October 23rd, 2014

Analyzing China’s 4th Plenum Outcomes

China just concluded the 4th Plenum of the powerful Communist Party Central Committee, now let’s take a look at what happened and what did not.

1. The only official document issued so far is the Communique, which summary I’ve given below.

2. No words on the outcoming of Zhou Yongkang, former security czar who has been investigated for corruption. This may surprise many, because the 4th Plenum is largely expected to decide on Zhou’s fate. But to publicize the decision on Zhou now would greatly distract the public and the media from the Plenum’s other priorities. So even though the decision on Zhou has been made, it is not going to be announced for another 3-4 days.

3. For the same reason, decisions regarding anti-corruption efforts in the military, promoting rule of law in the military are also not highlighted in the Plenum’s Communique. But it doesn’t mean those issues were left out.

4. Overall, the Plenum struck the right tone on a number of rule of law issues including transparency, reforming cadre evaluation system, make the judiciary independent of the administrative branch, and it even paid lip-service to the Constitution, but without concrete plans of implementation, a lot of these goals sound a little cliche. Especially when it talks about intra-Party rule of law, it still reaffirms the basic framework that the Party is above the law.

 

Summary

  • Comprehensive push for governing by law; the goal is to establish a rule-of-law system with Chinese characteristics.
  • Constitution is core of the legal system, strengthen the implementation of the Constitution. – No word on establishing constitutional court, or how to achieve this goal.
  • Justice, equality, and transparency throughout the entire legislative process.
  • Strengthen Party leadership of legislation.
  • Make sure citizen’s rights of a person, property rights, and political rights are not infringed.
  • Government should execute its functions according to law; the institutions, functions, powers, processes, and responsibilities should be coined in law; establish “government power list system”.
    • In February this year, State Council publicized its “government power list,” which is a list of items requiring administrative approval and licensing from all State Council departments.
    • Local meetings on “government power list system” basically centers around the approval items, drawing lines between the government and the market, eliminating unnecessary administrative powers, etc.
  • The legal process of major administrative decisions must include public participation, expert discussion, risk assessment, legal examination, and group discussion. Within various administrative organs, internal legal examination system needs to be set up to evaluate the legal validity of major decisions. A lifetime responsibility system needs to be set up to trace and track the responsibilities for major decisions.
  • Transparency should be the norm: decision, implementation, management, service, results should be open.
  • Optimize the function and power configuration of the judiciary. Push for the separation of judicial power and implementation power. The Supreme Court should have circuit court. Research and experiment on establishing cross-administrative-jurisdiction courts and procuratorate. Research on using procuratorate to bring public-interest lawsuits.
  • People’s supervision – didn’t make clear what’s different from before.
  • Establish legal service system that covers rural and urban areas. Optimize legal aid system.
  • Raise quality/professionalism of the legal personal.
  • Strengthen intra-Party legal system. Include the results of legal construction into cadre evaluation as an important metric. – didn’t make clear how this is done.
  • Stripped Li Dongsheng, Jiang Jiemin, Yang Jinshan, Wang Yongchun, Li Chuncheng, and Wan Qinliang of their party affiliations.

September 19th, 2014

What’s China’s climate change position going into U.N. Summit and Paris COP?

Planned target: In 2020, CO2 emission per GDP reaches 40-45% reduction to 2005 level.

Carbon Trade

China is studying about establishing systems that control the total amount of carbon emissions, and hopes to gradually be able to control both the intensity and the quantity of carbon emissions. China wants to speed up the establishment of a nation-wide carbon emission trade market. (Xie Zhenghua, 09/2014, http://people.china.com.cn/2014-09/12/content_7199024.htm)

On August 31, 2014, China announced that it will establish a nation-wide carbon trade market in 2016. Since June 2013, China has established 7 provincial/municipal cap and trade market, and up till September 2014, 12.6 million tons of CO2 equivalents have been traded, totally nearly 500 million RMB (which means it’s super cheap.) About 2,000 companies have been involved in China’s regional cap-and-trade markets so far. Most of China’s carbon emission exchanges are in the red, with Shenzhen being the only exception.

The reason why the Shenzhen Emissions Exchange is relatively successful is that it’s small and agile. It controls the carbon emissions of 635 companies, has over 20 institutional investors and over 700 individual investors. It has the smallest carbon capacity among all the testing exchanges: 30 million tons of CO2 per year. It has the greatest liquidity coverage ratio – 5.41%, five times the other exchanges. The market is very active, and is open to foreign currency investors. In Shenzhen, the price is around 65-80 RMB per ton of carbon.

In comparison, the carbon price at Beijing Emissions Exchange is around 60.4RMB now, which is a 67.8% increase over the initial price when the exchange opened in Nov. 28, 2013. The price on European carbon markets now stands at around 3 euros.

Hurdles in China’s cap-and-trade market includes:

  • Local government still prioritize GDP growth, and therefore unwilling to sell the allowances to other localities. This local protectionism fragments the carbon market, and makes the economics much less cost-efficient.
  • The penalty of violating or exceeding pollution allowances is miniscule. This would require a national level climate change law. (The law is being drafted and expected to seek public opinion on October. See below)
  • There’s a need for cross-regional trade.

 

New Climate Change Law

The draft of the new Climate Change Law is completely in July 2014, but it’s not going to be released for public input until October. This is going to be the basis for the cap-and-trade because CO2 is not a pollutant as defined in the Air Pollution Prevention and Control Law, so setting targets for CO2 and other climate warming agents would require the legal backings of this new Climate Change Law.

According to Chang Jiwen, leading expert on the drafting committee, CASS started studying about legislating climate change since 2008, and it formally started the drafting of this Law in 2010, and publicized a draft opinion in 2012. (Caixin)

It is unclear the slow progress of this law is a resulting of conflicting interests or lack of priority.

 

New Air Pollution Law

China is now seeking public opinion on new amendments to Air Pollution Prevention and Control Law (1987), which is going to be the legal form of the Air Pollution Action Plan (Sept 2013). The drafting of the amendments to the Air Pollution Law started in 2006. Though the law has not been finalized, there are several important changes expected in the amended law:

  • Two new chapters are going to be added to the Air Pollution Law: the united prevention and control in key regions and dealing with heavily polluted weather.
  • The controlled amount (target) of key air pollutants will be delegated by the provincial governments to the city and county governments, according to State Council targets for each province. Then the city and county governments have to assign the targets to each polluting entities. For districts that exceeded the controlled amount, licensing of environmental impact assessments documents will be suspended for all new major polluting projects.
  • Strengthen the regime for pollution emitting licenses.
  • Strengthen the control on coal fire plants, vehicles, industry, and dusts.
  • Increase penalty on pollution emission without license.

 

Authority

  • Zhang Gaoli will attend the U.N. climate meeting in the place of Xi Jinping. Zhang’s portfolio includes natural resources and the environment. He’s the Politburo Standing Committee member that oversees NDRC, Ministry of Finance, Ministry of Housing and Urban Development, Ministry of Environmental Protection, Ministry of Land and Resources, State Council Development Research Center, Tax Bureau, Statistics Bureau, Three Gorges Dam Office, South-North Water Project Office.
  • The cap-and-trade system is under the authority of the NDRC. Xie Zhenhua is still China’s climate envoy.
  • The new Climate Change Law is also under NDRC, with input from Ministry of Environmental Protection, Ministry of Water, China Meteorological Administration, and NEA. It’s been drafted by experts from CASS, CAS, and University of Politics and Law.
  • The amended Air Pollution Prevention and Control Law is under Ministry of Environmental Protection.

 

Opportunity for U.S. Engagement

The biggest opportunity for U.S. engagement at this point is to help China figure out how to build up the national cap-and-trade market. Right now they can’t get the emission numbers (caps) right, and can’t figure out the most economically efficient way to set up the system nation-wide. This creates opportunity for informed input.

  • Key Difficulty in Engaging with China on Climate
  • The difference in political power of the executive branch is causing the greatest difficulty in U.S.-China climate talks: China can use whatever it agrees on an international platform to pressure domestic dissenting voices into complying; whereas any kind of binding commitment U.S. attempts to make internationally simply wouldn’t pass the Congress.
  • The U.S. thinks it has already done about 90-95% of what is possible on dealing with climate change. (Understanding the reality that Congress is not going to pass anything.) This means going whatever executive power can take it: power plant rules for instance.
  • The U.S. has no idea exactly how much China is doing compared with what it can actually do. Is China doing 10% of what it can? Is it doing 30-40% of what is feasible?
  • China, on the other hand, thinks U.S. is not doing nearly enough of what is possible. As far as China is concerned, it’s the U.S.’ responsibility in getting its own politics in order, and being able to carry out stable policies that are going to make significant cuts.

 

U.N. and Paris Climate Summit Expectations

Jeff Goodell: The Paris agreement will largely be a “bottom up” treaty, in which each country will put forward a “contribution” for what each is willing to do to reduce carbon pollution. Those contributions will then be reviewed in the future – exactly how and by whom isn’t clear – to make sure each nation is keeping its promise. There will be no legally binding caps on emissions, no mandated “targets” that countries need to reach. In fact, it will not be a treaty at all (a treaty would need to be ratified by the U.S. Senate, which everyone knows will never happen). It will likely be an agreement “with legal force,” which means, basically, that some parts of the agreement might be legally binding in some countries.

China sees Obama’s power plant rules as a good thing, but thinks U.S. can do more. China insists on the position that regarding per-capita emissions, the average American is responsible for dumping almost three times as much CO2 into the atmosphere every year as the average Chinese. Zou Ji, the deputy director general for the National Center for Climate Change Strategy and International Cooperation and a key member of the Chinese negotiating team said: “I have lived in the U.S., where everyone has a clothes dryer and an air conditioner and a big refrigerator and a big house and a big car. In the EU and Japan, they also live well, but people there only consume half the energy Americans do. You do have the capacity to live at the same standard and consume far less – if you choose.”

 

 

September 12th, 2014

Energy News 9-10-2014

Houston Chronicle – Two more LNG projects cross finish line for exports

The Department of Energy has authorized the Cameron LNG project in southwestern Louisiana as well as a much smaller Florida facility. With this approval, these plants become just the second and third facilities in the United States approved to export LNG. The Cameron facility is expected to export up to 1.7 billion cubic feet of natural gas per day to Taiwan, Japan, and other countries that do not have free trade agreements with the U.S.

 

http://www.houstonchronicle.com/business/energy/article/Energy-Department-gives-out-two-more-LNG-export-5747191.php

 

The American Interest – Poland reports Gazprom supply disruption

Poland’s gas monopoly has reported a 20% decline in Russian gas supplies and a German firm has reported slightly lower flows as well. Polish pipeline operator Gaz-System said that the reduction in supplies coming from Russia forced it to temporarily stop re-exporting natural gas to Ukraine.

 

http://www.the-american-interest.com/blog/2014/09/10/poland-reports-gazprom-supply-disruption/

 

Bloomberg – Putin oil deals with Exxon, Shell imperiled by sanctions

According to anonymous U.S. officials, the new sanctions against Russia over Ukraine would prohibit U.S. and European cooperation in oil exploration in Russia’s Arctic territory and shale formations. The added sanctions wouldn’t interfere with conventional drilling in Russia but could threaten to curtail Russia’s future oil production by limiting its exploration capabilities.

 

http://www.bloomberg.com/news/2014-09-10/putin-oil-deals-with-exxon-shell-imperiled-by-sanctions.htmlhttp://www.bloomberg.com/news/2014-09-10/putin-oil-deals-with-exxon-shell-imperiled-by-sanctions.html

 

Business Spectator – BP chief urges Scotland to vote ‘No’

BP CEO Bob Dudley became the latest business leader to weigh in on Scotland’s upcoming independence vote, urging a ‘No’ vote. Dudley asserted that the future of Scotland’s North Sea oil reserves is best served by maintaining the current integrity of the United Kingdom.

 

http://www.businessspectator.com.au/news/2014/9/10/international-news/bp-chief-urges-scotland-vote-no

 

USA Today – Blue and red states going green on energy policy

A bipartisan report by Stanford University and the Hoover Institution has found that states on both ends of the political spectrum have pushed energy efficiency and renewable power initiatives in recent years.

 

http://www.usatoday.com/story/money/business/2014/09/11/blue-and-red-states-turn-green-energy-wise/15402293/

 

May 22nd, 2014

3 Things to Know about the Russia-China Gas Deal

By now, I’m sure you’ve heard of the Russia-China gas deal that is estimated at $400 billion over the course of 30 years, starting in 2018. There are also a lot of speculations and confusion over the term of the deal, who has got the upper hand, etc. I’d like to chime in on a few points here:

1. Yes, it’s a big deal, but China’s energy appetite is even bigger.

Russia will provide 38 bcm (billion cubic meters) of natural gas per year to China, but it’ll take some time after 2018 to ramp up to that level. Alexei Miller, chief executive of Gazprom, estimated the deal at $400 million. Putin said that ““This is the largest contract in the history of the gas industry of the former USSR and the Russian Federation.” (Washington Post)

This is, however, not the biggest gas deal for China. China began importing gas from Turkmenistan at the end of 2009, under a 30-year contract signed in July 2007 at the level of 30 bcm/year. In late 2011, China and Turkmenistan signed another agreement that added another 34 Bcm/year, which brings the total of Turkmen gas to China to nearly 65 Bcm/ year. 65 billion cubic meters – that’s a big deal!

Yet when you compare it to China’s energy appetite, it’s almost a drop in the bucket. Natural gas on the whole makes up about 4% of China’s total primary energy consumption. China is trying to raise the natural gas percentage in the energy mix to 7.5%, and reduce the coal percentage from 70% to 65% by the end of 2015 — a goal many experts think they will not achieve. The government expects the natural gas use to rise to 420 bcm by 2020. If China can get 38 bcm from Russia by 2020, it’ll be 9% of the natural gas use, of the  7-8% of the total energy consumption — that is, 0.0068.

 

2. What’s the price? Who got a better deal?

We do not know the specific terms of the contract. Putin mentioned that the two sides negotiated till 3 AM (as in the morning), then start all over again. The fact that they reached an agreement the next day suggests that it is a rushed deal, even though the deal is 10 years in the making.

There are still some facts that came out in the reports.

A. The price is likely to be around $12/mmBtu.

ITAR-TASS, a major Russia news agency reported the following:

Gazprom expected to get $400 as a starting price for 1 thousand cu. m. of gas for China. The Chinese side wanted to buy gas for $350-360.

The price of Russian gas for China would be no less than $400 for 1,000 cubic meters, an expert of the Eurasian Development Research Center of the Chinese State Council said in April. Inclusive of infrastructure costs, supplies to China would cost no less than $400 for 1,000 cubic meters, given Russia’s export price of $380 for 1,000 cubic meters, he said.

Deputy Director of the Institute of Energy Strategy Alexei Belogoryev then estimated the contract price at $350-400 for 1,000 cubic meters. Director of the Energy Development Fund Sergei Pikin predicted a price of about $380.

Any of the scenario above would convert to a price of around $12/mmBtu.

Just to put this number in context for you: in 2013, the gas from Myanmar to China has a delivered price of $11.81/mmBtu; Turkmen gas averaged $9.55/mmBtu; Uzbek gas averaged $8.83/mmBtu, according to customs data. So the Russian gas is not as cheap as the Chinese expected.

 

B. The price is pegged to oil and oil products.

As BBC and a number of other news agencies reported, Putin said specifically that the price is pegged to oil, which is something China does not want.

President Putin said in a statement to the Russian news channel Rossiya: “The price is satisfactory for both sides.

“It is tied, like it is envisaged in all our international contracts with Western partners, specifically our partners in Western Europe, to the market price on oil and oil products. It is an absolutely calibrated, general formula for pricing.”

 

C. This sets the benchmark price for LNG imports.

We have seen a convergence of price expectation for gas in China: $10-11/ mmBtu, or $12/mmBtu when it reaches eastern China. This is going to be the benchmark price against which future LNG imports would be measured against, and has great significance for U.S. companies planning to export to China.

3. Who needs whom more in this case? And why didn’t China get a better deal?

Europe has roughly 30% dependency on Russia for natural gas, but as much as 76% of Russia’s natural gas goes to Western Europe, which means Russia in fact has a greater need for diversification of their export. With the Ukraine crisis putting Russia sharply at odds with U.S. and Western Europe, Russia desperately needs to find an alternative market for its natural gas, which is why this deal, stalled for a decade, is all of sudden at the forefront of Putin’s agenda now.

On the other hand, China has a massive population with increasing energy demand — not just any energy, they want something cleaner burning than coal, so they’ve been propelled to go on huge energy quests all over the world, and Russia has the largest natural gas reserve.

From the analysis above, it seems like Russia has got a better deal: they’ve got the price pegged to oil and at a pretty high price; they are able to diversify the export and relieve some of the pressure since Crimea crisis; they manage to conclude the deal during Putin’s visit — just imagine what a failed deal would do to Putin’s image domestically.

This leads some to speculate whether or not China essentially helped Russia out of a difficult situation in exchange for other kinds of favors: What leverage does Russia have vis-a-vis China? Energy and military. Is it possible that towards the end of the negotiation, China lets Russia take the better side of the gas deal in order to reach a separate agreement regarding military technology? It is plausible.

It is also possible that CNPC just has less bargaining experience and power than Gazprom. Even though from an objective perspective, Russia and Gazprom need this deal more than China does, Putin and Gazprom leadership seem to be in their own reality bubble, unaware of the exact magnitude of the difficulties they are in.

Gazprom leadership reportedly were reluctant to turn to the east. And Putin himself, as seen from his speech to the Federal Assembly on the annexation of Crimea, almost lives in an alternative universe. He emotionally talked about “the graves of Russian soldiers”, and “Millions of people went to bed in one country and awoke in different ones [after the USSR’s collapse]…, while the Russian nation became one of the biggest, if not the biggest ethnic group in the world to be divided by borders.” as if Putin is preparing to annex whichever land where ethnically Russia people live. It is possible that Gazprom walked into the negotiation room convinced that they have the upper hand, that they possess all the power, and that panache in the end helped them emerge victorious.

 

 

 

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

 

 

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