www.goldmansachs.com | January 2015
Paulson Papers On Energy and Environment
At a high-level meeting of China’s top finance and economics body in June 2014, President Xi Jinping called for a sweeping energy revolution in China, centered on five areas: demand, production, technology, institutional governance, and global markets. The exclusive focus on energy was unexpected for a meeting of the group, which typically deals with general macroeconomic issues.¹ But addressing energy matters at such a meeting also made much sense. In his comments, Xi explicitly linked China’s energy security to the country’s economic prospects, arguing that a long-term energy strategy would need to align with economic goals.
That China’s energy structure and its economic model are mutually reinforcing should be obvious. That is because China’s development model determines its energy profile.
But China’s energy policies now and into the near future also need to be anchored in the ambitious economic restructuring agenda that Beijing has embarked upon, especially since Xi came to power in 2012. The higher priority being placed on environmental goals and the deployment of cleaner energy in the economic reform blueprint unveiled at the Communist Party’s Third Plenum in November 2013 will require a different approach to China’s complex energy conundrum.2 Since the plenum, this priority has been underscored in an energy strategy plan (2014-2020) unveiled in November 2014.
Beijing fully understands that in a now gargantuan and complex $10 trillion economy, the effects of energy consumption and production ripple far beyond its borders. China can move global markets and determine global energy prices. And having embedded itself in the global trading system and supply chains, China and the world are inextricably intertwined. China cannot isolate itself from the global economy, nor can the world immunize itself against the effects of what happens in China.
For example, the clouds of pollution dust that are now periodically found on the US West Coast, having blown over from Chinese factories manufacturing products for the global market, is just one of many illustrations of how China’s energy and environmental challenge is no longer just China’s problem. Other countries are deeply affected by China’s energy and economic choices.
Moreover, China’s large scale means that although it may view itself as a “developing” economy that has barely reached middle-income status, its resource and energy footprint is already enormous and akin to that of the world’s leading advanced economies.
To put it another way, China’s global impact has raced ahead of its own self-perception. And this means that China, despite the government’s protestations, cannot behave like a typical developing country when it comes to its energy development. This is especially so since China has already surpassed the United States in both total carbon emissions and energy consumption. China and other emerging markets like India will be the principal contributors to emissions and energy demand growth over the next decades, while the United States and most of the advanced economies are likely to move in the opposite direction.
For these reasons, Chinese policy is premised on an understanding of the gravity of the country’s energy and environmental woes. Beijing is confronting these with a sense of urgency.
Indeed, the surprise US-China climate change announcement at the AsiaPacific Economic Cooperation forum (APEC) in November 2014, in which China declared that it plans to peak its emissions by 2030, is yet another indication that Beijing is moving away from behaving like a typical developing country on the global stage.5 The public announcement of such a target date also signifies Beijing’s intent to take significant unilateral actions to curb its energy and carbon footprint.
But any assessment of what Beijing can achieve in the medium term needs to be tempered by a realistic understanding of the fact that economic growth, and therefore energy demand growth, still needs to continue for decades. And it is not yet clear whether a more consumptiondriven Chinese economy will help facilitate an energy transition or simply alter the character of China’s energy consumption.
The bottom line is this: China will have to determine how to keep growing while simultaneously reducing environmental and resource costs and emissions. That is because the latter will undermine the former, if left unattended. But no silver bullet exists for such a monumental task. It will take a variety of solutions, among them technology, smart policies, and various market incentives, to shift China’s energy profile in a meaningful way. And any forecast of China’s energy scenarios, even for the next five years, must account for a large dose of uncertainty, not least because of spotty data and the rapid changes in the economy.
This paper, which inaugurates a new series of “Paulson Papers on Energy and Environment” from the Paulson Institute, is intended as a “scene setter” that frames and examines the current state of China’s energy structure and some of the existing proposals to reshape its energy landscape through 2020. Subsequent papers in this series will focus on various aspects of China’s energy and environmental conundrum, providing analyses of different sectors and technologies or offering diverse views on policies that are germane to the major issues that China faces in this realm.
This paper does not offer specific prescriptions or solutions, but rather lays out the core elements of China’s energy strategy now and into the near future. The assessment will conclude with a brief discussion of the linkage between Beijing’s energy strategy and its international stance on climate change—a position that is largely a manifestation of its domestic energy and economic concerns.
Download the document: rebalancing-chinas-energy-strategy