September 24th, 2013

Brief Comments on China’s “Clean Air Act”

China released an ambitious plan to curb air pollution recently, focusing on limiting coal, heavy industries, and highly-polluted vehicles in three triangle regions surrounding Beijing, Shanghai and Guangzhou. New York Times and Reuters have pretty comprehensive reporting on this, and I just want to make two observations that seem to be missing.

 

1. Consider this: air pollution is now an important issue at the very top level (by that I mean the Politburo Standing Committee), however it is not a powerful portfolio. People watching this development (energy/ policy wonks, environmentalist, China hands, or U.S. policymakers seeking to use this momentum in China to spur some U.S. action) need to understand the difference between these two.

Let me put it this way: Zhang Gaoli, the Politburo Standing Committee Member and first-ranked Vice Premier who apparently is leading this effort, also has National Development and Reform Commission (NDRC), state-owned enterprises, fiscal policy, agriculture, housing and energy on his plate — air pollution is his least powerful portfolio. Unless the Chinese leadership establishes a Politburo leading group (lingdao xiaozu) on air pollution control or environmental protection, which is what I think they should do next, it will continue to be difficult for leaders at provincial/ regional/ municipal and other levels to execute this plan.

 

2. The U.S. $27.77 billion investment in air pollution control revealed by Ministry of Environmental Protection spokesperson during the July 10th press conference  failed to materialize in the final plan. This reflects a failed coordination of details between related institutions and provinces, and is just one of many examples that reminds us that the successful execution of  this plan hinges upon cross-agency collaboration that China finds extremely difficult, in the absence of a strong and powerful central coordinating body like the one I mentioned before.

August 7th, 2013

Infrastructure Investments That Get to Carbon Neutral

Christopher Kennedy et al, “Getting to Carbon Neutral: A Review of Best Practices in Infrastructure Strategy”, Energy Efficient Cities – Assessment Tools and Benchmarking Practices, The World Bank, 2010.

 

The study covers 68 cases of infrastructure investments. For the ones where the capital costs and GHG emissions are both known, there is a relatively consistent fit of increased emissions savings with higher investments. The investments achieving the most cost-effective reductions in GHG emissions are also distinguished in the study. Five cases that were particularly cost-effective and exceed GHG savings of 100,000 t e CO2 per year are:

1. Seville’s Solar Central Receiver Station

2. London’s Congestion Charging Scheme

3. Gothenburg’s Combined Heat and Power System

4. Sydney’s Source Separation and Energy Recovery Facility

5. Calgary’s Light Rail Transit System

 

I think it’s noteworthy that the above best practices with high emission savings cover a variety of sectors: transportation, solid waste, energy generation, and urban forestry. But from an investment perspective, cost-effectiveness is hardly a satisfactory indicator. Investors of carbon-reducing infrastructure projects also expect to achieve a good rate of return. OECD/IEA have identified a number of energy efficient initiatives (PDF), such as building retrofits, LED traffic signals, and pool heat recovery, for which rates of return greater than 100%  are achieved.

 

Table: Capital Costs and Annual GHG Savings:

August 5th, 2013

Middle East and the Global Energy Picture

I’m jotting down a few things about the Middle East and global energy demand/ security that occurred to me while writing of the briefing books for the Doha Energy Forum on energy efficiency, solar and other alternative energies. By the way, if you come across any good reports/ papers on these subjects, please send them my way. Thanks!

1. Iraq

It seems to me that the American society (and Western media in general) is so fed up with talking about “Iraq” that you hardly see that country been mentioned any more, even in relation to energy. While it’s fine to tune this out in a lot of other contexts, it’ll be a huge mistake to underrate it’s role in meeting the world’s energy demand and keeping the oil price stable.

Last year, Iraq has risen to the second biggest OPEC oil producer, with crude export at 3 million barrels per day! This is essentially what has kept the global oil price stable in the past couple of years. The increase in U.S. domestic production helped, but if Iraq slips into a civil war (which looks more and more likely by the day, and as Brookings expert Ken Pollack said “the surprising thing is why Iraq is not in a civil war already”), U.S. domestic production growth is a drop in a bucket in the global energy market, and you’ll see oil prices soaring very quickly. The rising violence and instability in Iraq is already causing its most export to waver.

We’ve all seen discussions in the past year about U.S. rethinking its security interests in the Middle East as confidence in U.S. domestic production rose. And China is being described as a “free rider” in reaping the benefits of U.S. – provided shipping lane security. But the developments in Iraq reminds us that U.S. still has an intrinsic interest in Middle East security. The Iraq problem is not going away even if we turn our head the other way.

Iraq oil production:

Source: International Energy Agency, October 2012.

Source: U.S. Energy Information Agency

 

2. GCC’s Evolving Energy Strategy

GCC member countries (Qatar, Saudi Arabia, the UAE, Kuwait, Bahrain, and Oman) control 40% of the world’s known oil reserves and 23% of proven natural gas reserves. World dependency on GCC energy exports is expected to grow by 2020. As the global energy markets become more competitive (the entry of shale gas is a game changer here), GCC countries are looking beyond their current fossil-fuel riches and investing heavily in alternative fuels, and in oil and gas downstream industries. They are expecting their petrochemical, metal, all the industries where low-cost energy feedstock matters and corresponding service industries to grow in the next decade. Recent regional natural gas shortage has constrained petrochemical industry’s strong growth sustained in the past two decades, yet GCC petrochemical players have adapted by switching to more liquid feedstocks.

Source: BP Statistical Review of World Energy 2011; Jacobs Engineering; Booz & Company analysis

 

U.S. and Europe were the historical hubs for petrochemical industry, but this landscape has changed dramatically in the past 30 years. China is now the world’s largest consumer of polyethylene and ethylene derivatives. Driven by emerging market demand, petrochemicals are entering the strongest period of sustained demand growth seen in the past 20 years, Morgan Stanley forecasts. MG estimates that over the next five years, China and India together will increase their consumption of polyethylene by 10.5 million tons, equivalent to the current US consumption.

As GCC increases their investment in adding value to fossil fuels, you will see even more closer cooperation between GCC states and China, and this will have significant geopolitical and security implications.

 

Enough rambling, back to my work…

 

 

 

July 15th, 2013

Shale Gas in China: Development and Challenges

Just finished writing a report on Shale Gas in China, in which I gave an overview of China’s shale gas exploration and development, mapped out joint China and foreign activities in this space, and analyzed some challenges issues – environmental constraints, technology and personnel shortage, pipeline access issues, land/ mineral rights management, and pricing/market mechanism.

The PDF file is available here: http://blogs.law.harvard.edu/ellachou/files/2013/07/Shale-Gas-in-China-Draft.pdf

I’d love to hear your thoughts and comments.

 

Hydraulic fracturing operations by Anton Oilfield Services in Sichuan Province, China.
Image Credit: Anton Oilfield.

 

 

 

 

 

June 18th, 2013

China: Decisive Move on Coal Power, Heavy Industries; Another Boost for PV/Clean Energy and Public Transportation

On Friday June 14th, China’s State Council established ten measures to combat air pollution and proposed ways to strengthen China’s PV industry.
Here are some of my thoughts, and I did a full translation of the texts at the end of the post for your reference.
1. The set of 10 air pollution measures are China’s toughest attempt yet to tackle this problem.

a. Take Measure No. 2 for instance, it sets out to reach the 12th five year plan (FYP) goal one year in advance in eliminating the outdated production capacities on key coal downstream industries such as iron & steel, cement, etc. The goal as set in the 12thFYP  was to eliminate the outdated 20 GW power capacity, 48 million tons of iron and steel, 42 million tons of coke fuel, and 370 million tons of cement, which would affect 150 to 160 million tons of coal, i.e. 31.29 million tons of standard coal annually. To reach the goal one year advance would cut 39.11 million tons of standard coal consumption annually, which converts to roughly 60 million tons of raw coal per year. This number may not seem big in China’s overall coal consumption, but it means that this measure alone could cut China’s future annual raw coal demand growth by one third. (China expect to reach peak coal use in 2015 at 4 billion tons/year.)

b. It is clear from these measures that the Chinese leadership has come to understand that air pollution is not just the matter of concern for the environmental protection agencies, but rather of acute and crucial national importance. According to the 2010 Global Burden of Disease Study, in 2010, outdoor air pollution contributed to 1.2 million premature deaths in China. Furthermore, the annual cost of medical treatment for illnesses caused by air pollution in China is equal to 1.2% of the country’s GDP, according to a report by environmental experts and the Asia Development Bank released early this year. Researchers at MIT Joint Program on the Science and Policy of Global Change, quantified costs from both lost labor and the increased need for health care, and found that the air pollution cost the Chinese economy $112 billion (4.96% of GDP) in 2005.

2. Central-local dynamic:

a. Elements of these measures have been tested out in different localities, so they are not entirely new. Beijing, for instance, released its 2013 Clean Air Action Plan in March, with all the major elements: strict control on new projects: no more coal, heavy oil or other high-pollution projects (it holds the municipal DRC, Environmental Protection Bureau and each local governments accountable on this); decarbonization of existing plants; green transportation; strengthen air pollution measuring and reporting, research on subsidizing renewable energy-powered heating, etc.

b. In the implementation stage, it would be up to different localities again to take the broad measures and device detailed execution plans. After all, they’ll be the ones held responsible according to Measure No. 10. We can expect regional policies and standards to be established very soon, and those of Beijing-Tianjin-Hebei, Yangtze River Delta, Pearl River Delta regions would be more stringent than the national policy.

3. Creating new growth points: natural gas, renewable energy, public transportation, especially metro and railway, and energy efficiency industries.

a. I’ll write about the solar industry separately in response to the State Council meeting’s measures to give solar a boost, but China is developing each of these sectors at a massive scale. Take metro (urban rail) for instance, last month, China Communications and Transportation Association reports that 35 cities has been approved to build nearly 6,000 km of urban rail lines, at an estimated cost of US $212 billion. “150 million people will be living along those metro lines in about 35 cities over the next 10 years, and this is going to fundamentally change the shape of China,” according to Jonathan Woetzel, a director in McKinsey’s Greater China office.

4. Challenges and Next Steps

Broadly speaking, China is doing a hard balancing act between social stability and economic development, in which the mounting public pressure propelled the government to take real actions against pollution, but it has to do so without upsetting its economic growth, which has been in the past two decades, the source of its legitimacy and relative stability. It’s going to struggle with the evolving role of the government as market forces begin to play a more important role. SOEs and banks would have to reform and improve their practices. The government is going to face the push back from strong existing interests groups, including from local governments, every step of the way.

In more specific terms though, there are a few important things China would have to resolve relatively soon:

a. Financing these infrastructure projects. As Patrick Chovanec quickly pointed out, the China’s local governments will fund these projects by issuing high-yield bonds they have no realistic means of repaying. China’s National Audit Office reported in January that the total debt at 36 local governments had risen 13% to stand at 3.85 trillion RMB (US $627.70 billion) at the end of 2012 from two years before. Standard Chartered estimates local government debt at 15% of the country’s GDP at the end of 2012, while Credit Suisse put the number at 36%. As a senior auditor commented, China’s local government debt is “out of control”, and could spark a bigger financial crisis than the housing market did in US.

b. Codification — move beyond these administrative measures and put them into laws and regulations. Measure No. 7 called for the amendment of the Air Pollution Control Act and other relevant laws. China is also considering enhancing the collection of coal resource tax, pollution discharge tax, etc. These are all important legislative developments to watch. China launched its first pilot carbon emissions exchange today in Shenzhen. Now trading at $4.90/metric ton, 22% below (largely considered failed) Europe’s Emissions Trading Scheme. So how to design these economic tools to curb emission and promote growth, especially on a national scale, will be a huge challenge for the government.

 

Ten Measures for Air Pollution Control

1. Reduce pollutant emissions

Comprehensive renovate small coal-fired boilers; accelerate the desulfurization and denitrification, and elimination of dust in key industries. Remediate urban dust. Improve fuel quality, eliminate yellow-standard cars before set deadline.

 

2. Strictly control additional production capacities of high energy consumption, high polluting industries.

Accomplish the elimination of outdated production capacity in iron and steel, cement, electrolytic aluminum, flat glass and other key industry one year ahead of the Twelfth Five Year Plan schedule.

 

3. Vigorously promote clean production. Decrease the main atmospheric pollutants emission intensity in key industries by 30 percent by the end of 2017. Vigorously develop public transport.

 

4. Accelerate the adjustment of energy structure; increase natural gas, coal methane and other clean energy supply.

 

5. Strengthen the constraining power of energy-saving and environmental indicators constraint.

For projects that fail to pass energy or environmental evaluation, they shall not get approval for construction, shall not get land provision, shall not be provided loans, or receive power or water supply.

 

6. Implementing both incentives and constraints in the new energy saving mechanism, and enhance the effort to collection pollution discharge fees. Increase credit support for air pollution prevention and remediation. Increase international cooperation. Rigorously nature environmental and advanced energy industries.

 

7. Using laws and standards to “force” industrial restructuring and upgrading.

Formulate or revise emission standards for key industries. Propose to amend the Air Pollution Control Act and other laws. Instill mandatory environmental information disclosure on heavy polluting industries and enterprises. Announce urban air quality rankings in key cities. Increase the penalty for violations.

 

8. Establish Beijing-Tianjin-Hebei, Yangtze River Delta, Pearl River Delta and other regional joint prevention and control mechanism; strengthen the PM2.5 control in densely populated areas and key large cities; build target responsibility system at each province (district and municipality) on atmospheric environmental remediation appraisal.

 

9. Include heavily polluted weather into local government emergency management.

According to the level of contamination, implement production limits, emission limits on heavy polluting enterprises, and implement vehicle use limits in a timely manner.

 

10. Establish a “breathe together, struggle together” code of conduct in the whole society. The local governments shall assume full responsibility on local air quality, and enforce the corporation’s responsibility of remediating of their pollution. The State Council, and its relevant organs shall coordinate linkage, promote savings and green consumer behavior and lifestyle, and mobilize the citizen participation in environmental protection and supervision.

May 16th, 2013

My Next Big Project

Dear friends,

I’m cooking up something tremendously exciting! You know, cleantech, energy, China, legal stuff. Would love to hear your thoughts of course. Shoot me an email and we’ll talk.

If you are in Boston next week, join me for an energy meetup at Coda (Back Bay) on Thursday May 23, 6pm – 8pm. It’ll be a blast!

xoxo,

ella

 

 

April 17th, 2013

To Chinese Overseas Students in US

Dear friends,

I am as horrified, and as heartbroken as many of you are to hear about the tragedy in Boston.

Dorothy came to this country with as much hope and dreams as you and I did — a life so beautiful and so full of promise, only to end so abruptly! The impact on her family and loved ones will never go away. And as for the rest of us, the terror that seized upon us may inevitably make us question the American society, and the choices we (and in some cases, our parents) made to come here.

But we must be stronger than we’ve ever been. We must be better than we’ve ever been. If we allow the violent extremism and terrorism to shake us and terrify us, then they would have won.

Even though we are on a foreign land, we have each other and we have our school communities. Reach out to each other. Make sure no one is left alone.

In South America, the biggest hazard to survival is the constant flooding, but the red ants, all be it so small individually, would hold onto each other to form living waterproof rafts. This is the time we need to hold onto each other. Make sure no one is left alone.

 

 

 

 

 

February 20th, 2013

What Would China’s Carbon Tax Regime Look Like

My Twitter stream is bubbling with excitement about China’s introduction of carbon tax: Quartz, Think Progress, etc. all reported on the Xinhua report, but the larger context is missing and the key questions about the implementation are not answered.

 

  • It’s an environmental tax, not a carbon tax

The first thing I want to clarify is that calling it a “carbon tax” would be a gross misnomer, because for a long time to come, the majority of the tax collected from this would still be from what used to be called “pollution discharge fees”, not from taxing carbon emissions. It’s a change in form, but still a significant one, and here is why:

When pollution discharge only triggers a “fee”, local government habitually using this fee reduction or even elimination as an incentive for industries to settle into their jurisdiction and generate GDP. Since the fee is administrative, not legal, industries can easily evade the fee by building a close relationship with the local government, without running into legal issues. A conversion of that “fee” to “tax” would place legal responsibilities on the companies.

The tax on carbon would in fact be puny. The Xinhua report noted that previous MOF expert suggestion for the carbon tax was 10 yuan (US $1.5) per ton of carbon dioxide in 2012, with gradual increase to 50 yuan ($7.9) per ton by 2020.

 

  • The distortion of price signals in China’s fiscal system is the main reason for the low-quality economic growth and structural imbalance

Enough has been said about the imbalance in China’s growth model: at the macro level, it takes form in over-reliance on investment and exports to stimulate economic growth, while domestic consumption is inadequate (only 35% of GDP); at the micro level, it’s long-term reliance on limited added value, low labor cost, over-consumption of energy, resources, and the environment, and a lack of homegrown brands, technology and innovation, etc. etc. The main reason for the low-quality and imbalanced economic growth is the distortion of price signals in China’s fiscal system. For instance, the low interest rate lead to over-investment and excessive capacity.  The artificially low resource and environmental cost lead to the overuse and severe environmental degradation.

China now burns as much coal as the entire rest of the world combined, a whopping 3.8 billion tons in 2011, but what most reports miss is that the tax on coal in China is merely 2-3 yuan (US $0.4) per ton, and 8 yuan (US $1.27) per ton for charred coal, even though the price of coal has increased to several hundreds of yuan per ton.

The point of a carbon tax, be in China or elsewhere, is to set the price signal straight. We tax income; we tax property; we tax goods and services — all the things we want more of, so wouldn’t it be logic to actually tax the thing we want less of: pollution?

My environmental law professor Jody Freeman, who served as Counselor for Energy and Climate Change in the Obama White House before coming back to Harvard, told us that she used to say two words to almost everyone she met at the White House – “carbon tax”, and they would look at her as if she was crazy. This needs to be changed. If the giant climate rally in DC this past Sunday is any indication, that is we need a sensible policy to address the reality and challenges of climate change now. And in the case of China, I think starting with adjusting the distorted price signals, while giving due consideration to the widening income gaps and social injustices, is essential.

 

  • Implementation: A tax regime reform that incorporates environmental tax

As previously stated, this environmental tax is mainly converted from pollution discharge fees. Previously, pollution discharge was inspected by and the fee was charged by environmental protection bureaus. The environmental tax, however, is collected by the tax bureau according to the amount of pollution discharged by factories, and that amount is corroborated by the environmental protection bureau. That is to say, the environmental protection bureau becomes an agency that collects statistics for tax purposes.

In 2012, Hubei Province started collecting environmental tax within 100-kilometer periphery of the capital city Huhan, after a test run at Huangshi city. 10% of Hubei’s environmental tax goes to the central government, 15% to the provincial government and 75% goes to the municipal and county government, with the exception of thermal power stations with above 300MW capacity – 10% of their environmental tax goes to the central government and 90% to the provincial government.

The revenue from Hubei’s environmental tax goes to a special “environmental protection fund” that invests in de-sulfur and de-nitrate efforts, supports environmental projects, the prevention of local pollution, and the development of environmental technologies. Hubei government also stated that projects in these field are eligible for loan interest subsidies.

On a national level, the tax regime envisioned by the Ministry of Finance would be that the provincial government’s revenue mainly comprised of turnover tax (which includes environmental tax) and income tax, municipal and county government’s revenue mainly comprised of property tax, and subsidized by action tax (such as tax on large scale entertainment) and special purpose taxes. Since the mid-1990s, the central government strengthened vertical control, and adopted “tiaotiao” management in a number of systems including the tax system. This means that local tax bureaus are directly managed and supervised by the tax institutions of a higher level. Though they have working relations with the government at the same level, they are not managed by the local government. Jia Chen, senior official at Ministry of Finance, noted that under the tax reform, provincial government would be given proper tax management authority, despite the centralized tax system, in order to nurture local tax sources.

I should note that the proportion of environmental tax in the overall revenue of any level of government would be tiny, as is the pollution discharge fee portion of the revenue mix now. Local governments would continue to come up ways to give industries tax rebates and subsidies to attract them to their own jurisdictions, so the effect of the environmental tax or the carbon tax on the industries would be negligible. Standardizing fees into a tax is a step in the right direction. China can use a price on carbon, and environmental issues in general, as a starting point to address the price distortions that are stifling its long-term growth.

 

 

February 4th, 2013

Key Issues in US/World Energy

I attended several interesting energy conferences in the past week, including Energy Innovation 2013 and a two-day private meeting at Brookings (which is why I can’t make references as to who made which remarks). Here’s a run down of the key issues discussed in these conferences. Do you agree or disagree with some of these points? And how do you see the future of world’s energy?

Natural Gas Vs. Renewables

Arguments for natural gas:

  • Yes, solar panel price is down, but there is still balance of system cost. High penetration of wind and solar is not a trivial issue, because someone would have to bear the cost of natural gas power running at 15% capacity. Now every 4 GW of wind needs 3 GW of natural gas to balance it.
  • Natural gas buys us time to solve renewables’ intermittency problem.
  • Natural gas is the killer app for coal in US and many other countries. Gas infrastructure is least capital intensive. Less sunk cost and easy demand response.
  • Think about cost not just as the cost of technology, but the total cost of deployment. Even though the solar panel price is down, the “soft cost” isn’t in the US. Cost of installation is $2-2.60/watt in Germany, and twice as much in US.

Arguments for renewables against natural gas:

  • Instead of looking at solar as energy source, think about it as part of an integrated system with demand response EV.
  • Water use in energy is second largest water usage behind agriculture. And fossil fuel is heavy in water use whereas renewables isn’t.

 

Subsidies

  • US can’t back renewables with subsidies like Germany did with solar. It’s not sustainable. All subsidies, fossil fuel and renewables, should be eliminated in US.
  • PTC now is promiscuous and funds any wind project. It has to do more in innovation, and be allocated in smart and advanced projects such as combined wind and storage.

 

Nuclear

  • Until the public are more educated on radiation and nuclear, we won’t go far in the area. However, Nuclear Regulatory Commission’s responsibility is public safety, not advocacy, not to inform and educate the public.

 

Innovation and the Way Forward

  • US and Europe are irrelevant to future energy demand growth, which would happen in developing countries like China, India, South America. And innovation comes out of growth — China’s CNOOC has $15 billion in energy innovation budget.
  • We must harness the best system we know of, capitalism, to deal with emissions. Put a price on carbon and give businesses the profit motive.
  • We need to bear in mind that we are solving a global problem, so we need scaleable, global solutions and bipartisan agreement.
  • We need to note how risk-averse US has become.
  • We don’t have time, yes, but the question is how to get to zero-carbon. We need a cure, not just to slow down the symptom.

 

Energy Access

  • We must remember that more than 1.4 billion people worldwide have no access to electricity, and 1 billion more only have intermittent access. Energy access is life saving. Average lifespan for people without electricity is more than 30 years shorter than the rest of us.
  • Despite trends in population growth and urbanization, energy access will continue to require a combination of on grid, mini-grid and off-grid solutions.
  • Don’t overlook the transaction cost for energy access, e.g. in India, it takes 7 years to get permission and licensing from all relevant agencies for a small hydropower.
  • The key to sustainable energy access is not the technology. It is critical to establish sustainable institutions with the management capacity, sound revenue-collecting systems, good business practices. Advanced metering is not the only solution, we must engage with the community, finding people who are trainable. Community participation is the KEY to success.
  • Here when we discuss eliminate subsidies for fossil fuel, we must remember lots of these countries lack the social safety net, and see the natural resource reality of that country.

December 28th, 2012

How Fat Big Ocean Saved My Voice

Five days before Christmas, I woke up, tried to say good morning to “grandpa” in the living room — my voice didn’t come out. I tried again, nothing.

Panic.

I had been coughing for the past two days, but never thought I’d lose my voice completely.

Three days before Christmas: I started to think that I used to sound like an angel. Not that I ever sang, but I missed singing to trashy songs on the radio like the one about never getting back together with the ex-boyfriend.

Then Damien and his wife took me to Chinatown where we got some cola seeds. They are called pang da hai in Chinese, which literally means “fat big ocean”. The whole pack has at least 40 seeds and only costs $3.75!

Why are they called “fat big ocean”? As you can see, these dried seeds are the size of almonds:

After you put them in the hot water for a while, they bloom like flowers. The tea from these cola seeds has been used to cure sore throat in China and South Asian countries for hundreds of years. And they worked magic on me! Now I have a really cool deep voice and am on my way to full recovery. Yay! Merry Christmas!

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