00074918.2012.654483
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
What can Indonesia learn from China's industrial
energy saving programs?
Michael T. Rock
To cite this article: Michael T. Rock (2012) What can Indonesia learn from China's industrial
energy saving programs?, Bulletin of Indonesian Economic Studies, 48:1, 33-55, DOI:
10.1080/00074918.2012.654483
To link to this article: http://dx.doi.org/10.1080/00074918.2012.654483
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Date: 17 January 2016, At: 23:58
Bulletin of Indonesian Economic Studies, Vol. 48, No. 1, 2012: 33–55
‘Indonesia in Comparative Perspective’ Series
WHAT CAN INDONESIA LEARN FROM
CHINA’S INDUSTRIAL ENERGY SAVING PROGRAMS?
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Michael T. Rock*
Resources for the Future, Washington DC, and Bryn Mawr College, Bryn Mawr PA
Even though Indonesia’s CO2 emissions are dominated by deforestation while
China’s are dominated by industry, Indonesia has much to learn from China’s industrial energy saving programs. To begin with, it is only a matter of time before
Indonesia’s emissions from fossil fuels overtake those from deforestation. Given
the long technological lock-in effects of energy systems and industries, Indonesia
needs to think now about how it will tackle this problem. There are other reasons
for believing that Indonesia might learn something from China – the CO2 intensities
of GDP, of industry and of cement production have been rising in Indonesia, while
they are falling in China. China’s better intensity performance is due to policies that
Indonesia would do well to follow – adopting a technological catch-up industrial
development strategy; raising energy prices to scarcity values; liberalising domestic
markets and opening the economy to trade and investment; and mounting a massive energy saving program.
Keywords: energy policy, industrial policy, environment, technology
INTRODUCTION
Comparing China and India has become something of a growth industry. Comparing China and Indonesia is anything but.1 That said, an interesting essay in
this journal (Hofman, Zhao and Ishihara 2007) compares development strategies
and outcomes in these two countries. They ind broad similarities in reformist
development strategies, a common reliance on growth for political legitimacy,
and remarkably similar development outcomes (high growth; rapid declines in
the incidence of poverty; solid total factor productivity growth; low inlation; and
* [email protected]. I wish to thank Michael Toman of the Development Research
Group at the World Bank for his guidance and support for my China work. Financial support from the Knowledge for Change Program at the World Bank is gratefully acknowledged. The views and indings presented here should not be attributed to the World Bank,
its management or its member countries. I also wish to thank Resources for the Future for
supporting my China work via the Gilbert F. White Fellowship. Finally, I would like to
thank Chris Manning and Budy P. Resosudarmo for comments on earlier drafts.
1 An amazon.com search for ‘China and India’ turned up 15 books, while a library search
of journal articles on ‘China and India’ generated 224 references. Comparable searches for
‘China and Indonesia’ found three books and 15 journal articles (searches conducted on 4
May 2011).
ISSN 0007-4918 print/ISSN 1472-7234 online/12/010033-23
http://dx.doi.org/10.1080/00074918.2012.654483
© 2012 Indonesia Project ANU
34
Michael T. Rock
FIGURE 1 Energy Intensity of Real GDP
(kg of oil equivalent per $ of real GDP)
4
China
3
Indonesia
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2
1
0
1960
1970
1980
1990
2000
2010
Source: World Bank, World Development Indicators, .
substantial shifts in the structure of production following reform).2 Given these
indings, both countries might be well served by more detailed and less macro
comparisons. That is what is attempted in this paper.
But the focus of comparison here is in what many will think an odd place –
energy use and carbon dioxide (CO2 ) emissions. On its face such a comparison
appears foolhardy. Energy use in industry dominates CO2 emissions in China,
while deforestation and land cover change dominate CO2 emissions in Indonesia
(Fisher-Vanden et al. 2004; Resosudarmo et al. 2011). Given this monumental difference, some may conclude that Indonesia has little to learn from China. But,
as Resosudarmo et al. argue (2011: 148), it is only a matter of time before CO2
emissions from fossil fuels overtake those from deforestation. Given the potential
for technological lock-in associated with investments in the energy sector and in
industry, it behoves Indonesia to begin thinking now about how it might save
energy and reduce CO2 emissions in industry.
There is one other reason to consider what Indonesia can learn from China.
China has been much more successful than Indonesia in reducing the CO2 intensity of GDP and of industry, despite the fact that its energy mix is more dependent on coal – an energy source with a very high CO2 emissions factor.3 China has
experienced a rather remarkable decline in the energy intensity of its GDP, while
Indonesia has not (igure 1). At the start of China’s program of economic reform in
2 Of course they also ind important differences, including Indonesia’s low and stable income inequality and China’s rapidly rising inequality (Hofman, Zhao and Ishihara 2007:
174).
3 China depends on coal for about 80% of its energy, Indonesia for about 40% (World
Bank, World Development Indicators, ).
What can Indonesia learn from China’s industrial energy saving programs?
35
FIGURE 2 CO2 Intensity of Real GDP
(1961 = 100)
180
150
120
Indonesia
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90
China
60
30
0
1960
1970
1980
1990
2000
2010
2000
2010
Source: As for igure 1.
FIGURE 3 CO2 Intensity of Industry
(1971 = 100)
140
120
100
80
60
China
40
Indonesia
20
0
1960
1970
1980
1990
Sources: World Bank, World Development Indicators (see igure 1); IEA (International Energy Agency),
online data services, available at .
1978, energy use per dollar of real GDP was nearly four times as high in China as
in Indonesia, yet by 1999 there was virtually no difference in the energy intensity
of GDP in China and Indonesia. Even more surprisingly, the CO2 intensity of GDP
has been falling in China, though it has been rising in Indonesia (igure 2). While
one might suspect that the rise in the CO2 intensity of GDP in Indonesia is simply
a consequence of deforestation, igure 3 suggests that at least part of it is due to a
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36
Michael T. Rock
rise in the CO2 intensity of industry.4 Here again, the Chinese experience is quite
different from that of Indonesia.
What accounts for these differences? There appear to be at least three answers
to this question. To begin with, China started its reform period with unusually
high energy and CO2 intensities. This, no doubt, was a consequence of the heavy
industry and energy ineficiency focus of its socialist development strategy.
From this perspective, it may not be particularly surprising that China experienced rapid declines in energy and CO2 intensities following the onset of marketoriented reforms. Second, as will be demonstrated, better performance in China
appears also to be a consequence of a more open trade5 and investment regime;6
a more complete market liberalisation program;7 energy prices that are closer to
their scarcity values;8 and a concerted effort by the government of China to reduce
the energy intensity of GDP. Finally, China has a better technological catch-up
performance.9 Better catch-up policies mattered because they enabled industrial
enterprises in a wide range of sectors to upgrade their technological capabilities
substantially so they could more easily beneit from the environmental technique
effects associated with liberalisation (particularly the rise in energy prices), privatisation and the opening of the economy to trade and investment. This successful
policy package suggests that Indonesia may have much to learn from China.
What follows demonstrates how this policy package contributed in China
to rapid declines in the energy and CO 2 intensity of production in one energyintensive industry – cement. There are three reasons to focus on cement.
First, it is one of the largest industrial emitters of CO 2 in both countries (see
table 1 for Indonesia and Wang, Wang and Zhang 2005 for China). Figure 4
shows that cement accounts for an average of roughly 5% of CO2 emissions
in Indonesia and 6% in China over the last two decades. Second, the CO 2
intensity of cement is falling in China but appears 10 to be rising in Indonesia
4 The CO2 intensity of GDP includes CO2 emissions from land cover change, while the
CO2 intensity of industry and of cement does not.
5 Following Lipsey and Sjöholm (2011), I regressed country trade shares in 2005 on country land area and population, and compared predicted values with actual values. China’s
actual trade share is nearly 45% higher than expected, while Indonesia’s is only 9% higher
than expected.
6 Lipsey and Sjöholm (2011) argue that the stock of inward foreign direct investment (FDI)
in Indonesia is much lower (only 59%) than might be expected for a country with its characteristics, while China’s stock of inward FDI is roughly what can be expected.
7 Price controls, non-tariff barriers (NTBs) and import licensing and quotas have virtually
disappeared from China (Branstetter and Lardy 2008), while NTBs and price controls have
become more common in Indonesia (Basri and Hill 2008).
8 Petrol and electricity prices in particular are well below their scarcity values in Indonesia
(Basri and Hill 2008).
9 See the discussion of technological catch-up policies in China below. Lipsey and Sjöholm
(2011) argue that Indonesia has weak technological capabilities, while Hill (1995) argues
that Indonesia does not have a technology policy.
10 I say ‘appears’ simply because there are no reliable estimates of CO2 emissions from
cement in Indonesia. Constructing estimates by relying on very limited energy use data
from the central statistics agency (BPS) does not seem to help either – it suggests that the
What can Indonesia learn from China’s industrial energy saving programs?
37
TABLE 1 Greenhouse Gas Emissions (GHG) from Manufacturing in Indonesia a
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Rank Sector
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Cement
Steel rolling industry
Iron & steel basic industries
Weaving mills except gunny & other sacks
Wearing apparel made of textiles (garments)
Pulp
Preparation of textile ibre
Structural materials made of porcelain
Motor vehicle component & apparatus
Straight fertilisers
Crumb rubber
Toys
Finished textiles
Spinning mills
Cultural papers
Tire & inner tubes
Crude vegetable & animal cooking oil
Products of plastics for technical/industrial purposes
Basic chemicals not elsewhere classiied
Cooking oil made of palm oil
5-digit ISIC Estimated 2005
Code
GHG Emissions
(MMT of CO2e)
26411
27102
27101
17114
18101
21001
17111
26202
34300
21122
25123
36941
17122
17112
21012
25111
15141
25206
24119
15144
11.5
5.5
4.6
4.1
3.9
3.8
3.6
2.9
2.5
1.9
1.5
1.4
1.2
1.1
1.1
1.1
1.0
1.0
1.0
0.9
a ISIC = International Standard Industrial Classiication; MMT = million metric tons (million tonnes);
CO2e = carbon dioxide equivalent.
Source: Ministry of Finance and National Council on Climate Change (2009: 19), citing BPS (2005) and
AIRD (2009): ‘Estimates are based on surveyed energy use among medium and large irms (BPS 2005)
and Ministry of Industry natural gas estimates for major users (AIRD 2009)’.
CO2 intensity of cement was virtually zero in 2004! The estimate in igure 5 is based on
the following calculations. The International Energy Agency (IEA) online data services at
report CO2 emissions from fuel burning
for the non-metallic minerals sector in Indonesia. An IEA report (IEA 2007: 139) argues
that 70–80% of CO2 emissions in this sector are from cement. The German aid agency GTZ
suggests that CO2 emissions from the non-metallic minerals sector on Java in 2005 were
overwhelmingly (more than 90%) dominated by cement (GTZ 2009: 49). To err on the side
of under-estimation, I assumed that cement accounted for 50% of the CO2 emissions from
the non-metallic minerals sector. Since IEA data do not take account of CO2 emissions
from the calcination of limestone in kilns – the process that produces clinker, the molten
marble-sized chunks that are cooled and ground to produce cement (Plunkett, Morgan
and Pomeroy 1997: 77) – I assumed 0.5 tonnes of CO2 per tonne of clinker from calcination
of limestone and a clinker-to-cement ratio of 80%. This ratio is well below the average for
the three cement enterprises operating on Java in 2005 (90%) and what Holcim and Indocement achieved on Java in 2003 (95.8%) (GTZ 2009: 49).
38
Michael T. Rock
FIGURE 4 Share of Cement in Total CO2 Emissions
(%)
10
8
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6
4
China
2
Indonesia
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Sources: World Bank (2011); IEA (International Energy Agency), Online data services, available at
; author’s calculations.
(figure 5). Given that Indonesia’s large-scale cement industry uses state-ofthe-art OECD production technologies and is dominated by OECD cement
multinationals,11 the latter finding, by itself, is surprising. Finally, opportunities to save energy and reduce CO2 emissions in particular industries are
inextricably linked to the underlying technological regimes in those industries. While the focus is on cement, similar stories can be told for China about
iron and steel (Rock, Kejun and He 2011); aluminium (Rock and Wang 2011);
and pulp and paper (Rock and Song 2011). Said another way, there appears
to be a successful pattern of policies and institutions affecting energy use
and CO2 emissions across a number of industries in China.
A TALE OF TWO INDUSTRIES
The development paths of China’s and Indonesia’s cement industries could not
be more different. The story of China’s cement industry following the onset of
economic reform is one of technological modernisation (Rock and Cui 2011) that
facilitated rapid growth in the industry,12 and equally rapid declines in the energy
11 Of the four biggest cement producers in Indonesia in 2006, Cemex owned 24.9% of
Gresik; Lafarge (Cementia) owned 88% of Andalas Indonesia; Holcim owned 77% of Cibinong; and Heidelberg Cement owned 65% of Indocement (Timuryono 2007). The latter
share declined to 51% following Heidelberg’s sale of some of Indocement’s shares in 2009
(HeidelbergCement 2011: 170). Efforts to privatise Indonesian cement producers began soon
after the Asian inancial crisis of 1997–98 (Bird 2004: 100; Prasetiantono 2004: 148), and Andalas Indonesia, Cibinong and Indocement continue to have majority foreign ownership.
12 Cement production in China rose from 146 million tonnes in 1985 to 1.86 billion tonnes
in 2010 (Rock and Cui 2011: 62)
What can Indonesia learn from China’s industrial energy saving programs?
39
FIGURE 5 CO2 Intensity of Cement
(tonnes of CO2 per tonne of cement)
1.0
0.8
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0.6
0.4
China
Indonesia
0.2
0.0
1985
1990
1995
2000
2005
2010
Sources: Cement production data for Indonesia: US Geological Survey, ‘Minerals Information’ website,
accessed 1 November 2011 at ;
energy use data for Indonesia: see footnote 10. All data for China are from Rock and Cui (2011).
and CO2 intensity of cement production. The story of Indonesia’s cement industry, especially after the New Order came to power, also revolves around rapid
growth,13 but there the primary concern has been in curbing quasi-monopoly
power (Plunkett, Morgan and Pomeroy 1997). On the eve of China’s economic
reforms, its cement industry was tiny, energy intensive, technologically backward, and conducted in small-scale, geographically dispersed enterprises. In
New Order Indonesia, a domestic cement industry was fostered by import substitution policies and subsequently led by a small number of relatively large stateowned and private sector irms producing cement with modern rotary kilns.
While China used an array of industrial and technology policies to restructure its
cement industry completely, Indonesia struggled to ind a successful regulatory
strategy that limited the market power of the country’s protected cement irms.
While China enticed its cement enterprises to upgrade technologically, there is
no evidence that Indonesia was concerned with the technological capabilities of
its cement producers. While China encouraged (by increasing energy prices) and
forced (through mandatory energy savings programs) its cement enterprises to
save substantial amounts of energy (and CO2) emissions, Indonesia talked about
the need to do so, but did little. What follows describes the trajectory of each
country’s cement industry and the policies and institutions that inluenced those
trajectories.
13 Cement production in Indonesia rose from 5 million tonnes in 1980 to 22 million tonnes
in 1994 (Plunkett, Morgan and Pomeroy 1997: 79) and 42 million tonnes in 2010 (US Geological Survey, ‘Minerals Information’ website, accessed 1 November 2011 at ).
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40
Michael T. Rock
The history of cement in Indonesia
The history of Indonesia’s cement industry is intimately bound up with the broader
evolution of Indonesia’s economic and industrial development. In the early part of
the 20th century, the Dutch imposed tariffs on Japanese imports, spawning a small
boom in import substitution – including the building of Indonesia’s irst modern cement plant, the NV Nederlandsch-Indische Portland Cement Maatschappij
in Padang, with Dutch capital (Robison 1986: 9). Two other cement companies
emerged between independence and the collapse of the Soekarno government in
the mid-1960s.14 After Soeharto’s New Order government replaced the Soekarno
regime, industrial policies were quite bifurcated until the mid-1980s, when Indonesia inally began to deregulate its economy and open it to trade and investment.
In consumer goods, New Order industrial policy focused on attracting foreign
direct investment (Hill 1986), but in industries that were resource based, skill
based (autos) and capital intensive (iron and steel), policy was quite interventionist. Because of this, state control of banks and the banking system, including the administrative allocation of highly subsidised credit, lasted into the 1980s
(MacIntyre 1993). State-owned industries in cement,15 petrochemicals and steel
were hallmarks of the ‘industrial deepening’ policies of the 1970s and of the hightechnology policies that followed (McKendrick 1992; Auty 1990). State allocation
of lucrative import and commodity distribution licences, including in cement,
was an essential part of the New Order’s relationship with the Sino-Indonesian
business community (World Bank 1989; Robison 1986: 302).16 Extensive regulation of both domestic and foreign investment lasted into the 1990s (World Bank
1989: 70).
When it came to competition, the New Order government preferred monopolistic structures, particularly in resource-based industries. A state company held a
monopoly on oil and gas development and distribution and a state logistics company controlled the distribution of basic commodities (Bresnan 1993: 125–9, 164–
93). One well-known Soeharto ‘crony’ capitalist held a monopoly on lour milling
and trade in cloves (Elson 2001: 252). Another controlled much of the logging and
plywood industry (Barr 1998). In cement, Indonesia had a three-irm concentration ratio of 92% in 1995; one irm, PT Indocement, owned by a Soeharto crony,
controlled 40% of capacity (Plunkett, Morgan and Pomeroy 1997: 82). The cement
industry was also heavily protected from foreign competition.17
Given this policy thrust, it is not surprising that the cement industry, which
was considered strategic by the New Order government, was heavily regulated
(Maarif 2001: 17–21; Plunkett, Morgan and Pomeroy 1997). For much of the New
Order period, access to the industry was restricted by a ‘Negative List for Investment’. The government routinely controlled the price of cement in every regional
14 PT Semen Gresik was built by the government in Gresik in East Java in 1957. In 1960, PT
Semen Tonasa was established in South Sulawesi. (I wish to thank an anonymous reviewer
for this information.)
15 By 1974, state-owned enterprises controlled 75% of cement production (Robison 1986:
144).
16 Plunkett, Morgan and Pomeroy (1997) describe the regulation of the cement industry
from 1974.
17 The effective rate of protection for cement was 138% in 1987 (Maarif 2001: 17).
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What can Indonesia learn from China’s industrial energy saving programs?
41
market.18 It divided the market by allocating cement deliveries by each producer
to each regional market and by appointing local distributors and retailers. It also
allocated the right to import cement (Plunkett, Morgan and Pomeroy 1997: 87).
Many of these actions took place or were reinforced in monthly meetings between
the Indonesian Cement Association and government regulators. While the ostensible reason for regulation was to ensure the availability of ample amounts of
cement at reasonable prices in each regional market, in fact the government acted
as an enforcer for the industry association’s cement cartel.
As Indonesia began the long and arduous process of deregulating industry and
opening it to trade and investment in the late 1980s, the cement industry too was
progressively deregulated (Plunkett, Morgan and Pomeroy 1997: 88; Maarif 2001:
17–20). In 1987, rules governing the export and import of cement were simpliied.
In 1990, all restrictions on imports were removed. In 1993 restrictions on entry
were eliminated. By 1995, the effective rate of protection for cement had dropped
to –12%. Price controls were lifted in 1997 (though they were later re-instated; see
Basri and Hill 2008: 1,402). Following the East Asian inancial crisis in 1997–98,
OECD cement multinationals bought controlling shares in Indonesian cement
companies at ire-sale prices (see footnote 11).
Despite these moves towards deregulation, the industry remains highly concentrated. By the early 2000s, the four big producers controlled by OECD cement
multinationals accounted for nearly 94% of the domestic market, while seven
companies controlled 100% of production (Prasetiantono 2004: 147). This in part
relects the fact that the Indonesian market is small by large developed and developing country (China and India) standards, despite the rapid rise in cement production in the two decades before the Asian inancial crisis. It also relects the
importance of economies of scale in the cement industry. However, there is serious concern that this deregulated industry continues to act as a cartel that limits
competition, divides up the market and controls prices.19
To make matters worse, there is little evidence that the Indonesian government
assisted irms in upgrading their technological capabilities in the 1980s and 1990s.
By the mid-1990s, Indonesia lagged behind its East Asian neighbours on most
technology indicators. Its spending on research and development (R&D) was very
low (0.2% of GDP); it had very few patent applications (12 between 1981 and 1990);
very few scientists and engineers were engaged in R&D (183 per million of the
population); enrolments in tertiary education were low (10% of the relevant age
group in 1991); and few young adults had science or engineering degrees (0.4% of
22–23-year-olds) (Hill 1995: 92). Indonesia’s restrictive policies inhibited the inlow
of new technology, and private irms under-invested in training and R&D (Hill
1995: 103–7).
Things have not improved much. R&D spending as a share of GDP was
even lower in 2005 than it was in the 1990s (only 0.05% of GDP); meanwhile US
majority-owned manufacturing afiliates operating in Indonesia were spending
only 0.06% of employee compensation, or $80 per employee, on R&D in 2004
18 This began in 1974, when the government set a ceiling price on bagged cement (Plunkett, Morgan and Pomeroy 1997: 86).
19 ‘KPPU [the Business Competition Supervisory Commission] alleges cartel in cement
industry’, Jakarta Post, 25/1/2010.
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42
Michael T. Rock
(Lipsey and Sjöholm 2011).20 The comparable igures for US irms operating in
China were 14.9% of employee compensation and $1,492 per employee. In addition, Indonesia is falling behind in the attraction of inward foreign direct investment. Because of this, it is not particularly surprising that total factor productivity
growth has been low in Indonesia, although it has tended to be higher during
periods of economic liberalisation (Thee 2006: 342). Nor is it surprising that total
factor productivity growth in cement has been uneven.21
Given this coniguration, how have Indonesia and its cement industry
responded to growing pressures to save energy and reduce CO2 emissions? There
is substantial evidence to suggest that both the government and the industry are
very aware of the pressing need to save energy in cement production, and of
the options and costs associated with doing so. The Indonesian government’s
climate change sectoral roadmap (Republic of Indonesia 2009: 59) and an internal Ministry of Finance report (Ministry of Finance and National Council on Climate Change 2009) identify cement as the most energy-intensive manufacturing
industry and (as table 1 conirms) the one with the highest level of energy and
CO2 emissions; and the roadmap identiies the abatement reduction potential in
cement (Republic of Indonesia 2009: 62–4). Both PT Indocement (Hoidalen 2004)
and the Indonesian Cement Association (Timuryono 2007) have participated in
seminars in Indonesia that identify the opportunities for saving energy and CO2
in Indonesia’s cement industry.
Both the government and the cement industry are also keenly aware of the
industry’s heavy reliance on coal as the primary source of energy. In 2005 over
8 million of the industry’s almost 12 million tonnes of CO2 emissions came from
coal (Ministry of Finance and National Council on Climate Change 2009: 20, igure 2.3). More recently, the government has developed an abatement cost curve
for the cement sector through 2030 that identiies three win–win cost-effective
interventions: shifting to blended cements;22 using alternative fuels; and recovering heat to co-generate electricity (Dewan Nasional Perubahan Iklim 2010: 34).
But so far, there is little evidence to suggest that all this activity has generated
concrete programs in either government or the private sector to save energy in
cement. Nor is there much evidence, so far, of actual energy and CO2 savings.23
Indonesia’s experience stands in marked contrast to that of China.
20 Lipsey and Sjöholm (2011) provide comparative data to illustrate how Indonesia has
lagged behind neighbouring countries, including China, on various technological indicators.
21 Total factor productivity growth in Indonesia’s non-metallic minerals industry, which is
dominated by cement, varied from 10.3% per year between 1976 and 1980 to a low of –4.1%
per year between 1981 and 1983 (Vial 2006: 367).
22 About 50% of CO2 emissions in cement production come from clinker making (Galitsky
and Price 2007), so reducing clinker content by blending in other materials can signiicantly
reduce the CO2 intensity of cement production.
23 That said, GTZ (2009: 49) shows that blended cement accounted for 10% of cement produced in three cement enterprises operating on Java in 2005, while roughly 4% of cement
production at Holcim and Indocement in 2005 was blended. While this level of blended cement will save on energy use and CO2 emissions from calcination, it is negligible compared
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What can Indonesia learn from China’s industrial energy saving programs?
43
The history of cement in China
On the eve of its economic reforms, China’s cement industry was tiny; its activities were small in scale, geographically dispersed, very energy intensive and technologically backward (Rock and Cui 2011). This coniguration was a consequence
of three distinct but inter-related polices adopted between 1961 and 1966: administrative decentralisation of central planning (Wu 2005: 44; Lardy 1978: 137–44);
an ‘agriculture irst’ development strategy (Prybyla 1970: 366–7); and government
support for the ‘ive small producer goods industries’, including cement, that
served agriculture (Whiting 2001: 50; Wong 1979: 10–12). Administrative decentralisation was China’s answer to the problems caused by a Soviet-style planning framework that was unsuitable for Chinese conditions. The ‘agriculture irst’
development strategy was aimed at increasing grain output, while the ‘ive small
industries serving agriculture’ program was intended to increase the supply of
modern inputs to agriculture. This development strategy lasted until 1978.
Between 1961 and 1978 this combination of policies fostered the emergence of
a small-scale technological regime in cement, using antiquated vertical shaft kiln
technology.24 China started building small-scale cement plants in 1958; by 1965, it
had 200 of them, accounting for 30% of cement production. The number of smallscale plants rose to 1,800 in 1971 and 2,800 in 1975. By 1975, 80% of China’s more
than 2,100 counties had at least one small-scale cement plant, and small-scale
cement plants accounted for 61% of production. Market liberalisation of the rural
economy after 1979 strengthened this technological regime. By 2002, 3,657 smallscale cement irms (Ligthart 2003) accounted for 72% of production (Cui 2009).
But by the early 1990s, as the returns to China’s decentralised and small-scale
industrial development strategy began to slow, the government altered direction
to foster the development of a socialist market economy (Yusef, Nabeshima and
Perkins 2006: 70). Initial changes focused on deregulating the industrial economy
and opening it to private enterprise. In 2003 the central government began a massive restructuring program that included efforts to foster a set of ‘national champions’ in a wide range of key industries, including cement.
At the same time, the government decided to revitalise state-owned enterprises
by privatising a very large number of township and village enterprises (TVEs) and
adopting an industrial development strategy based on ‘grasping the large, letting
go of the small’ (Sutherland 2003: 10). This strategy was based on an assumption
that the government could use large state-owned industries to create East Asian
style conglomerates that could compete with OECD multinationals. Following
the targeting of 57 state-owned industrial groups for promotion, including several in cement (Sutherland 2003: 46), the core enterprise in each group was (1)
granted greater control over state assets in the group; (2) encouraged to develop
an internal inance company to mobilise capital; and (3) permitted to annex state
research institutes to enhance the group’s R&D capabilities.
The aims of the ‘grasping the large’ restructuring program in cement were to
close small vertical shaft kiln cement plants; to shift to larger production lines
with the level achieved in China. There 40% of cement is blended, saving nearly 600 million
tonnes of CO2 in 2010 (see igure 6 below).
24 Detailed descriptions of this technology are provided in Sigurdson (1977: 152–66) and
Perkins (1977: 177–93).
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44
Michael T. Rock
using state-of-the-art rotary kilns; to create a small number of very large irms
that could compete with the OECD cement conglomerates (Ligthart 2003); and
to develop an export-oriented indigenous engineering and capital goods and services industry in cement (Rock and Cui 2011). To achieve these goals, the government adopted a set of speciic quantitative restructuring objectives. By 2010 China
expected to have reduced the number of cement irms by 40%. When combined
with new investment, large rotary kilns were expected to account for 70% of output by 2010, and by the same year the government aimed to increase the share of
output by the top 10 irms to 35% (roughly 350 million tonnes) (Price and Galitsky 2007). This restructuring program has achieved substantial progress. Large
new rotary kilns increased their share of cement production from 9.6% in 2000 to
34.2% in 2005 (Kang 2007). By 2010, the share of ‘large’ rotary kiln-based plants in
cement production had exceeded the target, reaching 80% (Rock and Cui 2011). By
2005, the top 10 irms in the industry had increased their share of production from
4% in 2000 to 13.7% (still some way from the 35% target for 2010), while the top 25
publicly listed companies in 2005 accounted for 25% of production (Kang 2007).
Two other aspects of China’s industrial and technology policies affected the
cement industry. As part of the 15th ive-year plan (2001–05), China decided that it
needed to shift emphasis from capital accumulation to technical change (Gu et al.
2009: 372). The government set out to increase technological spillovers from FDI
and to become an innovation economy. With respect to the latter, it reformed its
national innovation system by radically increasing R&D expenditures as a share
of GDP,25 funding a number of new science and technology (S&T) programs,26
and converting a large number of government research institutes into marketdriven non-government S&T enterprises.27
As a result, there has been a signiicant shift in the use of S&T resources, away
from government research institutes and towards enterprises (Guan, Yam and
Mok 2005: 340). New rules governing S&T spin-off enterprises have spawned a
signiicant number of very successful non-state S&T enterprises such as Lenovo
and Stone in information technology (Lu 2003) and Sinoma International in
cement (Rock and Cui 2011). And the absorption of engineers from government
research institutes by large modern shareholding enterprises such as Capital Steel
and Baosteel has facilitated productivity growth within these enterprises and the
export of iron and steel making capital equipment and know-how (Brandt, Rawski and Sutton 2008: 603; Rock, Kejun and He 2011).
The government also experimented with a range of policies to increase technological spillover from FDI. In the early 1980s, during the early stages of the opening of the economy, it supported a ‘make it ourselves’ approach to technological
upgrading. When that strategy failed, as it did in cement (Rock and Cui 2011), the
25 R&D expenditures as a share of GDP rose from 0.6% in 1994 to 1.4% in 2006 (Hu and
Jefferson 2008: 288).
26 These include the 863 Program and the 973 Program, which focus on basic research
and frontier technologies; the Torch Program, which supports high-tech industries; and
the Spark Program, which is aimed at developing S&T to revitalise the rural economy (Hu
and Jefferson 2008: 294).
27 Some government research institutes closed, others merged, while still others were absorbed by enterprises (Hu and Jefferson 2008: 293).
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What can Indonesia learn from China’s industrial energy saving programs?
45
government used its market power from the mid-1980s to the mid-1990s to trade
access to its market for technology transfer. That strategy bogged down in the
mid-1990s, leading the government to encourage domestic enterprises to make
investments in research and development. And it linked the import of foreign
technologies and complete (or ‘turnkey’) manufacturing plants with the training
of domestic engineers.
There is substantial evidence that these strategies worked. A study of large and
medium cement enterprises in China between 2001 and 2004, undertaken using
a capital, labour, energy and materials (KLEM) framework, shows that enterprise
investments in R&D have a signiicant impact on a cement enterprise’s energy
intensity – that is, an increase in R&D expenditures as a share of an enterprise’s
sales reduces the energy intensity of its production (Fisher-Vanden et al. 2011). A
recent case study shows that investments in technological capabilities enabled a
large Chinese cement industry research and design enterprise to capture a signiicant share of the domestic and international markets for new cement plants (Rock
and Cui 2011).
Finally, the government has been pushing industrial enterprises to save energy
(Price, Wang and Yun 2008). Beginning in the early 1980s, it did so simply by
building energy eficiency into its command economy, establishing energy intensity standards for a large number of industrial sub-sectors and enterprises, and
limiting the supply of energy to enterprises based on those standards (Sinton,
Levine and Wang 1998: 818–25). This ‘energy quota’ management system was
reinforced by signiicant investments in energy conservation; by the creation of
a large number of energy conservation centres that provided energy eficiency
services to enterprises; and by the development of a credible energy statistics
collection and reporting system that enabled the government to track enterprise
and industry performance relative to established standards. This package of policies and institutions helped reduce the energy intensity of GDP by 5.2% per year
between 1980 and 2002 (Zhou, Levine and Price 2010: 1), while the energy intensity of cement fell by 17% between 1985 and 2002 (Rock and Cui 2011).
As the economy shifted increasingly from plan to market, and government reorganisation emphasised regulatory rather than planning functions in the early
2000s (Naughton 2003), this set of policies and institutions became less useful
and they simply withered away. At the same time, the energy intensity of GDP
rose by 3.8% per year between 2002 and 2005 (Zhou, Levine and Price 2010: 1).
Startled by this setback in 2005, the government developed a new set of policies to
reduce energy intensity.28 It eliminated energy subsidies to industrial enterprises
and removed export rebates for energy-intensive products, including cement. It
set a new target of improving the energy intensity of GDP by 20% between 2006
and 2010. To achieve this goal, the government redoubled efforts to close enterprises that used backward technologies, including vertical shaft cement kilns. In
2006, it created a program for improving energy eficiency in the country’s top
1,000 industrial enterprises, including those producing cement (Price, Wang and
Yun 2008). It revitalised the country’s energy conservation centres and rebuilt the
statistical system for tracking performance at enterprises and in local governments. It linked the new energy intensity standards system to the cadre personnel
28 This paragraph draws on Zhou, Levine and Price (2010).
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46
Michael T. Rock
evaluation system. Available evidence suggests that the government met its overall energy intensity improvement goal for 2010 (Zhou, Levine and Price 2010).
How has this set of policies and institutions – which emphasise technological
upgrading; openness to trade, investment and new ideas; and energy eficiency –
affected energy intensity in China’s cement industry? There are several answers
to this question. With respect to technological upgrading, the inding of FisherVanden et al. (2011) that cement enterprise investments in R&D have a statistically
signiicant effect on energy eficiency has been illustrated at the enterprise level. A
study of technological upgrading in one medium-sized cement enterprise found
that its investments in long-run technological learning enabled it to reduce energy
intensity by 30% between 1980 and 2009 (Rock and Cui 2011). These investments
in technological learning also enabled the irm to maintain a substantial energy
eficiency advantage over the rest of the vertical shaft kiln industry. Openness to
new ideas from the international community also helped this irm to save energy.
Fortunately, this experience is not an isolated one. Since 1979, China’s government has made numerous investments in technological upgrading and energy
saving in vertical shaft cement kilns. As a result, comprehensive energy consumption in these kilns declined by nearly 25% between 1985 and 2010 (Rock and Cui
2011: 64). Meanwhile the government was phasing out vertical shaft kiln cement
plants and replacing them with large, modern rotary kiln cement plants. Because
the import costs of this shift were prohibitive, government funds supported the
development of an indigenous technological capability to design, make, install,
commission and service a Chinese version of a large modern rotary kiln. The government turned to three of its national cement industry design and research institutes to develop these capabilities.29
During the 1980s and early 1990s, one of these institutes attempted to design,
manufacture and operate a small rotary kiln (with a capacity of 700 tonnes per
day) without any external assistance. But this effort failed. From the mid-1990s,
the Ministry of Building Materials imported four turnkey rotary kiln cement production lines from Europe and Japan. As part of the acquisition, the government
required the foreign engineers to teach Chinese cement engineers how to design
new cement plants; manufacture cement-making equipment; and install, commission and service new cement production lines. A detailed description of how this
happened can be found in Rock and Cui (2011). Sufice it to say that, as a consequence of this one experience with openness to trade and investment, the research
institutes mastered each of these tasks and formed a public–private cement engineering enterprise, Sinoma International, which went on to capture a large share
of the Chinese and international markets for new cement plants.
China’s cement enterprises also saved energy in response to increases in its price,
particularly the price of coal. The study by Fisher-Vanden et al. (2011) demonstrates
that rising energy prices encouraged signiicant energy savings. There is strong evidence too to suggest that the government’s mandatory energy saving programs
made a difference. During the period of the irst program (1980–2002), energy intensity in China’s cement industry fell by 1.7% per year. Between 2006 and 2010, during the second program, energy intensity fell by 6.3% per year (Rock and Cui 2011).
29 One of these was in Tianjin, one was in Nanjing and the other was in Chengdu.
What can Indonesia learn from China’s industrial energy saving programs?
47
FIGURE 6 CO2 Saved in China’s Cement Industry a
(million tonnes)
600
Blended cement
500
Kiln efficiency improvements
400
Replace VSKs with rotary kilns
Co-generation of electricity
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300
Alternative (waste) fuels
200
100
0
1986
1990
1994
1998
2002
2006
2010
a VSK = vertical shaft kiln.
Source: Rock and Cui (2011).
In sum, the available evidence suggests that investments in technological
learning and openness to trade and investment (and new ideas), alongside pressures to save energy, helped cement enterprises in China to reduce their energy
intensity. But what precisely have cement enterprises done to save energy and
how much energy and CO2 have been saved? A large literature suggests that
cement enterprises can save energy through (1) shifting to blended cement (to
reduce energy-intensive clinker production); (2) improving the fuel eficiency of
kilns by retro-itting existing vertical shaft and rotary kilns; (3) replacing vertical shaft kilns with larger and more eficient rotary kilns; (4) recovering heat in
the production process to generate electricity; and (5) burning alternative (waste)
fuels in kilns (Galitsky and Price 2007; Soule, Logan and Stewart 2002; Worrell,
Galitsky and Price 2008; Hohne et al. 2008).
These options for saving energy are well understood by the relevant institutions
in China.30 The China Energy Group of the Lawrence Berkeley National Laboratory
(LBNL) at the US Department of Energy has developed a benchmarking tool that
draws on these ways to save energy in cement in China (Galitsky et al. 2008), and
has conducted numerous workshops there on its use. The China Energy Group of
LBNL (Worrell, Galitsky and Price 2008) and the international science and technology enterprise Battelle (Soule, Logan and Stewart 2002) have undertaken detailed
empirical studies of these opportunities, such as shifting to blended cement and
closing vertical shaft kilns, for saving energy in China’s cement industry.
30 They include the Energy Research Institute of China’s National Development and Reform Commission (Galitsky et al. 2008); Sinoma International, the cement enterprise studied by Rock and Cui (2011) (interviews, December 2011); the China Building Materials
Academy (Cui et al. 2004); and the China Cement Association (interviews, December 2011).
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48
Michael T. Rock
Against the background of this widespread understanding in China about how
to save energy in the cement industry, what follows summarises how much CO2
was saved between 1985 and 2010. More details on each of these interventions can
be found in Rock and Cui (2011). Figure 6 identiies year-by-year savings in CO2
from the energy saving interventions listed above.
Three aspects of igure 6 are important. First, the largest single source of savings
in CO2 is the shift to blended cement – by 2010, 40% of cement produced in China
(745 million tonnes) was blended. This shift alone accounts for 574 million tonnes
of CO2 saved, or 65% of total CO2 savings. Roughly 20% of total savings achieved
between 1985 and 2010 (184 million tonnes) came from eficiency improvements in
vertical shaft kilns and rotary kilns, while 15% (137 million tonnes) came from the
closing of vertical shaft kilns and the switch to rotary kilns. So far, savings in CO2
from the use of alternative fuels or the co-generation of electricity have been very
small. Taken together, CO2 savings made in 2010 came to 905 million tonnes. As
a result of these efforts, the CO2 intensity of cement production fell from roughly
0.9 tonnes of CO2 per tonne of cement in 1985 to 0.6 tonnes of CO2 per tonne of
cement in 2008 (igure 5). While the scale effect of growth has swamped the technique effect (Copeland and Taylor 2003), it is clear that China has weakened the
link between cement production and CO2 emissions (igure 7), resulting in CO2
savings of 962 million tonnes in 2010 over business as usual. This is an enormous
sum and is 45 times as large as total CO2 emissions from cement in Indonesia.
And as Rock and Cui (2011) argue, China has several remaining and signiicant
opportunities to reduce CO2 emissions from cement. If adopted, they, along with
a looming peak in demand for cement, might just enable near-term CO2 emissions
to peak and then decline.
WHAT CAN INDONESIA LEARN FROM CHINA?
So what can Indonesia learn from China about saving CO2 in its energy-intensive
industries? Given the huge differences in technological starting points in these
industries, it is tempting to argue that Indonesia can learn little from China.
Furthermore, Indonesia may lack the institutional and political framework that
would allow it to take advantage of lessons learned from the stronger and more
centralised Chinese state. Nevertheless, there are several reasons for considering
what Indonesia can learn from China’s experience.
To begin with, differences in state capabilities between China and Indonesia
are almost assuredly overdrawn. By one measure of institutional quality – the
Political Risk Group’s International Country Risk Guide – the Indonesian bureaucracy is no worse than the Chinese.31 As Lipsey and Sjöholm (2011: 44) note,
China, Indonesia, Vietnam and the Philippines all share relatively high levels
of corruption, so there may not be much difference there either. By yet a third
measure – the World Bank’s ‘trading across borders’ variable, reported in its
31 This source rates a country’s
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
What can Indonesia learn from China's industrial
energy saving programs?
Michael T. Rock
To cite this article: Michael T. Rock (2012) What can Indonesia learn from China's industrial
energy saving programs?, Bulletin of Indonesian Economic Studies, 48:1, 33-55, DOI:
10.1080/00074918.2012.654483
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Date: 17 January 2016, At: 23:58
Bulletin of Indonesian Economic Studies, Vol. 48, No. 1, 2012: 33–55
‘Indonesia in Comparative Perspective’ Series
WHAT CAN INDONESIA LEARN FROM
CHINA’S INDUSTRIAL ENERGY SAVING PROGRAMS?
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:58 17 January 2016
Michael T. Rock*
Resources for the Future, Washington DC, and Bryn Mawr College, Bryn Mawr PA
Even though Indonesia’s CO2 emissions are dominated by deforestation while
China’s are dominated by industry, Indonesia has much to learn from China’s industrial energy saving programs. To begin with, it is only a matter of time before
Indonesia’s emissions from fossil fuels overtake those from deforestation. Given
the long technological lock-in effects of energy systems and industries, Indonesia
needs to think now about how it will tackle this problem. There are other reasons
for believing that Indonesia might learn something from China – the CO2 intensities
of GDP, of industry and of cement production have been rising in Indonesia, while
they are falling in China. China’s better intensity performance is due to policies that
Indonesia would do well to follow – adopting a technological catch-up industrial
development strategy; raising energy prices to scarcity values; liberalising domestic
markets and opening the economy to trade and investment; and mounting a massive energy saving program.
Keywords: energy policy, industrial policy, environment, technology
INTRODUCTION
Comparing China and India has become something of a growth industry. Comparing China and Indonesia is anything but.1 That said, an interesting essay in
this journal (Hofman, Zhao and Ishihara 2007) compares development strategies
and outcomes in these two countries. They ind broad similarities in reformist
development strategies, a common reliance on growth for political legitimacy,
and remarkably similar development outcomes (high growth; rapid declines in
the incidence of poverty; solid total factor productivity growth; low inlation; and
* [email protected]. I wish to thank Michael Toman of the Development Research
Group at the World Bank for his guidance and support for my China work. Financial support from the Knowledge for Change Program at the World Bank is gratefully acknowledged. The views and indings presented here should not be attributed to the World Bank,
its management or its member countries. I also wish to thank Resources for the Future for
supporting my China work via the Gilbert F. White Fellowship. Finally, I would like to
thank Chris Manning and Budy P. Resosudarmo for comments on earlier drafts.
1 An amazon.com search for ‘China and India’ turned up 15 books, while a library search
of journal articles on ‘China and India’ generated 224 references. Comparable searches for
‘China and Indonesia’ found three books and 15 journal articles (searches conducted on 4
May 2011).
ISSN 0007-4918 print/ISSN 1472-7234 online/12/010033-23
http://dx.doi.org/10.1080/00074918.2012.654483
© 2012 Indonesia Project ANU
34
Michael T. Rock
FIGURE 1 Energy Intensity of Real GDP
(kg of oil equivalent per $ of real GDP)
4
China
3
Indonesia
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2
1
0
1960
1970
1980
1990
2000
2010
Source: World Bank, World Development Indicators, .
substantial shifts in the structure of production following reform).2 Given these
indings, both countries might be well served by more detailed and less macro
comparisons. That is what is attempted in this paper.
But the focus of comparison here is in what many will think an odd place –
energy use and carbon dioxide (CO2 ) emissions. On its face such a comparison
appears foolhardy. Energy use in industry dominates CO2 emissions in China,
while deforestation and land cover change dominate CO2 emissions in Indonesia
(Fisher-Vanden et al. 2004; Resosudarmo et al. 2011). Given this monumental difference, some may conclude that Indonesia has little to learn from China. But,
as Resosudarmo et al. argue (2011: 148), it is only a matter of time before CO2
emissions from fossil fuels overtake those from deforestation. Given the potential
for technological lock-in associated with investments in the energy sector and in
industry, it behoves Indonesia to begin thinking now about how it might save
energy and reduce CO2 emissions in industry.
There is one other reason to consider what Indonesia can learn from China.
China has been much more successful than Indonesia in reducing the CO2 intensity of GDP and of industry, despite the fact that its energy mix is more dependent on coal – an energy source with a very high CO2 emissions factor.3 China has
experienced a rather remarkable decline in the energy intensity of its GDP, while
Indonesia has not (igure 1). At the start of China’s program of economic reform in
2 Of course they also ind important differences, including Indonesia’s low and stable income inequality and China’s rapidly rising inequality (Hofman, Zhao and Ishihara 2007:
174).
3 China depends on coal for about 80% of its energy, Indonesia for about 40% (World
Bank, World Development Indicators, ).
What can Indonesia learn from China’s industrial energy saving programs?
35
FIGURE 2 CO2 Intensity of Real GDP
(1961 = 100)
180
150
120
Indonesia
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90
China
60
30
0
1960
1970
1980
1990
2000
2010
2000
2010
Source: As for igure 1.
FIGURE 3 CO2 Intensity of Industry
(1971 = 100)
140
120
100
80
60
China
40
Indonesia
20
0
1960
1970
1980
1990
Sources: World Bank, World Development Indicators (see igure 1); IEA (International Energy Agency),
online data services, available at .
1978, energy use per dollar of real GDP was nearly four times as high in China as
in Indonesia, yet by 1999 there was virtually no difference in the energy intensity
of GDP in China and Indonesia. Even more surprisingly, the CO2 intensity of GDP
has been falling in China, though it has been rising in Indonesia (igure 2). While
one might suspect that the rise in the CO2 intensity of GDP in Indonesia is simply
a consequence of deforestation, igure 3 suggests that at least part of it is due to a
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36
Michael T. Rock
rise in the CO2 intensity of industry.4 Here again, the Chinese experience is quite
different from that of Indonesia.
What accounts for these differences? There appear to be at least three answers
to this question. To begin with, China started its reform period with unusually
high energy and CO2 intensities. This, no doubt, was a consequence of the heavy
industry and energy ineficiency focus of its socialist development strategy.
From this perspective, it may not be particularly surprising that China experienced rapid declines in energy and CO2 intensities following the onset of marketoriented reforms. Second, as will be demonstrated, better performance in China
appears also to be a consequence of a more open trade5 and investment regime;6
a more complete market liberalisation program;7 energy prices that are closer to
their scarcity values;8 and a concerted effort by the government of China to reduce
the energy intensity of GDP. Finally, China has a better technological catch-up
performance.9 Better catch-up policies mattered because they enabled industrial
enterprises in a wide range of sectors to upgrade their technological capabilities
substantially so they could more easily beneit from the environmental technique
effects associated with liberalisation (particularly the rise in energy prices), privatisation and the opening of the economy to trade and investment. This successful
policy package suggests that Indonesia may have much to learn from China.
What follows demonstrates how this policy package contributed in China
to rapid declines in the energy and CO 2 intensity of production in one energyintensive industry – cement. There are three reasons to focus on cement.
First, it is one of the largest industrial emitters of CO 2 in both countries (see
table 1 for Indonesia and Wang, Wang and Zhang 2005 for China). Figure 4
shows that cement accounts for an average of roughly 5% of CO2 emissions
in Indonesia and 6% in China over the last two decades. Second, the CO 2
intensity of cement is falling in China but appears 10 to be rising in Indonesia
4 The CO2 intensity of GDP includes CO2 emissions from land cover change, while the
CO2 intensity of industry and of cement does not.
5 Following Lipsey and Sjöholm (2011), I regressed country trade shares in 2005 on country land area and population, and compared predicted values with actual values. China’s
actual trade share is nearly 45% higher than expected, while Indonesia’s is only 9% higher
than expected.
6 Lipsey and Sjöholm (2011) argue that the stock of inward foreign direct investment (FDI)
in Indonesia is much lower (only 59%) than might be expected for a country with its characteristics, while China’s stock of inward FDI is roughly what can be expected.
7 Price controls, non-tariff barriers (NTBs) and import licensing and quotas have virtually
disappeared from China (Branstetter and Lardy 2008), while NTBs and price controls have
become more common in Indonesia (Basri and Hill 2008).
8 Petrol and electricity prices in particular are well below their scarcity values in Indonesia
(Basri and Hill 2008).
9 See the discussion of technological catch-up policies in China below. Lipsey and Sjöholm
(2011) argue that Indonesia has weak technological capabilities, while Hill (1995) argues
that Indonesia does not have a technology policy.
10 I say ‘appears’ simply because there are no reliable estimates of CO2 emissions from
cement in Indonesia. Constructing estimates by relying on very limited energy use data
from the central statistics agency (BPS) does not seem to help either – it suggests that the
What can Indonesia learn from China’s industrial energy saving programs?
37
TABLE 1 Greenhouse Gas Emissions (GHG) from Manufacturing in Indonesia a
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Rank Sector
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Cement
Steel rolling industry
Iron & steel basic industries
Weaving mills except gunny & other sacks
Wearing apparel made of textiles (garments)
Pulp
Preparation of textile ibre
Structural materials made of porcelain
Motor vehicle component & apparatus
Straight fertilisers
Crumb rubber
Toys
Finished textiles
Spinning mills
Cultural papers
Tire & inner tubes
Crude vegetable & animal cooking oil
Products of plastics for technical/industrial purposes
Basic chemicals not elsewhere classiied
Cooking oil made of palm oil
5-digit ISIC Estimated 2005
Code
GHG Emissions
(MMT of CO2e)
26411
27102
27101
17114
18101
21001
17111
26202
34300
21122
25123
36941
17122
17112
21012
25111
15141
25206
24119
15144
11.5
5.5
4.6
4.1
3.9
3.8
3.6
2.9
2.5
1.9
1.5
1.4
1.2
1.1
1.1
1.1
1.0
1.0
1.0
0.9
a ISIC = International Standard Industrial Classiication; MMT = million metric tons (million tonnes);
CO2e = carbon dioxide equivalent.
Source: Ministry of Finance and National Council on Climate Change (2009: 19), citing BPS (2005) and
AIRD (2009): ‘Estimates are based on surveyed energy use among medium and large irms (BPS 2005)
and Ministry of Industry natural gas estimates for major users (AIRD 2009)’.
CO2 intensity of cement was virtually zero in 2004! The estimate in igure 5 is based on
the following calculations. The International Energy Agency (IEA) online data services at
report CO2 emissions from fuel burning
for the non-metallic minerals sector in Indonesia. An IEA report (IEA 2007: 139) argues
that 70–80% of CO2 emissions in this sector are from cement. The German aid agency GTZ
suggests that CO2 emissions from the non-metallic minerals sector on Java in 2005 were
overwhelmingly (more than 90%) dominated by cement (GTZ 2009: 49). To err on the side
of under-estimation, I assumed that cement accounted for 50% of the CO2 emissions from
the non-metallic minerals sector. Since IEA data do not take account of CO2 emissions
from the calcination of limestone in kilns – the process that produces clinker, the molten
marble-sized chunks that are cooled and ground to produce cement (Plunkett, Morgan
and Pomeroy 1997: 77) – I assumed 0.5 tonnes of CO2 per tonne of clinker from calcination
of limestone and a clinker-to-cement ratio of 80%. This ratio is well below the average for
the three cement enterprises operating on Java in 2005 (90%) and what Holcim and Indocement achieved on Java in 2003 (95.8%) (GTZ 2009: 49).
38
Michael T. Rock
FIGURE 4 Share of Cement in Total CO2 Emissions
(%)
10
8
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6
4
China
2
Indonesia
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Sources: World Bank (2011); IEA (International Energy Agency), Online data services, available at
; author’s calculations.
(figure 5). Given that Indonesia’s large-scale cement industry uses state-ofthe-art OECD production technologies and is dominated by OECD cement
multinationals,11 the latter finding, by itself, is surprising. Finally, opportunities to save energy and reduce CO2 emissions in particular industries are
inextricably linked to the underlying technological regimes in those industries. While the focus is on cement, similar stories can be told for China about
iron and steel (Rock, Kejun and He 2011); aluminium (Rock and Wang 2011);
and pulp and paper (Rock and Song 2011). Said another way, there appears
to be a successful pattern of policies and institutions affecting energy use
and CO2 emissions across a number of industries in China.
A TALE OF TWO INDUSTRIES
The development paths of China’s and Indonesia’s cement industries could not
be more different. The story of China’s cement industry following the onset of
economic reform is one of technological modernisation (Rock and Cui 2011) that
facilitated rapid growth in the industry,12 and equally rapid declines in the energy
11 Of the four biggest cement producers in Indonesia in 2006, Cemex owned 24.9% of
Gresik; Lafarge (Cementia) owned 88% of Andalas Indonesia; Holcim owned 77% of Cibinong; and Heidelberg Cement owned 65% of Indocement (Timuryono 2007). The latter
share declined to 51% following Heidelberg’s sale of some of Indocement’s shares in 2009
(HeidelbergCement 2011: 170). Efforts to privatise Indonesian cement producers began soon
after the Asian inancial crisis of 1997–98 (Bird 2004: 100; Prasetiantono 2004: 148), and Andalas Indonesia, Cibinong and Indocement continue to have majority foreign ownership.
12 Cement production in China rose from 146 million tonnes in 1985 to 1.86 billion tonnes
in 2010 (Rock and Cui 2011: 62)
What can Indonesia learn from China’s industrial energy saving programs?
39
FIGURE 5 CO2 Intensity of Cement
(tonnes of CO2 per tonne of cement)
1.0
0.8
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0.6
0.4
China
Indonesia
0.2
0.0
1985
1990
1995
2000
2005
2010
Sources: Cement production data for Indonesia: US Geological Survey, ‘Minerals Information’ website,
accessed 1 November 2011 at ;
energy use data for Indonesia: see footnote 10. All data for China are from Rock and Cui (2011).
and CO2 intensity of cement production. The story of Indonesia’s cement industry, especially after the New Order came to power, also revolves around rapid
growth,13 but there the primary concern has been in curbing quasi-monopoly
power (Plunkett, Morgan and Pomeroy 1997). On the eve of China’s economic
reforms, its cement industry was tiny, energy intensive, technologically backward, and conducted in small-scale, geographically dispersed enterprises. In
New Order Indonesia, a domestic cement industry was fostered by import substitution policies and subsequently led by a small number of relatively large stateowned and private sector irms producing cement with modern rotary kilns.
While China used an array of industrial and technology policies to restructure its
cement industry completely, Indonesia struggled to ind a successful regulatory
strategy that limited the market power of the country’s protected cement irms.
While China enticed its cement enterprises to upgrade technologically, there is
no evidence that Indonesia was concerned with the technological capabilities of
its cement producers. While China encouraged (by increasing energy prices) and
forced (through mandatory energy savings programs) its cement enterprises to
save substantial amounts of energy (and CO2) emissions, Indonesia talked about
the need to do so, but did little. What follows describes the trajectory of each
country’s cement industry and the policies and institutions that inluenced those
trajectories.
13 Cement production in Indonesia rose from 5 million tonnes in 1980 to 22 million tonnes
in 1994 (Plunkett, Morgan and Pomeroy 1997: 79) and 42 million tonnes in 2010 (US Geological Survey, ‘Minerals Information’ website, accessed 1 November 2011 at ).
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Michael T. Rock
The history of cement in Indonesia
The history of Indonesia’s cement industry is intimately bound up with the broader
evolution of Indonesia’s economic and industrial development. In the early part of
the 20th century, the Dutch imposed tariffs on Japanese imports, spawning a small
boom in import substitution – including the building of Indonesia’s irst modern cement plant, the NV Nederlandsch-Indische Portland Cement Maatschappij
in Padang, with Dutch capital (Robison 1986: 9). Two other cement companies
emerged between independence and the collapse of the Soekarno government in
the mid-1960s.14 After Soeharto’s New Order government replaced the Soekarno
regime, industrial policies were quite bifurcated until the mid-1980s, when Indonesia inally began to deregulate its economy and open it to trade and investment.
In consumer goods, New Order industrial policy focused on attracting foreign
direct investment (Hill 1986), but in industries that were resource based, skill
based (autos) and capital intensive (iron and steel), policy was quite interventionist. Because of this, state control of banks and the banking system, including the administrative allocation of highly subsidised credit, lasted into the 1980s
(MacIntyre 1993). State-owned industries in cement,15 petrochemicals and steel
were hallmarks of the ‘industrial deepening’ policies of the 1970s and of the hightechnology policies that followed (McKendrick 1992; Auty 1990). State allocation
of lucrative import and commodity distribution licences, including in cement,
was an essential part of the New Order’s relationship with the Sino-Indonesian
business community (World Bank 1989; Robison 1986: 302).16 Extensive regulation of both domestic and foreign investment lasted into the 1990s (World Bank
1989: 70).
When it came to competition, the New Order government preferred monopolistic structures, particularly in resource-based industries. A state company held a
monopoly on oil and gas development and distribution and a state logistics company controlled the distribution of basic commodities (Bresnan 1993: 125–9, 164–
93). One well-known Soeharto ‘crony’ capitalist held a monopoly on lour milling
and trade in cloves (Elson 2001: 252). Another controlled much of the logging and
plywood industry (Barr 1998). In cement, Indonesia had a three-irm concentration ratio of 92% in 1995; one irm, PT Indocement, owned by a Soeharto crony,
controlled 40% of capacity (Plunkett, Morgan and Pomeroy 1997: 82). The cement
industry was also heavily protected from foreign competition.17
Given this policy thrust, it is not surprising that the cement industry, which
was considered strategic by the New Order government, was heavily regulated
(Maarif 2001: 17–21; Plunkett, Morgan and Pomeroy 1997). For much of the New
Order period, access to the industry was restricted by a ‘Negative List for Investment’. The government routinely controlled the price of cement in every regional
14 PT Semen Gresik was built by the government in Gresik in East Java in 1957. In 1960, PT
Semen Tonasa was established in South Sulawesi. (I wish to thank an anonymous reviewer
for this information.)
15 By 1974, state-owned enterprises controlled 75% of cement production (Robison 1986:
144).
16 Plunkett, Morgan and Pomeroy (1997) describe the regulation of the cement industry
from 1974.
17 The effective rate of protection for cement was 138% in 1987 (Maarif 2001: 17).
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What can Indonesia learn from China’s industrial energy saving programs?
41
market.18 It divided the market by allocating cement deliveries by each producer
to each regional market and by appointing local distributors and retailers. It also
allocated the right to import cement (Plunkett, Morgan and Pomeroy 1997: 87).
Many of these actions took place or were reinforced in monthly meetings between
the Indonesian Cement Association and government regulators. While the ostensible reason for regulation was to ensure the availability of ample amounts of
cement at reasonable prices in each regional market, in fact the government acted
as an enforcer for the industry association’s cement cartel.
As Indonesia began the long and arduous process of deregulating industry and
opening it to trade and investment in the late 1980s, the cement industry too was
progressively deregulated (Plunkett, Morgan and Pomeroy 1997: 88; Maarif 2001:
17–20). In 1987, rules governing the export and import of cement were simpliied.
In 1990, all restrictions on imports were removed. In 1993 restrictions on entry
were eliminated. By 1995, the effective rate of protection for cement had dropped
to –12%. Price controls were lifted in 1997 (though they were later re-instated; see
Basri and Hill 2008: 1,402). Following the East Asian inancial crisis in 1997–98,
OECD cement multinationals bought controlling shares in Indonesian cement
companies at ire-sale prices (see footnote 11).
Despite these moves towards deregulation, the industry remains highly concentrated. By the early 2000s, the four big producers controlled by OECD cement
multinationals accounted for nearly 94% of the domestic market, while seven
companies controlled 100% of production (Prasetiantono 2004: 147). This in part
relects the fact that the Indonesian market is small by large developed and developing country (China and India) standards, despite the rapid rise in cement production in the two decades before the Asian inancial crisis. It also relects the
importance of economies of scale in the cement industry. However, there is serious concern that this deregulated industry continues to act as a cartel that limits
competition, divides up the market and controls prices.19
To make matters worse, there is little evidence that the Indonesian government
assisted irms in upgrading their technological capabilities in the 1980s and 1990s.
By the mid-1990s, Indonesia lagged behind its East Asian neighbours on most
technology indicators. Its spending on research and development (R&D) was very
low (0.2% of GDP); it had very few patent applications (12 between 1981 and 1990);
very few scientists and engineers were engaged in R&D (183 per million of the
population); enrolments in tertiary education were low (10% of the relevant age
group in 1991); and few young adults had science or engineering degrees (0.4% of
22–23-year-olds) (Hill 1995: 92). Indonesia’s restrictive policies inhibited the inlow
of new technology, and private irms under-invested in training and R&D (Hill
1995: 103–7).
Things have not improved much. R&D spending as a share of GDP was
even lower in 2005 than it was in the 1990s (only 0.05% of GDP); meanwhile US
majority-owned manufacturing afiliates operating in Indonesia were spending
only 0.06% of employee compensation, or $80 per employee, on R&D in 2004
18 This began in 1974, when the government set a ceiling price on bagged cement (Plunkett, Morgan and Pomeroy 1997: 86).
19 ‘KPPU [the Business Competition Supervisory Commission] alleges cartel in cement
industry’, Jakarta Post, 25/1/2010.
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Michael T. Rock
(Lipsey and Sjöholm 2011).20 The comparable igures for US irms operating in
China were 14.9% of employee compensation and $1,492 per employee. In addition, Indonesia is falling behind in the attraction of inward foreign direct investment. Because of this, it is not particularly surprising that total factor productivity
growth has been low in Indonesia, although it has tended to be higher during
periods of economic liberalisation (Thee 2006: 342). Nor is it surprising that total
factor productivity growth in cement has been uneven.21
Given this coniguration, how have Indonesia and its cement industry
responded to growing pressures to save energy and reduce CO2 emissions? There
is substantial evidence to suggest that both the government and the industry are
very aware of the pressing need to save energy in cement production, and of
the options and costs associated with doing so. The Indonesian government’s
climate change sectoral roadmap (Republic of Indonesia 2009: 59) and an internal Ministry of Finance report (Ministry of Finance and National Council on Climate Change 2009) identify cement as the most energy-intensive manufacturing
industry and (as table 1 conirms) the one with the highest level of energy and
CO2 emissions; and the roadmap identiies the abatement reduction potential in
cement (Republic of Indonesia 2009: 62–4). Both PT Indocement (Hoidalen 2004)
and the Indonesian Cement Association (Timuryono 2007) have participated in
seminars in Indonesia that identify the opportunities for saving energy and CO2
in Indonesia’s cement industry.
Both the government and the cement industry are also keenly aware of the
industry’s heavy reliance on coal as the primary source of energy. In 2005 over
8 million of the industry’s almost 12 million tonnes of CO2 emissions came from
coal (Ministry of Finance and National Council on Climate Change 2009: 20, igure 2.3). More recently, the government has developed an abatement cost curve
for the cement sector through 2030 that identiies three win–win cost-effective
interventions: shifting to blended cements;22 using alternative fuels; and recovering heat to co-generate electricity (Dewan Nasional Perubahan Iklim 2010: 34).
But so far, there is little evidence to suggest that all this activity has generated
concrete programs in either government or the private sector to save energy in
cement. Nor is there much evidence, so far, of actual energy and CO2 savings.23
Indonesia’s experience stands in marked contrast to that of China.
20 Lipsey and Sjöholm (2011) provide comparative data to illustrate how Indonesia has
lagged behind neighbouring countries, including China, on various technological indicators.
21 Total factor productivity growth in Indonesia’s non-metallic minerals industry, which is
dominated by cement, varied from 10.3% per year between 1976 and 1980 to a low of –4.1%
per year between 1981 and 1983 (Vial 2006: 367).
22 About 50% of CO2 emissions in cement production come from clinker making (Galitsky
and Price 2007), so reducing clinker content by blending in other materials can signiicantly
reduce the CO2 intensity of cement production.
23 That said, GTZ (2009: 49) shows that blended cement accounted for 10% of cement produced in three cement enterprises operating on Java in 2005, while roughly 4% of cement
production at Holcim and Indocement in 2005 was blended. While this level of blended cement will save on energy use and CO2 emissions from calcination, it is negligible compared
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What can Indonesia learn from China’s industrial energy saving programs?
43
The history of cement in China
On the eve of its economic reforms, China’s cement industry was tiny; its activities were small in scale, geographically dispersed, very energy intensive and technologically backward (Rock and Cui 2011). This coniguration was a consequence
of three distinct but inter-related polices adopted between 1961 and 1966: administrative decentralisation of central planning (Wu 2005: 44; Lardy 1978: 137–44);
an ‘agriculture irst’ development strategy (Prybyla 1970: 366–7); and government
support for the ‘ive small producer goods industries’, including cement, that
served agriculture (Whiting 2001: 50; Wong 1979: 10–12). Administrative decentralisation was China’s answer to the problems caused by a Soviet-style planning framework that was unsuitable for Chinese conditions. The ‘agriculture irst’
development strategy was aimed at increasing grain output, while the ‘ive small
industries serving agriculture’ program was intended to increase the supply of
modern inputs to agriculture. This development strategy lasted until 1978.
Between 1961 and 1978 this combination of policies fostered the emergence of
a small-scale technological regime in cement, using antiquated vertical shaft kiln
technology.24 China started building small-scale cement plants in 1958; by 1965, it
had 200 of them, accounting for 30% of cement production. The number of smallscale plants rose to 1,800 in 1971 and 2,800 in 1975. By 1975, 80% of China’s more
than 2,100 counties had at least one small-scale cement plant, and small-scale
cement plants accounted for 61% of production. Market liberalisation of the rural
economy after 1979 strengthened this technological regime. By 2002, 3,657 smallscale cement irms (Ligthart 2003) accounted for 72% of production (Cui 2009).
But by the early 1990s, as the returns to China’s decentralised and small-scale
industrial development strategy began to slow, the government altered direction
to foster the development of a socialist market economy (Yusef, Nabeshima and
Perkins 2006: 70). Initial changes focused on deregulating the industrial economy
and opening it to private enterprise. In 2003 the central government began a massive restructuring program that included efforts to foster a set of ‘national champions’ in a wide range of key industries, including cement.
At the same time, the government decided to revitalise state-owned enterprises
by privatising a very large number of township and village enterprises (TVEs) and
adopting an industrial development strategy based on ‘grasping the large, letting
go of the small’ (Sutherland 2003: 10). This strategy was based on an assumption
that the government could use large state-owned industries to create East Asian
style conglomerates that could compete with OECD multinationals. Following
the targeting of 57 state-owned industrial groups for promotion, including several in cement (Sutherland 2003: 46), the core enterprise in each group was (1)
granted greater control over state assets in the group; (2) encouraged to develop
an internal inance company to mobilise capital; and (3) permitted to annex state
research institutes to enhance the group’s R&D capabilities.
The aims of the ‘grasping the large’ restructuring program in cement were to
close small vertical shaft kiln cement plants; to shift to larger production lines
with the level achieved in China. There 40% of cement is blended, saving nearly 600 million
tonnes of CO2 in 2010 (see igure 6 below).
24 Detailed descriptions of this technology are provided in Sigurdson (1977: 152–66) and
Perkins (1977: 177–93).
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Michael T. Rock
using state-of-the-art rotary kilns; to create a small number of very large irms
that could compete with the OECD cement conglomerates (Ligthart 2003); and
to develop an export-oriented indigenous engineering and capital goods and services industry in cement (Rock and Cui 2011). To achieve these goals, the government adopted a set of speciic quantitative restructuring objectives. By 2010 China
expected to have reduced the number of cement irms by 40%. When combined
with new investment, large rotary kilns were expected to account for 70% of output by 2010, and by the same year the government aimed to increase the share of
output by the top 10 irms to 35% (roughly 350 million tonnes) (Price and Galitsky 2007). This restructuring program has achieved substantial progress. Large
new rotary kilns increased their share of cement production from 9.6% in 2000 to
34.2% in 2005 (Kang 2007). By 2010, the share of ‘large’ rotary kiln-based plants in
cement production had exceeded the target, reaching 80% (Rock and Cui 2011). By
2005, the top 10 irms in the industry had increased their share of production from
4% in 2000 to 13.7% (still some way from the 35% target for 2010), while the top 25
publicly listed companies in 2005 accounted for 25% of production (Kang 2007).
Two other aspects of China’s industrial and technology policies affected the
cement industry. As part of the 15th ive-year plan (2001–05), China decided that it
needed to shift emphasis from capital accumulation to technical change (Gu et al.
2009: 372). The government set out to increase technological spillovers from FDI
and to become an innovation economy. With respect to the latter, it reformed its
national innovation system by radically increasing R&D expenditures as a share
of GDP,25 funding a number of new science and technology (S&T) programs,26
and converting a large number of government research institutes into marketdriven non-government S&T enterprises.27
As a result, there has been a signiicant shift in the use of S&T resources, away
from government research institutes and towards enterprises (Guan, Yam and
Mok 2005: 340). New rules governing S&T spin-off enterprises have spawned a
signiicant number of very successful non-state S&T enterprises such as Lenovo
and Stone in information technology (Lu 2003) and Sinoma International in
cement (Rock and Cui 2011). And the absorption of engineers from government
research institutes by large modern shareholding enterprises such as Capital Steel
and Baosteel has facilitated productivity growth within these enterprises and the
export of iron and steel making capital equipment and know-how (Brandt, Rawski and Sutton 2008: 603; Rock, Kejun and He 2011).
The government also experimented with a range of policies to increase technological spillover from FDI. In the early 1980s, during the early stages of the opening of the economy, it supported a ‘make it ourselves’ approach to technological
upgrading. When that strategy failed, as it did in cement (Rock and Cui 2011), the
25 R&D expenditures as a share of GDP rose from 0.6% in 1994 to 1.4% in 2006 (Hu and
Jefferson 2008: 288).
26 These include the 863 Program and the 973 Program, which focus on basic research
and frontier technologies; the Torch Program, which supports high-tech industries; and
the Spark Program, which is aimed at developing S&T to revitalise the rural economy (Hu
and Jefferson 2008: 294).
27 Some government research institutes closed, others merged, while still others were absorbed by enterprises (Hu and Jefferson 2008: 293).
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What can Indonesia learn from China’s industrial energy saving programs?
45
government used its market power from the mid-1980s to the mid-1990s to trade
access to its market for technology transfer. That strategy bogged down in the
mid-1990s, leading the government to encourage domestic enterprises to make
investments in research and development. And it linked the import of foreign
technologies and complete (or ‘turnkey’) manufacturing plants with the training
of domestic engineers.
There is substantial evidence that these strategies worked. A study of large and
medium cement enterprises in China between 2001 and 2004, undertaken using
a capital, labour, energy and materials (KLEM) framework, shows that enterprise
investments in R&D have a signiicant impact on a cement enterprise’s energy
intensity – that is, an increase in R&D expenditures as a share of an enterprise’s
sales reduces the energy intensity of its production (Fisher-Vanden et al. 2011). A
recent case study shows that investments in technological capabilities enabled a
large Chinese cement industry research and design enterprise to capture a signiicant share of the domestic and international markets for new cement plants (Rock
and Cui 2011).
Finally, the government has been pushing industrial enterprises to save energy
(Price, Wang and Yun 2008). Beginning in the early 1980s, it did so simply by
building energy eficiency into its command economy, establishing energy intensity standards for a large number of industrial sub-sectors and enterprises, and
limiting the supply of energy to enterprises based on those standards (Sinton,
Levine and Wang 1998: 818–25). This ‘energy quota’ management system was
reinforced by signiicant investments in energy conservation; by the creation of
a large number of energy conservation centres that provided energy eficiency
services to enterprises; and by the development of a credible energy statistics
collection and reporting system that enabled the government to track enterprise
and industry performance relative to established standards. This package of policies and institutions helped reduce the energy intensity of GDP by 5.2% per year
between 1980 and 2002 (Zhou, Levine and Price 2010: 1), while the energy intensity of cement fell by 17% between 1985 and 2002 (Rock and Cui 2011).
As the economy shifted increasingly from plan to market, and government reorganisation emphasised regulatory rather than planning functions in the early
2000s (Naughton 2003), this set of policies and institutions became less useful
and they simply withered away. At the same time, the energy intensity of GDP
rose by 3.8% per year between 2002 and 2005 (Zhou, Levine and Price 2010: 1).
Startled by this setback in 2005, the government developed a new set of policies to
reduce energy intensity.28 It eliminated energy subsidies to industrial enterprises
and removed export rebates for energy-intensive products, including cement. It
set a new target of improving the energy intensity of GDP by 20% between 2006
and 2010. To achieve this goal, the government redoubled efforts to close enterprises that used backward technologies, including vertical shaft cement kilns. In
2006, it created a program for improving energy eficiency in the country’s top
1,000 industrial enterprises, including those producing cement (Price, Wang and
Yun 2008). It revitalised the country’s energy conservation centres and rebuilt the
statistical system for tracking performance at enterprises and in local governments. It linked the new energy intensity standards system to the cadre personnel
28 This paragraph draws on Zhou, Levine and Price (2010).
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Michael T. Rock
evaluation system. Available evidence suggests that the government met its overall energy intensity improvement goal for 2010 (Zhou, Levine and Price 2010).
How has this set of policies and institutions – which emphasise technological
upgrading; openness to trade, investment and new ideas; and energy eficiency –
affected energy intensity in China’s cement industry? There are several answers
to this question. With respect to technological upgrading, the inding of FisherVanden et al. (2011) that cement enterprise investments in R&D have a statistically
signiicant effect on energy eficiency has been illustrated at the enterprise level. A
study of technological upgrading in one medium-sized cement enterprise found
that its investments in long-run technological learning enabled it to reduce energy
intensity by 30% between 1980 and 2009 (Rock and Cui 2011). These investments
in technological learning also enabled the irm to maintain a substantial energy
eficiency advantage over the rest of the vertical shaft kiln industry. Openness to
new ideas from the international community also helped this irm to save energy.
Fortunately, this experience is not an isolated one. Since 1979, China’s government has made numerous investments in technological upgrading and energy
saving in vertical shaft cement kilns. As a result, comprehensive energy consumption in these kilns declined by nearly 25% between 1985 and 2010 (Rock and Cui
2011: 64). Meanwhile the government was phasing out vertical shaft kiln cement
plants and replacing them with large, modern rotary kiln cement plants. Because
the import costs of this shift were prohibitive, government funds supported the
development of an indigenous technological capability to design, make, install,
commission and service a Chinese version of a large modern rotary kiln. The government turned to three of its national cement industry design and research institutes to develop these capabilities.29
During the 1980s and early 1990s, one of these institutes attempted to design,
manufacture and operate a small rotary kiln (with a capacity of 700 tonnes per
day) without any external assistance. But this effort failed. From the mid-1990s,
the Ministry of Building Materials imported four turnkey rotary kiln cement production lines from Europe and Japan. As part of the acquisition, the government
required the foreign engineers to teach Chinese cement engineers how to design
new cement plants; manufacture cement-making equipment; and install, commission and service new cement production lines. A detailed description of how this
happened can be found in Rock and Cui (2011). Sufice it to say that, as a consequence of this one experience with openness to trade and investment, the research
institutes mastered each of these tasks and formed a public–private cement engineering enterprise, Sinoma International, which went on to capture a large share
of the Chinese and international markets for new cement plants.
China’s cement enterprises also saved energy in response to increases in its price,
particularly the price of coal. The study by Fisher-Vanden et al. (2011) demonstrates
that rising energy prices encouraged signiicant energy savings. There is strong evidence too to suggest that the government’s mandatory energy saving programs
made a difference. During the period of the irst program (1980–2002), energy intensity in China’s cement industry fell by 1.7% per year. Between 2006 and 2010, during the second program, energy intensity fell by 6.3% per year (Rock and Cui 2011).
29 One of these was in Tianjin, one was in Nanjing and the other was in Chengdu.
What can Indonesia learn from China’s industrial energy saving programs?
47
FIGURE 6 CO2 Saved in China’s Cement Industry a
(million tonnes)
600
Blended cement
500
Kiln efficiency improvements
400
Replace VSKs with rotary kilns
Co-generation of electricity
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300
Alternative (waste) fuels
200
100
0
1986
1990
1994
1998
2002
2006
2010
a VSK = vertical shaft kiln.
Source: Rock and Cui (2011).
In sum, the available evidence suggests that investments in technological
learning and openness to trade and investment (and new ideas), alongside pressures to save energy, helped cement enterprises in China to reduce their energy
intensity. But what precisely have cement enterprises done to save energy and
how much energy and CO2 have been saved? A large literature suggests that
cement enterprises can save energy through (1) shifting to blended cement (to
reduce energy-intensive clinker production); (2) improving the fuel eficiency of
kilns by retro-itting existing vertical shaft and rotary kilns; (3) replacing vertical shaft kilns with larger and more eficient rotary kilns; (4) recovering heat in
the production process to generate electricity; and (5) burning alternative (waste)
fuels in kilns (Galitsky and Price 2007; Soule, Logan and Stewart 2002; Worrell,
Galitsky and Price 2008; Hohne et al. 2008).
These options for saving energy are well understood by the relevant institutions
in China.30 The China Energy Group of the Lawrence Berkeley National Laboratory
(LBNL) at the US Department of Energy has developed a benchmarking tool that
draws on these ways to save energy in cement in China (Galitsky et al. 2008), and
has conducted numerous workshops there on its use. The China Energy Group of
LBNL (Worrell, Galitsky and Price 2008) and the international science and technology enterprise Battelle (Soule, Logan and Stewart 2002) have undertaken detailed
empirical studies of these opportunities, such as shifting to blended cement and
closing vertical shaft kilns, for saving energy in China’s cement industry.
30 They include the Energy Research Institute of China’s National Development and Reform Commission (Galitsky et al. 2008); Sinoma International, the cement enterprise studied by Rock and Cui (2011) (interviews, December 2011); the China Building Materials
Academy (Cui et al. 2004); and the China Cement Association (interviews, December 2011).
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Michael T. Rock
Against the background of this widespread understanding in China about how
to save energy in the cement industry, what follows summarises how much CO2
was saved between 1985 and 2010. More details on each of these interventions can
be found in Rock and Cui (2011). Figure 6 identiies year-by-year savings in CO2
from the energy saving interventions listed above.
Three aspects of igure 6 are important. First, the largest single source of savings
in CO2 is the shift to blended cement – by 2010, 40% of cement produced in China
(745 million tonnes) was blended. This shift alone accounts for 574 million tonnes
of CO2 saved, or 65% of total CO2 savings. Roughly 20% of total savings achieved
between 1985 and 2010 (184 million tonnes) came from eficiency improvements in
vertical shaft kilns and rotary kilns, while 15% (137 million tonnes) came from the
closing of vertical shaft kilns and the switch to rotary kilns. So far, savings in CO2
from the use of alternative fuels or the co-generation of electricity have been very
small. Taken together, CO2 savings made in 2010 came to 905 million tonnes. As
a result of these efforts, the CO2 intensity of cement production fell from roughly
0.9 tonnes of CO2 per tonne of cement in 1985 to 0.6 tonnes of CO2 per tonne of
cement in 2008 (igure 5). While the scale effect of growth has swamped the technique effect (Copeland and Taylor 2003), it is clear that China has weakened the
link between cement production and CO2 emissions (igure 7), resulting in CO2
savings of 962 million tonnes in 2010 over business as usual. This is an enormous
sum and is 45 times as large as total CO2 emissions from cement in Indonesia.
And as Rock and Cui (2011) argue, China has several remaining and signiicant
opportunities to reduce CO2 emissions from cement. If adopted, they, along with
a looming peak in demand for cement, might just enable near-term CO2 emissions
to peak and then decline.
WHAT CAN INDONESIA LEARN FROM CHINA?
So what can Indonesia learn from China about saving CO2 in its energy-intensive
industries? Given the huge differences in technological starting points in these
industries, it is tempting to argue that Indonesia can learn little from China.
Furthermore, Indonesia may lack the institutional and political framework that
would allow it to take advantage of lessons learned from the stronger and more
centralised Chinese state. Nevertheless, there are several reasons for considering
what Indonesia can learn from China’s experience.
To begin with, differences in state capabilities between China and Indonesia
are almost assuredly overdrawn. By one measure of institutional quality – the
Political Risk Group’s International Country Risk Guide – the Indonesian bureaucracy is no worse than the Chinese.31 As Lipsey and Sjöholm (2011: 44) note,
China, Indonesia, Vietnam and the Philippines all share relatively high levels
of corruption, so there may not be much difference there either. By yet a third
measure – the World Bank’s ‘trading across borders’ variable, reported in its
31 This source rates a country’s