China's Climate Conundrum

In the last two years, China’s President Xi Jinping signed two major climate agreements with the United States committing China to peak its carbon emissions by 2030 and to increase the non-fossil-fuel share of all energy to a target of 20 percent. In addition, China submitted to the United Nations’ meaningful Intended Nationally Determined Contributions (INDCs) outlining its carbon reduction targets. Chinese officials at all levels of government — central, provincial and local — are focused on developing low-carbon initiatives, with each one competing to have the most visible initiatives, ideally without having to expend much in the way of new resources. Whether you are talking to planners in Beijing or local officials in Yunnan or Chongqing, one finds rhetorical support for a low-carbon economic future, marked by significant investments in green energy alternatives. This commitment seems stronger and more pervasive in China than in the United States, and it has only emerged in the past three years.

The first aspect of China’s electricity sector that strikes the casual observer is its sheer size — 1,505 GW, which is larger than any system in the world by a significant margin. In 2015, it installed approximately 51 GW of solar and wind capacity, compared to 12 GW installed in the United States over the same period. These are impressive number, but given the intermittent nature of solar and wind generation, these sources remain a small volume of total consumed power. Second, China measures its success not in terms of renewables, but in terms of non-fossil-fuel power sources, which includes nuclear and large hydroelectric facilities. These low-carbon sources are not being aggressively pursued in the U.S. or Europe due to both political and economic challenges. Nuclear and hydro power have very high capacity factors — that is, they can provide power for most of the day, which makes them especially valuable to ensure grid reliability. Finally, China has adopted carbon and energy productivity as its primary measure of its success in realizing its low-carbon goals and has set extremely aggressive targets. However these targets can be reached by reducing the amount of carbon emitted (the numerator) or by increasing economic activity (the denominator). This measure allows China to seek ambitious reductions in carbon emissions, while still pursuing aggressive economic growth targets.

Beneath the surface of this momentum lie three large challenges that China must address if it is to turn public rhetoric into an effective green energy program.

First, China has a very inefficient electric dispatch system — the methodology by which the grid decides how to utilize its generating assets. In the U.S., the grid operator dispatches the lowest-cost plant to operate first, the next-lowest next and so forth. Power costs vary with demand, which increases throughout the day, but the overall cost to meet each day’s demand is the lowest possible, while still guaranteeing grid stability and security. In China, the grid operator signs contracts with each generator for a set number of operating hours according to energy sources and technologies, and plant use is prorated so that each generating unit of the same kind is used for approximately the same number of hours. The idea was initially designed to attract more investors by assuring them a fixed number of hours in which their power would be purchased, but the unintended result is that the dirty coal-fired plant that is old and inefficient is often dispatched the same number of hours as a more efficient new unit, and that renewable energy resources are often curtailed when supply exceeds demand. The outcome is poor economic performance and poor environmental impacts. This is not news to the Chinese central government, which is trying to convince the grid companies to change this dispatch system, but so far without success.

Second, there are enormous differences among the 26 provinces. Some have much higher per-capita income levels than others. Some are moving rapidly to a service economy, but others are heavily dependent on the production of fossil fuels and energy intensive manufacturing. Still others, primarily in the western parts of the country, have been left out of China’s economic boom. A low-carbon strategy that is politically acceptable in one province may not be economically viable for another. Hence having national low-carbon targets that are the same for every industry in every province may not be feasible. Instead, China will be under pressure to design separate carbon goals and separate timetables for each province. But differentiated goals and timetables raise the issue: how does the government decide what is economically feasible and politically fair? Further, implementing aggressive caps on carbon emissions in some provinces and not in others may lead to the relocation of carbon-intensive facilities from the former to the latter. The result would be relocating emissions, not reducing them. The Beijing government faces very difficult choices — whichever path it takes, there will be cries of outrage from the impacted stakeholders.

Third, the criteria for promotions within the Chinese government have been weighted towards meeting economic goals. Provincial officials who meet their economic growth numbers have a good chance to advance. Large infrastructure projects, such as coal power plants involving large capital investments that can raise local employment rates and boost the local economy, have been traditionally favored. Implementing a low-carbon strategy that involves significantly greater investments in solar and wind power and the implementation of an aggressive energy efficiency program, characterized by stronger building codes and alternative means of transportation, will in the near term increase the costs of goods and services. The result is likely to be lower growth numbers, which is not a good outcome for politically ambitious officials. In the past two years, the central government asserted that it would assess and promote public officials based on their success in reaching both their economic and environmental goals. The key question is will local and provincial officials believe that assertion? If they believe that jobs and high levels of economic growth will determine their future, it may be quite hard to persuade them to adopt aggressive green energy goals. China’s central government can adopt strong standards, guidelines and regulations, but they will be implemented and enforced at the provincial level. Therefore, getting the incentives right for the sub-national officials on whose shoulders will fall the implementation and enforcement burden of reducing pollution, both carbon and conventional, becomes essential.

It is one thing to manufacture millions of photovoltaic collectors for the world’s export markets, but it will be a much more difficult challenge for China to transition to a low-carbon economy and a green energy portfolio. Such a transition will require major changes and challenges, ranging from reforming China’s electricity grid to enhancing the incentives and responsibilities of local officials to establishing carbon targets and standards that are perceived at the local and provincial levels as fair, politically viable, enforceable and economically sustainable.