China's Challenges in Strengthening its Energy Security

IMGXYZ542IMGZYXOn October 16, 2006, the Carnegie Endowment for International Peace and the World Resources Institute co-sponsored a discussion entitled “China’s Challenge in Strengthening Energy Security” with Dr. Kelly Sims Gallagher, Director of the Energy Technology Innovation Project of the Belfer Center for Science and International Affairs at Harvard University and Dr. David Jhirad, Vice-President for Science and Research at the World Resources Institute. Carnegie Senior Associate and Director of the China Program, Minxin Pei, moderated the discussion.  This discussion is the first of a series of Carnegie-WRI co-sponsored talks that will serve to demonstrate how greater US-China cooperation on environmental issues would be fruitful for both countries. A summary of the event follows.

Dr. Kelly Sims Gallagher’s discussion focused on the results of her newly published book China Shifts Gears: Automakers, Oil, Pollution and Development (MIT Press, 2006) as well as the broader efforts of the Energy Technology Innovation Project at Harvard University.  China, according to Gallagher, faces a multitude of energy-related challenges: the need for energy for sustained economic growth, increasing foreign dependency for oil and gas, severe urban air pollution, provision of energy for the poor, global climate change, massive acid deposition and the need to access advanced energy technologies to address all of these challenges.  Though Chinese government officials traditionally conceptualize energy security as the need to acquire enough energy to maintain economic growth, for Sims, energy security also means not doing intolerable and irreversible damage to the environment.

To put the Chinese experience in perspective, Dr. Gallagher quoted some interesting statistics. Currently, China consumes 2/3 the total energy that the United States does, and emits 2/3 of the greenhouse gases.  Furthermore, in comparison with the US, China imports and uses a third the oil. More than half of China’s oil comes from the Middle East, with the largest exporters to China being Angola, Saudi Arabia and Iran respectively.  According to the International Energy Outlook, China will surpass the US in energy consumption in 2030 and in carbon dioxide emissions in 2015. In 2005, China consumed 40% of the world’s coal production and this accounted for 80% of China’s greenhouse gas emissions. China used 400 gigawatts of electricity last year; 129 gigawatts capacity, the entire capacity of India, was only built in the last three years.  The current energy system is inefficient; with little regulation in China, there is little incentive for companies to move toward more efficient energy options.

Gallagher used the case study of the Chinese auto industry to understand what opportunities American companies had to transfer energy efficient technology to China and under what circumstances did they fail to do so. This case study was chosen because of the high level of access as well as the fact that the main source of urban air pollution in the large Chinese coastal cities are vehicles.  China’s auto industry and supplying industries employee 36.4 million workers and the value added accounts for 6% of total manufacturing in China. The industry is characterized by joint ventures between foreign auto-making firms and Chinese companies.  Through these joint ventures, the Chinese have acquired good manufacturing skills, but weak design and innovation skills.

The reason for this is that American companies are unwilling to transfer technology to their Chinese joint ventures due to the lack of intellectual property rights (IPR) protection in China. Furthermore, the Chinese failed to design and implement aggressive and consistent strategies for the acquisition of technological capabilities from foreigners. Gallagher analyzed three joint ventures: Beijing Jeep Corporation, Shanghai GM and Chang’An Ford.  In all three cases, little knowledge was transferred along with the product; in short, US FDI in the Chinese automobile industry did not improve Chinese vehicle technological capabilities.

In terms of pollution control technology, American firms did not transfer these to their Chinese counterparts until the Chinese government imposed the first standard, which was not very stringent.  It is evident from the fact that once the standard was imposed, the technology was transferred immediately, that the problem was not complications with the transferring of technology, but lack of incentive.  US firms are very standard-oriented; they will not take on that extra marginal cost to add energy efficient technologies to their products unless required too.  Furthermore, the Chinese government has been reluctant to put environmental standards in place for fear that they might hurt Chinese firms.

Dr. David Jhirad commented briefly on areas where US-China cooperation would be the most beneficial, and how to sustain this type of cooperation. Firstly, China needs to join the International Energy Agency because this would give China a greater stake in global outcomes.  According to Jhirad, China desperately needs to move toward more efficient coal usages, consolidate its six power grids into one national grid, and improve urban planning to encourage public transportation. Sixteen trillion dollars is required to build the global energy infrastructure-eleven of it is for China and India.  Will the necessary capital be available to help China improve its energy standards?

The success of any dialogue designed to convince the Chinese to adopt new energy standards will depend on the United States’ standards and laws. The US needs to prepare to do at home what it is urging China to do.  According to Jhirad, US-China energy cooperation should be a top priority for US political and business leaders.

During the Q&A session, Gallagher commented that she believes many of the environmental problems and energy efficiency problems the world is facing will be solved by market forces. 

This summary was prepared by Oriana Skylar Mastro, Junior Fellow in the China Program at the Carnegie Endowment for International Peace.