay 2008

The total primary energy supplies for China for the period 1980 through 2004 are illustrated in Figure 2 below.

Figure 2. Total primary energy supplies for China: 1980 through 2004

Source: Sanjay 2008

China’s primary energy demand by fuel type is illustrated in Figure 3 below.

Figure 3. China’s primary energy demand by fuel type

Source: Sanjay 2008

China’s share of the projected global incremental energy demand for the period 2000-2030 is shown in Figure 4 below.

Figure 4. China’s projected global incremental energy demand: 2000-2030

Source: Sanjay 2008

Figure 5 below projects China’s aggregate energy investments by fuel type for the period 2001 through 2030.

Figure 5. China’s projected aggregate energy investments by fuel type: 2001-2030

Source: Sanjay 2008

China’s historic coal production and consumption rates for the period 1988 through 2008 are illustrated in Figure 6 below.

Figure 6. China’s historic coal production/consumption: 1988-2008

Source: Sanjay 2008

The next graph shown in Figure 7 below illustrates China’s projected investments in coal through 2030.

Figure 7. China’s projected investments in coal through 2030.

Source: Sanjay 2008

Figure 7 above indicates that China will need to invest more than $4 billion annually in order to increase productivity and satisfy the increase in demand for coal by 2030 (Sanjay 2008). The next graphic in Figure 8 below illustrates China’s oil production and consumption levels for the period 1990 through 2010.

Figure 8. China’s oil production and consumption levels: 1990-2010

Source: Sanjay 2008

Figure 9 below illustrates China’s projected oil supply outlook for the period 1990 through 2030.

Figure 9. China’s projected oil supply outlook for the period 1990 through 2030.

Source: Sanjay 2008

Finally, China’s natural gas production and consumption levels for the period 1987 through 2007 are illustrated in Figure 10 below.

Figure 10. China’s natural gas production and consumption levels: 1987-2007

Source: Sanjay 2008

Chapter 3: Summary and Conclusions

Summary

The research showed that China stands at an important juncture in its history and the direction it takes with regards to its energy policies in the coming years will have profound implications for the rest of the world. The country’s impressive economic performance in recent decades has been achieved in large part by focusing on industrial development with little attention being paid to the environmental consequences that were involved, but this practice is changing in substantive ways. Indeed, the Chinese leadership has clearly stated that it is their priority to develop cleaner and more efficient energy resources and has established ambitious goals to this end. In spite of some significant progress in achieving these goals, though, the research also showed that China remains highly dependent on coal, and all signs indicate that this reliance will not simply vanish in the foreseeable future.

These trends have significant implications for the United States as well as the rest of the international community, especially rapidly developing nations such as India and Brazil. Although the research showed that it is unlikely that China would be willing to use military means to secure its energy needs, this eventuality cannot be ruled out given the mindset that is in place among the country’s leadership wherein China’s energy requirements make it increasingly vulnerable to dissent from within and encroachment from without. On the one hand, China’s increasing demands for energy may help create the impetus that is needed to more rapidly develop viable alternative renewable energy resources such as solar, wind and biomass and perhaps even the Holy Grail of energy sources, fusion energy, which promises to provide unlimited energy if the technology can be successfully developed. On the other hand, though, current indications, though, suggest that it would be foolhardy to adopt a “wait-and-see” approach to China’s energy needs. Taken together, it is clear that China’s economic development is inextricably tied to its reliance on coal at present, but the initiatives being taken today and in the coming years will reduce this dependency in favor of other fossil fuels such as oil and natural gas. These are only short-term solutions, though, to China’s and the world’s energy needs given the limited amounts of these resources that remain and China is in the same position as the rest of the world in terms of requiring viable energy alternatives that will help reduce carbon emissions and global warming.

Conclusions

Based on the major themes that emerged from the research, it is reasonable to conclude that China’s modern industrial revolution and unprecedented economic growth will become the most important geopolitical and economic event of the 21st century. The manner and means by which China comes to terms with the necessary modernization of its energy sector will also be a defining characteristic of the 21st century given its global impact. If it can marshal the political will to develop the necessary institutional framework to enable decision-making on energy policy in a more transparent and durable fashion, it may well be able to address some of the more seemingly intractable issues that confront its economy and affect its social fabric. In the final analysis, it is reasonable to conclude that China’s economic development in the future will depend in large part on the types of energy policies it adopts in the near-term. Therefore, despite the continued availability of coal and development of cleaner coal, China will not be able to maintain current economic progress without heavily developing its petrochemical acquisitions abroad because coal is not viable for longer term heavy use due to environmental and efficiency concerns.

References

Bradsher, Keith. “China’s Energy Use Threatens Goals on Warming.” New York Times. May 6,

2010. Retrieved from www.nytimes.com/2010/05/07/business/energy-environment/

07 energy.html?pagewanted=all.

Campbell, Richard J. “China and the United States — a Comparison of Green Energy Programs

and Policies.” June 14, 2010. Congressional Research Service 7-5700.

Chasek, Pamela S. The Global Environment in the Twenty-First Century: Prospects for International Cooperation. New York, United Nations University Press, 2000.

“China.” CIA World Factbook. 2010. Retrieved from https://www.cia.gov/library/publications / the-world-factbook/geos/ch.html.

Gee, Robert W., Songbin Zhu and Xiaolin Li. “China’s Power Sector: Global Economic and Environmental Implications.” Energy Law Journal 2007: 28(2): 421-423.

Gregson, Jonathan. “Life beyond the Oil Rush.” Global Finance March 2005: 19(3): 8-9.

Khare, Sanjay V. “China’s Energy Supply and Consumption.” University of Toledo. 2008.

Retrieved from http://astro1.panet.utoledo.edu/~vgade/teaching/energy-phys-

6980/notes/chapter-1/China-supply-and-consumption-svk1.pdf.

Leggett, Jane a., Jeffrey Logan and Anna Mackey. September 10, 2008. “China’s Greenhouse

Gas Emissions and Mitigation Policies.” Congressional Research Service 7-5700.

Ma, Ying. “China’s View of Climate Change.” Policy Review 2010: 161, 27-29.

Prakash, Aseem and Jeffrey a. Hart. Responding to Globalization. London: Routledge.

Quin, Dai and Lawrence R. Sullivan. “The Three Gorges Dam and China’s Energy Dilemma.”

Journal of International Affairs 1999: 53(1): 53.

Rashid, Ahmed and Saywell, Trish. “Beijing gusher: China pays hugely to bag energy supplies abroad.” Far Eastern Economic Review February 1998: 26.

Schmidt, Charles W. “Economy and Environment: China Seeks a Balance.” Environmental

Health Perspectives 2002: 110(9): 516-518.

World Bank. “The private sector and power generation in China.” 2000 World Bank Discussion

Paper No. 406, Washington, DC.

Wu, Yanrui. China’s Economic Growth: A Miracle with Chinese Characteristics. New York:

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Zang, Dongsheng. “Green from Above: Climate Change, New Developmental Strategy, and Regulatory Choice in China.” Texas International Law Journal 2009: 45(1): 201-203.

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