WORLD BANK DISCUSSION PAPER NO. 330 Work in progress for public discussion China Issues and Options in Greenhouse Gas Emissions Control Edited by Todd M. Johnson, Junfeng Li, Zhongxiao iang, and Robert P Taylor Recent World Bank Discussion Papers No. 259 Policies Affecting Fertility and Contraceptive Use: An Assessment of Twelve Sub-Saharan Countries. Susan Scribner No. 260 Financial Systems in Sub-Saharan Africa: A Comparative Study. Paul A. Popiel No. 261 Poverty Alleviation and Social Investment Funds: The Latin American Experience. Philip J. Glaessner,Kye Woo Lee, Anna Maria Sant'Anna, and Jean-Jacques de St. Antoine No. 262 Public Policy for the Promotion of Family Farms in Italy: The Experience of the Fund for the Formation of Peasant Property. Eric B. Shearer and Giuseppe Barbero No. 263 Self-Employment for the Unemployed: Experience in OECD and Transitional Economies. Sandra Wilsonand Arvil V. Adams No. 264 Schooling and Cognitive Achievements of Children in Morocco: Can the Government Improve Outcomes? Shahidur R. Khandker, Victor Lavy, and Deon Filmer No. 265 World BankAFinanced Projects with Community Participation: Procurement and Disbursement Issues. Gita Gopal and Alexandre Marc No. 266 Seed Systems in Sub-Saharan Africa: Issues and Options. V. Venkatesan No. 267 Trade Policy Reform in Developing Countries since 1985: A Review of the Evidence. Judith M. Dean, Seema Desai, and James Riedel No. 268 Farm Restructuring and Land Tenure in Reforming Socialist Economies: A Comparative Analysis of Eastern and Central Europe. Euroconsult and Centre for World Food Studies No. 269 The Evolution of the World Bank's Railway Lending. Alice Galenson and Louis S. Thompson No. 270 Land Reform and Farm Restructuring in Ukraine. Zvi Lerman, Karen Brooks, and Csaba Csaki No. 271 Small Enterprises Adjusting to Liberalization in Five Afican Countries. Ron Parker, Randall Riopelle, and William F. Steel No. 272 Adolescent Health: Reassessing the Passage to Adulthood. Judith Senderowitz No. 273 Measurement of Welfare Changes Caused by Large Price Shifts: An Issue in the Power Sector. Robert Bacon No. 274 Social Action Programs and Social Funds: A Review of Design and Implementation in Sub-Saharan Africa. Alexandre Marc, Carol Graham, Mark Schacter, and Mary Schmidt No. 275 Investing in Young Children. Mary Eming Young No. 276 Managing Primary Health Care: Implications of the Health Transition. Richard Heaver No. 277 Energy Demand in Five Major Asian Developing Countries: Structure and Prospects. Masayasu Ishiguro and Takamasa Akiyama No. 278 Preshipment Inspection Services. Patrick Low No. 279 Restructuring Banks and Enterprises: Recent Lessons from Transition Countries. Michael S. Borish,Millard F. Long, and Michel Nol No. 280 Agriculture, Poverty, and Policy Reform in Sub-Saharan Africa. Kevin M. Cleaver and W. Graeme Donovan No. 281 The Diffusion of Information Technology: Experience of Industrial Countries and Lessons for Developing Countries. Nagy Hanna, Ken Guy, and Erik Arnold No. 282 Trade Laws and Institutions: Good Practices and the World Trade Organization. Bernard M. Hoekman No. 283 Meeting the Challenge of Chinese Enterprise Reform. Harry G. Broadman No. 284 Desert Locust Management: A Time for Change. Steen R. Joffe No. 285 Sharing the Wealth: Privatization through Broad-based Ownership Strategies. Stuart W. Bell No. 286 Credit Policies and the Industrialization of Korea. Yoon Je Cho and Joon-Kyung Kim No. 287 East Asia's Environment: Principles and Prioritiesfor Action. Jeffrey S. Hammer and Sudhir Shetty No. 288 Africa's Experience with Structural Adjustment: Proceedings of the Harare Seminar, May 23-24, 1994. Edited by Kapil Kapoor No. 289 Rethinking Research on Land Degradation in Developing Countries. Yvan Biot, Piers Macleod Blaikie, Cecile Jackson, and Richard Palmer-Jones No. 290 Decentralizing Infrastructure: Advantages and Limitations. Edited by Antonio Estache No. 291 Transforming Payment Systems: Meeting the Needs of Emerging Market Economies. Setsuya Sato and David Burras Humphrey No. 292 Regulated Deregulation of the Financial System in Korea. Ismail Dalla and Deena Khatkhate No. 293 Design Issues in Rural Finance. Orlando J. Sacay and Bikki K. Randhawa (Continued on the inside back cover) WORLD BANK DISCUSSION PAPER NO. 330 China Issues and Options in Greenhouse Gas Emissions Control Report ofa joint Study Team from The National Environmental Protection Agency of China, The State Planning Commission of China, United Nations Development Programme, and The World Bank Edited by Todd M Johnson, Junfeng Li, Zhongxiaojiang, and Robert P Taylor The World Bank Washington, D. C. Copyright @ 1996 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing June 1996 Discussion Papers present results of country analysis or research that are circulated to encourage dis- cussion and comment within the development community. To present these results with the least possible delay, the typescript of this paper has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. 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The complete backlist of publications from the World Bank is shown in the annual Index of Publica- tions, which contains an alphabetical title list (with full ordering information) and indexes of subjects, au- thors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'Ina, 75116 Paris, France. ISSN: 0259-210X Todd M. Johnson is an energy and environmental economist in the Environment and Municipal Development Di- vision (Country Department II) of the World Bank's East Asia and Pacific Regional Office. Junfeng Li is an energy effi- ciency specialist at the Energy Research Institute, Beijing, China. Zhongxiao Jiang is a macroeconomist with the Chinese Academy of Social Sciences, Beijing. Robert P. Taylor is senior energy economist in the Infrastructure Division (Country Department II) of the Bank's East Asia and Pacific Regional Office. Library of Congress Cataloging-in-Publication Data China: issues and options in greenhouse gas emissions control / edited by Todd M. Johnson ... [et al.]; report of a joint study team from the National Environmental Protection Agency of China ... [et al.]. p. cm. - (World Bank discussion papers; 330) Includes bibliographical references. ISBN 0-8213-3660-6 1. Greenhouse gases-Environmental aspects. 2. Energy consumption-Environmental aspects-China. 3. Air quality management-Economic aspects-China. 4. Air quality management- China. I. Johnson, Todd. II. China. Kuo chia huan ching pao hu chii. III. Series. TD885.5.G73C474 1996 363.73'92'0951-dc2O 96-20971 CIP Contents FOREWORD v ACKNOWLEDGMENTS vii ABSTRACT ix DATA NOTES x EXECUTIVE SUMMARY 1 Introduction 1 Methodology 2 Factors affecting GHG emissions and options for reduction 3 The costs of GHG emission reduction 4 Recommendations 5 CHAPTER 1 STUDY OBJECTIVES AND BACKGROUND 9 Study objectives 9 Potential climate change impacts in China 10 Agricultural production 10 Sea-level rise 11 Terrestrial ecosystems 11 GHG sources and sinks inventory for China, 1990 12 Energy consumption 13 Energy production, storage, and distribution 14 Agricultural sector emissions 14 Cement 15 Forests and land use changes 15 CHAPTER 2 MACROECONOMIC ANALYSIS 16 Introduction 16 The China Greenhouse Gas Model 16 Baseline GHG Scenario 18 Economic development and GHG emissions 18 Economic growth 19 Economic structure 20 A baseline energy use scenario 20 Sources of future declines in energy intensity 23 Options for limiting GHG emissions 24 Energy efficiency 24 Improvements in industrial energy efficiency 25 Alternative energy 28 Electric power alternatives 28 Non-power alternatives 29 Forestry 30 Agriculture 30 Conclusions 31 Future emissions 31 Environmental implications of the Baseline GHG Scenario 32 Summary of options for reducing GHG emissions 32 CHAPTER 3 THE COSTS OF LIMITING EMISSIONS 34 Summary of least-cost options 34 Costs of GHG reduction 34 Significance testing 34 Energy efficiency 35 Alternative energy 35 Forestry 36 Agriculture 36 iii Energy efficiency 36 Introduction 36 Case study analysis: Concepts and methods 37 Industrial energy efficiency 38 Industrial restructuring projects 38 Incentives and constraints to implementing restructuring projects 39 Industrial energy conservation projects 40 Energy conservation projects in unhealthy enterprises 41 Incentives and constraints to conservation project implementation 41 High-efficiency energy-consuming equipment 42 Equipment producers 42 Consuming enterprises 43 Constraints to dissemination of high-efficiency equipment 43 Improved coal processing 44 Implementation issues and constraints 44 Energy-efficiency improvements in buildings and the residential sector 45 Alternative energy 45 Prospects for alternative energy technologies 46 Cost estimates for low-carbon energy sources 46 Coal substitutes for electric power generation 47 Alternative sources for direct use 48 GHG control in the forestry sector 50 China's forestry sector 50 Forest resources 50 FGHY program 50 Barriers to large-scale FGHY forestry development 51 Modeling carbon sequestration in China 51 Scenario assumptions 51 National forestry model 51 Forestry plantation models: Financial and economic analysis 51 Results of the financial analysis 52 Conclusions 53 GHG control in the agricultural sector 54 Reducing methane emissions from ruminant animals 54 Rice production 55 CHAPTER 4 CONCLUSIONS AND RECOMMENDATIONS 56 Guiding principles 56 Recommended strategy for reducing GHG emissions in China 57 Economic reform 57 Enterprise reform 57 Incentives and regulatory framework 58 Factor market development 58 Environmental regulatory policy 58 Priority project areas 59 Improvements in energy efficiency 59 Alternative energy development 62 GHG control in the forestry sector 63 CHG control in the agricultural sector 63 International assistance for reducing CHG emissions in China 64 Conventional development assistance programs 64 Policy reform 64 Support for restructuring and no-regrets projects 64 Role of the Global Environment Facility 64 Expected criteria for GEF support 65 Overcoming market and non-market barriers 65 iv Foreword Global climate change is one of the looming quality forms of energy to meet the needs of environmental threats of the 21st century. Al- economic and social development. At the same though the speed and magnitude of the so-called time, there is vast potential for improving the "greenhouse effect" is not yet known, scientific efficiency of energy use in China through further evidence is mounting that the increase in world- institutional strengthening, the transfer of ad- wide atmospheric concentrations of CO2 and other vanced technologies from abroad, and specific long-lived greenhouse gases that has been acceler- investments. An important way of improving ating over the past century will have a significant energy efficiency is through the process of eco- effect on global temperatures, precipitation, and nomic reform, including enterprise restructuring, sea level. Fossil fuel combustion by the developed financial sector development, and the move toward countries over the past century is primarily respon- market pricing and efficient allocation of energy sible for the increase in global atmospheric concen- and other factors of production. Even with major trations of carbon dioxide. However, while energy improvements in energy efficiency, however, the use has peaked or declined in the developed only way to reduce greenhouse gas emissions in countries, energy use is rising in China and other China over the longer term is through the expan- rapidly developing countries; if current trends sion of renewable energy sources. continue, China will surpass the United States as the world's largest energy consumer and emitter of Because China and other large energy consum- CO2 early in the next century ers figure so prominently in the calculus of global climate change, it is essential for them to take This report represents the summary findings actions to limit greenhouse gas emissions, particu- and conclusions of a three-year study, China: Issues larly those actions that have other positive eco- and Options in Greenhouse Gas Emissions Control. nomic or environmental benefits. Based on the The study was conducted under a technical assis- recommendations of this study, the Chinese Gov- tance project of the United Nations Development ernment is proceeding with measures to reduce Programme, executed by the World Bank and greenhouse gas emissions. For its part, and with the implemented by the Chinese Government. As the support of the GEF, the World Bank is committed to first comprehensive country study funded by the helping China improve the efficiency of energy use Global Environment Facility (GEF), it addresses the and to support the commercialization of cleaner key determinants of future energy use in China and alternative energy technologies. identifies cost-effective options for limiting green- house gas emissions. The study was conducted by a joint team from the National Environmental Nicholas C. Hope Protection Agency of China, the State Planning Director Commission of China, UNDP, and the World Bank; China and Mongolia Department the Summary Report, which is reproduced here, was East Asia and Pacific Region subsequently endorsed by the respective institu- tions. For the foreseeable future, China will need to expand the supply of electricity and other high- v Acknowledgments This report summarizes the findings and recom- United Nations Development Programme, and the mendations of a United Nations Development World Bank fully endorse the findings and recom- Programme (UNDP) technical assistance study, mendations of this report. "China: Issues and Options in Greenhouse Gas Emis- sions Control," supported by the Global Environment The Summary Report was drafted and edited by Facility and executed by the Industry and Energy Todd M. Johnson (principal author), with LiJunfeng, Division, China and Mongolia Department, of the Jiang Zhongxiao, and Robert P. Taylor (task manager). World Bank. It draws heavily on eleven subreports Editorial and production assistance was provided by and numerous background papers prepared as in- Kathlin Smith. puts to the study by teams of Chinese and interna- tional experts. Joint Chinese-international study team for In China, about twenty ministries and leading the summary report agencies worked on the study, and some 600 person- months were devoted to it. Research for the project National Environmental Protection Agency of in China was managed by the National Environmen- China tal Protection Agency (NEPA), which was the overall coordinator. The State Planning Commission (SPC) Zhang Kunmin, Deputy Administrator coordinated research on energy efficiency and alter- Wang Hanchen (Project Coordinator), Deputy native energy. Assistance was also provided by the Director, Modern Research Center for Economic Ministry of Machinery Industry and the Shanxi Plan- and Environmental Policy ning Commission. International experts visited China Wu Baozhong, Director, Department of Pollution on three major missions in April and May 1992, Oc- Control tober and November 1992, and June and July 1993. Liu Yi, Foreign Economic Cooperation Office A two-week workshop to design the China Green- Hao Jiming (Consultant), Professor, Research Institute house Gas Model was held at Stanford University in of Environmental Lngineering, Tsinghua University September 1992. Chinese experts visited the World Zhuang Dean (Consiltant), Senior Engineer, Chinese Bank between October 1993 and March 1994, during Academy of Science and Technology Development which time the macroeconomic modeling was done Chen Xikang (Consultant), Professor, Institute of and the major findings of the Summary Report were Systems Science, Chinese Academy of Science discussed and synthesized. Xu Deying (Consultant), Professor, Research Institute of Forestry, Chinese Academy of Forestry The Summary Report is the product of a joint Chinese-international study team including repre- State Planning Commission of China sentatives from NEPA, the SPC, the UNDP, and the World Bank. Team members are listed on page iv. Shen Longhai, Director, Department of Spatial The joint study team attended a two-week workshop Planning and Regional Economy in Washington, D.C. in May 1994 to review the major Zhou Fengqi, Director, Energy Research Institute findings and formulate conclusions. Zhu Liangdong, Advisor and Senior Engineer The National Environmental Protection Agency Zhou Changyi, Division Chief, Department of Raw and the State Planning Commission of China, the Materials Industry vii Wang Shumao, Division Chief, Energy Conservation and Rational Utilization Division, Energy Research Institute Liu Zhiping, Associate Professor, Energy Research Institute Li Jingjing, Engineer, Energy Research Institute United Nations Development Programme Susan McDade (UNDP Project Manager), Assistant Resident Representative (Beijing) Richard Hosier, Principal Technical Advisor on Climate Change, Global Environment Facility The World Bank Robert P. Taylor (Bank Task Manager), Senior Energy Economist, EA2IE Todd M. Johnson (Study Principal Investigator), Environmental Economist, EA21E Li Junfeng (Consultant), Energy Efficiency Specialist, EA2IE Jiang Zhongxiao (Consultant), Macroeconomist, EA2IE Robert M. Wirtshafter (Consultant), Energy Efficiency Specialist viii Abstract This report summarizes the findings and the greatest potential for low-cost GHG emission recommendations of a three-year study on green- reduction. Over the longer term, however, the only house gas (GHG) emissions and options for abate- option for China and the world is to switch to non- ment in China over the coming decades. carbon energy sources. The study concludes that a Macroeconomic modelling results show that the two-pronged strategy for reducing GHG emissions continuation of rapid economic growth in China in China should be adopted, whereby (i) economic could result in a threefold increase in GHG emis- reform and policy initiatives are continued for the sions between 1990 and the year 2020. Specific purpose of improving resource allocation and measures for limiting GHG emissions are examined encouraging energy conservation, and (ii) a set of in detail, including improvements in energy priority investment and technical assistance efficiency, more rapid introduction of non-fossil programs are undertaken which promote the energy technologies, afforestation for carbon acceleration of more efficient and low-carbon sequestration, and modifications to various GHG- technologies and which improve the institutional producing agricultural practices. In the short- to and human resource capacities to implement and medium-term (before 2010), energy efficiency holds sustain these programs. ix Data Notes Currency equivalents All Chinese currency (yuan) references in this report are in constant 1990 prices and are converted to U.S. dollars at the official exchange rate of 4.7 yuan (Y) per U.S. dollar. Weights and measures 1 ton of coal = 0.7143 tce (average) = 20.934 GJ 1 ton of crude oil = 1.43 tce = 41.816 GJ 1000 m3 of natural gas = 1.33 tce = 38.931 GJ 1 ton fuelwood (air dry) = 0.54 tce 1 hectare = 104 m2= 2.47 acres 1 GJ coal = 25.8 kgC 1 GJ crude oil = 20 kgC 1 GJ natural gas = 15.3 kgC All CO2 weights expressed as molecular weight of carbon (C) Abbreviations and acronyms C carbon CFC chlorofluorocarbons CH4 methane CO carbon monoxide CO, carbon dioxide EIRR economic internal rate of return FGHY fast-growing high-yield (forestry plantations) FIRR financial internal rate of return GDP gross domestic product GEF Global Environment Facility GJ gigajoule GHG greenhouse gas GWP global warming potential 1-0 input-output IPCC Intergovernmental Panel on Climate Change kgce kilogram of coal equivalent kW kilowatt kWh kilowatt-hour LNG liquified natural gas LPG liquified petroleum gas mtce million tons of coal equivalent MW megawatt N20 nitrous oxide NEPA National Environmental Protection Agency of China NOx nitrogen oxides NPV net present value OECD Organization for Economic Cooperation and Development PV photovoltaic SO2 sulfur dioxide SOE state-owned enterprise SPC State Planning Commission of China t metric ton tce ton of coal equivalent TSP total suspended particulates TVE township and village enterprise UNDP United Nations Development Programme x Executive Summary INTRODUCTION Potential climate change impacts on China The burning of fossil fuels and other human ac- China and other low-income countries are likely tivities are changing the balance of CO2 and other to be most affected by climate change because their heat-trapping gases in the atmosphere. According economies are more dependent on climate-sensitive to scientific theory, the "greenhouse effect" has the sectors, such as agriculture, and because they are least potential to dramatically alter the earth's climate in a able to afford mitigation or adaptive measures, such relatively short span of time. At current emission as the building of dikes. Chinese researchers have rates, global atmospheric CO, concentrations will predicted that a doubling of CO2 will have a nega- double by the middle of the twenty-first century. tive impact on rice, wheat, and cotton production According to the Intergovernmental Panel on Climate because of the combined effects of higher tempera- Change (IPCC), this will result in a warming of the tures, increased soil evaporation, and more frequent earth's atmosphere by 1.5-4.5 degrees C and cause and severe storms. This prediction is consistent with global mean sea levels to rise by 0.25-0.50 meters. recent modeling work by the IPCC, which estimates that agricultural production would fall by 6-8 per- One of the goals of the Framework Convention cent worldwide, and by 10-12 percent in developing on Climate Change (FCCC), established at the Envi- countries, with a doubling of atmospheric CO2 con- ronmental Summit in Brazil in 1992, is to provide centrations. Rising sea level is another concern for assistance to developing countries to help them limit China and other countries with large populations liv- their emissions of greenhouse gases (GHGs). Despite ing in low-lying coastal plains. According to studies the need to take measures to limit GHG emissions, by Chinese researchers, a 1-meter increase in sea level, economic development and poverty alleviation are when combined with storm surge and the astronomi- recognized by the FCCC as the top priorities for China cal tide, will flood areas below a 4-meter contour line and other low-income countries. in China's coastal plains. The inundated land would cover an area the size of Portugal, including the cit- Energy is the largest source of greenhouse gas ies of Shanghai and Canton, and would displace 67 emissions worldwide, and China currently accounts million people at current population levels, more than for 10 percent of global energy use. However, among the population of the Philippines. countries with the highest GHG emissions, only China is likely to maintain rapid rates of economic Despite the potential for disastrous consequences growth well into the next century and this expansion associated with human-induced climate change, there will require additional energy. This study evaluates is substantial uncertainty in impact predictions and the reduction potential and costs of a broad array of in the climate change process itself. Until the scien- options for reducing GHG emissions in China over tific uncertainty associated with the greenhouse ef- the next twenty-five years. This summary report is fect and its impacts can be reduced, it is rational for the result of a two-year investigation by a joint Chi- China to focus first on a "no-regrets" policy for GHG nese-international study team of representatives from reduction; that is, those policies or projects that make the National Environmental Protection Agency and sense for economic, social, or environmental reasons the State Planning Commission of China, the United Nations Development Programme, and the World Bank, with support from the Global Environment Facility (GEF). 1 Executive Summary other than GHG reduction. A no-regrets policy is Figure 1 China: Greenhouse gas emissions, 1990 particularly important for low-income countries, where there are many other urgent developmental Carbon dioxide (85%) needs and environmental concerns. Estimates of current GHG emissions Methane (13%) Cement :Coal mines Energy consumption is by far the largest contribu- tor of GHG emissions in China, accounting for more Animals than 80 percent of total emissions in 1990. Coal ac- Rice fields counted for 76 percent of primary energy use in China Rice fed in 1990, followed by oil (17 percent), hydropower (5 r use percent), and natural gas (2 percent). Industry and electric power generation accounted for 75 percent of China's CO2 emissions from commercial energy Nitrous oxide (2%) consumption, while the residential sector accounted for 14 percent and transportation 4 percent. Indus- trial boilers used outside the power sector consumed more than 350 million tons of coal in China in 1990, Note: Excludes CFCs. In 1990, forests were a small sink of accounting for about 35 percent of the country's coal carbon dioxide. use. Methane accounted for approximately 13 percent influence on future emissions levels. A China GHG of China's GHG emissions in 1990 (CO2 equivalent), model was constructed for the study, composed of with rice fields, coal mining, ruminant animals, and an econometric macroeconomic model, an 18-sector animal wastes contributing 88 percent of methane input-output model of the economy, a matrix of en- emissions (Figure 1). All other sources of GHG emis- ergy demand coefficients, and an emissions matrix sions, including CO2 from cement manufacturing, to calculate both global (CO2 CH4, and N20) and lo- methane from landfills, N20 from fertilizer, and non- cal (TSP and SO0) emissions. Economic structure and CO2 emissions from biomass burning and land use its change over time is represented by a series of in- changes, accounted for about 6 percent of China's put-output tables projected to the years 2000, 2010, total GHG emissions in 1990. Forests were a small and 2020, based on China's historical situation and sink of carbon in 1990. the trends in other countries, including Japan, the United States, and Germany. METHODOLOGY In the microeconomic work, cost-benefit analysis was used to assess the net unit cost of GHG reduc- The study entailed extensive macroeconomic and tion for several reduction options: benefits were sub- microeconomic analysis, which was conducted by tracted from the costs of various projects, with the international and Chinese teams. The macroeconomic remaining "net" cost divided by the discounted tons work focused on (i) detailed sector and subsector of carbon equivalent reduced. Financial, economic, analysis of energy use and GHG emission trends, and and, where possible, local environmental economic the potential for energy conservation, interfuel sub- analyses were conducted for twenty-five energy effi- stitution, and GHG control in the forestry and agri- ciency projects, alternative energy sources, timber and culture sectors; (ii) development of scenarios for fu- protective afforestation plantations, and selected ag- ture growth in GHG emissions; and (iii) identifica- ricultural programs. The net present value, internal tion and analysis of the factors that have the greatest rate of return, and cost per ton of carbon equivalent reduced were calculated for these projects. 'The greenhouse gases that have been estimated in this report- Some of the conclusions of this study may need to CO, CH., and N20-have been added based on their heat-trap- be revised as more information about climate change, ping properties, or "global warming potential" (GWP). For an its effects, mitigation options and technologies, and explanation of the use of GWPs, see Climate Change, The IPCC China's economic development path becomes avail- Scientific Assessment, Intergovernmental Panel on Climate Change, (Cambridge University Press, 1990). able. 2 China: Issues and Options in Greenhouse Gas Emissions Control FACTORS AFFECTING GHG EMISSIONS AND The Baseline GHG Scenario results in an energy OPTIONS FOR REDUCTION use/GDP growth elasticity of about 0.5 from 1990 to 2020, and a reduction in the energy intensity of GDP Even with further dramatic declines in the energy in 2020 to one-third the 1990 level. The intensity of China's economy, continued economic macroeconomic analysis found that structural factors, growth will cause China's greenhouse gas emissions or "indirect energy savings," account for about three- to increase substantially by 2020. Under ahigh-growth quarters of the decline in total energy intensity dur- scenario developed by the study team, China's ing the period. economy grows at an annual rate of 9.5 percent dur- ing the 1990s, 8.0 percent from 2000 to 2010, and 6.5 Specific reduction options percent from 2010 to 2020. In the team's Baseline GHG Scenario, modeled to depict a continuation of Energy efficiency. In addition to indirect energy say- the development trends of the 1980s and early 1990s, ings through structural change, there is great poten- rapid growth would be accompanied by a three-fold tial for direct energy savings by reducing energy use increase in GHG emissions between 1990 and 2020. per unit of physical output. This can be accomplished The primary cause of the GHG increase would be a by the following means: rise in coal consumption from 1.05 billion tons in 1990 to about 3.1 billion tons in 2020. Actual levels of fu- * industrial modernization and restructuring, includ- ture coal use and CHG emissions can be influenced ing adoption of more efficient industrial processes, by a variety of policies and investment patterns. The achievement of economies of scale, and improved key factors are summarized in the following section management. In particular, an increase in the scale and described in greater detail in Chapter 2. of plants in the rapidly expanding thermal power sector can yield major efficiency gains. Macroeconomic factors * "classic" industrial energy conservation projects, in- Rate of economic growth. Slower growth in GDP cluding improved waste heat, gas, and waste stream can be expected to bring slower growth in GHG emis- recovery; expanded use of cogeneration; industrial sions. However, the rate of economic growth is also furnace and kiln renovation; installation of improved correlated with improvements in energy efficiency. monitoring and control systems; and use of improved More rapid development increases the opportunity insulation and other renovations in thermal and for adopting new, more energy-efficient processes and steam systems. technologies. In the team's slower-growth scenario, average annual GDP grows at 8.5 percent during the * improvements in the energy efficiency of new models 1990s, 6.5 percent from 2000 to 2010, and 5.0 percent of widely used equipment, particularly small and me- from 2010 to 2020. While China's total GDP in 2020 dium-sized coal-fired industrial boilers, electric mo- under the slower-growth scenario is less than 70 per- tors and associated industrial electrical equipment, cent of the GDP in the high-growth scenario, GHG air conditioning equipment and refrigerators, light- emissions decline by only 10 percent. ing devices, and steam traps associated with indus- trial piping networks. Economic structure. Changes in the structure of China's economy will continue to be primarily re- * additional coal processing and improvement of the qual- sponsible for future declines in energy intensity. In ity and consistency of coal supply, including expansion terms of energy use per unit GDP, China is one of the of coal gasification, washing, screening and sorting, most energy-intensive economies in the world. How- and briquetting. ever, the country's energy intensity is expected to drop sharply because of changes in the product mix * residential and commercial sector energy-efficiency and sources of value added in industry. With further measures, including the use of improved building economic reform, the increase in industrial value designs, building materials, centralized heating sys- added, which is expected to drive China's growth, tems, residential stoves, and electrical equipment. will come less from quantitative increases in the out- put of basic industrial goods and more from greater Alternative energy. In addition to improved energy product diversification, specialization, and improve- efficiency, the other major option for large-scale re- ments in quality duction of GHGs in China-and the world-is the substitution of low- or non-carbon alternatives for fos- 3 Executive Summary sil fuels. Reliance solely on market forces is not likely Table 1 Potential for GHG reduction to result in the substitution of large amounts of low- compared to baseline scenario, 2020 carbon fuels for coal in China over the medium term. Accelerated development of alternative energy Share sources, in line with their strategic importance for fuel mtC % diversification, as well as for improvements in envi- ronmental quality and poverty alleviation, will re- Energy efficiency (high scenario) -330 41 quire a program of well-targeted government and Alternative energy (high scenario) -237 29 international support for technology development, Afforestation (high scenario) -221 27 especially for renewable energy. By the year 2020, Agricultural programs -15 to -25 03 large-scale adoption of low-carbon energy sources _ -- - such as hydro, nuclear, gas, biomass, solar, and wind technologies could displace a substantial quantity of coal, particularly for electric power generation. Based could be limited to a doubling, rather than a tripling, on a projection of current trends in technological de- compared with the Baseline GHG Scenario, which velopment, the study team estimates that low-car- estimates 2,398 mtC. This could be achieved through bon fuels could provide 35-40 percent of electric the adoption of more aggressive direct energy effi- power generation and 15--20 percent of China's en- ciency measures, expanded use of alternative energy, ergy supply by the year 2020. Displacement of coal massive afforestation, and changes in selected agri- in non-power uses, such as industrial process heat cultural techniques. and residential cooking, will be a particular challenge. THE COSTS OF GHG EMISSION REDUCTION Forestry. By instituting a massive afforestation pro- gram, China could reduce net GHG emissions by The most cost-effective options for reducing GHG about 10 percent in 2020 compared with the Baseline emissions are those in which other, non-GHG-related GHG Scenario. To achieve this level of carbon se- project benefits exceed project costs. China is ex- questration, China would have to increase forested pected to have ample opportunity for implementing land by 4-5 million hectares per year between now such "no-regrets" options into the next century A and the year 2020, extend the use of fast-growing, key challenge is to overcome barriers that impede high-yield plantations, and broadly disseminate ad- rapid implementation of these projects. vanced silviculture techniques. This level of plant- ing would increase the percentage of forested land Energy efficiency. The study team evaluated twenty- in China from about 13 percent in 1990 to more than five representative energy-efficiency projects in 20 percent by the year 2020. Although fuelwood plan- China, primarily in the industrial sector, that show tations do not sequester much carbon on a net basis, promise for reducing energy use and GHG emissions. they can contribute to GHG reduction by producing Overall, the financial and economic internal rates of biomass, a substitute for fossil fuels. Utilizing wood return of these investments were attractively high, and forest residues grown on a sustainable basis to even without consideration of their major GHG re- generate power is an effective way to reduce GHGs duction benefits. Most projects also had human by both replacing coal and increasing carbon seques- health benefits through reductions in TSP and SO2 tered on forest stands. emissions. Yet, progress in implementing many of these projects is slow. Industrial modernization Agriculture. By further disseminating techniques for projects require large amounts of upfront investment cattle breeding and raising that improve the efficiency capital and often carry substantial risk. In today's of food digestion and use, methane emissions from growing economy, enterprise managers typically pay animals in China could be reduced by 25 percent by little attention to the life-cycle returns of cost-saving the year 2020. Rice growing techniques that decrease investments and tend to be interested in smaller en- the amount of time rice fields are flooded could re- ergy-efficiency projects only if payback periods are duce methane emissions from rice cultivation in short. Although important in the aggregate, the cost China by 15-20 percent by the year 2020. savings of some energy conservation measures are too small to be important to individual enterprises. Cost issues aside, the study team estimates that Finally, access to advanced foreign technologies and the increase in GHG emissions in China accompany- knowledge of the opportunities and experiences of ing the high-growth GDP scenario for 1990-2020 other enterprises at home and abroad is often poor. 4 China: Issues and Options in Greenhouse Gas Emissions Control Alternative energy. Most of the low-carbon fuels that 2. accelerated implementation of "no-regrets" could substitute on a large scale for coal are judged projects over the short to medium term; and to be more costly than coal over the next twenty-five years, even when the costs of meeting strict environ- 3. expanded development of less-carbon-intensive mental standards for coal use are added. There is energy technologies for the longer term. some opportunity for expanding "no-regrets" invest- ments in current non-coal energy supply technolo- Economic reform gies, including investments in hydroelectric power, the use of coal-bed methane, fuelwood production Completion of a successful transition to a market under favorable natural conditions, expanded explo- economy is fundamental to the Chinese government's ration and development of natural gas, and wind- economic development policy Success in economic powered electricity generation. Based on the cost ex- reform is also a key factor influencing future GHG pectations of most experts today, however, expanded emission levels. The pace of structural change in the development of nuclear power and other non-coal economy will be largely determined by progress in alternatives would be extremely expensive. To re- economic system reform, and the pace of structural duce the share of coal in the Baseline GHG Scenario change is the most important factor influencing the from 67 percent in 2020 to 57 percent would carry an energy efficiency of the economy. In addition, con- additional cost of more than US$100 billion. tinued progress in economic reform is important to help spur technical energy conservation and other Forestry. Anet cost analysis of carbon sequestration no-regrets projects. Further development of enter- from forestry projects found that four types of plan- prise autonomy and accountability, hard enterprise tations in China are financially and economically at- budget constraints, expanded competition, and tractive on a life-cycle basis even if GHG benefits are completion of price reforms are all important ele- not considered: (i) intensively-managed, fast-grow- ments of a framework of incentives for improving ing, high-yield (FGHY) timber plantations on good energy efficiency. land; (ii) extensively-managed timber plantations in South and Southwest China; (iii) improved open for- As in developed countries, environmental regu- est management regimes in South China; and (iv) latory policy can be an important tool in China to intensively-managed FGHY fuelwood plantations in encourage enterprises to use clean forms of energy South and Southwest China. and to use energy more efficiently. While China has made significant progress in establishing a compre- Agriculture. Certain improved breeding and feed hensive environmental regulatory system, enforce- programswerefoundtohaveveryhighfinancialand ment must be improved and modifications are economic rates of return and are being adopted across needed to make it more effective in a market system. China. An ammoniated feed program is being pro- Internationally, China should adopt and disseminate moted because it results in less local air pollution from its strategy for GHG reduction as part of its partici- crop residue burning as well as yielding high finan- pation in global climate change initiatives. cial returns. Economic analyses were not performed on the two rice-cultivation practices, but these tech- Priority policy, investment, and technical niques are already being used in some parts of China assistance areas for reasons other than GHG reduction. While continued economic reform is critical for effective GHG abatement, China's GHG control strat- RECOMMENDATIONS egy must also include a series of specific actions. These include reforming certain sector-specific poli- Based on its extensive analysis, the joint study cies; investing in no-regrets projects; and improving team concludes that the following elements are most institutional, technical, and managerial capacities. important in forming an optimal strategy to reduce GHG emissions in China: The joint study team concludes that the project areas summarized in the following paragraphs and 1. continuation and expansion of the economic re- in Chapter 4 represent areas of high priority for ac- form program to improve the overall efficiency of tion to reduce GHG emissions given the priority that resource use; China correctly places on economic development. 5 Executive Summary Primary emphasis should be placed on measures to phasizing financial benefits and targeting small en- speed investment in projects that have substantial terprises, including TVEs; and (v) technical assistance benefits aside from GHG reduction. The bulk of in- and training, including energy auditing, vestment in these projects should come from enter- preinvestment analysis, and staff training. prises themselves. The challenge for the Chinese gov- ernment is to assemble effective packages of policy Strategically important areas of concentration in- reform, investment, and institutional strengthening clude the following: measures to reduce barriers to implementing these projects and to catalyze a broad-based response. Uti- * industrial energy conservation projects, especially lizing international assistance where necessary, mea- those focusing on more efficient heat, steam, and by- sures to speed implementation of no-regrets projects product gas utilization. or to invest in the development of more cost-effec- tive low-carbon energy supply technology in China * projects to develop, manufacture, and effectively are among the most cost-effective means available market more efficient models of energy-consuming globally to reduce GHG emissions. equipment. National policies should be implemented to encourage the development of higher-efficiency Improvements in energy efficiency. Improvement in small- and medium-scale coal-fired industrial boil- the technical efficiency of energy use is the highest ers. priority for action to mitigate GHG emissions in China over the short and medium term. In terms of * improvement in the quality of coal supply, over policy, further enterprise reform and improved local the near term, through increased washing of steam environmental regulation are important. Further ef- coal, better sorting and matching of coal types and forts also are needed to complete energy price reform, sizes, and briquetting and pelletization. This requires such as the rationalization of natural gas prices. Af- policy and investment support, beginning with a pi- ter reviewing the impact of the recent liberalization lot project in one or two localities. Adoption of im- of coal prices, the Chinese government should weigh proved coal gasification technology will be impor- the potential advantages and disadvantages of coal tant over the long term. taxation, especially as a tool for meeting local envi- ronmental objectives. Finally, there is a need to pro- * improvement in the energy efficiency of residen- mote the implementation of more effective energy- tial and commercial buildings. This can be achieved efficiency standards for equipment, especially boil- through the implementation of policies to overcome ers and key electrical equipment. institutional barriers; the promotion of more efficient use of energy-intensive materials such as cement, In addition, the Chinese government should ex- steel, and bricks; the development, demonstration, pand its efforts to remove barriers to "no-regrets" and marketing of new energy-saving construction projects, such as insufficient access to information products; and the integration of more efficient dis- about technical opportunities and experiences, lack trict heating system designs in housing projects. of access to foreign technology, abnormally high tech- nical and market risks associated with new processes Although the transport sector is projected to ac- or technologies, high transaction costs for small in- count for only 5 percent of CO2 emissions from China vestments, and institutional constraints. Recom- in 2020 under the baseline scenario, the absolute mended means to overcome these barriers, particu- amount of energy consumed by the sector would in- larly in the current period of economic transition, crease from 45 mtce in 1990 to 173 mtce in 2020 and include the following: (i) improved credit facilities options for reducing emissions through efficiency im- for energy conservation investments, emphasizing provements, modal shifts, and structural change financially viable investments with longer payback could be important globally. Further research on such periods; (ii) well-targeted concessional finance for options is needed. demonstration of new energy-saving technologies, including those from abroad that carry substantial Alternative energy development. Greater support for technical or market risk; (iii) development of energy the development of low- or non-carbon energy tech- service companies which bear the risk of energy-say- nologies is urgently needed now for non-coal energy ing investment in enterprises in return for a share of alternatives to play a major role in China's economy the financial return; (iv) better dissemination of in- over the medium and long term. China will require formation on energy conservation investments, em- massive quantities of alternative energy supply dur- 6 China: Issues and Options in Greenhouse Gas Emissions Control ing the early part of the next century for local envi- ment efforts should focus on policies to improve ru- ronmental and logistical reasons, as well as for rea- ral credit and expand technical assistance, demon- sons relating to the global environment. Given the stration, and dissemination of proven no-regrets pro- abundance of low-cost coal resources in China, the grams. necessary technological development of alternative energy sources is not likely to occur at sufficient speed International assistance for reducing GHG solely through reliance on market forces. emissions in China Accordingly, the joint study team recommends Development assistance. Conventional international that the government establish, with international as- and bilateral assistance to China will continue to be sistance where required, an aggressive program to important for improving resource allocation in gen- accelerate the technological development of alterna- eral and energy efficiency in particular, both of which tive energy sources, particularly renewable energy are essential for GHG reduction. The technical assis- technologies. Primary emphasis should be placed on tance and lending programs of international agen- technologies that have the potential to make a large cies have helped to advance energy price reform, contribution to China's long-term energy supply. The capital market development, enterprise management, program should focus on research, technology trans- and ownership reforms in China. Continued and fer from abroad, and technology demonstration and expanded support from international agencies is also dissemination activities aimed at reducing the costs needed for China to implement many of the priority of the alternative energy supply and improving its investments in GHG reduction outlined above, such cost-effectiveness when compared with the use of as energy conservation, efficient power development, coal. high-yield timber plantations, improved animal feed, and alternative energy technologies. In addition, In addition, support should be given to speed the because private sector foreign investment will be adoption of alternative technologies where applica- important in the modernization of China's capital tions are currently cost-competitive with coal; for stock over the next several decades, the Chinese gov- example, in certain coal-bed methane, biomass, wind, ernment should seek to maximize the efficiency of or solar energy applications. Expanded exploration foreign technologies and processes that are brought of natural gas should also be emphasized. to China. GHG control in the forestry sector. Afforestation Role of the Global Environment Facility. GEF re- and forestry management practices that have the sources should be used to promote and accelerate potential for maximizing carbon sequestration at the priority policies, investment, and technical assistance lowest net cost should be the focus of government projects for GHG reduction in China outlined above support. Policies to encourage private investment in and in Chapter 4. Although the exact criteria for fu- the forestry sector are especially important, includ- ture GEF projects have yet to be finalized, based on ing improvements in rural capital markets, further experience with the GEF to date, the joint study team price reform, clarification of property rights, and lib- expects that the following principles will guide the eralization of foreign trade and investment policies. selection of future global climate change projects: (i) Technical assistance or technology transfer can also GEF resources should be used to advance global en- help expand China's fast-growing high-yield plan- vironmental objectives and not as another source of tation program and improve silviculture techniques, development funding; (ii) projects seeking GEF sup- nursery management, and forestry research and ex- port should be of national priority and part of the tension. country's overall climate change strategy; and (iii) GEF resources should aim to maximize the amount GHG control in the agricultural sector. In the agri- of GHG reductions per unit of GEF funding. cultural sector, China should focus its GHG control efforts on expanding and accelerating programs that To support China's priority policies, investment, increase the efficiency of livestock production. Mean- and technical assistance projects for GHG reduction, while, the international community should support GEF resources should be used primarily to overcome research in China on emissions and control mecha- market and non-market barriers to implementing nisms for methane from rice fields and N2O from fer- "no-regrets" projects and for accelerating the devel- tilizer, and the development and dissemination of opment of promising alternative energy technologies related applicable no-regrets technologies. Govern- for the longer term. Whether the constraints are of a 7 Executive Summary technical, informational, or institutional nature, the use of GEF resources to overcome barriers to no-re- grets projects will result in exceptionally large reduc- tions in GHG emissions per unit of GEF funding. The joint study team believes that the use of GEF re- sources in this manner will provide the most ben- efits to China and be the most efficient use of GEF funds for GHG reduction. Where technical or market risk represents a cur- rent binding constraint to the adoption of high-effi- ciency technologies, the GEF can play a critical role in supporting technology transfer through the pur- chase of technology rights, joint Chinese-interna- tional pilot project development programs, and the implementation of demonstration projects. The GEF should also support projects that address institu- tional, informational, or policy constraints, such as the development and implementation of more effec- tive standards, dissemination of proven processes and techniques, training programs, and public edu- cation campaigns. In addition to project options that have potential for broad dissemination under cur- rent market conditions but which require strategic input from GEF to overcome existing constraints, GEF resources should also be used to accelerate altenative energy technology development, particu- larly for renewables, so that such technologies can be adopted on a large scale in the future at costs com- petitive with carbon-intensive fuels. As an initial assessment of GHG mitigation for China, this report provides a framework for identi- fying priority projects for future GEF eligibility and funding in China. 8 Chapter 1 Study Objectives and Background STUDY OBJECTIVES transfer of financial resources and advanced technolo- gies to developing countries to assist them in reduc- ing GHG emissions. To ensure that these resources Scientific research and the historical climate record are used efficiently, it is essential that countries pre- appear to support the theory that the earth's climate pare climate change strategies that identify the least- is being affected by anthropogenic emissions of green- cost options for reducing GHG emissions. This re- house gases. Given the potential risks of global cli- port, which has been prepared jointly by the World mate change, it is appropriate for countries to limit Bank and the Chinese government, is intended to emissions, or as one author has stated, to "buy green- identify priorities for GHG reduction that could be house insurance."' However, because GHG emis- part of China's overall climate change strategy. sions are usually closely correlated with economic growth, limiting emissions is tantamount to limiting The tasks for the study were as follows: economic development-an unwelcome prospect for low-income countries. Because there are other im- * Establish a baseline GHG emissions inventory for portant developmental objectives that need to be China for 1990 based on internationally agreed-upon funded, nations should buy the least expensive in- standards. surance available, particularly until the significant un- certainty associated with global climate change is re- * Estimate GHG emissions over the next three de- duced. cades (1990-2020) under different scenarios. This report identifies and evaluates low-cost op- * Identify the factors that will have the greatest im- tions for GHC reduction that China can implement pact on reducing GHG emissions and quantify the in the short- to medium-term-between now and the magnitude of potential reductions. year 2010. Of the major contributors to worldwide GHG emissions, only China is expected to experience * Develop a methodology for calculating the net cost rapid economic growth over the next several decades. of GHG emissions reduction so that different options Given China's size and developmental potential, can be compared. major reductions in GHG emissions in the rest of the world will be required to offset even modest increases * Identify and evaluate emissions reduction options in emissions from China. By the same token, modest in four subsectors: energy-use efficiency, alternative improvements made now to reduce emissions from energy, forestry, and agriculture. China will have a tremendous impact on worldwide GHG emissions over time. * Identify barriers to the development of least-cost options for GHG reduction and describe what steps A major objective of the Climate Change Conven- can be taken by China, international development tion, which was adopted at the 1992 Environmental organizations, and the Global Environment Facility Summit in Brazil, is to provide a mechanism for the (GEF) to implement a least-cost reduction strategy in China. Alan S. Manne and Richard C. Richels. Buying Greenhouse Insur- ance: The Economic Costs of CO. Enussion Limits (Cambridge: MIT Press, 1992). 9 Study Objectives and Background POTENTIAL CLIMATE CHANGE IMPACTS IN nese researchers have predicted four principal im- CHINA pacts for China from climate change:' i) a general warming trend which would extend China's tropical Concern over the greenhouse effect is based on and northern growing regions, ii) lower crop yields the potential damage that global climate change due to reduced water availability caused by increased could inflict on food production, human settlement, evaporation, iii) a greater threat of soil erosion caused and terrestrial ecosystems that support both plant by higher precipitation levels and a decline in soil and animal life. There is considerable uncertainty moisture, and iv) increased flooding of coastal and in estimating the impacts of anthropogenic contri- low-lying plains caused by sea-level rise and more butions of CO2 and other heat-trapping gases in the frequent and severe storms. atmosphere. One of the tools used to explore future climate change is the computerized General Circu- lation Model, which is used to simulate past and fu- Table 1.1 Simulated changes in China's climate ture climate variation. Such models have been used with a doubling of CO2 to simulate the effect of increasing concentrations of CO, in the atmosphere. According to the leading Winter Summer models, a doubling of atmospheric CO,, which at current levels of emissions would be reached before Surface air temperature 4.8 3.9 2050, would increase global mean surface tempera- (degrees centigrade) tures by 1.5-4.5 degrees centigrade, while the global mean sea level would rise by 25-50 cm.1 Precipitation (%) 12.7 9.3 While the impacts of future climate change are Soil moisture (%) -2.4 -2.9 hard to predict, several studies have been concluded or are underway that explore potential global im- Total cloud cover (%) -5.1 -2.9 pacts. Most at risk from climate change will be com- munities that are least able to adapt and sectors that Source: Wang et al., 1992, National Center for Atmospheric Re- are most dependent on climate, such as agriculture. search, Albany, NY According to simulations done by the Intergovern- - mental Panel on Climate Change (IPCC), a doubling of CO, will lead to a decline in global agricultural The wide range of climatic zones in China- production of 6-8 percent, while in the developing subfrigid in the north to tropical in the south; humid countries the decline would be on the order of 10-12 in the east to arid and alpine in the west-would be percent. One of the most serious impacts will be the affected in different ways by global climate change. change in water availability. For instance, with a 1- The warming would be greater in winter than in sum- 2 degree centigrade temperature increase and a 10 mer. Rainfall would increase in the warming areas percent decrease in precipitation, water runoff could of the north and west as well as in coastal areas. Sum- decrease by 40-70 percent per year. Because there mer flooding would become more frequent in the are large populations in Asia living in low-lying areas of the Yangtze, Liaohe, and Huaihe Rivers, as coastal areas, there is particular concern in the re- would typhoons and storms, which affect China's gion over sea-level rise and the related issues of land southeast coast. Many parts of China could experi- subsidence, salt water inundation of fresh waters, ence an increase in drought, hot dry winds, and soil and the increased frequency and severity of storms. evaporation, especially in the spring and early sum- mer. Although predictions of regional climate change effects are less certain than global mean levels, esti- Agricultural production mates of changes for China with a doubling of at- mospheric CO, have been simulated through the use In China, agriculture is the economic sector that of a leading climate change model (Table 1.1). Us- would be most affected by climate change. Grain and ing these results as a guide, and based on historical vegetable crops, livestock, fisheries, and forest prod- climate change data for different parts of China, Chi- ucts would be affected by global warming in both 2ClinateCiange:ThelPCCScientificAssessnent,IPCC,(Cambridge: 3 For details, see the project subreport prepared for this study, Cambridge University Press, 1990). Potential Impacts of Climate Change on China, September 1994. 10 China: Issues and Options in Greenhouse Gas Emissions Control positive and negative ways. With a doubling of CO, duction in parts of North China, overall grass pro- the temperature zones in China are predicted to move duction in China is predicted to decline by the year north by as much as 4 degrees latitude. This would 2030 because water will be more scarce. The result reduce frost damage to crops, and, assuming that all would be a decline in the number of animals that other factors remained constant, would allow an in- could be supported on the same area of grassland, or crease in multiple cropping patterns and aid in pho- an increase in costs for supplementing animal diets. tosynthesis through the CO2 fertilization effect.' As temperatures rise, however, soil evaporation in- Fisheries. Several climate change variables were ex- creases; studies in China have shown that for every amined for their impact on both inland and coastal 1 degree centigrade increase in temperature, soil fisheries in China, including changes in temperature, evaporation increases by 5-10 percent. As a result, water area, availability of food nutrients, and storms. many parts of China would become drier with a dou- While some fisheries would benefit from increases bling of CO2. In regions where evaporation is greater in temperature and rainfall, the overall impact is pre- than precipitation, the need for additional irrigation dicted to be a decline in production by the year 2030. would increase the threat of secondary soil saliniza- Particularly affected would be the Yangtze River re- tion. Most areas of China would be more vulnerable gion, which accounts for 50 percent of China's inland to soil erosion as a result of climate warming. Sea- water area. There, lower temperatures in winter and level rise would inundate some coastal areas; low- higher frequency of storms and flooding could de- lying fields would be flooded more often, storm surge crease fishbreeding considerably by the year 2030. would be more frequent, typhoons would be more severe, and drainage of low-lying areas would be Sea-level rise more difficult. In delta areas, sea water intrusion would degrade farmland and cause the salinization The most serious impact of a rising sea level would of groundwater. As temperatures increase, insects, be the increased frequency and severity of storm rodents, and weeds could appear earlier in the spring surges and typhoons. However, sea water intrusion and remain longer in the autumn, causing more dam- and coastal erosion would also cause economic and age to crops and increasing pest and weed control social losses for China. In addition to the 25-50 cm costs. rise in global sea level by 2050 caused by global warming, relative sea level in parts of China is pre- Grain and vegetable crop production. Although glo- dicted to rise because of tectonic subsidence and bal warming would probably increase the area avail- groundwater overpumping. By 2050, relative sea able for triple-cropping of rice, the average yield is level is predicted to rise 70-100 cm in Tianjin, 50-70 projected to fall because of decreased water avail- cm in Shanghai, and 40-60 cm in the Pearl River Delta. ability At the margins of cereal production in the Chinese researchers have shown that if coastal areas north, increased temperatures would increase crop are not protected, a 1-meter increase in sea level will yields, particularly in Northeast China and on the flood regions lying below a 4-meter contour line in Qinghai-Tibet Plateau. Based on the many factors China's coastal plains when combined with the as- affecting crop production, including temperature, tronomical tide and storm surge. The inundated area precipitation, CO2 fertilization, evaporation, storms, would cover fourteen cities and counties in the Pearl flooding, disease, pests, and crop adaptability, Chi- River Delta, including Canton, and thirty-four cities nese researchers have estimated a decline in produc- and counties in East China, including Shanghai. This tivity for several crops, including wheat, rice, and area covers a total of 92,000 km2 and the flooding cotton. would displace 67 million people at current popula- tion levels. Livestock. The production of grasses, the primary feedstuff for animals in China, is predicted to be ad- Terrestrial ecosystems versely affected by climate change. While there would probably be marginal increases in grass pro- Wetlands, forests, and deserts, and their respec- tive flora and fauna, would most likely be adversely affected by a doubling of CO2. China's wetlands, 40 While laboratory experiments show that increased CO, concen- percent of which already face medium to serious trations can increase the productivity of certain types of plants by threat according to theAsian Wetlands Bureau, would as much as 50 percent, this initial response declines over time be further affected by increased evaporation and ni- and productivity eventually approaches that of crops grown un- der normal CO, levels. trification resulting from the temperature rise. More :11 Study Objectives and Background than 500 species of freshwater fish and 300 species of Table 1.2 CO2 emissions from major contributors, birds inhabiting Chinese wetlands and shallow in- 1990 (mtC)' land waters would be affected by changes in the area, seasonality, and location of wetlands. Mangroves, an CO, Percent important component of coastal ecosystems, could move north with warmer temperatures; however, China 596b 10 they would also be threatened by sea level rise and more frequent tropical storms. Arid and semi-arid United States 1,222 21 regions will be most affected by climate change, ex- periencing decreases in rainfall and soil moisture and Japan 248 4 increases in temperature. Combined with the harm- ful effects of doubled CO2 on plant growth in these USSR (former) 1,034 18 areas, desertification could increase. The area suit- able for growth of tropical rain forests would increase, Europe 1,198 21 while cold-temperate and temperate forests, which account for most of China's forests and available for- Other 1,392 22 estry land, would decrease. World 5,690 100 GHG SOURCES AND SINKS INVENTORY FOR a All weights are expressed in terms of the molecular weight of CHINA, 1990 carbon (C), as opposed to the full molecular weight of CO2. b The estimate for China is slightly different from the one In 1990, global anthropogenic CO2emissions were calculated in this report. For comparative purposes, the nearly 5.7 billion tons of carbon, of which China ac- Chinese estimate for this table was not modified. counted for about one-tenth. Per capita CO, emis- Source: World Resources, 1990-1991, World Resources Institute, sions from China were 0.6 tons of carbon (tC), com- (Washington, DC: 1992). pared with the United States (5.3 tC), Japan (2.3 tC), and the former Soviet Union (3.7 tC). An inventory of major emissions and sinks of stroying the ozone layer are potent greenhouse gases, GHGs has been made for China using the methodol- have not been estimated for this report since they are ogy adopted by the IPCC.1 The benefit of using this currently a relatively small portion of China's total standardized methodology is that it allows countries emissions and since China is phasing out their use to prepare emissions inventories that are comparable; under the Montreal Protocol Convention.7 the drawback is that the emission coefficients may not reflect the true situation in some countries. While Energy consumption is the source of 82 percent of IPCC coefficients have been used throughout this re- China's GHG emissions. Methane accounted for ap- port, major discrepancies that are believed to exist proximately 13 percent of GHG emissions in 1990 with the Chinese situation are discussed. The GHGs that are estimated in this report are carbon dioxide (CO2), methane (CH,), and nitrous 6 The GWPs used here are for a 100-year average: methane, 11 oxide (N20). In order to compare these gases, their times CO; and nitrous oxide, 290 times CO2. It should be noted "global warming potential" (GWP) has been used.6 that the GWP for methane of 11 times CO2 is for direct effects only. The 1990 IPCC scientific assessment estimated that the to- Chlorofluorocarbons (CFCs), which in addition to de- tal GWP of methane, including both direct and indirect effects, was 21 times CO2 It is likely that a 1995 IPCC supplement will recommend the use of a GWP for methane of 25 times CO,. See John T. Houghton (ed.) Climate Change 1992, The Supplementary The emission estimation methodology used in this study is based Report to the IPCC Scientific Assessment. (Cambridge: Cambridge on the results of the IPCC-commissioned Organization of Eco- University Press, 1992). nomic Cooperation and Development (OECD) Experts Meeting held in Paris in February 1991. The methodology outlined at this CFCs have been estimated in other recent climate change stud- meeting has been adopted and distributed by the IPCC. Estima- ies for China. See National Response Strategy for Global Climate tion of Greenhouse Gas Emissions and Sinks, Final Report from the Change: People's Republic of China, Asian Development Bank, Chi- OECD Experts Meeting, 18-21 February 1991, prepared for the IPCC, nese State Science and Technology Commission, Final Report, August 1991. September 1994. 12 China: Issues and Options in Greenhouse Gas Emissions Control Energy consumption Figure 1.1 China: Greenhouse gas emissions, 1990 China has an abundance of coal and a relative lack of petroleum and natural gas reserves; thus, coal is the major source of CO2 emissions in China. Unlike developed countries, where coal is used mainly in power generation, in China the power sector accounts for only about a quarter of total coal consumption. 4% Most coal is consumed directly by industry for steam 30/3 generation and by the residential sector for cooking and heating. 5% The industrial sector accounts for nearly three- 2% quarters of China's CO, emissions from energy con- sumption. Within industry, the largest energy-con- suming sectors are electric power, building materi- als, iron and steel, chemicals, and the energy produc- tion industry itself-coal mining, coal processing, and 0 Energy use 1Coal-bed methane oil and gas extraction. Together, these five sectors ECement DAnimals account for 79 percent of CO2 emissions from the in- E Rice fields 0 ther dustrial sector. Note: forests were a small sink of CO2 in 1990. Industrial boilers used outside the power sector consumed more than 350 million tons of coal in China in 1990, accounting for about 35 percent of the country's coal use and about 30 percent of GHG emis- (CO2 equivalent) with coal mining, rice fields, rumi- sions from energy consumption. There are an esti- nant animals, and animal wastes contributing 88 per- mated 430,000 industrial boilers in China, of which cent of methane emissions. All other sources of emis- more than 95 percent are coal-fired and very small sions, including CO2 from cement manufacturing, by international standards. methane from landfills, N20 from fertilizer, and non- CO2 emissions from forests and land use changes, China uses much less energy for transportation accounted for about 6 percent of China's total GHG than other developing and developed countries. emissions in 1990.' When correcting for statistical differences in the way transport energy use is reported in China, transport There is a high degree of uncertainty in GHG emis- accounts for about 7 percent of total energy use. sions estimates depending on the nature of emissions (such as deforestation) and the difficulty of measure- The residential sector accounts for about 14 per- ment (such as methane from rice and nitrous oxide cent of commercial energy consumption, most of from fertilizer use). Some estimates, however, are which is coal used for cooking and space heating. fairly accurate. For example, the range of uncertainty Non-commercial biomass fuels, including quality for CO2emissions from fossil fuels and cement manu- fuelwood, crop residues, and some animal dung, facture is approximately 10 percent. In contrast, the amounted to approximately 300 million tons of coal range of uncertainty for deforestation and land use equivalent (mtce) in 1990. CO2 emissions from bio- change is conservatively in the range of ±60 percent mass burning not obtained through deforestation are and there is even greater uncertainty for most sources ignored, since CO2 will be recaptured in subsequent of methane and nitrous oxide; the range of estimates plant growth. Non-CO2 emissions from biomass fu- for many nitrogen fertilizer coefficients is 0.001 to 6.84 els, such as CH, and N20, are, however, included in (percent N20-N produced). total GHG emissions. Recent Chinese studies indicate that a high per- For a complete discussion of the estimation methodology and centage of carbon remains unburned in China because results for China, see the project subreport, Estimation of Green- of inefficient fuel combustion in small industrial and house Gas Emissions and Sinks in China, 1990, August 1994. commercial boilers and in residential stoves.' Based 13 Study Objectives and Backgrouid on these studies, Chinese researchers have estimated that CO2 missions from coal consumption in China Figure 1.2 China: CO2 emissions from energy may be overstated by as much as 10 percent if IPCC consumption coefficients are used. As fuel combustion efficiency 3 4% improves over time, the true coefficient in China will 4% increase. Therefore, the joint study team concludes that using the international coefficient represents an upper bound of CO2 emissions from coal consump- 14% tion in China in 1990. Energy production, storage, and distribution 51% Methane is the primary greenhouse gas emitted in energy production. It is released in the process of oil and gas production, oil refining, and natural gas transmission and distribution. The largest source of 24% methane from energy production in China is coal mines; methane must often be vented from under- ground mines for safety reasons. Because of the large iO Industry U Power quantity of coal that is mined in China, and the fact 11 Residential ETransport that more than 95 percent of the coal comes from underground mines, methane emissions from this DAgriculture iOther source are estimated to be quite high. Based on the IPCC methodology and partial data from Chinese - - - - - coal mines, methane emissions from coal mining in China are estimated to be 12-18 mt per year. Accord- ing to estimates by Chinese coal production experts, methane emissions from coal production in 1990 were Table 1.3 China: Greenhouse gas emissions, 1990 between 4 and 7 mt per year. Because of the differ- ence in these estimates, an average of the two-10.67 CO,(mtC) CH,(mt) N20(mt) mt-was used for this report. ----- - - Energy 650 0.06 0.18 Agricultural sector emissions consumption Methane production from rice fields is a function Oil and gas leakage ... 0.18 ... of the age of the rice plants, the length of time the Coal-bed methane ... 10.67 ... fields are flooded, and the amount of decomposing biomass on the fields. For rice cultivation, the esti- Cement 29 ... ... mated daily emissions flux of 0.19-0.69 g CH,/m2 Landfill gas ... 0.79 derived by researchers in Hangzhou has been used to calculate emissions. Methane emissions from rice Rice fields ... 11.90 ... were estimated to be 11.0-12.8 mt in 1990. Animals: enteric ... 6.24 ... Ruminant animals-yellow cattle, buffalo, yak, fertilization camels, and goats-produce methane in digesting Animal wastes ... 2.70 food; ruminants account for about 95 percent of CH, emissions from domesticated animals. An additional Fertilizer ... ... 0.03 Biomass burning ... 3.62 0.05 9 In some parts of China, so much carbon is left in the ash that Total 679 36.16 0.26 the coal ash is sometimes reused as a fuel or combusts spontane- ously. To the extent that the carbon in coal ash is combusted, the Source: Estimation of Greenhouse Gas Enissiois and Sinks in Chunn. resulting CO, emissions would raise China's emission coefficient August, 1994 subreport prepared for China GHG StudV. toward international levels. 14 China: Issues and Options in Greenhouse Gas Emissions Control 2.7 mt of methane was produced from animal Fr wastes in 1990. Together, domesticated animals Figure 1.3 China: CO2 from industrial energy account for about 24 percent of methane emissions consumption, 1990 and 3 percent of total GHG emissions. 4%/1 The emission of N20, which is produced natu- rally in soil through nitrification and denitrifica- 10% tion, is enhanced by the application of nitrogen fer- 3 tilizers. N,O is also released through commercial energy consumption and biomass burning. Al- though the range of emissions estimates for N,O 10% is large, the high estimate from all sources amounts to 2.5 percent of total GHG emissions in China in 1990. Cement There are several non-energy related industrial activities that generate greenhouse gas emissions, 15% the most notable of which is CO2 from cement pro- 13% duction. In 1990, cement production in China was about 210 million tons, resulting in the emission of 29 mtC-about 4 percent of China's total GHG - Power QEnergy production emissions in 1990. O Otherindustrv EBuilding materials E Olron and steel EChenicals Forests and land use changes I WFood and tobacco O Machinery There is much uncertainty associated with for- estry sector emissions. Nonetheless, based on a review of land use in China, specifically the level of afforestation and the conversion of forestry lands to other uses, forests are estimated to have Figure 1.4 China: Methane emisssions, 1990 been a net sink of atmospheric carbon in 1990. The amount of carbon sequestered in woody biomass 6% and soils in China is estimated to be about 7 mtC, 6% which reduced total GHG emissions in 1990 by about 1 percent. 7 17% 30% ORice fields MCoal-bed methane O Ruminants U Animal wastes 08iomass burning Other 15 Chapter 2 Macroeconomic Analysis INTRODUCTION the economy, and factors appropriate for targeted policy and investment intervention, such as energy As China's economy develops, both the level and efficiency and afforestation. This chapter addresses the composition of GHG emissions are likely to the magnitude of GHG emissions associated with change. Anthropogenic emissions of greenhouse different factors, while the costs of reducing emis- gases, particularly those associated with energy con- sions are assessed in Chapter 3. sumption, are closely correlated with economic de- velopment. At the macroeconomic level, energy use and its change over time are related to the structure THE CHINA GREENHOUSE GAS MODEL of the economy, the efficiency of energy use, and the growth rate of the economy The pace at which low The China GHG Model is used to simulate eco- carbon-intensive energy supply technologies are in- nomic growth, structural change, energy consump- troduced will also affect the level of GHG emissions. tion, and the resulting emission of GHGs and selected While less important in China than energy consump- local air pollutants within China over the next twenty- tion, other GHG-producing activities that tend to be five years. The impacts of alternative energy, affor- correlated with economic growth include cement estation, and agricultural programs have been evalu- manufacturing, energy production, animal hus- ated separately and the results incorporated into the bandry, rice cultivation, and forest planting. China CHG Model. The model has four main com- ponents: i) a macroeconomic model, ii) an input-out- To study the relationship between economic de- put model, iii) energy coefficients, and iv) emissions velopment and GHG emissions, and to simulate fu- coefficients (Figure 2.1). ture GHG emissions in China under various sce- narios, a macroeconomic model was built for this Macro model. The macro model is used to project study: the China GHG Model. Through the use of final demand (Y): the demand for goods and ser- the China GHG Model, the key factors affecting GHG vices, investment, government expenditures, and net emissions in China in the future have been evaluated. exports. The macro model used for this study was This includes factors associated with economic de- originally built as part of a collaborative project be- velopment, such as the growth rate and structure of tween Stanford University, the University of Penn- Figure 2.1 Schematic of the China GHG Model I[ Macro Input-Output Energy GHG Model Table Consumption Emissions 16 China: Issues and Options in Greenhouse Gas Emissions Control sylvania, and the ChineseAcademy of Social Sciences. duce a given level of economic output. Given the It has been modified for this study by including en- importance of the energy coefficients for GHG emis- ergy as an additional factor of production and by sions, a bottom-up approach, based on a spreadsheet separating the energy sector from heavy industry. The of product-specific energy coefficients, was used to model is econometric, consisting of roughly 250 equa- strengthen and corroborate the results obtained from tions, 140 of which are regression equations based historical and cross-country comparisons of energy on Chinese economic and social statistics (1965-1992). 1-0 coefficients. The joint study team conducted a Together, the equations describe the Chinese detailed analysis of current and future energy con- economy, such as the production of goods, the popu- sumption, estimating the energy consumption re- lation and labor force, income determination, con- quirements for producing major commodities within sumption, capital formation, public finance, money each of the eighteen sectors. Four factors were con- and banking, prices, international trade, and the bal- sidered in modifying the energy coefficients: (i) the ance of payments. growth of the economy, since this affects the rates of structural change and investment in new energy-ef- Input-output model. An input-output (I-O) table rep- ficient capital stock; (ii) the scale of new plants and resents the structure of the economy and the efficiency equipment relative to existing facilities; (iii) the rate with which goods and services are produced. The I- of adoption of new energy-saving technologies and 0 coefficients, referred to as the "A" matrix, repre- industrial processes; and (iv) increases in product di- sent the inputs required from each sector to produce versity and improvements in product quality, which a unit of output. For example, to produce a unit of affect the amount of energy per unit of output value. steel may require inputs from the coal, heavy ma- By varying the product-specific energy efficiency co- chinery, and metallurgy sectors. Once the A matrix efficients, it is possible to assess the impact of im- has been determined, it is possible to estimate the provements in specific technologies on energy use total inputs (X) required by the economy-such as and emissions. labor, energy, steel, and cement-to produce a given mix of final demands (Y). For this study, China's Emissions coefficients. The China GHG Model gen- 1987 input-output table was aggregated into eighteen erates emissions matrices of both global and local air sectors and updated to the base year 1990 using both pollutants for each level of economic output. The the 1987 and 1981 Chinese I-0 tables.' To use 1-0 primary GHG estimated by the model is CO2 from analysis for future projections, it is necessary to esti- energy consumption. The model assumes that the mate how the 1-0 coefficients change over time. 1-0 percentage of carbon oxidized for each fuel is the coefficients for China were projected to the years 2000, same in all fuel combustion applications; thus, once 2010, and 2020 using Chinese historical I-0 tables and the quantity of energy consumed is determined, the cross-sectoral analyses of Chinese provincial I-0 amount of CO2 emitted can be calculated. Local pol- tables, and by reviewing historical changes in I-0 co- lutants estimated by the model include total sus- efficients for other countries, including Japan (1965, pended particulates (TSP) and sulfur dioxide (SO2). 1970, 1975, 1985), the United States (1939, 1947, 1958), For local pollutants, emission factors were estimated West Germany (1965, 1970, 1975), and the United for each of the eighteen sectors based on the average Kingdom (1965, 1970, 1975). ash and sulfur content in the fuel consumed by that sector, and on the emission rate and current level of Energy coefficients. The energy coefficients in the control within that sector.2 In addition to CO2 emis- model represent the amount of coal, petroleum, natu- sions from energy consumption, the China GHG ral gas, and electricity needed to produce a unit of Model also estimates CO2emisions from cement, and output for each of the eighteen sectors. The techni- cal energy coefficients in the I-0 table have an enor- mous effect on the amount of energy required to pro- 2 The sectoral emission coefficients for 1990 were estimated by Chinese energy and environmental specialists from line minis- tries and were reviewed and modified by experts from the Na- tional Environmental Protection Agency. Because the mandate This work was carried out under the direction of Professor Chen of this project is to look at global pollutants, the current version Xikang, Institute of Systems Science, Chinese Academy of Sci- of the China GHG Model does not take into account improve- ences. Professor Chen is a leading expert in the field of input- ments in TSP and SO, control by new equipment or the adoption output analysis and was responsible for building China's national of specific control devices for TSP or SO2. As such, the emission input-output tables in the 1970s. He presently forecasts economic levels of SO,and TSP for future years can be regarded as a worst- indicators for China, such as national grain production, using case scenario. These deficiencies are expected to be corrected in 1-0 analysis. later versions of the model. 17 Macroeconomic Analysis CH4 emissions from rice fields, coal mining, rice, and 2.3billion tons carbon (tC) The results and assump- animal husbandry. Together, these sources of GHGs tions used for the Baseline GHG Scenario are shown accounted for approximately 98 percent of China's in Table 2.1 and described in detail below. total GHG emissions in 1990. Forestry emissions and sequestration are generated "off-line" in a separate forestry model (see pp. 51-53). ECONOMIC DEVELOPMENT AND GHG EMIS- SIONS BASELINE GHG SCENARIO Future GHG emissions from China will depend primarily on the interrelated issues of economic For purposes of comparison, a baseline scenario growth, the structure of the economy, and the struc- of GHG emissions for China for the years 2000, 2010, ture of energy use. In contrast to the specific policy and 2020 was generated. The Baseline GHG Scenario options for reducing GHG emissions reviewed in the assumes that the current trends in economic growth next section, these factors are largely outside the di- in China will continue, paralleling the development rect influence of government policy.' Nonetheless, of other East Asian economies over the past thirty sensitivity analysis shows that macroeconomic and years, and that the energy efficiency improvements structural issues are the most important determinants that have been made in China over the past decade will also continue. Under the baseline GHG scenario, per capita gross domestic product (GDP) in China 3 All income and cost data presented in this chapter are in 1990 reaches US$2,600 in 2020 (1990 constant dollars), up constant prices. In addition, Chinese yuan are converted to US from roughly $370 in 1990; total energy consumption dollars using the official 1990 exchange rate of Y4.7/USS. surpasses 3.3 billion tce, up from 1 btce in 1990, and 4 Measures that can be taken to improve the overall efficiency of 1.18 times the level in the United States in 1990; and the economy, and thus reduce GHG emissions, are discussed on total GHG emissions increase threefold, surpassing pp. 57-59. Table 2.1 Baseline GHG Scenario: Results and assumptions for 2020 Results Greenhouse gas emissions: Total 2,398 mtC and equivalent (threefold increase over 1990) From energy consumption 2,089 (87%) Other 309 (13%) Per capita 1.6 tC Energy consumption 3,300 mtce SO2 and TSP emissions 55 mt, 48 mt, respectively Assumptions Economic growth Average 8 perent per annum between 1990 and 2020. Macroeconomic structure Contribution to GDP: slight decline of industry, growth of services, decline in agriculture. Energy efficiency Continuation of energy efficiency improvements. Energy-GDP elasticity of 0.5-0.6 maintained between 1990 and 2020. Alternative energy Expansion of hydro, nuclear, and renewable programs. Alternatives account for 22 percent of total electricity supply in 2020 and 8 percent of total energy supply. Forestry No change in the absolute level of net afforestation from 1990. Agriculture No change in GHG-generating emission factors (rice, animals, fertilizer) from 1990. Source: Joint Chinese-international study team, China GHG Study. 18 China: Issues and Options in Greenhouse Gas Emissions Control of future GHG emissions in China. Figure 2.2 GDP comparison: Japan and U.S. (1990) and China high-growth Economic growth Two scenarios of future income growth in China were evaluated using the China GHG Model. The 5000 high-growth scenario assumes that there are few po- 7 litical or social disruptions affecting the economy, the relatively high savings rate is maintained, and the economic reform program continues. Although the 3 high-growth scenario is optimistic in its assumptions, many experts have predicted that the growth rate in D China over the next twenty-five years will be even 2000 higher. A slower-growth scenario was also evaluated, representing the lower bound of a stable, though less 1000 robust, Chinese economy High growth. In the high-growth scenario, GDP 0 grows by an average of 8 percent per year between 1990 and 2020. The growth rate during the first de- - - n Chm 0DJapan a USA cade (1990-2000) is assumed to be 9.5 percent; dur- ing the second (2000-2010), 8.0 percent; and during Sources. Cluna Statistical Yearbook, World Development Report, the third (2010-2020), 6.5 percent. Actual income 1992; China GHG Model, joint study team. growth in China was 6.8 percent per year between 1965 and 1980, and 9.6 percent per year during the 1980s. Given China's double-digit growth in the early 1990s, its economy would have to grow at less than 8.5 percent annually for the remainder of the decade There are several factors specific to China's to fall short of the high-growth scenario. economy that are conducive to high growth in the coming decades. The economic reform program, In the high-growth scenario, China's GDP in the which is likely to continue and deepen, will create year 2020 reaches US$3.8 trillion (1990); roughly 1.4 new opportunities and incentives for expanding the times the size of Japan's economy and nearly three- domestic market and international trade. China's quarters the size of the U.S. economy in 1990. Per high savings rate, which has increased since the 1980s, capita income in 2020 in the high-growth scenario is essential for providing investment funds to con- would be approximately US$2,600 (1990), compa- tinue the economic expansion. In terms of age struc- rable to income levels at the lower end of "upper- ture, China's population is very young, which not middle-income" countries in 1990, such as Brazil, onlv increases the level of savings, but also provides South Africa, Mexico, Venezuela, and Hungary' an ample pool of workers and consumers. Japan, Ko- rea, and Singapore all had similar population age Average growth exceeding 8 percent annually over structures during their economic booms. The sheer several decades is not unprecedented among East size of China's economy represents an almost limit- Asian economies. Korea's economy grew at approxi- less market for goods and services, which means that mately 10 percent per year between 1965 and 1990, China will not need to rely on export-led growth as while Taiwan's GDP increased nearly 9 percent per have other East Asian economies. For these reasons, yearbetween 1951 and 1991. TheJapaneseeconomy the high-growth GDP scenario was used in the grew an average of 8.7 percent between 1946 and Baseline GHG Scenario outlined in Table 2.1. 1976, and its annual GDP growth was more than 10 percent between 1950 and 1970. Slower growth. Whether caused by government policy or market forces, slower economic growth re- __ -suits in lower energy consumption and GHG emis- Income data and definitions are from the World Bank, World sions. In the slower-growth case, China's economy Development Report, 7992 (New York: Oxford University Press is assumed to grow 1 percent less than in the high- 1993), pp. 218-219. growth case during the 1990s and 1.5 percent less for 19 Macroeconomic Analysis the decades between 2000 and 2020. Total GDP in Table 2.2 Structure of consumption: Share of the slower-growth case reaches only US$2.5 trillion household expenditures by the year 2020, while per capita income in 2020 is only US$1,760. 1990 2000 2010 2020 (%) (%) (%) (%) While total GDP in 2020 is less than 70 percent of Agricultural 34 21 15 11 GDP in the high-growth case, energy consumption is prducts 90 percent that of the high-growth case. When the products economy grows more slowly, the transformation of Light industrial 40 45 41 37 the economy proceeds at a slower pace, and per unit products energy consumption falls more slowly. There is also less capital investment in newer, more energy-effi- Services 14 21 29 35 cient plants and equipment. Compared with the high-growth case, GHG emissions from energy con- Source: China GHG Model, joint study team. sumption under the slower-growth case are reduced by about 14 percent, or 290 mtC. for light industrial products, for construction, and for Economic structure the manufacturing sector's demand for heavy indus- trial producer goods. The share of the tertiary or ser- Structure of consumption. At a per capita income of vices sector, however, is expected to increase sharply, $2,600, which is reached by China in 2020 under the largely offsetting a fall in agriculture's contribution high-growth income case, material goods typically to GDP. The overall effect of this macroeconomic dominate household consumption. The model pre- structural change on GHG emissions is not large, dicts that by the year 2020, the share of agricultural because neither agriculture nor services are energy- products (grain, vegetables, meat, and fish) in final intensive sectors. As shown in the following section, demand will fall for household consumers, while the however, other structural changes, especially within share of services (public utilities, health care, educa- the industrial sector, have a major bearing on future tion, and housing rental) will increase. Consump- GHG emissions. tion of light industrial products as a share of total consumption will remain roughly the same between A baseline energy use scenario 1990 and 2020. Future energy consumption patterns are the most Although the model cannot provide details on the important determinant of China's future GHG emis- consumption of specific commodities, it is likely that sions. The level of energy use required to sustain the composition of light industrial products would China's projected economic growth is uncertain, how- shift away from basic clothing and processed food- ever. As in other countries, there is uncertainty about stuffs toward more high-quality consumer goods. If China's ability to improve the technical efficiency of the distribution of income in 2020 remains roughly energy use in various applications and the level of the same as in 1990, some upper-income households energy services that will be demanded by its popula- will be able to afford automobiles and a range of high- tion. In China's case, structural changes, particularly valued services. However, at a per capita income of in industry, will determine the energy intensity of eco- less than $3,000, the average Chinese household will nomic output. In the high-growth GDP case, net in- still concentrate its spending on material goods such dustrial output is projected to grow ninefold between as household appliances (e.g., refrigerators, washing 1990 and 2020. How efficient will China's new in- machines, and air conditioners) and housewares (e.g., dustries be in converting a variety of intermediate furniture and carpeting). inputs into value added? How much will the pro- ductivity of industrial manufacturing equipment in- Structure of the macroeconomy. The structure of crease? How will the industrial product mix change? China's economy in 2020 will be largely determined How will improvements in product quality and spe- by the pattern of household consumption. As shown cialization affect energy use per unit of industrial in Figure 2.3, little change is expected in the share of value added? Structural changes stemming from heavy and light industry in total economic output such factors were the main reason for China's low over the next three decades. Industrial growth must energy consumption and GDP growth elasticities remain strong for China to satisfy consumer demand during the last fifteen years, and further structural 20 China: Issues and Options in Greenhouse Gas Emissions Control Figure 2.3 Macroeconomic structural change 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% AgulueTriy Agriculture Heavy Light Construction Tertiary Industry Industry N 1990 0 2000 5 2010 E 2020 Soune China GHG model, joint study team changes are expected to continue to be the main fac- Coal demand roughly triples between 1991 and tor in reducing the energy intensity of China's 2020 in the baseline case, despite major declines in economy in the future.' the energy intensity of the economy and faster growth in the use of other fuels. The baseline case envisages For reference, the joint study team prepared a de- growth in natural gas use of about 7 percent per year, tailed "baseline case" energy demand scenario to which would require major new discoveries or sub- assess the relative importance of different factors and stantial imports or both. Primary power production, potential interventions on total GHG emissions. This predominantly hydro and nuclear power, would also case is intended to model how energy demand may increase relatively quickly. Accordingly, the share of evolve under "business-as-usual" conditions. Struc- coal in total commercial energy use would fall from tural changes in the economy continue to reduce en- 76 percent in 1990 to 67 percent in 2020. Even so, ergy intensity (pp. 23-24), and continued progress is massive requirements for power generation and in- made in improving the technical efficiency of energy dustrial process heat and steam for the country's eco- use in key applications. Assuming the high-growth nomic expansion continue to drive coal demand up- GDP scenario, the baseline energy demand scenario ward, with tremendous logistical and environmen- shows growth in primary commercial energy con- tal implications. Power sector demand for coal rises sumption of about 3.3 times between 1991 and 2020, from some 250 million tons in 1990 to about 1,300 and an average annual growth rate of 4.1 percent million tons in 2020, and the proportion of coal used (Table 2.3). The energy use/GDP growth elasticity for power generation would rise sharply, from 24 during this period is about 0.5. This compares with percent in 1990 to 42 percent in 2020. Non-power elasticities of 0.52 from 1981 to 1990, and less than industrial coal demand rises from 546 million tons in 0.4 from 1991 to 1993. 1990 to more than 1,400 million tons in 2020. Owing to relatively modest growth in household cooking and heating demand, energy efficiency gains, and some substitution of other fuels, coal demand in the house- hold sector is expected to remain fairly constant, thus 6 See China: Energy Conservation Study, World Bank Report No. reducing the share of household consumption in to- 10813-CHA, February, 1993 (Washington, DC:1993). tal coal use. 21 Macroeconomic Analysis The industrial sector continues to dominate com- Industry also continues to dominate electric power mercial energy use, with industrial energy consump- use. Despite rapid growth in power demand in the tion rising in the baseline scenario by 3.9 percent per household and service sectors, industry still accounts year over the thirty-year period. Enormous poten- for about 65 percent of total electric power use in 2020 tial exists for reducing the energy intensity of indus- in the baseline energy demand scenario. trial production through structural changes and effi- ciency improvements.' Accordingly, the baseline energy demand scenario foresees a fall in energy use per unit of industrial value added by 2020 to about ' Although statistical issues detract from the accuracy and ulti- one-third of the 1990 level. Even so, expanding en- mate usefulness of such comparisons, official statistics show that energy use per unit of industrial value added in China in 1990 ergy use in industry accounts for 63 percent of the was about eighteen times that of Japan and about eleven times total increase in energy consumption over the period. that of South Korea. Table 2.3 Baseline commercial energy use scenario, 1990-2020 Average annual growth rate, 1990 2000 2010 2020 1991-2020 Total primary energy use (mtce) 987 1,560 2,380 3,300 4.1 Electric power use (TWh) 621 1,300 2,430 3,850 6.3 Per capita energy use (kgce) 863 1,200 1,700 2,280 3.3 Average annual growth rate, Primary energy use by type 1990 2020 1991-2020 Coal (million tons) 1,053 3,100 3.7 Oil (million tons) 112 440 4.7 Natural gas (billion m) 15 115 7.0 Electric power (TWh) 126 870 6.7 Average annual growth rate, Coal use by sector 1990 2020 1991-2020 mt % mt % %/year Power 251 24 1,300 42 5.7 Non-power industry: 546 52 1,440 46 3.3 Ferrous metals 103 10 215 7 ... Cement 50 5 155 5 Other building materials 99 9 295 10 ... Light industry 116 11 300 10 ... Households 167 16 165 5 0 Other 89 8 195 6 2.6 TOTAL 1,053 100 3,100 100 3.7 Sources: China Energy Statistical Yearbook, 1991; China GHG Model. 22 China: Issues and Options in Greenhouse Gas Emissions Control Per capita commercial energy consumption in the times that of major developed countries. In the baseline energy demand scenario increases from 863 baseline energy demand scenario, the energy inten- kgce in 1990 to about 2,280 kgce in 2020, an annual sity of China's economy falls from about 2.7 mtce growth rate of 3.3 percent (Figure 2.4). In the past, per US$1,000 of GDP in 1990 to about 0.9 mtce per China's per capita commercial energy consumption US$1,000 of GDP, in comparable prices, in 2020. has been high compared to other low-income devel- oping countries. Under the baseline scenario, per China's energy intensity is several times higher capita energy consumption levels relative to per than that of most other large countries because of its capita GDP approximate international trends. By unique economic structure. Similarly, the decline in 2020, China's per capita energy use would be within energy intensity foreseen in the baseline case is pri- the mainstream of international experience among marily because of structural factors. As shown on countries with similar income levels. In 2010 and page 26, there is tremendous scope for further im- 2020, per capita energy use would be less than half provement in the technical efficiency of energy use; that of some Eastern European countries at a similar that is, the efficiency of energy use per physical unit income level, but substantially higher than several of output. Even so, technical efficiency improve- other large developing countries. In 2020, per capita ments still amount to only 15-25 percent of the esti- energy consumption would be less than the average mated total decline in energy intensity. Structural for "upper-middle-income" countries in 1990 and less factors, as described below, would account for 75- than one-quarter of that in the United States in 1990. 85 percent of the total energy intensity decline.' Sources of future declines in energy 8 Estimates of the decline in energy intensity by source are pre- intensity sented in a subreport prepared for this project. See Energy De- mand in China: Overview Report, February 1995. Forthcoming. In 1990, China's economy was among the most 9 Additional analysis of these structural factors in China can be energy-intensive in the world, registering a level of found in China: Energy Conservation Study, World Bank Report energy use per unit of GDP of between three and ten No. 10813-CHA, February 1993 (Washington, DC:1993). Figure 2.4 Per capita GDP and energy consumption, low and middle income countries, 1990 and China baseline energy demand scenario 6000 g Romania U M Poland b Hungary Venezuela 400 S. Africa 000 0 3WJ CL P Ckina-22o a Argentina 0 Korea 200 Chi&21O fexico cbina20o China-1990 Colombia g M Brazil 1000 on Thailand 0 1000 2000 300 4000 5000 6000 GDP per capita (1990 US$) 23 Macroeconomic Analysis Changes in macroeconomic structure. One of the rea- ucts, rather than from the production of energy- and sons China's energy intensity is higher than most raw-material intensive basic industrial goods. In the other countries with similar per capita income levels textile and garment industry, for example, substan- is that industry currently makes up about 44 percent tial growth in value added will come from increases of China's GDP, a share much higher than that of other in product value, in terms of quality and fashion, low-income countries and even higher than that of rather than large increases in the amount of cloth or Japan. This drives up energy intensity because in- number of shirts produced. Declines in energy use dustry is far more energy intensive than the other per unit of output value resulting from this trend will major sectors. However, the projected slight decline be especially important in the chemical, machinery, in the share of industry by 2020 will provide some building materials, and light industry sectors, which energy savings, amounting to about 7 percent of the together accounted for more than 60 percent of in- energy intensity decline in the baseline case. More- dustrial final energy use in 1990. Although it is hard over, the increasing share of industry in GDP, which to quantify the future importance of this factor, it is tends to drive up energy use/GDP growth elastici- estimated to provide 35-40 percent of the total en- ties in other countries as they proceed from low- to ergy intensity decline in the baseline energy demand middle-income levels, will not occur in China. scenario. Residential energy use. While GDP increases tenfold, Other structural changes. The net effect of struc- residential energy use in the baseline energy demand tural changes in the non-industrial sectors, such as scenario would not quite triple over the thirty-year agriculture, commerce, transportation, and other ser- period, even with an increase in residential electric- vices, is estimated to account for a final 10-15 per- ity demand of more than ten times. This creates a cent of the total decline in energy intensity strong downward pressure on energy intensity Tech- nical energy efficiency gains in this sector are an im- portant factor, but over the long term, the demand OPTIONS FOR LIMITING GHG for household cooking and heating increases more EMISSIONS slowly than GDP as rapid economic development proceeds. This structural effect is estimated to ac- count for 10-15 percent of the total energy intensity Energy efficiency decline. Although structural effects may have the greatest Changes in the shares of industrial subsectors in in- impact on the energy intensity of China's economy, dustrial output. Changes in the contribution of dif- technical efficiency levels-energy consumption per ferent industrial subsectors to industrial output lead physical unit of output-can be more directly influ- to changes in overall energy intensity, since energy enced by national and local policies. Unlike many intensity varies among industries. For example, the other GHG reduction options, emissions reductions growth of less energy-intensive machinery and elec- from technical energy efficiency improvements can tronics industries, and the declining importance of be realized almost immediately. Because Chinese the energy-intensive metallurgy and chemical fertil- industry will undergo dramatic transformation as a izer industries will contribute to a decline in energy result of economic growth, the opportunities for en- intensity. Changes in the output mix among indus- ergy efficiency gains are greatest between now and trial subsectors will account for about 9 percent of the year 2010. Efforts to improve the efficiency of the decline in total energy intensity in the baseline energy and materials use in all new industrial enter- energy demand scenario. prises and infrastructure projects will be important in ensuring that general levels of energy efficiency Changes in the product mix within industrial continue to improve beyond 2010. subsectors. A shift in the product mix within differ- ent industrial subsectors has been the single most The baseline energy demand scenario assumes important factor in reducing China's energy inten- that efforts to foster energy-efficiency gains continue sity over the last decade. This trend is expected to in China, yielding technical energy savings of some continue, especially with further economic reform. 1,000-1,700 mtce per year by 2020-an amount Much of the expected increase in industrial value greater than China's total energy consumption in added will come from improvements in quality and 1990. In addition, the joint study team prepared a the production of more diverse and specialized prod- high-efficiency energy demand scenario to test the po- 24 China: Issues and Options in Greenhouse Gas Emissions Control tential impact of additional improvements in techni- vestment projects that can yield gains in energy effi- cal energy-efficiency levels. In this scenario, key unit ciency: consumption parameters were adjusted, primarily for the industrial sector, to reach levels more closely ap- 1. industrial modernization, where major restructur- proximating advanced international rates. Econo- ing of the enterprise results in energy savings and mies of scale in the production of energy-intensive other benefits; products are a large part of the additional energy sav- ings under the high-efficiency scenario. Table 2.4 lists 2. industrial energy conservation projects, such as re- and compares the most important assumptions for covery of waste heat, where the primary goal is en- both demand scenarios. ergy savings; and In the high-efficiency scenario, total primary com- 3. improvements in widely used industrial equipment, mercial energy demand in 2020 is 2,840 mtce. This such as electric motors and industrial boilers. represents an additional energy savings of 460 mtce per year and a reduction in GHG emissions of 330 Industrial modernization projects. Although efforts mtC compared with the baseline energy demand sce- at energy efficiency often focus on specific energy- nario. saving technologies, industrial modernization has had the greatest impact on energy savings in China IMPROVEMENTS IN INDUSTRIAL ENERGY EFFICIENCY in the past decade and will continue to for several decades. There are three aspects of industrial mod- In general, there are three types of industrial in- ernization that are most important for energy effi- Table 2.4 Comparison of selected unit energy consumption levels, baseline and high-efficiency (HE) scenarios, 1990-2020 China Japan 1990 2020 2020 1980 (baseline) (HE) Steel (kgce/t) 1,610 1,284 857 ... Cement (kgce/t) 208 196 135 135 Ammonia (kgce/t) 2,066 1,665 1,258 1,000 Thermal power (kgce/MWh) 427 348 345 338 Caustic soda (kgce/t) 1,790 1,325 1,000 1,000 Ethylene (kgce/t) 1,580 1,450 800 872 Industrial coal-fired (average 60 70 73 73b boilers efficiency, %) Electric motors (average efficiency, 87 90 92 92c mean size, %) a Comprehensive consumption (not directly comparable with international statistics). b Average U.K. efficiency for comparable size ranges. c Average efficiency for U.S. high-efficiency models. 25 Macroeconomic Analysis ciency: a) adopting modem and advanced processes * Electric power: Old small- and medium-sized and technologies, b) achieving economies of scale in plants, based on low- or medium-pressure boilers, production, and c) adopting modem management should be replaced by modem, larger, high-pressure practices. units. Whereas state of the art 600 MW units con- sume about 310 gce/kWh (net), the small plants that Advanced processes and technologies. There is much still provide much of China's thermal power typi- evidence that the adoption of new production meth- cally consume 500 gce/kWh or more. ods and technologies contributed greatly to the mod- ernization of Chinese industry during the 1980s and * Chemical fertilizer: Small- and medium-sized am- early 1990s while reducing energy use per unit of monia plants, of which more than 1,000 make am- output. Concerted efforts are needed to ensure that monium bicarbonate, should be replaced. this process of efficiency improvement continues into the future. In particular, policies should ensure that Modern management. To achieve the gains of new the most efficient new technologies and processes are technologies and processes at optimal scale, Chinese brought to China, recognizing that at present, this enterprises must improve their management prac- may not be occurring in all cases. Table 2.5 lists im- tices, including both "hardware" and "software." To provements in industrial technologies and processes achieve the energy-efficiency gains embodied in new that can result in large reductions in energy intensity. processes, hardware is often required for automated monitoring, metering, calculation, adjustment, and Economies of scale. Many, if not most, of China's control of new technologies. Equally important, yet major energy-consuming industries produce much often overlooked by enterprise managers, is the train- of their output in suboptimal sized plants. Industries ing of personnel to monitor, operate, and repair the that can provide major energy savings in China new automated equipment. Research on Chinese through the adoption of larger plants include the fol- industrial boilers has found that energy efficiency lowing: could be improved by 10-20 percent by optimizing the operation of existing boilers and ensuring that * Cement: The more than 5,000 small-sized plants they are well maintained. should be gradually replaced and medium-sized plants should be phased out. Table 2.5 Examples of energy savings through the adoption of new technologies and processes Industry New processes and technologies Iron and steel Conversion of open hearth furnaces to basic oxygen furnaces; use of DC electric arc furnaces; and phasing out of pig iron in steel making. Non-ferrous metals Replacement of outdated copper, lead, and zinc smelters; renovation of large facilities for electrolytic refining of aluminum; and adoption of modern technologies for new plants. Cement Replacement of wet kilns by dry process kilns with preheater or precalciner systems; phasing out of primitive shaft kilns; and utilization of industrial wastes such as fly ash and coal washery wastes. Brick Increase in percentage of hollow and perforated bricks, which reduces energy requirements for production and provides superior insulating properties for consumers. Textiles Greater application of electronic controls and other modern equipment. Chemicals Replacement of mercury by ion film process for caustic soda production. Source: Energy Efficiency in China: Technical Analysis, report prepared for the China GHG Study, September 1994. 26 China: Issues and Options in Greenhouse Gas Emissions Control Industrial energy conservation projects. Projects that about one-third of China's coal use. Small- and me- are considered "classic" industrial energy conserva- dium-sized electric induction motors used in indus- tion projects typically focus on the addition, replace- try account for almost half of China's total electric ment, or renovation of specific equipment in the pro- power consumption. Improvements in the energy duction process, with energy savings being the pri- efficiency of such equipment can yield cost savings mary objective. The following five types of energy to enterprises, but these savings tend to be small in conservation projects have great potential in China: relation to overall costs. Nonetheless, even modest efficiency gains translate into enormous aggregate * Waste heat, gas, and resource recovery. Waste heat savings. Moreover, improvement in the efficiency of can be used within the plant itself (e.g., cogeneration) new equipment is important in the medium and long or for district heating of nearby residential and com- term for reducing greenhouse gas emissions. The ef- mercial buildings. The recovered waste gas, large ficiency of the equipment being installed now will amounts of which are available from the iron and steel be a key determinant of efficiency levels far into the industry, can also be used by the plant or sold to gas future, especially given the current rapid growth in utility companies. The recovery of other waste industrial capacity. This underscores the need to en- streams, from chemicals to fly ash, can be profitable sure that new installations utilize the most energy and a major source of energy savings. efficient technologies available. * Cogeneration. Many industries in China can real- Improvements in coal processing. Improving the ize large energy-efficiency gains by establishing co- quality of coal through cleaning, sorting, screening, generation processes. Among the sectors that should and briquetting will increase the efficiency of coal uti- make use of cogeneration are iron and steel, pulp and lization in China. These processes also offer the ben- paper, and textiles. efits of reducing coal transport costs, and, perhaps most importantly, lowering emissions of local pollut- * Furnace and kiln renovation. Many industrial pro- ants such as TSP and SO2. In 1990, less than 18 per- cesses require the use of furnaces and kilns; however, cent of all coal produced in China was washed. Coal their efficiency is often quite low because of poor washing can reduce both the ash and sulfur content design, maintenance, or operation. In some cases, of coal, and in the process allow coal-fired boilers to the kiln is the most important part of the plant, such optimize the use of fuel and reduce the amount of as in the cement, brick, and glass industries. In such TSP and SO2 that is emitted during combustion. industries, improvement in the kiln requires major restructuring of the enterprise but also has the po- Residential energy-efficiency improvements. An tential for major energy savings. analysis of residential and commercial buildings in Shanxi, conducted as part of this study, shows that * Energy management systems. The installation of there is great potential for energy-efficiency gains in monitoring and control systems is often essential in building construction through the use of hollow reaping the energy-efficiency gains of new technolo- bricks, insulated plaster panels and walls, and im- gies. Opportunities for automation in China are nu- proved glass and window seals."o District heating merous, including the textile industry and many in- and other centralized heat distribution systems offer dustrial production lines. However, the training of substantial improvements over traditional systems, personnel must accompany the installation of auto- such as small coal-fired stoves, when designed and mated equipment for the efficiency gains to be realized. operated properly. In addition to space heating, there is great potential for energy-efficiency improvements * Insulation, thermal/steam system renovation. Signifi- in residential cooking. While the use of gas, both cant improvements in energy efficiency can be real- piped and bottled, has increased in urban areas since ized through relatively simple and inexpensive mea- the mid-1980s, the dominant fuel for cooking in ur- sures, such as the insulation of pipes and the instal- ban areas is coal and in rural areas is coal and bio- lation of effective steam traps. mass fuels. The energy efficiency gained in switch- ing from solid fuels to gas is largely because of the Efficient equipment. Improvements in the energy improved efficiency of the stoves and burners. Based efficiency of new models of widely used equipment can yield high energy savings for the economy Small- 10See the project subreport prepared for this study, Residential and and medium-scale coal-fired industrial boilers (which Commercial Energy Efficiency Opportunities: Taiyuan Case Study, Sep- exclude boilers for power generation) account for tember 1994. 27 Macroeconomic Analysis on residential surveys in Shanxi, the average amount nario, low-carbon fuels provide 39 percent of elec- of energy used for cooking with raw coal and bri- tricity generation, and an additional 130 mtce of low- quettes ranged from 437 to 579 kgce per capita, com- carbon fuel is substituted for fossil fuels for non- pared with LPG and coal gas, which used 69-114 power energy uses. The amount of coal used to pro- kgce. duce electricity in the baseline energy demand sce- nario is about 1300 mt in 2020, accounting for ap- Under the Baseline GHG Scenario, rapid growth proximately 30 percent of China's GHG emissions in energy use by the transportation sector over the from energy consumption. Under the Baseline GHG coming decades, particularly for road vehicles, re- Scenario, China will need to build an additional 700 sults in an increase in CO2 emissions from about 4 GW of electric power capacity between 1990 and percent of China's CO2emissions in 1990 to 5 percent 2020, equivalent to the completion of 39 new 600 MW by 2020. While still a relatively small share of China's units each year. Nevertheless, non-power uses of total energy use, the quantity of energy consumed energy, mainly for industrial process heat, residen- by China's transport sector will be huge in absolute tial cooking and heating, and transport, are estimated terms and relative to transport energy use worldwide. to account for more than two-thirds of primary en- Although no specific options for reducing transport ergy consumption in 2020. energy consumption were evaluated for this study, technical efficiency improvements, modal shifts, and In the high-substitution scenario, alternative fu- structural changes are all likely to be important for els including nuclear, wind, solar, and hydropower limiting the growth of GHG emissions from the trans- could provide nearly 40 percent of China's electric- portation sector in China. Further research on spe- ity by 2020, equivalent to about 16 percent of total cific options for GHG reduction in China's transpor- energy. This would reduce carbon emissions by tation sector is needed. about 140 million tons (mtC) compared with the Baseline GHG Scenario. Direct substitution of Alternative energy fuelwood for coal could provide up to 75 mtce by 2020, which would reduce GHG emissions by about China can greatly reduce greenhouse gas emis- 55 mtC. Coal-bed methane could provide up to 40 sions by reducing the proportion of carbon-intensive mtce of energy by 2020, which would reduce GHG energy sources in its energy mix. However, over the emissions by about 42 mtC.1 short term, there are limits to the extent of substitu- tion for coal because of the long lead times needed to ELECTRIC POWER ALTERNATIVES develop alternative technologies, the abundance of low-cost coal in China, and the sheer magnitude of Hydropower. China currently has a large and expand- the energy supply that will be needed to fuel China's ing hydroelectric development program. Under the economic expansion. Most experts expect that the baseline alternative energy scenario, which assumes only low-carbon-intensive fuels that can supply an that 80 percent of China's hydropower resources are appreciable increase in energy over the medium term developed by 2050, hydropower capacity expands in China are hydro for power generation, biomass from 36 GW in 1990 to about 138 GW in the year 2020. for direct use or for power generation, and natural Despite the large expansion in its capacity, hydro's gas and coal-bed methane as direct substitutes for contribution to power generation drops from 20 per- coal. Nonetheless, over the longer term, alternative cent in 1990 to about 16 percent in 2020. Even as- energy is the only option for significantly reducing suming a program whereby China develops every GHG emissions in China. economic hydro site by the middle of the 21st cen- tury (the high-substitution scenario), equivalent to In the Baseline GHG Scenario, coal, petroleum, about 184 GW of installed capacity by 2020, and gas provide 91 percent of China's energy supply hydropower's contribution to total electricity produc- and 78 percent of its electricity generation in 2020. tion would still fall to approximately 19 percent by Alternative energy supplies are used exclusively for the year 2020. electricity production. In addition to the Baseline GHG Scenario, the joint study team generated a high- substitution scenario to reflect the maximum amount of alternative (low-carbon) energy sources that could " Emissions from burning 30 bcm of gas amount to l8 mtC, while the reduction in carbon-equivalent from using methane instead be developed in China by the year 2020 under cur- of flaring it amounts to 60 mtC. The difference-42 mtC-is the rent development trends. In the high-substitution sce- total GHG reductions from use of coal-bed methane. 28 China: Issues and Options in Greenhouse Gas Emissions Control Table 2.6 Electricity supply scenarios, 2020 (TWh) 1990 Baseline High-substitution (TWh) % (TWh) % (TWh) % Hydro 126 20 601 16 719 19 Nuclear 0 0 208 5 568 15 Other renewables 0 0 45 1 208 5 Fossil fuels 495 80 2,996 78 2,355 61 Total 621 100 3,850 100 3,850 100 Nuclear power. Most Chinese energy experts em- reduce the overcutting and destruction of natural phasize nuclear and hydropower development as the forests. Fuelwood from new plantations could principal alternatives to coal for future electric power amount to 276 mt (air dry), or approximately 150 generation in China. The baseline case assumes that mtce, by 2020. If half of this amount could replace China's nuclear capacity would grow from zero in coal, either for direct use or for power generation, 1990 to about 32 GW in 2020. Under the high-substi- GHG emissions could be reduced by about 55 mtC. tution scenario, China would have 87 GW of installed nuclear capacity by the year 2020, which would re- Coal-bed methane. Currently, only about 430 mil- quire China to complete more than ten 600 MW plants lion cubic meters (cm) of methane, or less than 5 per- each year from 2010 onward. Cost issues aside, such cent of methane emissions from large state-owned an ambitious nuclear program would be the largest mines, is recovered through mine degasification and in the world and would require immediate action on used. This amount could be increased to 2-4 billion technology development, personnel training, and the cm (bcm) if the state mines with methane recovery establishment of the necessary regulatory framework. systems could increase their recovery to levels of best- practice in China. If coal production in China ex- Other renewable energy. In the high-substitution sce- pands to the levels envisioned by the Baseline GHG nario, the capacity of wind generators in China in- Scenario, the amount of coal-bed methane that could creases from the current level of 9 MW to 4,300 MW be recovered and used would be about 30 bcm, or by 2010 and to 9,000 MW by the year 2020. At present, double the current natural gas production in China. there is about 2,000 MW of wind-generated capacity worldwide. The high-substitution scenario assumes Natural gas. Natural gas sources may be expanded that as much as 82 GW of solar power generating either by discovery and development of new domes- capacity could be installed in China by the year 2020. tic sources, including tapping the large reserves of In 1991, worldwide shipments of solar PVs were coal-bed methane, or imported by way of pipeline about 55 MW. Despite the great expansion of solar construction or shipments of liquified natural gas. It and wind generation under the high-substitution sce- is assumed that in the future, natural gas will be used nario, other renewable energy sources would provide primarily for residential and commercial energy pur- only about 5 percent of electric power generation in poses, and, depending on the total supply, could also 2020. be used for electric power generation. The high value of natural gas in China warrants a more aggressive NON-POWER ALTERNATIVES exploration and development program. Domestic natural gas production is assumed to rise from 15 Fuelwood. While fuelwood plantations do not se- billion cm in 1990 to 115 billion cm in 2020 under the quester much carbon on a net basis (Table 2.7), their baseline scenario, and to 150 billion cm under the contribution to CO2 reduction can be significant if high-substitution scenario. Both of these scenarios fuelwood is substituted for fossil fuels. Assuming require large additions to proven natural gas reserves that only about half of the 150 mtce of fuelwood cur- in China. Still, these amounts are equivalent to only rently consumed in China is produced on a sustain- 4 and 6 percent, respectively, of total projected en- able basis, new sources of fuelwood can be used to ergy use in China in the year 2020. 29 Macroeconomic Analysis Other renewable energy. While small in comparison sequester 2.4-4.6 billion tons of carbon in woody bio- to overall energy use, other renewable energy sources mass and soil over a thirty-year period, or an aver- can be important in specific applications, such as resi- age of 80-153 mtC per year. Under the high sce- dential and commercial water and space heating, light nario, the amount of carbon sequestered in the year industrial process heat, and water pumping in agri- 2020 would be 221 mtC-nearly 30 percent of China's culture. Solar energy for residential and industrial 1990 GHG emissions and about 10 percent of baseline water heating, for example, has significant potential GHG emissions in 2020. China has planted trees at for displacing coal and other carbon-intensive fuels roughly the level of the "high scenario" since the late for direct us0. 1980s and has set a similar level of planting as the national goal for the year 2000. Nonetheless, even Forestry the low scenario requires an enormous program, in- cluding the planting and management of an addi- Through afforestation projects, the planting of tim- tional 5 million hectares of forest land each year be- ber and fuelwood plantations, and improved man- tween now and the year 2020. agement of open forests, it is possible to store carbon in trees and soil and thus reduce net GHG emissions. Agriculture Carbon sequestration is maximized by planting high- yield and fast-growing species on good land, under Through changes in agricultural practices, it is good growing conditions, and by applying modern possible to reduce GHG emissions from the agricul- forest management techniques. If some of the tural sector in China by 15-20 percent in the year 2020 fuelwood can be substituted for coal, the reduction compared with the Baseline GHG Scenario. Through of CO, from the forestry sector in China would be the use of better cattle breeds and improved feed pro- even greater. gram-, it is possible to reduce methane emissions from ruminant animals. Rice cultivation techniques An analysis of tree planting in China (see pp. 50-53) that limit the amount of time rice fields are flooded shows that a large-scale afforestation program could can also reduce methane production from rice fields. Table 2.7 Cumulative carbon sequestration Figure 2.5 Energy supply in 2020, high- by plantations, 1990-2020 (million tons C) substitution scenario 2 1% Type of plantation Scenario Low Medium High Intensively managed 419 630 803 plantations Extensively managed 1,180 1,777 2,266 plantations 23%! \ Fuelwood 141 208 312 plantations Open forest 630 949 1,267 management 0 Coal Do & gai Total 2,370 3,564 4,648 [[Hydro NNuclear O Other renewables 1Fuelwood SCoal-bed rnethane Source: Greeihouse Gas Emissions Control in the Forestry Sector, subreport prepared for the China GHG Study, November 1994. 30 China: [ssues and Op)tions in Green/ouse Gas Emissions Control Improved ruminant production. Improving cattle by IFigure 2.6 Source of GHG emissions in China way of artificial insemination crossbreeding can in- crease the usable carcass weight, increase the fertil- in 2020, baseline scenaro ity rate, reduce the number of bulls needed, and in- crease individual animal productivity All of these improvements help to reduce CH emissions per ki- logram of product. There is the potential to reduce methane emission by almost 11 percent per animal. 5 Chinese Ministry of Agriculture experts predict that improved breeding could extend to 70-90 percent of -4%, China's cattle population by the year 2020. If so, to- 86% 2% tal methane emissions from ruminant animals could 2/ be reduced by about 10 percent compared with the Baseline GHG Scenario. Asecond program, which shows great promise in China, is improving the productivity of cattle through the "ammoniated feed" program, whereby low-nu- trient crop wastes are treated with ammonia and fed O Energy MCement to cattle. The improved diet and increased feed con- @Coal-hed Methane E Animals sumption with ammoniated feed results in higher E Rice Other methane emissions from each animal, but emissions on a per kilogram weight gain basis decline by 35-40 percent. Therefore, fewer animals are needed to meet total food and animal power demands. Based on the current rate of adoption, it is possible that ammoni- ated feed could be used for about 20 percent of the CONCLUSIONS cattle stock in China by 2020, which would reduce methane emissions from ruminants by about 15-20 From the macroeconomic analysis, it is possible percent compared with the Baseline GHG Scenario. to (i) estimate future GHG emissions in China and assess changes in the sources of emissions over time; Changes in rice cultivation practices. A three-year (ii) examine the environmental implications of in- study by the Nanjing Institute of Environmental Pro- creased energy consumption; and (iii) identify the key tection found that semi-dry rice cultivation can re- options for reducing GHG emissions and assess the duce CH4 emissions by 31-43 percent. Because this potential magnitude of emissions reduction. system of cropping requires intensive soil prepara- tion and water management, and can be implemented Future emissions only on certain types of terrain, Chinese agricultural experts estimate that it could expand to only 15-25 Using the China GHG Model, the magnitude and percent of China's rice-growing area by 2020. If so, composition of GHGs in China over the next twenty- methane emissions from rice fields could be reduced five years can be analyzed. Under the Baseline GHG by about 10 percent compared with the Baseline GHG Scenario, the contribution of energy use to GHG emis- Scenario. Field studies throughout the world have sions increases from 82 percent in 1990 to approxi- found that methane emission rates vary widely de- mately 86 percent in 2020 (Figure 2.6). Given the pending on field location and time of year. Chinese rapid growth of the power sector under the Baseline studies mirror this variability. Analyses of intermit- GHG Scenario and the continuing importance of coal, tent irrigation of paddy fields have exhibited meth- emissions from the power sector increase from 24 ane emission levels 12 to 66 percent lower than for percent to 31 percent of total CO. from energy use normal practices. Because many regions are too dry from 1990 to 2020 (Figure 2.7). The proportion of to employ this technique, the Ministry of Agriculture emissions from cement manufacturing, energy pro- estimates that it could account for at most 10-15 per- duction (including coal-bed methane), and domestic cent of China's rice-growing area. This could result animals remains fairly steady over time since all are in a reduction in methane emissions from rice fields correlated with the growth of the economy 2 of about 8 percent compared with the baseline. (Table 2.8). Methane emissions from rice fields, which -3I Macroeconomic Analysis Table 2.8 Possible future GHG emissions from Environmental implications of the Baseline China by source, Baseline GHG Scenario (mtC GHG Scenario and equivalent) Most of the assumptions used for the Baseline 1990 2000 2010 2020 GHG Scenario, including the economic growth rate S- and the structure of final consumption, are derived Energy consumption from China's historical progress and the developmen- (CO2) 650 987 1,512 2,045 tal experience of other Asian countries. Extraordi- Energy consumption nary improvements in energy efficiency, while un- (N20 and CH) 14 21 33 44 precedented worldwide, are indeed possible based Cement 29 63 86 108 on the unique nature of energy consumption in China. Coal-bed methane 32 47 70 92 However, the environmental implications of the Animals 27 30 36 43 Baseline GHG Scenario are staggering. Mining, trans- Rice 36 36 36 36 porting, and burning 3.1 billion tons of raw coal, Other 20 24 29 37 roughly three times current usage, would have enor- Landfill gas 2 5 8 14 mous consequences for air, water, and land quality" Fertilizer 2 3 4 4 Carbon dioxide emissions increase more than three- Fizbrng 25 15 1fold in China between 1990 and 2020 under the (CH and N g2 0) Baseline GHG Scenario. Given this level of CO2emis- Oil and gas 1 1 2 4 sions from China in 2020, the rest of the world would production (CH,) have to decrease current emissions by roughly a third Afforestation -7 -7 to maintain worldwide emissions at 1990 levels. Total 801 1,201 1,795 2,398 Summary of options for reducing Source: China GHG Model, joint study team. GHG emissions What can be done to reduce such an increase in GHG emissions from China? The Baseline GHG Sce- are largely a function of the area of land planted rather nario already assumes enormous improvements in than rice production, are not projected to increase sub- energy efficiency, and thus reductions in GHG emis- stantially between 1990 and 2020. As a result, the share of GHG emissions from rice declines from about 5 percent in 1990 to 2 percent in 2020. Other sources 1, For example, the model shows that SO, emissions will increase of emissions remain at about 2 percent of total GHG from 16 mt in 1990 to 55 mt by 2020 while TSP emissions rise from emissions over the next twenty-five years. Landfill 14 mt to 48 mt using 1990 emission coefficients (Table 2.9). Al- gas, which is correlated with the size of the urban though structural change and environmental regulations will help population and the share of carbon-containing mat- control emissions, the analysis shows that great efforts will be needed to prevent the deterioration in air quality from increased ter in urban wastes, is projected to increase seven- coal use. fold by 2020, but will remain at less than 0.6 percent of total GHG emissions. Despite the transport sector's rapid growth in energy use in the Baseline GHG Sce- Table 2.9 Baseline GHG Scenario: Environmental nario, particularly for road vehicles, CO2 emissions implications of energy use from that sector only rise from about 4 percent of to- tal CO2 emissions from energy use in 1990 to 5 per- Year 1990 2000 2010 2020 cent by 2020. The amount of biomass burning, which is predominantly a function of residential fuel use in Energy consumption 987 1,560 2,375 3,300 China, is not projected to increase in China over the (mtce), of which: coming decades, as rural households increasingly rely Coal consumption (mt) 1,053 1,574 2,376 3,100 on other forms of energy for their needs. TSP (mt)* 14 22 35 48 "In the Baseline GHG Scenario, no measures are taken to reduce so (mt)* 16 27 41 55 these emissions even though, for instance, it is likely that a grow- ing share of the methane vented from coal mines will be collected * Assumes no change in emission coefficients from 1990. and utilized. 32 China: Issues and Options in Greenhouse Gas Emissions Control Table 2.10 Potential for reducing GHG emissions in Cina,2020Figure 2.7 China: Sectoral CO2 emissions from in China, 20202 energy consumption, 2020 GHG emissions relative 2% 3% to baseline (mtC) % Baseline GHG Scenario 2,398 High energy efficiency -330 Alternative energy -237 46% (high scenario) Afforestation -221 (high scenario) Agriculture -15 to -25 sions," primarily as a result of economic structural DIndustry EPower DIResidential change. ETransport 0Agriculture 1Other In addition to broad measures to improve the over- I all efficiency of the economy, there are more specific policy and investment options for reducing GHG emissions, including the following: (i) more aggres- sive technical energy conservation measures, (ii) more rapid adoption of low-carbon-intensive fuels, (iii) af- forestation, and (iv) selected agricultural programs. The magnitude of reduction potential for these op- tions, relative to the Baseline GHG Scenario, is given in Table 2.10. If all of these options were undertaken, GHG emissions could be reduced by more than 800 mtC by the year 2020-more than total GHG emis- sions from China in 1990. Instead of increasing more than threefold between 1990 and 2020, GHG emis- sions would increase by less than twofold. As will be discussed in the following chapter, however, the unit costs (yuan/ton) of undertaking each of these options vary greatly and the total costs for some are enormous. 14 An approximation of the potential fall in energy intensity in China between 1990 and 2020 can be measured as the difference in energy use under the Baseline GHG Scenario (3,300 mtce) and the case where there is no change in China's I-0 coefficients from 1990 (10,000 mtce). 33 Chapter 3 The Costs of Limiting Emissions SUMMARY OF LEAST-COST OPTIONS incremental benefits accruing to the enterprise and to Chinese society as a whole. Therefore, for pur- The most cost-effective options for reducing GHG poses of calculating the net cost of reducing GHG emissions are those that already make sense in terms emissions, financial, economic, and partial environ- of financial, economic, or social returns to society; mental benefits have been subtracted from total costs. these are called no-regrets policies since they can be The relative costs of various GHG reduction options undertaken without incurring specific net costs for in China are shown in Figure 3.1. GHG emissions reduction. No-regrets projects usu- ally provide several benefits, of which GHG reduc- The net cost per unit GHG reduction is calculated tion is only one. One reason that many no-regrets by using standard cost-benefit analysis and calculat- projects for reducing GHG emissions have not yet ing the GHG reductions associated with a project.3 been undertaken, particularly in China and other The resulting calculation is a net cost in yuan per ton developing countries, is because there are a variety of GHG reduced, expressed in present value terms. of market and non-market barriers that restrain these A major advantage of this approach is that the global investments.' In China, no-regrets projects for re- benefits associated with reducing GHG emissions ducing GHG emissions include several energy-effi- need not be quantified. This is an important consid- ciency investments, forestry plantations, some eration given the tremendous range of uncertainty projects to develop alternative sources of energy, and connected with GHG emissions and global climate modifications to various agricultural practices. De- change. A second advantage of this methodology is pending on the level of GHG reductions desired, it that it allows comparison of the costs of very differ- may be necessary to undertake additional projects ent types of projects, from an energy-efficiency in- that have a positive net cost to China. Significant vestment in the steel industry to a forestry planta- additional GHG reductions in China can be achieved tion for growing timber and sequestering carbon. through the further adoption of low-carbon-intensive Using the methodology outlined here, it should be energy sources, such as wind, nuclear, and solar en- noted that any GHG reduction project having a rate ergy. With current technology, however, large-scale of return greater than the target rate of return will adoption of these options is not part of the least-cost result in GHG reductions at no additional cost (zero energy supply. or negative cost per ton of CO, reduced). Costs of GHG reduction Significance testing Financial, economic, and, where possible, environ- Projects must be deemed significant in terms of mental economic analyses have been used to assess the level of GHG reductions that can be achieved. the cost of reducing GHG emissions.2 The incremen- There may be a host of projects that are low-cost but tal cost of reducing GHG emissions should be net of which would have a minimal effect on GHG reduc- These issues are discussed later in this chapter and in Chapter 4. 3 This is done by dividing the incremental net discounted cash flow by the present value of the incremental ton of GHG reduc- 2 For details on the economic methodology used, see the project tions at a given discount rate. This is referred to as "cost-effec- subreport prepared for this study, Energy Efficiency in China: Case tiveness" analysis, since some of the costs (e.g., global damages Studies and Economic Analysis, December 1994. from GHG emissions) are not quantified. 34 China: Issues and Options in Greenhouse Gas Emissions Control tions either because they are not replicable across the tor, were evaluated using case study analysis (see pp. economy or because the GHG emissions related to 36-45). Using the results of the financial and economic the activity are insignificant relative to the economy's analyses of these projects, the energy savings, GHG total emissions. The cut-off point for project signifi- reductions, and net costs of GHG reduction were cal- cance is subjective; however, it should be high enough culated. Since almost all of the energy-efficiency that scarce resources (capital, human, and manage- projects have high financial rates of return on a life- rial) are not used to develop projects that have little cycle basis, the net cost of GHG reduction is zero. effect on total emissions. Estimates of reduction po- However, there are several reasons why some of these tential for the following options have been given in projects are not sufficiently attractive to enterprises Chapter 2. and investors. Energy efficiency Alternative energy There is great potential in China for reducing en- The use of low-carbon-intensive fuels, such as hy- ergy use and CO. emissions at low cost through en- dropower, wind, solar, nuclear, coal-bed methane, ergy-efficiency investments. Twenty-five energy-ef- natural gas, and biomass energy, can yield large re- ficiency projects, most of them in the industrial sec- ductions in GHG emissions in China. However, many Figure 3.1 Estimated net cost of reducing GHG emissions in China with commercial technology (1990 Y/tC) 500- 1. Energy conservation 400 2. Improved cattle production 3. Industrial restructuring 300 4. High-yield fuelwood plantations (South China) 5. Coal-bed methane 200 6. High-yield commercial timber plantations - 100 -100 -200 7. Wind-powered electricity generation B. Incremental hydropower -300 9. Nuclear power 10. Solar photovoltaics -400 . -500 -_____ _________ ________________________ 1 2 3 4 5 6 7 8 9 10 Notes and sources: Net costs of reducing GHG emissions have been calculated using extended cost-benefit analysis. 1. Energy conservation: Average cost per ton reduction for the seven classic energy conservation projects evaluated. See Energy Efficiency in China: Case Studies and Economic Analysis, December 1994. 2. Improved cattle production: Average cost per ton for improved cattle breeding and feed programs. See Greenhouse Gas Control in the Agricultural Sector, September 1994. 3. Industrial restructuring: Average cost per ton reduction for the six industrial modernization projects evaluated. Ibid. 4. High-yield fuelwood plantations: See Greenhouse Gas Emissions Control in the Forestry Sector, November 1994. 5. Coal-bed methane: Calculated from economic cost-benefit analysis data provided by the GEF China coal-bed methane project. 6. High-yield commercial timber plantations: Average cost per ton of intensive and extensive timber plantations. See Greenhouse Gas Emissions Control in the Forestry Sector, November 1994. 7. Wind-powered electricity generation: See Alternative Energy Supply Options to Substitute for Carbon-Intensive Fuels, December 1994. 8. Incremental hydropower Hydroelectric capacity beyond levels currently part of China's power expansion plan. Ibid. 9. Nuclear power [bid. 10. Solar photovoltaics: Ibid. 35 The Costs of Limiting Emissions of these alternative energy sources have a positive However, because these two practices are being used net cost for reducing GHG emissions; that is, they in some regions of China, it is assumed that the costs are more expensive than coal or coal-fired power associated with reducing GHG emissions are low. generation even when accounting for the local envi- ronmental costs of coal use, such as air pollution4 (Figure 3.1). In the short to medium term, only hy- ENERGY EFFICIENCY dropower, biomass fuels, natural gas, and coal-bed methane can be developed using conventional tech- Introduction nology on a large scale at costs that are competitive with coal. Other alternative energy sources, includ- This section reviews the economics of energy-ef- ing nuclear, wind, solar, and imported gas, are all ficiency investments in China, primarily in industry, projected to be more expensive than coal for power and the incentives or disincentives for enterprises to generation in China under typical conditions until at pursue such investments. The analysis is based on least the year 2020, even assuming substantial reduc- background reports on energy efficiency for all ma- tions in the cost of alternative energy jor sectors, and on the results of twenty-five case stud- ies of typical energy conservation investments. Both Forestry the background reports and the case studies were undertaken by joint Chinese-international teams.s The analysis of tree planting for carbon seques- The background reports describe the gains in energy tration in the United States and other developed efficiency that have been made in China over the past countries has generally assumed that all costs (land ten years and identify the factors within each sector acquisition, planting, and management) are attrib- that are most responsible for these gains. uted to carbon sequestration, and private, social, or other environmental benefits associated with the The main objective of the case studies was to as- plantations are not calculated. The analysis here sess the economics of various energy conservation shows that planting trees on some types of planta- investments and, by subtracting the financial, eco- tions, particularly intensively-managed timber plan- nomic, and local environmental benefits associated tations, is profitable in parts of China on a life-cycle with these projects, determine the net cost of energy basis. For these types of commercial forestry projects, efficiency for GHG reduction. The case studies were the net cost of carbon sequestration is zero. This re- selected to include projects with high potential for sult was obtained without considering the significant energy savings, but also to represent the range of in- economic and environmental benefits associated with vestments yielding energy-efficiency gains. Each case tree planting, such as wind shelter, erosion control, study includes estimates of the incremental costs and and ecosystem protection. benefits of a prospective or recently completed project at a specific Chinese enterprise, based on discounted Agriculture cash flow analysis of life-cycle costs and benefits with and without the project. In addition to sixteen case Increasing the efficiency with which ruminant studies of energy conservation investments in manu- animals are raised can reduce the amount of meth- facturing enterprises, nine other case studies cover ane emitted. Economic analyses of two techniques analysis of the economics of the production of more for improving meat and milk production from cattle efficient industrial equipment, improved coal pro- in China-cross-breeding with improved genetic cessing, energy conservation in power production stock and the use of ammoniated feed-show that and delivery, and energy savings in residential and the financial returns to these techniques are high. commercial buildings. Economic analyses were not performed on semi-dry rice cultivation and intermittent irrigation of rice fields, which can also reduce methane emissions. Alternative sources of power are compared to a new coal-fired 5 Details of the technical and case study analyses are provided in power plant with high-efficiency particulate and NOx controls three subreports prepared for this study: Energy Efficiency in China: using low-sulfur coal. The inclusion of SO2 scrubbers on new Technical and Sectoral Analysis, August 1994; Energy Demand in plants would most likely reduce the differential between coal and China: Overview Report, February 1995 (forthcoming); and Energy alternative energy sources; however, the cost advantage would Efficiency in China: Case Studies and Economic Analysis, December still favor coal. 1994. 36 China: Issues and Options in Greenhouse Gas Emissions Control CASE STUDY ANALYSIS: CONCEPTS AND METHODS and outputs have been adjusted to reflect shadow prices, estimated to reflect the true values of these Financial and economic returns. Overall, the inter- items in China's economy. The EIRR of all sixteen nal rates of return for the energy-efficiency invest- projects is 12 percent or higher. ments in manufacturing enterprises are exception- ally high (Table 3.1). Based on the actual prices faced The impact of price distortions. Although problems by Chinese enterprises in 1990, all sixteen projects remain in certain sectors, the prices that most Chi- reviewed have financial internal rates of return (FIRR) nese consumers pay for energy do not pose a major of well over 12 percent, while three-quarters of the constraint to widespread adoption of energy conser- projects have FIRRs of 20 percent or more. Over the vation measures. By the end of 1993, 77 percent of life of the projects, therefore, financial benefits real- all coal produced was sold at free-market prices, and ized by the enterprises clearly far outweigh costs. In price controls on the remaining 23 percent of produc- ten of the sixteen projects, the benefits include in- tion are scheduled to be removed in 1994. Although creases in output levels or quality of output, whereas problems remain with the structure of electricity in the other projects, benefits are derived solely from prices, the average electricity prices paid by consum- cost savings. Economic internal rates of return (EIRR) ers in most major load centers now approximate long- are also high. In these calculations, prices of inputs run marginal costs. Table 3.1 Internal rates of return for selected energy efficiency projects in manufacturing Financial Economic Environmental (%) (%) economic (%) M1. Steel: Conversion of open hearth furnace to BOF 16 16 16 M2. Steel: Adoption of continuous casting 19 19 20 M3. Steel: Reheating furnace renovation 36 38 38 M4. Steel: Blast furnace gas recovery 41 41 42 M5. Aluminum kiln renovation 84 83 83 CH1. Ammonia: Medium-sized plant restructuring 20 23 23 CH2. Ammonia: Small plant waste heat recovery 71 54 56 CH3. Caustic soda: Adopting membrane electrolyzer 29 32 33 B1. Cement: Medium-sized kiln renovation 15 14 14 B2. Cement: Conversion from wet to dry process 19 18 18 B3. Cement: Small-scale kiln renovation 35 33 33 L1. Pulp and paper: Adoption of cogeneration 25 29 29 L2. Pulp and paper: Black liquor recovery 25 22 22 TI. Textiles: Cogeneration in printing and dyeing 38 38 38 T2. Textiles: Caustic soda recovery 58 34 35 T3. Textiles: Computerized energy management infinitea infinite infinite system a The payback period is less than one year. Source: Energy Efficiency in China: Case Studies and Economic Analysis, September 1994 subreport prepared for the China GHG Study. 37 The Costs of Limiting Emissions Table 3.1 shows the effect that the use of economic Industrial restructuring projects shadow prices, as opposed to actual 1990 prices, has on project rates of return.6 The returns of seven Many of the projects that yield high energy say- projects increase with adoption of prices more con- ings in manufacturing require major restructuring of sistent with economic costs, while the returns of eight existing plants. Such programs are common through- others decrease; one remains the same. However, the out China today, as enterprises seek to upgrade pro- extent to which projects "switch" from being unat- duction processes and capture economies of scale to tractive to attractive, or vice versa, is minimal. Since better compete in the emerging market economy. three-quarters of the projects reviewed exhibit rates Among the case studies, six are typical of industrial of return of 20 percent or more under both the par- restructuring projects, including (i) conversion of tially and fully reformed environments, it is clear that open-hearth steel furnaces to basic oxygen furnaces domestic price distortions alone are not the driving (BOF), (ii) adoption of continuous casting in steel force leading Chinese enterprises to use energy-inef- production, (iii) process and product restructuring ficient production processes. As a corollary, further in the medium-scale ammonia industry, (iv) large- price reform alone cannotbe expected to resolve prob- scale kiln renovations in medium-sized cement lems of inefficient energy use in industry plants, (v) conversion from the wet to the dry pro- cess in cement production, and (vi) adoption of mem- Local environmental externalities. When reductions brane electrolyzer technology in caustic soda produc- in health damages attributable to reductions in par- tion. ticulate and sulfur dioxide emissions are taken into account, the rates of return of the industrial projects Project characteristics. As shown in Table 3.2, in- reviewed (shown as "environmental economic" rates dustrial restructuring projects with high energy-effi- of return) increase in all cases over EIRR levels, al- ciency gains typically exhibit the following charac- though the average change is small, averaging 0.3 teristics: percent. For that reason, adding the domestic envi- ronmental benefits to the projects does not lead to a Relatively modest rates of return. Of the sixteen case wholesale "switch" in any of the projects from unac- studies in manufacturing, all four projects with fi- ceptable to acceptable because, in most cases, the rates nancial rates of return under 20 percent are restruc- of return of these manufacturing enterprise conser- turing projects. vation investments are already high. Outside of manufacturing, however, the importance of local en- High investment costs. Since these projects require vironmental benefits to the viability of energy-effi- major retooling of production lines, investment costs ciency investments is greater in some cases, most typically exceed Y100 million (US$21 million). notably in coal processing. Long payback periods. Because of modest rates of re- INDUSTRIAL ENERGY EFFICIENCY turn and high investment costs, discounted payback Three types of industrial energy-efficiency projects periods of the projects reviewed are six to nine years. were analyzed in the study, and most of the case stud- Multiple benefits. Restructuring projects generally ies reviewed below fall into one of the following cat- provide a variety of benefits, including reductions in egories of projects. operating costs, of which energy costs are just one. Most importantly, such projects generally yield in- * Industrial restructuring; creases in output value because of increased pro- * Industrial energy conservation projects; and duction levels, quality improvements, or both. Out- * High-efficiency energy-consuming put value increases substantially in all six of the re- equipment. structuring case studies. Coal processing, which can improve energy effi- High financial significance to enterprises. Net project ciency in industry as well as in other sectors, is ad- benefits are high relative to the enterprise's overall dressed in a separate section. operations: they are equivalent to at least 20 percent of total enterprise cost streams over the project pe- riod. Indeed, successful completion of these projects is often critical to the enterprise's overall financial 6 Energy price distortions were greater in 1990 than in 1993. health. 38 China: Issues and Options in Greenhouse Gas Emissions Control Table 3.2 Economic parameters of industrial restructuring projects with energy-efficiency gains Discounted NPV of Output Annual Energy payback investment value Signifi- energy savings period (million increase cance savings ('000 Financing FIRR (%) (years) yuan) (%) ratio' (%) ('000 tce) Y/tce) burdenb Steel: BOF 16 9 741 15 2c 145.6 5.09 29 conversion Steel: 19 8 298 125 4c 139.3 2.14 87 Continuous casting Ammonia: 20 8 298 125 44 139.3 2.14 87 Medium-sized plant restructuring Cement: 15 9 362 128 47 93.5 3.87 122 Medium-sized kiln renovation Cement: 19 9 362 128 47 93.5 3.05 75 Conversion to dry process Caustic soda: 29 6 44 20 22 17.6 2.5 124 Restructuring aThis ratio measures the financial significance of a project's net benefits to the enterprise. It is defined as the NPV of the incremental cash flow of the project divided by the PV of enterprise total cost stream without the project during the time period that the project would be undertaken. bThis is a rough measure of the capacity of the enterprise to finance the project. It is the percentage of the enterprise net cash flow without the project, over the same time horizon as the proposed project, required to finance the project investment. cThese case studies yielded low significance ratios because the projects considered only one steel shop in large companies. The first case involves the Anshan Iron and Steel company, the largest in China, and the second case was at the Benxi Iron and Steel Works, also a large plant. High energy savings per project. Because industrial re- INCENTIVES AND CONSTRAINTS TO structuring projects tend to be large, energy savings IMPLEMENTING RESTRUCTURING PROJECTS in the case studies reviewed average 185,000 tons of coal equivalent (tce) per year. There is now great incentive for enterprises in China to engage in restructuring projects. Often, they High gross investment costs per unit energy savings. represent the cornerstone of enterprise management's Because energy savings are just one of several project plan to improve its competitive standing. Indeed, objectives, the gross investment cost per tce saved completion of restructuring projects may be required tends to be high, averaging more than Y3,000 in 1990 for enterprise survival. In many cases, such as the prices. steel, cement, and ammonia projects reviewed, projects are not especially risky from a technical view- High financing burden. Enterprise financing of indus- point. Typically, other enterprises have already pur- trial restructuring projects is problematic, not only sued similar technical renovations and their experi- because investment costs are high but also because, ence is fairly well known. prior to restructuring, these enterprises tend to be fi- nancially weak. Securing project financing is probably the most 39 The Costs of Limiting Emissions serious constraint in implementing these restructur- of reheating furnaces in the steel industry, (ii) recov- ing projects. Upfront investment costs are high, and ery of blast furnace gas for use in cogeneration in iron investment capital is in short supply Moreover, many and steel production, (iii) waste heat recovery in of these enterprises are either currently incurring small-scale ammonia plants, (iv) renovation of small- losses or are only marginally profitable-hence, the scale vertical shaft cement kilns, (v) cogeneration in need to engage in a restructuring of operations. pulp and paper manufacturing, (vi) cogeneration in Moreover, because significant financial resources are textile printing and dyeing operations, and (vii) adop- required for restructuring, internally generated en- tion of computerized energy management systems terprise investment funds are often insufficient. Be- in textile plants. cause enterprises are often saddled with high fixed operating costs stemming from a range of social guar- Project characteristics. "Classic" industrial energy antees to workers, the financial risk associated with conservation projects typically exhibit the following these projects is high. The success of industrial re- characteristics (Table 3.3): structuring efforts ultimately depends on the current enterprise reform drive, and especially on the con- High rates of return. The financial rate of return of each tinued reform of China's banking system. of the seven projects reviewed is at least 25 percent. Industrial energy conservation projects Modest investment costs. These projects are smaller than restructuring projects. Investment costs in the Seven projects reviewed as case studies fall into cases reviewed averaged Y12 million (US$2.5 million the category of energy conservation: (i) renovation in 1990 prices). Table 3.3 Review of economic parameters of industrial energy conservation projects' Discounted NPV of Annual Investment payback investment Output energy per tce period (million value Significance savings saved FIRR (%) (years) yuan) increase (%) ratiob (%) ('000 tce) ('000 Y/tce) Steel: Reheating furnace renovation 36 4 0.89 0 ... 1.45 0.61 Steel: Blast-furnace gas recovery 41 6 14.11 0 3.2 24.91 0.57 Ammonia: Small plant waste heat recovery 71 3 2.69 11 6.2 4.72 0.57 Cement: Small-scale kiln renovation 35 6 23.63 32 12.2 40.33 0.59 Pulp and paper cogeneration 25 7 36.62 0 ... 33.48 1.08 Textiles: Cogeneration 38 4 6.64 0 8.6 3.63 1.83 Textile: Energy management system infinite 0.5 0.11 0 1.5 0.42 10.50 aThe aluminum kiln renovation (M5), pulp and paper black liquor recovery (12), and textile caustic soda recovery (T2) case studies are not listed in Tables 3.3 or 3.4, since these projects exhibit mixed characteristics. They are classified between the restructuring and "narrower" energy conservation categories. bSee Table 3.2 for explanations. 40 China: Issues and Options in Greenhouse Gas Emissions Control Medium-length payback periods. Although there is sub- enterprises. The existence of high-return, yet uncom- stantial variation, discounted payback periods are pleted, incremental projects may be one symptom of shorter than for restructuring projects, averaging four broader, more fundamental issues requiring the to five years in the cases reviewed. completion of broader restructuring efforts, or, at worst, plant closure. Focus on energy benefits. In keeping with their nar- rower focus, the primary financial benefit of energy Industrial energy conservation projects, therefore, conservation projects is a reduction in energy oper- must be evaluated in the context of the overall op- ating costs. Although these benefits alone generate erations of enterprises. Two issues to consider when high rates of return in the cases reviewed, most reviewing these incremental projects are whether the projects exhibit no increase in production levels or enterprise will be viable after the project is under- value of commodities produced. taken, and whether the enterprise can finance and manage the project. Isolated support for incremen- Low financial significance to enterprises. Net project tal projects in unhealthy enterprises is both counter- benefits tend to be low in relation to the enterprise's productive and a waste of resources. Energy conser- overall operations since these are generally small vation projects may, however, be a productive part projects. With the exception of pulp and paper co- of a broader restructuring package to make an un- generation and small-scale cement kiln renovation, healthy enterprise viable, especially in energy-inten- the net project benefits of the projects listed in Table sive industries. 3.3 are equivalent to less than 10 percent of total en- terprise cost streams over the project period. INCENTIVES AND CONSTRAINTS TO CONSERVATION PROJECT IMPLEMENTATION Modest energy savings per project. Energy savings in the case studies reviewed average just over 15,000 As mentioned above, some seemingly attractive tce per year. In the aggregate, however, implemen- energy conservation projects may not be undertaken tation of many industrial energy conservation projects because of fundamental financial and economic prob- may lead to greater energy savings than in restruc- lems in an enterprise. In addition, however, there turing projects because of widespread application. are numerous constraints impeding the implemen- tation of attractive energy conservation projects in Low gross investment costs per unit energy savings. The enterprises that are financially healthy and growing. gross investment cost per tce saved tends to be sub- Some of these constraints stem from the current tran- stantially lower than in restructuring projects, aver- sition from a planned to a market economy, while aging less than Y800 (1990 prices) per tce saved per others are common in developed market economies year. as well. Modest financing burden. Enterprise financing of these Weak cost-consciousness. The "classic" energy con- conservation projects tends to be easier than for re- servation projects presented in Table 3.3 depend on structuring projects. In the cases reviewed, invest- upfront investments to reduce future operating costs. ment costs were typically 20 percent or less of the net Such investments require a commitment by enterprise cash flow of the enterprise without the project. management to control operating costs as a means to increase enterprise profits. While the profit motive ENERGY CONSERVATION PROJECTS and market competition are rapidly increasing cost- IN UNHEALTHY ENTERPRISES consciousness in Chinese enterprises, it takes time for management methods and attitudes to change. Because "classic" industrial energy conservation projects focus on equipment replacement or renova- Reforms are underway in China to provide state- tion of just one or several aspects of a plant's opera- owned enterprises with autonomy and full account- tion, they may be described as "incremental" projects, ability for profits and losses. New fiscal and tax pro- rather than restructuring projects. Even though these visions will enforce budget constraints and acceler- incremental projects show good financial and eco- ate the move toward corporate forms of operation. nomic returns, they may exist in enterprises that are Implementation of these reforms takes time, however, financially and economically nonviable. Indeed, the as enterprise managers adapt to the new competi- greatest potential for high rate-of-return, efficiency- tive environment. Thus, the provision of well-de- oriented incremental projects tends to be in inefficient signed and practical information on the cost-savings 41 The Costs of Limiting Emissions and profit implications of specific energy conserva- enterprise managers have limited knowledge of these tion investments is both urgent and important. opportunities. Particularly lacking is practical infor- mation on enterprise experiences with different tech- Demands for short payback periods. Enterprise nologies and the details of cost savings and increased managers and potential investors almost always as- profits. sess "classic" energy conservation projects in terms of their payback period, rather than their life-cycle Low financial significance and transaction costs. rate of return. Conservation investments with Even if rates of return are high and payback periods payback periods of more than five years are rarely are considered acceptable, many energy conservation undertaken by enterprises or investors, unless there projects may not be considered priority investments are other pressures to do so. by enterprises because net benefits are not large rela- tive to the size of the enterprise. The time and effort Risk and uncertainty. The use of payback period required for staff to gather information, design calculations is usually associated with risk and un- projects, undertake the relevant analysis, and imple- certainty. Whereas investments in output expansion ment the projects may not be worthwhile. In other yield physical, easily perceived benefits, the benefits words, there may be additional, hidden costs in- from energy-saving investments are future cost say- volved in project preparation and implementation, ings calculated by analysts. Skepticism concerning especially for highly valued staff, that reduce the these calculations often stems from perceptions of project's attractiveness. technical risk. Will the renovation project or new equipment really result in the energy savings fore- High-efficiency energy-consuming cast? In China, this natural bias has been exacerbated equipment by a management culture attuned to maximizing physical output and achieving-or surpassing-out- The introduction and dissemination of high-effi- put quotas. ciency equipment will entail technology transfer, product development, and manufacturing and mar- Additional uncertainties or risks may be seen on keting by producers, as well as more purchases by the other part of the cost savings calculation: forecast consuming enterprises. The perspectives of produc- energy prices. Although recently energy prices have ers and consumers and the economic issues they face increased in real terms, the pricing system has been are briefly reviewed below. changing rapidly. Other aspects of the system, espe- cially for electricity, also remain complex, non-trans- EQUIPMENT PRODUCERS parent, and difficult for enterprise managers to fully understand and predict. If non-energy prices (such The equipment industry in China includes a few as prices for a factory's products) increase faster than large key producers and many small producers, most energy prices, the original energy conservation in- of which lack economies of scale and use outdated vestment may be less attractive than other uses of technology. Product prices are now largely decon- investment funds. trolled and a competitive market framework is in place. However, industries are still adjusting to mar- A final uncertainty is market and technical risk ket forces. These industries have not completely re- stemming from the rapid change in China's economy. aligned their structure, supply and demand remain Increasing competition and market development are unbalanced in some cases, and future market price driving a major economic restructuring and causing levels are uncertain. Product marketing capabilities volatility in the profitability of different sectors and and customer service efforts are still weak, since they product lines. In China today, flexibility to respond did not exist under the planned economy. Some key to rapid market changes is critical. Long payback issues relating to the financial attractiveness of pro- periods mean funds are tied up. Not only may fu- ducing more energy-efficient equipment models, ture opportunities for high-return profits be lost, but based on the case study analysis, are presented be- market changes may make renovated production low. lines, although more energy-efficient, less profitable or unprofitable as a whole. Market conditions and enterprise profitability. Pro- duction capacity exceeds market demand in the in- Inadequate information. Often, viable energy con- dustrial boiler industry, profits on the standard mod- servation investments are not undertaken because els are weak, and enterprises are exploring new op- 42 China: Issues and Options in Greenhouse Gas Emissions Control portunities. However, demand for variable-speed increase in efficiency. Project attractiveness is sensi- electric motors and steam traps exceeded supply in tive to the number of operating hours, load rates, and early 1993. In two case studies, the rates of return on the level of energy prices. In cases where pollution investments to expand variable-speed motor produc- already translates into financial costs, the attractive- tion were very high under prevailing product prices. ness of more efficient industrial boilers varies accord- The relationship between supply and demand for ing to environmental protection requirements. new, high-efficiency motors is unclear, and the returns to investment for expanded production at current Attractiveness varies greatly between new installa- prices appear modest. tions and replacements. The attractiveness of pur- chasing new high-efficiency equipment is greater Product pricing. Prices for more efficient products when a choice is being made for a new installation. should divide benefits between producers and con- In replacing older operating equipment, the key pa- sumers in such a way that each has a proper incen- rameters are the degree of relative efficiency improve- tive to pursue the innovation. This is best achieved ment and the remaining value (e.g., operating life) of by giving full play to market forces. Exact produc- the equipment being replaced. tion costs for a new generation of more efficient in- dustrial boilers have yet to be determined, but to be Low financial significance. Although rates of return commercially successful, product prices cannot be may be high and payback periods short, the finan- significantly higher than existing designs. For more cial significance to enterprises of the reduced energy efficient variable-speed motors, market-clearing costs from investments in higher-efficiency equip- prices have not been fully realized. ment is typically quite low. This is particularly true for items such as small electric motors or steam traps. Project rate of return sensitivity. The case studies Except for adoption of variable speed motors in cer- show that the rates of return for investment in ex- tain applications, consuming enterprises may often panded production of high-efficiency and variable consider energy efficiency less important than other speed motors are particularly sensitive to product product characteristics, such as reliability, product prices and raw material costs. The relative attrac- life, ease of installation, and ease of purchase and tiveness of developing new product lines must be repair. compared with upgrading existing ones. CONSTRAINTS TO DISSEMINATION OF Foreign participation. Several joint-venture opera- HIGH-EFFICIENCY EQUIPMENT tions have been established in the electric motors in- dustry, where export potential is strong and Chinese Producing enterprises. Barriers to technology trans- production costs are low. In the coal-fired industrial fer from abroad represent one set of constraints to boiler industry, however, there are no joint ventures expanded development and production of more en- with foreign firms. There is no market for these boil- ergy-efficient equipment. In all of the equipment in- ers abroad, and intellectual property rights would be dustries, application of foreign technology is critical difficult to protect in the domestic market. in achieving high efficiency at reasonable cost. Al- though necessary to enable proper compensation for CONSUMING ENTERPRISES research and development investment, protection of intellectual property rights presents a number of bar- Investments in higher-efficiency equipment gen- riers. First, foreign firms are often concerned that erally exhibit the following characteristics: protection will be inadequate, and thus deny access to state-of-the-art technology. Second, the costs of Attractiveness varies widely in different applica- such rights may often be prohibitive to individual tions. The ratio of operating costs (primarily energy Chinese enterprises, especially considering the ad- costs) to equipment purchase costs is high for higher- ditional risk associated with cost recovery through efficiency equipment. The greater the total energy higher prices. Finally, because by definition success- costs, the greater the benefit for a given percentage ful protection of intellectual property rights means that technology access is limited to only some pro- 7 ducers, the overall objective from the perspective of This ratio also is substantially higher in China than in most other countries, since prices for the equipment are substantially energy efficiency and greenhouse gas reduction- lower than prices abroad (although equipment quality and reli- widespread and rapid dissemination-may be com- ability are generally poorer). promised. 43 The Costs of Limiting Emissions Another category of constraints is the risk and case of small boilers, which may often have poor, if uncertainty involved in developing and marketing any, emissions control equipment. One recent study the new products. Some risk and uncertainty is to be shows that a major increase in steam coal washing is expected as a normal aspect of business development. economically justified based on transportation, user However, uncertainties concerning product cost and efficiency, and maintenance gains alone. More thor- market response at different prices were especially ough cleaning is justified if environmental benefits high in some cases reviewed, such as for high-effi- are included.' ciency coal-fired industrial boilers or high-efficiency electric motors. For boilers, where new models must From the producer's perspective, the attractive- be developed specifically for Chinese conditions, ness of steam coal washing varies dramatically ac- major technical risks exist in product development cording to sales price. Two washery projects analyzed and initial manufacturing. Production costs for much for this study showed a wide spectrum, yielding an of the new equipment are uncertain, including the unviable financial rate of return in one example and future price and availability of raw materials. Gen- an exceptionally high rate of return in the other. From erally speaking, however, the largest risk concerns the consumer's perspective, there is little interest in marketability and future product price levels, espe- paying significantly more for washed steam coal. cially because competitive markets for producer goods are relatively new and consumer interest is un- In the case of briquettes, the manufacture and use certain for the reasons given below. of household briquettes is generally attractive finan- cially, whereas the manufacture and use of industrial Consuming enterprises. Although there are cases briquettes, based on existing pilot applications, is where payback periods for installation of new high- generally not attractive unless environmental benefits efficiency equipment are quite short and consumer are considered. The use of relatively simple briquettes interest may be strong, consumer adoption is often in specially designed, low-cost household briquette bound by the same types of constraints as are classic stoves is common in urban areas, and further exten- industrial energy conservation projects: enterprises sion in rural areas will provide consumers substan- may not be sufficiently cost-conscious, investments tial benefits in terms of improved efficiency, conve- may be perceived as too risky, or enterprises may not nience of use, and less indoor smoke. Manufactur- have good information. Even more so than for other ing techniques for industrial briquettes or pellets have conservation projects, incentives for the installation been less successful, however, and efficiency and of high-efficiency equipment are weak because of low boiler maintenance gains have not been sufficient to financial significance. Many enterprises will give low justify the higher consumer prices. Nonetheless, the priority to such investments because the potential cost potential for environmental benefits, especially im- savings are low relative to total costs. Moreover, par- provements in health, is considerable from lower ticularly for motors and associated electrical equip- particulate and SO2 emissions. ment, new models may not conform to existing fac- tory layouts, making enterprise adoption technically IMPLEMENTATION ISSUES AND CONSTRAINTS difficult. Achievement of efficiency and environmental pro- Improved coal processing tection gains through improved coal sorting, screen- ing, and allocation, and through increased The economics of expanded washing of steam coal beneficiation (such as washing and briquetting) must depend upon coal varieties, transportation distances involve the entire supply-use chain: coal producers, between producers and consumers, how coal is used, coal transporters, wholesale and distributing agen- and the nature of air pollution concerns at consump- cies and companies, and final consumers. However, tion sites. Transportation cost savings, stemming the existing coal allocation and marketing system, from the need to move fewer tons of coal per unit including pricing, in China does not provide proper energy because of the lower ash content in washed incentives to improve coal quality. Substantial coal, are substantial. Additional, but smaller, ben- progress will require a strong and sustained commit- efits include some energy-efficiency gains, and re- ment to (i) further reform markets for coal supply duced maintenance and ash disposal cost savings for consumers. Substantial benefits may be achieved in environmental protection, in terms of improved par- 8 See China: Investment Strategies for the Coal and Electricity Deliv- ticulate and S02 control. This is especially so in the ery Systems (Washington, DC: World Bank), April 1994. 44 China: Issues and Options in Greenhouse Gas Emissions Control and distribution, and (ii) improve the regulation of Energy-efficiency improvements in buildings air pollution emissions, especially enforcement. and the residential sector A shift from the traditional supply-driven system Improvements in the construction and mainte- to a consumer demand-driven system is critical to nance of residential and commercial buildings are ensure that producers and consumers receive the closely related to China's system of housing owner- proper signals concerning the most efficient mix of ship. In urban areas, below-market rents for hous- coal products. Until recently, China's coal produc- ing and subsidized utility bills have typically been tion and allocation system was characterized by com- provided to workers by government work units and mand and control for production, central allocation enterprises as part of their compensation. Housing of mine output and transportation, and consumer ac- and wage reform are necessary to improve the main- ceptance of whatever coal was supplied. In 1993 and tenance and reduce utility expenses of residential 1994, prices in the coal industry were deregulated, a buildings. significant step toward adopting a more market-ori- ented system. Yet, major institutional changes and A second problem, which also exists in well-de- progress in enterprise reform throughout the supply veloped market economies, relates to building con- and distribution chain will be necessary for the new struction. When new housing is built, contractors and system to work. Consumer attitudes will need to builders often try to minimize construction costs, in- change, and enterprises accustomed to a "take-it-or- cluding investments in more energy-efficient mate- leave-it" system will have to get used to the idea of rials and systems, because they will not be respon- choice and discrimination between different products sible for the long-term operating costs. In China, this and different prices. problem is compounded by the rapid increase in housing construction. Contractors want to build as For an efficient market-based system to work, quickly as possible, and incentives for innovation are there must be standard, well-recognized procedures weak since the demand for buildings exceeds the sup- for preparation and enforcement of long-term con- ply. Building material producers also have little in- tracts between consumers and suppliers. Long-term centive to create new products, since the demand for assurances for supply of a given type and quality of old products is high. A case study of residential build- coal are critical for large and medium-sized consum- ing construction in Beijing using new building stan- ers to maximize the efficiency of coal combustion. For dards shows that the project is viable with an inter- China's coal market to develop, there will be a need nal rate of return of 25 percent based on projected for more sophisticated institutions, expertise, and in- energy savings relative to investment cost. Yet, formation dissemination mechanisms relating to a achievement of such gains on a large scale will re- wide variety of coal types and products with ever- quire major efforts to further develop market forces changing product-specific prices. and regulation to increase the incentives for all of the parties involved. The growth of a market-oriented system, how- ever, will not by itself provide an adequate frame- ALTERNATIVE ENERGY work for the development of environmentally sound coal supply and use patterns. The experience of other In the short to medium term, until 2010, it will be countries has shown that improvements in coal pro- difficult for China to reduce its reliance on coal by cessing, such as the washing of steam coal, are adopting less carbon-intensive fuels. Over the longer achieved only when strong emissions control regula- term (beyond 2010), alternative energy sources could tions are in place. Environmental regulation is the be developed in China on a large scale, providing key to changing consumer demand, which in turn some 20 percent of total energy and 40 percent of to- changes the coal supply and distribution chain. In tal electricity supply by 2020. However, the analysis recent years, China has made considerable progress conducted for this study shows that even under op- in establishing air quality standards and emission timistic assumptions, most of the alternative energy regulations. These regulations, however, need to be sources that can be developed on a large scale in further improved and broadened in scope. Most im- China over the next twenty-five years are more costly portantly, enforcement must be improved. Signifi- than coal.9 Unless the costs of alternatives can fall to cant improvements in emissions control can be ex- a level comparable to coal, there will be a high net pected only when polluting enterprises face fines and cost for reducing CO2 through the adoption of alter- other financial incentives to reduce their pollution. native energy. 45 The Costs of Limiting Emissions The cost analysis summarized in this section and nant fuel for electric power generation and direct fuel the GHG reduction potential estimates provided in use in China. The joint study team's high coal-re- Chapter 2 are the product of a joint international- placement scenario projects that only 29 percent of Chinese research effort. International experts pre- the total electricity generated in 2010 could be ob- pared reports on the current development of liquified tained from sources other than coal. There are two natural gas (LNG), solar photovoltaic (PV), nuclear, main reasons why alternatives for power generation and wind energy, focusing on recent commercial de- over the short to medium term will be limited. First, velopments and the current and projected future costs substantial lead times are needed for capital-inten- of these technologies internationally. Chinese experts sive projects such as hydro and nuclear power. Sec- evaluated the current stage of development of these ond, some alternatives may not be fully commercial and other alternative energy technologies in China before 2010. Of the non-coal-fired power supply in and prepared scenarios of future energy supply and 2010, 80 percent is predicted to come from hydro- costs for the years 2000, 2010, 2020, and 2050.10 electric generation and the remainder from all other sources. The only alternatives to coal that could pro- The environmental analysis of alternative energy vide significant amounts of energy for direct use be- sources in this section requires some elaboration. fore 2010 are coal-bed methane, biomass, natural gas, First, because coal is the dominanat source of energy and, possibly, solar technology in China, it has been used as the reference for com- paring the costs of alternative energy sources. Apre- Longer term. While alternative fuels could provide mium has been added to the market price of Chinese up to 40 percent of China's electricity supply by 2020 coal and the cost of coal-fired power generation to (as presented in the high-substitution scenario), sub- allow for the removal of particulates and waste gases stitutes to coal for power generation will be costly to meet international standards. Second, negative en- given current expectations of future technology de- vironmental impacts of alternative energy sources velopment. The joint study team estimates that, com- have not been calculated. For instance, while most pared with the baseline scenario, it will require an alternatives to coal that reduce CO, emissions also additional 750 billion yuan (US$159 billion) to meet reduce some local air pollutants (such as TSP, SO2, electric power demand in the year 2020 under the and NOx), there can be harmful environmental im- high alternative energy scenario.n While there are pacts associated with alternative fuels. Before adopt- low-carbon substitutes for coal in electric power gen- ing alternative energy technologies, major environ- eration, such as hydro, nuclear, wind, and solar, more mental costs should be assessed, such as resettlement than 80 percent of the energy used in China is di- and ecosystem damage associated with construction rectly consumed for process heat or for residential of hydroelectric projects; the hazards of LNG trans- cooking and heating. Even with the accelerated port and distribution; local air pollution associated growth in electric power sector in China, direct use with biomass combustion; and the costs and risks of of energy will still account for about 60 percent of securing, storing, processing, or disposing of nuclear total commercial energy in China in the year 2020. fuel. Cost estimates for low-carbon energy sources Prospects for alternative energy technologies Based on a review of international and domestic Short to medium term. The mix and quantity of al- experience, the joint study team has estimated the ternative energy resources that could be developed costs of alternative energy sources. For electric power on a large scale before 2010 are limited to those that generation, where alternative energy options are are already available in China or could be easily im- greatest, both investment and levelized generation ported from abroad. Coal is projected to be the domi- costs have been estimated. Because large-scale sub- stitution will not take place before 2010, the time frame for the cost estimates is roughly the year 2020. 9 TRanges have been used to reflect the high degree of The Cost of coal use in China is assumed to increase, both for uncertainty for most of these estimates. Cost esti- direct use and for electric power generation, as a result of more strict environmental controls on coal combustion. 10 A complete review of alternative energy in China and its role in reducing GHG emissions is contained in the project 11 All cost estimates in this chapter are in 1990 constant prices subreport prepared for this study, Alternative Energy Supply and converted to USS at the 1990 official exchange rate of 4.7 Options to Substitute for Carbon-Intensive Fuels, December 1994. yuan/US$. 46 China: Issues and Options in Greenhouse Gas Emissions Control mates for alternative energy sources that could sub- erating capacity by the year 2020. If hydro resources stitute for coal or other fossil fuels for direct use have are developed even more rapidly, the question is how been based on the economic analyses conducted for quickly the marginal cost of installed capacity will this study and other GEF projects." rise. The joint study team estimates that on average, the levelized cost of hydroelectric generation will rise COAL SUBSTITUTES FOR ELECTRIC to at least 0.30-0.35 yuan/kWh by the year 2020 for POWER GENERATION large-scale projects under the baseline alternative energy scenario. Since more than 70 percent of Under all alternative energy scenarios, the abso- China's hydro resources are concentrated in remote lute amount of thermal power capacity in China will regions of southwest China, where both construction increase over the next twenty-five years. The extent and distribution costs are higher, it is likely that an to which low carbon-intensive fuels can be substi- expansion of hydro capacity beyond the baseline will tuted for coal for power generation is related to result in levelized costs at or above 0.35 yuan/kWh. upfront capital investment and capacity cost, and to While a number of the new hydroelectric schemes the average cost of generating electricity for each of may still be economically attractive because of sys- the alternatives. tem regulation and peaking capabilities, their costs are still well above the estimated levelized costs of Coal as the reference. Alternative energy sources coal for baseload generation. must be competitive with coal. According to Chi- nese estimates, investment costs for domestic coal- Nuclear power. Many Chinese energy experts argue fired plants are about 2,600 yuan/kW (1990 yuan), that the development of nuclear power is inevitable while an additional 15 percent will be required to given the perceived lack of other large-scale alterna- meet stricter environmental regulations; total invest- tives and the difficulties that China will have in trans- ment is thus estimated at about 3,000 yuan/kW Costs porting coal from inland mines to high-demand for coal-fired power plants in China with some for- coastal areas, especially in the Southeast. There are eign equipment and advanced environmental con- vast differences of opinion surrounding the costs and trols are approximately 4,500 yuan/kW." Based on expansion capabilities of the nuclear power industry these capital investment costs and long-run costs for in China. Chinese nuclear proponents anticipate that coal, the levelized generation costs for a coal-fired capital costs will fall to 6,500 yuan/kW (US$1,180/ plant in China have been estimated in the range of kW in 1990 US$) by the year 2020 as China develops 0.18-0.25 yuan/kWh (1990 constant prices) in 2020.14 its own nuclear production industry. However, even with such low estimates, the levelized costs of nuclear Hydro. Hydropower is currently part of China's power are 40 percent above the high estimates for least-cost development program for electric power modem coal-fired baseload generation in 2020. If the generation. Under the Baseline GHG Scenario, which cost estimates of the international experts participat- is an extrapolation of China's current development ing in this study (US$1,900-2,700/kW) prove more program, China will quadruple its hydroelectric gen- accurate, nuclear power would be too expensive to compete with coal in China. 12 Cost estimates for coal-bed methane recovery and use were Wind. Wind turbine power generation is one of the obtained from the Global Climate Change Division, U.S. Envi- most proven renewable energy technologies world- ronmental Protection Agency, which is involved in a GEF-sup- wide and is developing rapidly. In California, wind ported technical assistance project assessing coal-bed methane use in China. generation is among the least-cost options for elec- tricity production. Wind farms in the United States This estimate is based on the Yangzhou thermal power project in the 50 to 100 MW scale are being installed for as in Jiangsu, financed in part by the World Bank. The coal plant at little as US$700/kW At this cost, wind generated Yangzhou includes both domestic and foreign-produced equip- ment and includes state-of-the-art environmental controls, includ- electricity would be approximately 0.04 $/kWh, ing electrostatic precipitators for particulate control (more than which could be competitive with coal under condi- 99 percent removal efficiency) and low-NOx burners. Although tions of equal reliability. Chinese experts estimate there are no special SO, controls, the plant will burn very low- that wind-powered electricit eneration would cost sulfur (0.3-0.4 percent) coal. in the range of Y7,000--10,000/kW (US$1,490-2,130/ 14 The high end of the levelized costs is based on the higher capi- kW). One factor increasing the current cost of wind tal costs and increased costs for delivered coal, which could re- farms in China is size: installations are smaller and suit from a rise in marginal transport costs if more coal has to be C moved. Chinese-manufactured wmd turbines are not as big 47 The Costs of Limiting Emissions as foreign designs (20-350 kW). A second reason for costs for LNG-generated electric power in other Asian the high costs of wind generation in China is that the countries are currently as low as 0.05 $/kWh, which cost of building backup facilities has been included. would make it one of the lower-cost alternative The key to lowering the installed costs of wind tur- sources of energy for power generation in China, bines in China in the future is to improve domestic particularly in areas of the country far from coal re- turbine designs to make them larger and more reli- serves, such as the southeast coast. able, to capture scale economies by establishing larger wind farms, and to select sites where wind regimes Solar. Technical improvements in photovoltaic (PV) and power system characteristics minimize require- electric generation over the past twenty years have ments for backup capacity. At the low end of the resulted in a steady decrease in installed costs. As a range for installed costs, wind power is likely to be result, solar photovoltaics have become economic in competitive with coal-fired power generation. remote locations in developed and developing coun- tries. Still, the cost of electricity from solar PV is more Natural gas. Electricity generation using natural gas than four times the cost of conventional power gen- is a proven technology that is cleaner than coal-based eration cost levels in China and the United States. options, and, when used in a combined-cycle system, Additional cost reductions will require that cell pro- can be competitive with coal for baseload generation duction and assembly move from small batch, manual on a cost per kilowatt-hour basis. In addition, a com- production to fully automated manufacturing. Even bined-cycle gas system emits 60-70 percent less CO, with the most optimistic of assumptions for the next per unit of electricity than a coal-fired plant. The costs century, experts expect that PV-generated electricity of generating electricity with natural gas in China are in China will be twice the cost of coal-generated elec- highly dependent on the source of the gas. The cheap- tricity. Solar thermal power station proponents ex- est sources are the domestic on-land reserves close to pect greater efficiency from mass production of consumption centers. However, proven gas resources heliostats and reduced receiver costs. To realize these in China are very limited compared with both coal efficiencies will require a more aggressive develop- and petroleum. Moreover, for both domestic and im- ment strategy than is currently being pursued in ported gas, it is not clear that electric power genera- China or in other countries. tion is the highest-valued use of natural gas in China. If domestic natural gas is to replace coal for electric ALTERNATIVE SOURCES FOR DIRECT USE power generation in China, vast new domestic re- serves must be found. Some additional gas may be In addition to coal, China currently uses oil, natu- available through importation, either in the form of ral gas, and biomass fuels as direct energy sources. LNG or by pipeline from Russia or CentralAsia. The Under the Baseline GHG Scenario, China will require high capital costs for developing LNG, competition about 2 billion tce in the year 2020 for non-power for gas supplies in the Asia region, and limited num- energy applications, including transport, residential ber of suitable ports are likely to restrict China's use cooking and heating, and industrial process heat. It of LNG in the medium term. Nonetheless, levelized is assumed in the analysis that petroleum will be used Table 3.4 Energy and electricity production by energy type, 1990 and 2020 1990 2020, baseline 2020, high-substitution Total % Electricity % Total % Electricity % Total % Electricity % primary generation primary generation primary generation energy (TWh) energy (TWh) energy (TWh) (mtce) (mtce) (mtce) Coal 752 76 432 70 2,220 67 2,913 76 1,915 58 2,249 58 Oil and gas 184 19 62 10 783 24 83 2 750 23 106 3 Hydro 51 5 127 20 209 6 601 16 250 8 719 19 Nuclear 0 0 0 0 72 2 208 5 198 6 568 15 Other 0 0 0 0 16 0 45 1 187 6 208 5 Total 987 100 621 100 3,300 100 3,850 100 3,300 100 3,850 100 Sources China Statistical Yearbook (1990); China GHG Study (2020). 48 China: Issues and Options in Greenhouse Gas Emissions Control almost exclusively in the transport sector. Fuel for covery and processing. The reform of natural gas direct use in the residential and industrial sectors will prices in China since 1990 has led to an increase in include coal, gas, and renewable energy such as so- the amount of coal-bed methane recovered. This lar and fuelwood. trend is likely to continue given the local environ- mental benefits of gas use and residential consum- Natural gas. Because of its convenience, natural gas ers' willingness to pay for gas. is highly valued in China as a residential cooking fuel. Given its cleanliness, natural gas will become even Fuelwood. Unlike most other alternative energy more important as a substitute for coal for environ- sources, the costs of producing fuelwood in China mental reasons, particularly in urban areas. If envi- can be lower than coal on an energy equivalent ba- ronmental benefits are considered, the highest-val- sis. Based on an economic analysis of fuelwood plan- ued use of natural gas is expected to be in the resi- tations in which fuelwood is grown under good con- dential sector, and, depending on the amount of do- ditions and intensive management, the discounted mestic gas that is discovered, may preclude much cost of producing a ton of fuelwood was found to be natural gas being used by the power sector. 119-245 Y/tce compared with coal at about 160 Y/ tce. Fuelwood production costs are lowest in South Coal-bed methane. Methane from coal mining is one China, where costs range from 119-141 Y/tce. How- of China's best alternative energy options and can be ever, the current price of fuelwood sold by state for- developed in the near term. Economic analysis of est farms in China is only about 90 Y/tce, which is various uses of coal-bed methane carried out under below the break-even price for all fuelwood planta- a GEF technical assistance study" concludes that the tions. If fuelwood were used in China for more com- highest valued use of the gas is as a substitute for mercial purposes, such as tobacco and tea drying or coal use by coal mines and other consumers in the power generation, fuelwood plantations would have immediate locality. Other uses, including piping of a ready source of funds for development and a true the gas to nearby cities for residential consumption market price for fuelwood could develop. However, and on-site electricity generation, also show rates of while strong commercial demand would aid in the return above 12 percent at current market prices for development of fuelwood plantations, Chinese for- gas, coal, and electric power. The main barriers to esters argue that strong demand and higher prices the development of coal-bed methane have been low make it even more difficult to protect natural forests gas prices and a lack of technical expertise in gas re- from illegal felling. Protection of forests has been the major reason for governmental support of fuelwood plantations. 15 Coal-bed Methane in China, GEF Technical Assistance Study Table 3.5 China: Estimates of capital and levelized costs of electric power, 2020 Investment cost (1990 Y/kW) Levelized cost (1990 Y/kWh) Coal 4,000-5,000 0.18-0.25 Wind 3,300-6,500 0.20-0.37 Geothermal 7,000-14,000 0.28-0.45 Incremental hydro 6,000-7,500 0.30-0.35 Nuclear 7,000-12,000 0.35-0.66 Biomass (gasified) 5,000-10,000 0.29-0.45 LNG 4,000-8,000 0.24-0.40 Solar PV 10,000-20,000 0.50-1.00 Solar thermal 8,000-12,000 0.32-0.70 Source: Alternative Energy Supply Options to Substitute for Carbon-Intensive Fuels, December 1994 subreport prepared for the China GHG Study. 49 The Costs of Limiting Emissions Other renewables. In rural areas not connected to inces of Jilin, Liaoning, and Inner Mongolia, and in an electric power grid, wind can be a low-cost source Sichuan and Yunnan in the southwest. By the late of power for agricultural, residential, and light in- 1980s, the stock of mature and over-mature forests dustrial purposes. Solar energy, both active and pas- amounted to about 2.6 billion m, of which only about sive, could be an important source of residential wa- half was commercial. At current rates of exploita- ter heating and space heating and cooling. There are tion, the stock of commercial forests will be exhausted reportedly about 2 million residential solar water within ten years. China is the third largest consumer heaters in China today and another 500,000 domesti- of forest products in the world, and the demand for cally produced units are being sold annually. Al- wood products has been expanding with the devel- though precise cost information on solar water heat- opment of the economy. Current wood consumption ers produced in China is not available, domestic units is approximately 300 million m3 per year, of which are likely to be competitive in certain parts of China, about half is industrial roundwood, a third is and with further development, their use could be ex- fuelwood, and the remainder is used for rural con- panded in the residential and commercial sector and struction. During the 1980s, the consumption of for- in some industrial process heat applications. One of est resources exceeded the annual increase in grow- the drawbacks of solar and wind energy which in- ing stock by some 20 million m. creases their cost is that backup capacity may be needed, particularly for commercial and industrial Because of the shortage of forest resources in China applications. and the gap between the supply and demand for wood products, China has instituted the largest af- forestation program in the world. Between 1984 and GHG CONTROL IN THE FORESTRY SECTOR 1988, China planted an average of 3.25 million hect- ares per year; the net increase in forested land was Sequestration, or the storage of carbon in woody about 0.65 million hectares per year. In 1989 and 1990, biomass and soils, can be a cost-effective means of the area of planting exceeded 5 million hectares per reducing net GHG emissions in developing coun- year, with the net increase surpassing 2 million hect- tries." The key to low-cost carbon sequestration in ares per year. In addition to timber and fuelwood developing countries is to take advantage of the fi- plantation forests, China has initiated a large-scale nancial and social benefits of forestry development. protective afforestation program in North China and Under the right conditions, multi-use afforestation has designated some 3 million hectares of open for- projects, the planting of timber and fuelwood plan- ests, mostly on steep slopes, to be protected for for- tations, and the management of open forests in China est development. If China continues to increase its can yield positive financial returns, meaning that the forested area at the rate of the past five years, forests cost of carbon sequestration from these projects is low. will cover more than 15 percent of its land area by the end of the century. China's forestry sector FGHY PROGRAM FOREST RESOURCES In the past, Chinese plantation forests have had China is deficient in forest resources. It has 131 low survival rates and low productivity, largely be- million hectares of forested land, but forests account cause of poor management and inferior lands. Since for only 13.6 percent of the land area. Forest resources the mid-1980s a new, fast-growing, high-yield amount to only 0.11 hectares per capita, less than one- (FGHY) afforestation program has been initiated in sixth the world average. The standing volume of China. This program relies on (i) planting on good wood is about 11 billion cubic meters (m-), equiva- quality sites, (ii) improved genetic materials and seed- lent to about 9.5 M3 per capita, far below the world ling preparation, and (iii) detailed silviculture pre- average of 66 m per capita. Natural forests account scriptions for planting, tending, and harvesting. Tree for about three-quarters of the forested area in China species are selected that can meet minimum growth and 95 percent of the standing wood volume. Most rates under given soil and climatic conditions. natural forests are located in the northeastern prov- Among the most common FGHY species in China are larch, fir, poplar, pine, eucalyptus, and paulownia. More than a quarter of the plantations established in theNet GHG emissions is the sum of all emission sources China since 1985 have been FGHY plantations. the amount of carbon that can be captured and stored in plant Ciasne18 aebe GYpattos biomass or soils. 50 China: Issues and Options in Greenhouse Gas Emissions Control BARRIERS TO LARGE-SCALE FGHY in China's forests. The model divides forested land FORESTRY DEVELOPMENT into five age classes (Table 3.7). Forest growth is rep- resented by the movement of land through these age While there are approximately 200 million hect- classes, while standing volume is calculated by mul- ares of land theoretically available in China for for- tiplying the area in each age class by the average stand estry development, there are competing claims for age and the mean annual increment (ml/ha/yr). An these lands, including agriculture, animal husbandry, algorithm based on demand projections determines and urban and industrial development. Moreover, the area of timberland harvested each year, with har- much of the land available for forest development in vesting beginning in the oldest age class and work- China is of poor quality and inappropriate for inten- ing its way downward; the youngest age class is pro- sive forestry plantations. Some types of forestry de- hibited from being harvested. Soil carbon absorp- velopment, including fuelwood plantations and open tion follows the S-shaped pattern of tree growth, with forest management, tend to be financially viable only the volume of soil carbon equal to the difference be- in southern China, whereas much of the land avail- tween the initial and equilibrium carbon levels. able for forestry development is in the north and northwest. The planting and reforestation program evaluated by the model shows that China's stemwood will more Forests in China are managed by state forest farms, than double between 1990 and 2020, from 12 to 28 collectives, and individuals. Although most land is billion m. However, the harvesting of old growth controlled by state forest farms, much of this land is forests and the planting of new forests will signifi- contracted to collectives and individual households, cantly change the age structure of China's forests. which provide labor and inputs. The quality of man- Currently, mature and over-mature stands make up agement by collectives and individuals is generally about 20 percent of China's timber reserves. After low, since they have had limited access to advanced thirty years, only 6 percent of its reserves are pro- silviculture techniques and since most face financial jected to be mature and over-mature stands, demon- constraints. In the 1980s, roughly a quarter of the strating a dramatic decrease in old-growth forests and total forested land was transferred from the state to foreshadowing shortages of large-diameter timber households as part of the household responsibility and a loss of old-growth habitat. A shortage of large- system. While land tenure relations were improved, diameter timber in coming decades means that China household forest farms continue to be characterized must either increase the volume of timber imports or by low productivity and minimal adoption of im- improve its capability to manufacture specialty wood proved silviculture techniques. products (e.g., medium density fiberboard and lami- nated beams) from small-diameter timber. Modeling carbon sequestration in China FORESTRY PLANTATION MODELS: FINANCIAL AND SCENARIO ASSUMPTIONS ECONOMIC ANALYSIS Two computerized models were developed for Several studies of the costs of carbon sequestra- analyzing the magnitude and costs of carbon seques- tion through tree planting and modified forestry prac- tration in China: (i) a national model that predicts tices have reinforced the perception that the net costs standing volume, age class structure, and forest car- of carbon sequestration by the forestry sector are posi- bon balance; and (ii) plantation models for assessing tive. " Such studies have generally calculated the cost the costs and benefits of forestry planting and net of carbon sequestration as the total cost of tree plant- costs of carbon sequestration. Both models are simu- ing-purchasing or renting land, establishing and lated for thirty years, beginning in 1990, with the maintaining trees-divided by total carbon seques- planted or managed areas based on the scenarios tration (in biomass and soil). Not generally consid- given in Table 3.6. The medium scenario roughly ered are the direct economic benefits from tree plant- corresponds to the actual level of planting in China ing; that is, revenues from the sale of timber prod- during the early 1990s. ucts (sawlogs, pulpwood, and fuelwood), social ben- NATIONAL FORESTRY MODEL See for example, R.J. Moulton, and K.R. Richards, Costs of Sequestering Carbon Through Tree Planting and Forest Management The national forestry model was used in Chapter in the United States (Washington, DC:U.S. Department of 2 to estimate the potential for carbon sequestration Agriculture Forest Service, December 1990). 51 The Costs of Limiting Emissions Table 3.6 Planting assumptions (million hectares per year) Incremental natural Replanting of Incremental regeneration Scenario clear-cut forests plantations (open forests) Total area Low 2.62 1.34 0.89 4.85 Medium 2.62 2.01 1.34 5.97 High 2.62 2.68 1.79 7.09 efits from reducing deforestation, and environmen- planting of fast-growing regenerable species, such tal benefits such as erosion control and habitat pro- as locust and eucalyptus, with the intention of maxi- tection. While the regular thinning and harvesting mizing biomass production and financial returns. The of timber plantations can result in lower overall car- area of fuelwood plantations (medium scenario) is bon sequestration than if the forests are left un- taken from the 1991-1995 five-year plan target (2.6 touched, the financial benefits from the use of for- million hectares, or 520,000 ha/yr), while the propor- estry products are crucial to the success of afforesta- tion of intensive and extensive plantations is based tion programs, particularly in developing countries. on the current situation (40/60) as reflected in gov- ernment forestry statistics. In 1990, 3.67 million hect- This analysis considers the net cost of carbon se- ares were closed for natural regeneration; this is re- questration from tree planting and modified forestry ferred to here as open forest management. practices in China, whereby the private financial ben- efits are subtracted from the costs. Financial tables, RESULTS OF THE FINANCIAL ANALYSIS which include the costs of establishment, mainte- nance, harvesting, and reforestation, and the benefits Intensively managed plantations. Intensively managed from sales of sawlogs, pulpwood, and fuelwood, have plantations would be established on the most pro- been prepared for intensive, extensive, and fuelwood ductive forestry lands and have the highest growth plantations, and for the improved management of rates and the highest costs. Based on the most recent open forests.11 To calculate the cost-effectiveness of (1993) prices for timber products, and even assum- carbon sequestration, the net present value of each ing the substantially lower prices in 1990, ten of the respective project is divided by the discounted car- twelve intensive plantation species yielded internal bon sequestered in living biomass and in the soil. rates of return (IRR) above the target rate of 12 per- cent. The World Bank recently appraised similar For the financial analysis of various plantation FGHY plantations as part of a forestry project in six- programs, the scenarios of new "incremental planta- teen provinces in China and estimated the average tions" (Table 3.8) were subdivided into three catego- rate of return for such plantations at 18.1 percent.9 ries: (i) intensively managed plantations, which re- fers to the planting of fast-growing species, such as 19 The World Bank, Staff Appraisal Report, China: Forest Chinese fir (Abies), masson pine, larch (Larix), pau- Resource Development and Protection Project, May 1994. lownia, poplar, and eucalyptus on good quality land . Table 3.7 Standing stock by age class (million in3) to maximize biomass production and financial re- turns, (ii) extensively managed plantations, which refers to the planting and management of naturally Age class 1990 2000 2010 2020 occurring species in China, such as oak, birch, spruce, Total 11,960 16,140 20,490 27,740 fir, and various pine species, which would be man- Young 970 2,834 4,630 5,948 aged as commercial forests but with much longer Middle-age 4,345 5,152 6,359 11,130 rotations and lower costs than intensive plantations; and (iii) fuelwood plantations, which refers to the Premature 2,127 4,573 6,773 8,988 Mature 3,503 3,425 2,623 1,607 18 Financial data for the intensive plantations is taken from the Over-mature 1,015 156 105 67 National Afforestation Project, which has received financial and Source: National forestry model, joint study team. technical assistance from the World Bank. 52 China: Issues and Options in Greenhouse Gas Emissions Control Extensively managed plantations. While the costs of Sensitivity analysis. The variable that most influences extensive plantations are much lower than intensive the rate of return of the plantation projects is the price plantations, so are the growth rates. The financial of forest products (sawlogs, smallwood, pulpwood, analysis shows that only three of the ten extensive and fuelwood). The most recent price information plantation models yielded rates of return above 12 for fast-growing species in intensive plantations, col- percent. The models that yielded positive net present lected as part of the National Afforestation Project, values were Chinese fir, masson pine, and Yunnan has been used in the plantation models. Over the pine growing in South and Southwest China. past five years, timber prices throughout the country have increased substantially as the government has Fuelwood plantations. The Chinese government has eased price controls on "in-plan" timber harvests and promoted fuelwood plantations to reduce the adverse as a growing percentage of "above-plan" timber har- impact of fuelwood collection on natural forests and vests have been sold at market prices. timber plantations. Nearly two-thirds of fuelwood production would come from fuelwood plantations, Conclusions and one-third from thinnings and removal of dead or dying wood from other plantations. In contrast to The net cost analysis demonstrates that the least- other plantations, the production of fuelwood is not cost means of sequestering carbon in China is through financially viable at official prices on current state- FGHY timber plantations. Whilenotnearly as attrac- owned fuelwood plantations (30-50 Y/t). However, tive as FGHY plantations, other low-cost options for the true market price or opportunity cost of fuelwood sequestering carbon in China include planting fast- is probably double this amount based on the cost of growing natural species, such as Chinese fir and pine, collection or compared with other fuels. At 100 Y/t, on extensive plantations in South China, and open which is roughly the fuel equivalent price of coal in forest management, also in South China where the regions reviewed minus the difference in fuel growth rates are high. By contrast, gross cost analy- combustion efficiency, fuelwood production exceeds ses done in the United States and elsewhere conclude the 12 percent rate of return target in South and South- that least-cost sequestration forestry projects are those west China. that minimize total costs, even when the forestry projects in question are not commercial.20 Open forest management. Growth rates of existing open forests can be improved by applying better sil- - - 20 viculture techniques and by protecting the forests For instance, Xu calculated the gross costs of carbon sequestra- against destructive felling and encroachment. Some tion for China using the Moulton and Richands methodology and concluded that the least-cost measure was management of open timber and fuelwood would be available from these forests in Southwest China, where the mean annual increment lands through selective thinning and removal of dead was high and the costs of labor and other inputs were low. By or dying trees. The financial analysis suggests that contrast, under the net cost approach, open forest management improved open forest management is commercially does not meet the target rate of return (12%) in most regions of the country and in no region is open forest management as at- viable only in South China. tractive in financial terms as intensive plantations. Xu Deying, Economic Analysis and Forestry Options for Mitigating Global Cli- mate Change: A Chinese Case Study, Research Institute of Forestry, Chinese Academy of Forestry (Beijing, China, 1993). Table 3.8 Plantation scenarios (thousand hectares per year) Intensively Extensively managed managed Fuelwood Total incremental Scenario plantations plantations plantations plantations Low 280 710 350 1,340 Medium 420 1,070 520 2,010 High 538 1,360 780 2,680 Source: Joint study team, China GHG Study See Table 3.6 for total planting. 53 The Costs of Limiting Emissions GHG CONTROL IN THE 140 bulls were imported from North America and AGRICULTURAL SECTOR Western Europe for use in the program. Since 1980, Indian and Pakistani milk breeds such as Mara and There are several agricultural technologies and Ravi Nili have been bred with Chinese buffalo in practices that can reduce GHG emissions and that South China to increase milk production, while Sim- are being promoted in China for non-GHG reduction mental and Holstein-Frisian species have been bred reasons. Research on new and exotic agricultural with Chinese yellow cattle to improve both milk and techniques for reducing GHG emissions is being con- meat production. ducted in China and abroad and may yield additional low-cost options for emissions reduction. However, Artificial insemination using frozen semen has this section focuses on currently available no-regrets several advantages over natural service. For example, options because they are the most likely to be imple- it can prevent premature mating, fix the dates of mented in the short term and will not require large breeding, and increase the conception rate. Another government subsidies. The analysis covers methane advantage of frozen semen artificial insemination is emissions from rice cultivation and from large rumi- its ease of mastery. With about fifteen days of train- nant animals, which together accounted for about 90 ing, a veterinarian can learn the skill and produce a percent of China's agricultural sector emissions in conception rate of 50 to 80 percent. 1990.21 From a commercial beef producer's perspective, Reducing methane emissions from ruminant the artificial insemination program has been a finan- animals cial success. Case study results indicate a 74 percent financial rate of return from using improved cattle In 1990, ruminant animals accounted for more instead of domestic yellow cattle. Sensitivity analy- than a quarter of GHG emissions from the agricul- sis given alternative weight gain and feed consump- tural sector in China. Improved feed and breeding tion levels indicates stable results. programs for large ruminant animals have the po- tential to reduce methane emissions by increasing the Ammoniated feed. The treatment of straw and other efficiency with which products (meat, milk, and draft crop residues with various forms of ammonia (such power) are produced. Based on rough estimates as urea) allows otherwise low-nutrient residues to made in 1990, the average animal in China yielded become an important component of an animal's diet. only about 5.5 kg of meat per head and about 1,500 This reduces feed costs and thus increases the profit- kg of milk per lactation, compared with 130 kg of ability of raising animals for meat, milk, or draught meat per head and 7,000 kg of milk per lactation in power. In addition to raising rural incomes and help- the United States.22 Economic analysis of two popu- ing to expand meat and milk production, this tech- lar animal husbandry programs in China shows that nique reduces rural air pollution by limiting crop resi- methane emissions can be reduced by 25-50 percent due burning. Large-scale trials using ammoniated with no net costs; that is, both projects have sound feed and protein supplements for cattle have been financial and economic rates of return. carried out in Henan and Hebei provinces under a cooperative project between provincial institutions, Improved breeding. The efficiency of beef and milk the Ministry of Agriculture, and UNDP. The trial production can be improved in China by selectively stage of the project has been successfully completed breeding exotic species of cattle and buffalo with and the Chinese government plans to expand the am- domestic species to improve genetic quality In 1978, moniated feed program to other parts of the country the Chinese State Science and Technology Commis- by guaranteeing the supply of urea and promoting sion decided that artificial insemination should be rural credit for cattle and equipment purchases. used to improve domestic breeds of cattle. In 1980, In the early 1980s, China started a pilot program of using ammoniated straw to feed cattle. Straw and 21 For details, see the subreport prepared for this study Green- stalks are ammoniated by cutting them to 2-3 cm house Gas Control in the Agricultural Sector, September 1994. lengths, mixing them with urea and water, and al- lowing them to ferment. According to estimates, the Sollod and Walters, Reducing Ruminant Methane Emissions in ammoniated straw contains two to three times as China, U.S. Environmental Protection Agency, Global Change Di- vision, Office of Atmospheric Programs (Washington, DC: Octo- much crude protein as the raw product, and the ber 1992), p. 3. amount of consumption and speed of digestibility in- 54 China: Issues and Options in Greenhouse Gas Emissions Control crease by 20 percent. between 1985 and 1988. By 1988, 674,000 hectares- 2 percent of China's total rice area-was cultivated After a slow start, the program has recently ex- in this manner. The technique has been combined panded rapidly. In 1986, only 43,000 tons of straw with fish farming and the inter-cropping of aquatic were ammoniated while in 1991 the amount had vegetables and medicinal plants to further raise ru- grown to 3.71 million tons. Reasons for this rapid ral incomes. Although the technique saves water, it adoption include low investment costs, ease of un- is very labor intensive, which may discourage its derstanding and mastering the technique, availabil- implementation. ity of raw materials, and large financial returns. Intermittent irrigation of paddy fields. Rice shoots A primary factor in the attractive financial returns do not have to live in water all the time. At certain is enhanced weight gain. Research at the HebeiAni- times the soil needs to be moist, while at other times mal Husbandry Research Institute found average the field can be allowed to dry, which promotes soil daily weight gains of 644 grams when treated straw ventilation. The appropriate timing of moist versus was used versus 348 grams with untreated straw, an dry periods can improve productivity and reduce 85 percent improvement. In both cases, treatments methane emissions. Prolonged flooding enables peak included 1.5 kg of cotton seed cake and a mineral anaerobic activity, which produces methane. By supplement. Using these weight gain differentials, a shortening the period of flooding, the conditions for financial rate of return of 110 percent is obtained when growth of methanogenic bacteria are disrupted, and a hypothetical project using ammoniated feed is com- methane production is suppressed. pared with a similar project using untreated straw. In recent years, this production technology has Rice production been widely adopted in the high-yield rice growing areas of China. However, there are limits to its use. Although economic analyses of rice cultivation Regions with water shortages and low-lying land that practices for reducing methane emissions were not is slow to drain cannot benefit from this technology. conducted for this project, the Chinese Ministry of As a result, it is estimated that by 2020, intermittent Agriculture reports that the programs discussed be- irrigation in China will account for no more than 10- low are being adopted in various parts of the coun- 15 percent of production. try for other reasons. To the extent that farmers are adopting these techniques without government as- sistance, it can be assumed that the financial benefits of these techniques outweigh the costs and that the corresponding costs in terms of methane reduction are zero. Anaerobic decomposition of organic material in flooded rice fields produces methane, which is re- leased to the atmosphere primarily by transport through the rice plants. A major determinant of the amount of methane produced is the level and dura- tion of flooding. For this reason, cultivation tech- niques that limit the flooding of fields may reduce methane emissions from rice production. Semi-dry rice cultivation. Semi-dry cultivation of rice involves digging furrows and flooding them two- thirds full. Rice is transplanted on the ridge, pro- moting development of the root system. The lower water level reduces the extent of anaerobic decom- position of organic material and thus the production of methane. A pilot project for semi-dry cultivation of rice was begun in 1982 in Sichuan Province and was introduced in several other southern provinces 55 Chapter 4 Conclusions and Recommendations GUIDING PRINCIPLES countries. China's development strategy will have an enormous impact on the level of GHG emissions. The China currently accounts for about 10 percent of most important and cost-effective way of reducing global CO2 emissions and this percentage is almost GHG emissions without impairing development is certain to increase as China's economy develops. to improve the efficiency of the economy. This can Given the prospects for continued rapid economic best be accomplished by continuing and deepening growth in China well into the next century, it is es- the economic reform program that China initiated in sential that China be included in any international 1978. strategy to mitigate global climate change. Many de- veloped countries have already provided bilateral as- In addition to improving the overall efficiency of sistance to China to address climate change issues the economy, there are several low-cost options for and have endorsed the provision of similar assistance reducing GHG emissions in China over the short to to China through global environmental initiatives medium term (before 2010). As shown in previous such as the Global Environment Facility (GEF). This chapters, the GHG reduction potential of these study, the first country-specific study to be funded projects is significant. Moreover, because they pro- by the GEF, and the expected follow-up investment vide other substantial benefits in terms of financial, and technical assistance projects, demonstrate the economic, and, in many cases, local environmental importance that the Chinese government and the in- returns, there is little or no net cost for GHG reduc- ternational community attach to reducing GHG emis- tion. Such "no-regrets" projects should be the pri- sions in China. mary focus of China's GHG reduction strategy over the next 10--15 years.' It is also in China's own interest to limit GHG emissions. While small countries can do little to af- While economic reform and no-regrets projects fect global climate change since their emissions are a should form the basis of China's GHG reduction strat- minuscule part of global GHG emissions, China can egy for the immediate future, the only long-term GHG have a substantial effect on incremental global emis- reduction option for China and the world is the de- sions and thus can limit the potential climate change velopment of alternatives to fossil fuel. Some alter- impacts that will affect China and the rest of the native energy technologies are commercial in China world. Furthermore, climate change impacts are today and should be expanded as part of China's likely to be more severe for China and other low-in- medium-term no-regrets strategy. However, many come countries since a larger share of their income is of the most promising non-carbon energy sources can- derived from climate-sensitive sectors such as agri- not be adopted on a large scale in China until tech- culture and because they are least able to afford ad- nologies are further developed that can compete in aptation or avoidance measures. Therefore, China both scale and cost with coal. For this to happen, has a strong incentive to take action to reduce GHG China must enlarge its development program for al- emissions, regardless of the potential impact on other ternative energy technology, substantially increasing countries. current development investments to make a large impact as early as possible. Despite the imperative to limit GHG emissions, economic development and poverty alleviation must 1 For a discussion of the concepts of no-regrets and net costs of be the top priority for China and other low-income GHG reduction, see p. 34. 56 China: Issues and Options in Greenhouse Gas Emissions Control In sum, China's strategy for reducing GHG emis- * changes in the share of energy use and output sions should be based on the following principles: among various sectors (e.g., agriculture, industry and services); * Continue and expand the economic reform pro- gram to improve the efficiency of resource use; * changes in the share of different industrial subsectors in industrial output; and * Accelerate the implementation of "no-regrets" projects over the short to medium term; and, * changes in the product mix and sources of value added within various sectors. * Enlarge and improve the program to develop low- carbon-intensive energy technologies for the longer In China, there is vast potential for energy-effi- term. ciency gains from increases in the value of the indus- trial product mix per unit of energy input through (i) increasing product diversification and specialization RECOMMENDED STRATEGY FOR REDUCING and (ii) improving product quality. The potential for GREENHOUSE GAS EMISSIONS IN CHINA gains in energy efficiency is greater through indirect structural changes than through technical efficiency Based on the detailed analysis conducted for this improvements (see pp. 23-24). study, the joint study team recommends that China pursue a two-pronged strategy for reducing green- The future magnitude of indirect energy-efficiency house gas emissions: (i) further promote economic gains through structural change is tied to the speed reform, whereby market incentives and regulatory and depth of progress in China's economic system controls are adjusted or introduced to improve re- reform. This includes the related issues of increasing source allocation and encourage energy efficiency; the importance of market forces, increasing competi- and (ii) implement a set of priority investment and tion, and increasing enterprise autonomy and ac- technical assistance programs to accelerate the adop- countability. Progress on economic system reform tion of more efficient and low-carbon technologies will also help catalyze technical energy-efficiency ini- and improve the institutional and human resource tiatives, as discussed on pp. 59-60. capacity necessary to implement and sustain these programs. This strategy for global climate change ENTERPRISE REFORM mitigation is largely consistent with China's domes- tic environmental and economic modernization ob- Reforms must be completed to make enterprises jectives, and thus does not pose a major new or dif- economically autonomous units that are fully ac- ferent set of conditions or constraints on the public countable for their own profits and losses. Comple- sector or enterprises. tion of such reforms will further encourage the cost- consciousness, profit-seeking innovation, and prod- Economic reform uct mix changes necessary to support new gains in both indirect and direct energy efficiency. Until re- The proportion of China's GHG emissions from cently, enterprise decision making in China was energy consumption-currently about four-fifths- closely tied to government policy, which often deter- is expected to increase in the future.' China's GHG mined product mix, scale of production, capital in- reduction strategy, therefore, must aim to maximize vestment, and factor payments. Since the mid-1980s, the economic value derived from energy consump- state-owned enterprises (SOEs) have been given tion through improvements in the efficiency of en- greater control over their operations and there has ergy use per unit of economic output. As discussed been a rapid expansion of "nonstate" entities, includ- in Chapter 2, improvements in energy efficiency are ing township and village enterprises (TVEs), and pri- achieved both indirectly, through changes in the struc- vate firms. Nonstate entities have generated new em- ture of the economy, and directly, through the use of ployment, contributed to economic production and improved technologies that result in energy savings exports, and there is growing evidence that they have per unit of physical output. The following structural had a positive impact on the competitive market en- changes will result in declines in the energy-inten- vironment for all enterprises in China. Further re- siveness of the economy: structuring of SOEs is needed to improve economic efficiency. This includes: (i) reducing and eventu- 2 See p. 31. ally eliminating the direct and indirect subsidies that 57 Conclusions and Recommendations many SOEs still enjoy, and enforcing true account- expansion of the stock and bond markets for financ- ability through a "hard budget constraint;" and (ii) ing enterprise investment. Further reforms are transferring, to independent enterprises or the gov- needed in China's capital market and financial sec- ernment, the SOEs' traditional responsibility for pro- tor to ensure that all firms have equal access. In ad- viding a broad range of social services-housing, re- dition, mechanisms for writing off bad loans from tirement pensions, education, and health care. ailing SOEs and improved allowances for bankrupt- cies are necessary to ensure that capital market re- INCENTIVES AND REGULATORY FRAMEWORK forms continue. Historically, below-market energy prices were a A functioning labor market is essential to the effi- primary reason for high per-unit energy consump- cient operation of enterprises in China. Because SOEs tion and are one of the reasons Chinese enterprises have historically provided lifetime employment and have not been motivated to invest in energy conser- numerous social services, they have not been able to vation. Over the last decade, China has made great respond to changing market conditions. The output progress in reforming energy prices. Oil product from TVEs and private firms has expanded rapidly prices are now close to world market levels, average in China over the past decade in part because of their end-use electricity prices now compare reasonably enhanced ability to acquire or shed labor. well with long-run marginal costs, and, as of 1994, coal is sold at market prices. Nevertheless, further Access to and the development of advanced tech- reform is still necessary. Measures to further ratio- nologies is important for the modernization of nalize energy prices include adoption of nondiscrimi- China's industrial sector and, consequently, for the natory pricing of natural gas; improvements in the reduction of per-unit energy consumption. The re- structure of electricity prices, including elimination duction of trade barriers, the establishment of patent of subsidies and low in-plan prices for certain indus- protection, and the mobility of scientific personnel trial consumers; and adoption of differential rates for are all necessary to ensure that internationally ad- coal to better reflect quality. These measures would vanced technologies are available. In addition, the help to improve overall energy efficiency by Chinese Chinese government may need to ensure that tech- consumers. nologies important for the global environment are de- veloped. For instance, government support of re- Other policies that distort enterprise behavior and search and development for alternative energy tech- result in inefficient resource use and the consequent nologies is important for both strategic and environ- excess of GHG emissions include (i) regulatory and mental reasons, and, without such support, enter- trade barriers that restrict market entry and exit for prises will underinvest in such research and devel- new competitors (both domestic and foreign), (ii) tax opment. policy that discriminates against enterprise owner- ship forms, and (iii) foreign trade policies that restrict ENVIRONMENTAL REGULATORY POLICY the import or transfer of certain goods. Environmental regulation can be important for re- FACTOR MARKET DEVELOPMENT ducing GHG emissions in China by (i) encouraging the adoption of cleaner and more efficient new pro- The development and continued reform of China's cesses and technologies, and (ii) making global cli- financial system are necessary to ensure that all en- mate change mitigation an explicit environmental terprises can borrow against future earnings to re- goal. In developed countries, the establishment and spond to market conditions. The lack of a function- enforcement of environmental regulations have been ing capital market and government restrictions on important means of accelerating the acquisition of the type of investments allowed were why Chinese cleaner and more energy-efficient technologies and enterprises historically did not operate at proper equipment. While China has made considerable scale, invest in new plants and equipment, or move progress over the past decade in establishing a com- into more socially desirable product lines. Several prehensive environmental regulatory system, the improvements have been made in China's capital system must be better suited to a market economy. markets since the early 1980s, including the introduc- The expansion of the non-state sector and the grant- tion of bank loans to replace state budgetary appro- ing of greater autonomy to SOEs have reduced the priations, separation of the governmental and com- effectiveness of government measures for regulating mercial functions of the People's Bank of China, and enterprise behavior, including pollution control. En- 58 China: Issues and Options in Greenhouse Gas Emissions Control vironmental policies in China should take advantage energy use is clearly the top priority for specific ac- of the incentives that firms now have to reduce costs tion to mitigate GHG emissions in China over the and increase profits. Market-based incentives must short and medium term. As shown in Chapter 2 (pp. be provided to firms to encourage them to adopt 24-28), further improvements in the technical effi- cleaner and more energy-efficient processes and tech- ciency of energy use can have a major impact on nologies, while pollution fines should be raised to China's GHG emissions over the next twenty-five levels that exceed the cost of prevention or cleanup. years. As shown in Chapter 3 (pp. 37-38), improve- In all instances, environmental regulations in China ments in energy efficiency also are among the most should be more strictly and uniformly enforced. cost-effective means to reduce GHG emissions, since Another aspect of environmental policy, which can there are many investments where energy cost say- be quite cost-effective, is increasing public awareness ings more than offset total costs. Expanded invest- and participation in environmental pollution control. ment is required to reduce energy use per physical Publicizing local environmental quality indicators, unit of output, both through renovation of existing educating the public about the relative health risks facilities and through adoption of more efficient pro- of environmental pollution, and identifying the main cesses and equipment in new facilities. Actions to polluters and actions needed for compliance are ef- conserve coal are most important because of coal's fective measures for reducing environmental pollu- dominance in the energy mix and the high carbon tion. dioxide emissions associated with its combustion. Industry will continue to be the sector with the great- Internationally, China should enunciate and pub- est potential for energy-efficiency savings. Improv- licize its strategy for GHG reduction as part of its glo- ing the efficiency of use of certain energy-intensive bal climate change initiative. Components of this raw materials, such as steel, requires addressing strategy are contained in this report and in reports many of the same problems in implementation as already prepared under other environmental plans, direct technical energy efficiency. These problems can including Agenda 21 and the National Environmen- and should be addressed as a component of GHG tal Action Plan. mitigation. Priority project areas The challenge for China is to increase and accel- erate the levels and effectiveness of investment in While overall improvements in economic effi- energy-efficiency improvements. Continuing enter- ciency through further economic reform are critical prise reform and energy price reform have given en- for effective GHG abatement, China's GHG control terprises more incentives to conserve energy. China strategy must also include a series of more specific also has built a sound institutional network for pro- actions. These actions include investment projects, moting energy conservation and has developed a reform of certain sector-specific policies, and efforts wide range of programs, some with marked success. to further build institutional, technical, and manage- Yet, many cost-effective investments in energy-effi- rial capacities. In most cases, these actions provide ciency renovations have not been implemented. In additional benefits and serve other goals and objec- fact, energy-inefficient designs, processes, and equip- tives as well. ment are still widely used in the development or con- struction of China's new industrial production capac- The joint study team concludes that the project ity and housing stock. areas described below warrant highest priority for action to reduce GHG emissions in China. This con- Improvements in energy conservation will require clusion is based on the analysis in Chapter 2 concern- the further development of market-based incentives. ing which measures can contribute most to reducing Timely and effective completion of the transition to a GHG emissions, and the analysis in Chapter 3 regard- market economy is the most important action that ing the cost-effectiveness of different measures. To- can be taken to encourage enterprises to conserve gether, these analyses provide an overview of which energy Successful completion of the reform program measures can reduce the most GHG emissions at the to enforce hard budget constraints on SOEs, in par- lowest cost. ticular, is critical to improve energy cost-conscious- ness in these enterprises. Further efforts should also IMPROVEMENTS IN ENERGY EFFICIENCY be made to complete energy price reform (p.58). Fol- lowing a review of the impact of the recent liberal- Improvement in the direct, technical efficiency of ization of coal prices, the government should also 59 Conclusions and Recommendations consider the potential advantages of additional taxa- whereby small grants are provided for innovative tion of coal as a means to incorporate some environ- conservation investments in exchange for publication mental externalities into the cost of coal burning. A of a full assessment of all project results, good or bad, first step would be to undertake an in-depth study of might be attractive in China. the advantages and disadvantages of coal taxation for environmental goals. Energy conservation equity investment concepts. The Chinese government should encourage experimen- To speed progress in meeting global and national tation with new organizational forms being devel- environmental goals, the government should supple- oped abroad. For example, public or private "en- ment its efforts to encourage market forces with more ergy service companies" or "conservation investment effective initiatives to overcome the barriers imped- companies" finance energy conservation investments ing progress discussed in Chapter 3. These barriers in enterprises in exchange for a portion of the life- include insufficient access to information on techni- cycle profits. The companies shoulder the risk by cal opportunities and experiences, lack of access to providing a guaranteed operating cost reduction to foreign technology, technical and market risks, high the participating enterprises. transaction costs for small investments, and institu- tional constraints. Government support for such ini- Improved dissemination of information. Several pro- tiatives is especially important now, since enterprises grams exist at the central and provincial levels for are increasingly interested in market incentives for dissemination of information on energy conservation energy conservation and managers want to expand technology, but these do not satisfy the country's enor- their experience and knowledge of options. Recom- mous needs. There is a pressing need for informa- mendations for action, especially to support energy tion on project implementation experiences in enter- conservation in industry, include the following: prises, including full technical details and, most im- portantly, an assessment of the financial results and Credit facilities. China's credit facilities for energy cost savings. Programs targeting small enterprises, conservation investment can be useful; however, a especially TVEs, need to be developed. Marketing series of improvements should be made. Enterprises assistance initiatives could aid in the dissemination receiving energy conservation investment financing of high-efficiency technologies, and a government- should be required to demonstrate their overall fi- sponsored energy-efficiency labeling program should nancial and economic viability or present a credible be instituted for key types of equipment to report the restructuring plan to achieve such viability. This results of standardized energy-efficiency tests based would ensure that the project is sustainable and that on common use patterns. Consumer response to all the correct problem is addressed (see p. 41). Given such programs should be surveyed and evaluated, the wealth of investment opportunities with sound and program revisions incorporated accordingly. life-cycle returns, credit facilities should focus on fi- nancially viable investments with longer payback pe- Technical assistance and training. The current need for riods, which tend to be less attractive to enterprises technical assistance and training exceeds the capac- and commercial banks. ity of the existing institutional network. The govern- ment should complete a critical assessment of the Concessionalfinance. Many developed and develop- network for providing enterprises with energy au- ing countries have instituted programs to provide tax diting, preinvestment, and energy-efficiency training or duty relief or both, interest rate subsidies, or small services, focusing on the results achieved. It should grants for selected energy conservation investments. also identify areas for improvement and follow-up The most effective programs tend to be well targeted, work. with specific objectives to catalyze larger responses. In China, the best results may be obtained through In addition to these efforts to accelerate energy selective assistance for (i) development and demon- conservation investment, further recommendations stration of new energy-saving technologies, includ- on important areas are provided below. ing technology transferred from abroad and innova- tions carrying substantial technical or market risk; Industrial energy conservation. China's energy con- (ii) development and introduction to manufacturing servation agencies are likely to achieve the best re- of new, high-efficiency equipment; and (iii) pre-in- sults if the efforts to promote conservation invest- vestment and ex-post evaluation work. Adaptation ments in industry are targeted toward "classic" in- of a program that has been successful in the U.K., dustrial energy conservation projects in enterprises 60 China: Issues and Options in Greenhouse Gas Emissions Control that can demonstrate a sound financial future. Ex- duction of mandatory efficiency standards in select amples of such classic conservation projects include cases, such as electric motors and air conditioners. waste heat or gas recovery, cogeneration, furnace or To be effective, efficiency standards must be set so kiln renovation, adoption of energy management that rigorous testing can be conducted. The standards systems, improved insulation and thermal/steam should be gradually phased in to enable industries system renovation, and installation of high-efficiency to comply without undue hardship and should be equipment. Support is needed for projects to con- strictly enforced. serve energy-intensive raw materials, such as steel. Although large energy-efficiency gains also can be Improvements in coal processing. Adaptation and achieved through industrial restructuring projects, dissemination of clean coal technologies will be an assistance for these broader initiatives is best left to important element in China's GHG control strategy. other institutions. However, energy conservation Over the long term, adoption of more efficient coal agencies can and should help in identifying and as- gasification technology will result in substantial en- sessing the implications for energy consumption of ergy-efficiency gains as well as local environmental industrial restructuring and modernization initia- benefits. For local environmental reasons, China has tives. emphasized expanding the use of coal gas among residential, commercial, and small-scale urban indus- High-efficiency energy-consuming equipment. Imple- trial consumers. Development of integrated coal gas- mentation of a national initiative to develop higher- ification for combined cycle power generation may efficiency small- and medium-scale coal-fired indus- have advantages in terms of project implementation. trial boilers, through adaptation of foreign technol- ogy to Chinese conditions, is among the top priori- In the near term, however, the most pressing is- ties for reducing GHG emissions over the near term. sue relating to cleaner and more efficient coal use is These industrial boilers account for about 30 percent improvement in the quality of the coal supply, of current GHG emissions from energy use; cost-ef- through increased washing of steam coal, better sort- fective design improvements could reduce unit coal ing and matching of coal varieties and sizes to con- consumption levels by 10-20 percent. With little po- sumer needs, and briquetting and pelletization. tential for exports and profits, there has been a Given that coal is China's dominant source of energy marked lack of international commercial interest in and that more than half of the country's coal is con- the small coal-fired boiler sector, and Chinese enter- sumed by relatively small-scale users, improvements prises have little access to foreign technical advances. in the quality and uniformity of supplies can yield Without assistance, individual Chinese boiler manu- large gains in efficiency and reduce carbon dioxide facturers are unlikely to be able to shoulder the costs emissions. Yet, in this respect, China has made little and technical and market risks associated with progress in the last decade. Improved results depend upfront outlays for technology acquisition, adapta- upon policy support and institution building to (i) tion, and demonstration, and for trial production of complete the reform of the coal supply and distribu- new designs. tion system from a supply-driven system to a con- sumer demand-driven, market-based system, and (ii) Additional support is also needed to encourage improve regulation of air pollution emissions, espe- the adoption of other types of high-efficiency equip- cially enforcement of air pollution standards (see ment, such as high-efficiency electric motors, vari- p. 45). able-speed motors, and associated high-efficiency industrial electrical equipment; more efficient air- A recommended means to speed progress is to conditioning equipment and refrigerators; efficient implement a pilot project to reform the system for lighting devices; and steam traps associated with in- coal supply, processing, and utilization in one or two dustrial piping networks. Improving the efficiency urban areas. Such an initiative could include (i) of electric motors and associated industrial equip- implementation of a system for rigorous air pollu- ment is most important, since such equipment ac- tion control regulation and enforcement, (ii) a pro- counts for almost half of China's total electricity use. gram to replace the urban fuel supply system with Additional support might best include selective as- market-oriented coal marketing companies, (iii) tar- sistance for technology development and demonstra- geted investment in coal selection and briquetting tion, assistance in marketing, provision of better in- facilities, and (iv) selected assistance to consumers formation to consumers including energy-efficiency to adopt more efficient coal use technology. product labeling where appropriate, and the intro- 61 Conclusions and Recommendations Energy savings in residential and commercial build- that the dominance of coal in China's energy mix will ings. Various studies have shown that increases in decline significantly over the medium term. A sig- energy efficiency can improve living standards in nificant decline in the share of coal use by 2020 based residential buildings with little or no increase in en- on current technology can be achieved only at enor- ergy use. Policy must be developed to overcome in- mous financial cost, and therefore cost reduction stitutional barriers and constraints in the incentives through technology development is critical. structure (p. 45). Areas for review include (i) oppor- tunities for improving energy-efficiency incentives for * Increased reliance on non-coal energy alternatives homeowners and occupants through ongoing hous- is the only means to reduce GHG emissions over the ing reform initiatives; (ii) heat, gas, and electricity long term, short of unacceptable constraints on in- pricing policies for residences and commercial build- come growth. The development of alternatives to ings, and the potential use of differential connection exponential growth in coal use also will become in- charges to encourage energy efficiency; (iii) measures creasingly essential from both local environmental to improve the application and enforcement of en- and logistical points of view. Although energy effi- ergy-efficiency codes for buildings; and (iv) oppor- ciency is critical over the medium term, only low-or tunities for introducing innovative financing and cost- non-carbon fuels can solve the long-term GHG emis- sharing schemes involving two or more parties in sions problem. housing construction, ownership, and occupancy. Large-scale development of coal alternatives over Support is needed for development, demonstra- the medium and long term requires sustained policy tion, and marketing of new energy-saving construc- support and strategically placed investment for tech- tion products, including high-quality, double-paned nology development and demonstration today. windows with good-quality weather-strip, hollow China's energy industry is currently guided by short- bricks, insulation (especially insulated wall paneling), term objectives focused on alleviating shortages and heating system controls, and improved coal stoves. adjusting to the new market environment. Institu- There is a need to integrate more efficient district tional responsibilities for developing alternative en- heating system designs with energy-efficient hous- ergy sources are fragmented. The government needs ing block construction projects. to continue its efforts to establish a well-targeted, clear strategy for the development of cost-effective alter- ALTERNATIVE ENERGY DEVELOPMENT native energy technology Expanded use of less carbon-intensive alternatives One of the top priorities in China's GHG reduc- to coal is a second important objective for the energy tion strategy, therefore, should be to develop and sector in China's GHG reduction strategy. To con- implement a series of new initiatives to accelerate the tribute significantly to China's energy economy over development of alternative energy technologies. Pri- the medium and long term, however, greater sup- mary emphasis should be given to technologies that port for the development of low- or non-carbon en- are most likely to contribute significantly to China's ergy technologies is urgently needed today. Accord- long-term energy supply The program should focus ingly, the joint study team recommends that the gov- on research and development, technology transfer ernment establish, with international assistance from abroad, and technology demonstration and dis- where required, an aggressive program to accelerate semination activities aimed at reducing the costs of the technological development of alternative energy alternative energy supply and improving its cost-ef- sources, particularly renewable energy technologies. fectiveness when compared with the use of coal. These activities require support today, including ex- The following two conclusions of this study, de- panded support from the international community tailed in Chapters 2 and 3, pose the central problem and GEF, if alternative energy technologies are to that must be addressed in China's GHG strategy: make a significant, commercially viable contribution in the future. o, it expanded development, beyond cur- rent plans, of the principal alternatives to coal is cost- Experts believe that several alternative energy prohibitive using currently commercial technologies, options hold substantial potential for the future if fur- even when accounting for the high costs of measures ther advances in technology can be made. A few ex- to reduce local environmental impacts of coal use. amples include more cost-effective methods for har- Relying solely on market forces, there is little chance nessing nuclear power, wind farms based on large- 62 China: Issues and Options in Greenhouse Gas Emissions Control scale generators, advances in solar photovoltaic and country's growing demand for forest products, China thermal-electric technologies, large-scale biomass should encourage private investment, both domes- energy utilization schemes, and new methods for tic and foreign, in commercial timber and fuelwood extracting natural gas under difficult geological con- forestry projects. Policies that can accelerate forestry ditions. Transfer of advanced technology from de- development in China include (i) improvements in veloped countries will be important in the proposed capital markets, (ii) further price reform, and (iii) clari- technology development effort, but China faces an fication of land-tenure rights. Improvements in capi- additional challenge to develop very large new sup- tal markets, including equal access to credit, are plies of non-coal energy for economic development. needed to allow individuals and firms to borrow for Technical leadership in China, therefore, is also nec- long-term forestry projects. The reform of timber essary. prices in the past several years has helped encourage private sector investment; further reform of log and Several alternative energy technologies exist that wood product prices and the removal of international are cost-effective compared with coal under a wide trade barriers would improve allocation of wood variety of conditions. Technical assistance or the products in China. With respect to land rights, na- transfer and demonstration of approaches or tech- tional and local governments in China must provide niques new to China may accelerate development. legal assurances to individuals or groups that they Two examples include expanded coal-bed methane can secure the gains of forestry development in the extraction and use, and further development of sus- distant future or will be able to transfer those rights tainable biomass fuel use, such as through the devel- to others. opment of high-yield plantations for fuelwood pro- duction for direct use or for power generation. The government can promote more cost-effective development and management of priority afforesta- GHG CONTROL IN THE FORESTRY SECTOR tion projects through technology transfer, demonstra- tion, and technical assistance. Among the areas of Under the right conditions, afforestation and for- greatest significance are the improvement of (i) grow- estry protection programs can provide significant ing stock, including genetic improvement, seed sup- GHG reduction at low net cost. The afforestation ply, and plant propagation systems; (ii) site manage- programs that are most important for carbon seques- ment, including site identification and classification, tration are different from those that are most impor- fertilization, and weed control; and (iii) stand man- tant for other environmental reasons such as erosion agement, including tree spacing, thinning, and prun- control, watershed management, or biological diver- ing. Human resource capacity building is needed in sity. The objective of carbon sequestration is to amass silviculture and nursery management, forestry re- the most carbon in standing biomass and in the soil search and extension, market analysis, and affores- at the lowest cost. The following afforestation and tation model design. forestry management practices have the greatest po- tential for cost-effective reduction of net carbon emis- GHG CONTROL IN THE AGRICULTURAL SECTOR sions in China: (i) the planting of fast-growing, high- yield (FGHY) timber plantations on good quality The three primary sources of GHG emissions from land; (ii) the establishment of certain multiple-use China's agricultural sector are rice fields, nitrogen fer- protection forests; (iii) the planting of high-yield tilizer, and domesticated animals. The practical, no- fuelwood plantations on good sites, particularly in regrets options for reducing emissions from domes- southern China; and (iv) improved management and ticated animals have been identified by this study and supplemental planting of open forests, also predomi- many have already been adopted in China. China nantly in southern China. Although fuelwood plan- should expand and accelerate programs that increase tations themselves do not provide significant carbon the efficiency of livestock production while reducing sequestration, they can significantly reduce carbon the amount of methane generated per unit of animal emissions by limiting destructive cutting of natural product or unit of work. In addition, China should forests and by substituting fuelwood for coal and promote research and development of no-regrets other fossil fuels in direct use or for power genera- options for reducing methane from rice fields and tion. N20 from fertilizer. Given the limited public resources available in The introduction of improved breeding stock and China to support forestry development and the the expansion of ammoniated straw and feed supple- 63 Conclusions and Recommendations ments have had positive financial and social benefits cient resource allocation. Through their lending and and have reduced methane emissions. One way of technical assistance programs, multilateral agencies expanding these programs is to improve rural finan- have advanced the policy dialogue on price reform, cial institutions. Agricultural extension is also needed capital market development, and enterprise manage- to popularize these practices and to demonstrate the ment and ownership reforms. Energy price reform proper techniques and financial benefits. The ammo- has been an important part of the policy discussion, niated feed program is of particular significance since with international agencies providing policy studies it will help reduce the burning of crop residues in the and recommendations for energy price reform pro- fields. Crop residue burning, in addition to causing grams in specific sectors. Perhaps most notable have local air pollution, contributes non-CO2 emissions been the efforts in the reform of natural gas and elec- such as methane, N20, NOx, and CO to the atmo- tric power tariffs. Continuing support of China's sphere. capital market and enterprise management and own- ership reform programs, which are critical for improv- ing economic and energy efficiency, will be key com- INTERNATIONAL ASSISTANCE FOR ponents of multilateral development assistance to REDUCING GHG EMISSIONS IN CHINA China in the 1990s. The two primary modes of international assistance SUPPORT FOR RESTRUCTURING AND to China for GHG reduction are (i) non-targeted as- NO-REGRETS PROJECTS sistance through conventional programs, and (ii) tar- geted global environmental assistance, such as International development institutions contribute through the Global Environment Facility (GEF). In to China's GHG reduction strategy by lending for addition, the Chinese government should seek to projects that improve resource allocation in general maximize the efficiency of technologies and processes and energy use in particular. Through their lending that are brought to China. Private sector foreign in- programs to China's industrial and energy sectors, vestment will play a large role in the modernization international agencies can contribute to the introduc- of China's capital stock over the next several decades, tion of energy-efficient technologies, the promotion and this modernization will have an enormous im- of restructuring programs and achievement of scale pact on energy consumption and GHG emissions well economies, and the adoption of modern management into the future. While not addressed in this study, methods. further research should be undertaken to ensure that private sector investment is as efficient as possible. Many of the priority projects for GHG reduction in China outlined on the previous pages are being Conventional development assistance supported through bilateral and multilateral assis- programs tance. For instance, multilateral lending agencies have recently approved investment projects in China Individual countries and the international com- for industrial energy conservation, efficient power munity have a strong interest in helping China re- development, timber and protective forestry manage- duce GHG emissions. China is receiving various ment and afforestation, and improved animal feed. types of conventional international assistance which International development agencies have also pro- have a direct impact on GHG reduction. Although vided support to China for pilot initiatives in alter- climate change mitigation is not the primary-or even native energy, coal-bed methane extraction and use, an intended-objective of most of this assistance, and improved coal utilization. While these projects these efforts are among the most important measures have not been justified on the basis of climate change that can be taken by the international community to mitigation, their contribution to GHG reduction is sig- reduce GHG emissions in China. nificant and could be further documented in the course of project preparation. POLICY REFORM Role of the Global Environment Facility International development organizations have played a small but important role in supporting the The joint study team recommends that GEF re- reform of China's economy over the past ten years sources be used in China to promote and accelerate and such efforts will continue to be critical for effi- the priority projects for GHG reduction outlined above. 64 China: Issues and Options in Greenhouse Gas Emissions Control The broad objective of the GEF for climate change projects normally eligible for assistance through com- mitigation is to help developing countries reduce or mercial or development banks would not be funded minimize GHG emissions subject to their develop- by the GEF. ment goals. While the specific criteria for GEF II have not been finalized, the following principles are likely The priority projects for GHG reduction in China to guide investment and technical assistance projects: outlined in this chapter meet the first two criteria, but not necessarily the third. * GEF funds should be used specifically to advance global environmental objectives and not as another The following areas for GEF support are consis- source of development funding. tent with the principles and criteria outlined above. * GEF should fund projects that are national priori- OVERCOMING MARKET AND NON-MARKET BARRIERS ties of the recipient country and that are part of the country's climate change convention strategy GEF resources should be used to overcome non- policy barriers to projects that yield significant ben- * GEF resources should be used to achieve the larg- efits to the national economy The case study analy- est reductions in GHG emissions per unit of GEF sup- ses of Chapter 3 have shown that even where the fi- port. This means that GEF support should i) be used nancial and economic returns are good and where for projects that are replicable; that is, able to pro- financing is not a constraint, some projects are not ceed without government or other concessional fi- proceeding as fast as they should. While many of nancing after GEF support has been exhausted; and these barriers exist in well-developed market econo- ii) leverage other sources of funding for GHG reduc- mies, some are more pronounced in China because tion, particularly domestic private funds. the economy is in transition. GEF resources could help overcome the following barriers: i) imperfect or asym- EXPECTED CRITERIA FOR GEF SUPPORT metrical information, ii) technical and market risk, and iii) high transactions costs. Based on the study team's experience with the GEF to date, it is expected that the project areas for GEF Imperfect information. Information that serves a support will generally be required to meet each of purely public good, such as climate change mitiga- the following criteria: tion, is unlikely to be provided by the private sector; thus, projects that depend on such information may * The project areas targeted for assistance must dem- not be undertaken. Public education campaigns, tech- onstrate the potential for major reductions in GHG nology dissemination, extension services, and human emissions as measured in terms of tons of carbon- resources may be needed to overcome information equivalent per year. The reduction potential should barriers. be compared with current and projected GHG emis- sions, estimates of which are given in Chapters 1 and 2. Public education. Public education campaigns can address the lack of information which is often a bar- * Assistance should support investment and tech- rier to the adoption of new equipment or ways of nical assistance projects that are currently cost-effec- doing business. Public campaigns, which have been tive in terms of unit costs for GHG reduction or that used extensively in China, can and are being used by show the clear potential for being cost-effective in the central and local governments to promote energy future. Although difficult to quantify precisely, the conservation and afforestation. Consumer labeling, most cost-effective GEF projects are likely to be those such as standardized data on the life-cycle costs of that address capacity building, institutional strength- major energy-consuming equipment, enables con- ening, imperfect information, or other market and sumers to make more informed decisions when pur- non-market barriers to no-regrets GHG reduction chasing capital equipment. projects. Dissemination of technology and techniques. Once * A strong case must be made that the project in projects have been proven successful and commer- question could not proceed without GEF support and cially viable, the government can assist in promoting that the constraints are other than general investment the technology throughout the country. Extension, capital shortages or policy distortions (such as subsi- particularly in the agricultural sector, has been one dies or price controls). In general, this means that of China's institutional strengths. In addition to ag- 65 Conclusions and Recommendations ricultural programs, expanded efforts are needed for mines. While industrial technologies and processes dissemination of information on no-regrets projects are the most obvious examples, the import of tech- in energy efficiency, forestry, and alternative energy. nologies in agriculture and forestry, such as improved cattle species or advanced silviculture techniques, Training. Without the concurrent development of would also benefit GHG reduction. human capital, many of the options for reducing GHG emissions will not succeed. For instance, much of Demonstration projects. To reduce the risk associ- the energy-efficiency savings associated with new ated with new technologies and processes that have equipment cannot be realized unless operators are the potential for cost-effective GHG reduction, the trained to use and maintain the equipment. Local GEF could support selected demonstration projects. service centers can be set up to provide enterprises In addition to overcoming technical risk, demonstra- with assistance and training on energy use, energy tion projects allow information to be disseminated audits, technical troubleshooting, and investment on the financial aspects of adopting the new technol- appraisal and post-investment monitoring. Training ogy. In return for subsidies, enterprises undertaking is especially needed in financial and economic analy- demonstration projects should be required to provide sis to demonstrate the returns to energy efficiency and detailed information on both the technical and finan- other types of investments. cial aspects of the project. Seed monies could be pro- vided to enterprises to undertake demonstration Imperfect markets for risk. The GEF can help over- projects with commercial returns, and proceeds could come excessive risk associated with the acquisition be used to promote additional high-priority projects. or demonstration of new technologies that are im- portant for GHG reduction. Even in countries with Transaction costs. When there are many consumers, well-developed capital markets, technical and mar- the costs of acquiring information or negotiating with ket risk can hinder the development of superior tech- producers become prohibitive. For instance, it is nologies. In developing countries such as China, the nearly impossible for the thousands of consumers of risk associated with adopting new technologies or steam traps, insulated pipe, water pumps, or electric processes is even greater. Faced with the choice of motors to negotiate with producers to demand more investing in a proven process that increases output efficient products. Without consumer product label-, or a relatively unknown technology that saves en- ing or efficiency standards it may be too costly for ergy, many enterprises opt for the former. When such individual consumers to acquire information or to "risk premiums" are large, or where the benefits for inform producers how much they are willing to pay an individual firm are relatively small, there is al- for more energy-efficient equipment. most no chance that the superior technology will be adopted until the risk can be reduced or shared. Standards. Inparallelwithproductlabeling,China should expand and improve its system of energy-ef- Technology transfer. For enterprises to invest in new ficiency standards. Such standards should be technologies or processes, there must be private re- adopted for key consumer goods, such as refrig< turns to that investment. In practice, this often means tors and air conditioners, and for major energy-con- that the technologies are held in strict confidence by suming equipment, such as electrical motors and in- the developer or that investment to develop a tech- dustrial boilers. Codes for building materials (glass, nology is not made because the nature of the tech- bricks, wallboard) and for building construction nology makes it nearly impossible to appropriate should also be selectively adopted. private returns. When the objective is to maximize GHG reductions, it is in society's interest to have lead- ing technologies and processes in the public domain. The GEF could help China acquire internationally advanced technologies having broad applicability and major GHG reduction benefits, but which would otherwise have insufficient returns to domestic de- velopers. Industrial technologies related to energy production and consumption are key areas for tech- nology transfer. 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