Decoupling China’s carbon emissions increases from economic growth from 1980 to 1997

Z.X. Zhang r Energy Economics 22 2000 587]614 590 Fig. 1. CO emissions in China and the United States, 1990]2020. 2 global CO emissions, although none of these carbon savings have resulted from 2 conscious domestic climate mitigation policies. Next, we analyse what the economic effects would be if China’s carbon emissions in 2010 were cut by 20 and 30, respectively, relative to the baseline. Then, we envision some plausible strategies that China might take at the international climate change negotiations subsequent to Buenos Aires. Finally, some concluding remarks are drawn.

2. Decoupling China’s carbon emissions increases from economic growth from 1980 to 1997

With more than 1.2 billion people, China is home to approximately 21.5 of the Ž . world’s population see Table 1 and has a large and rapidly growing economy, making the country an important player on the world stage. Since launching its open-door policy and economic reform in late 1978, China has experienced Ž . spectacular economic growth, with its gross domestic product GDP growing at the average annual rate of approximately 10 over the period 1978]1997. Along with Z.X. Zhang r Energy Economics 22 2000 587]614 591 Table 2 a CO emission coefficients for China 2 Fuels tCrtce Coal 0.651 Oil 0.543 Natural gas 0.404 Hydropower, nuclear power and renewables a Ž . Source: Energy Research Institute 1991 . the rapid economic development, energy consumption rose from 571.4 million tons Ž . of coal equivalent Mtce in 1978 to 1440.0 Mtce in 1997. Currently, China leads the world in both production and consumption of coal, and coal has accounted for approximately 75 of the total energy consumption over the past years. This share has remained stable after having increased from 70 in 1976, indicating that coal has fuelled much of China’s economic growth over the past two decades. Although China had surpassed Russia to become the world’s second largest energy producer and user in 1993, China’s current per capita energy consumption of 1.17 tons of Ž . Ž . coal equivalent tce see Table 3 is approximately half the world’s average, or only approximately one-twelfth of that of the US. Accompanying the growth in fossil fuel use, China’s CO emissions have grown 2 rapidly. The corresponding CO emissions from fossil fuels in China over the 2 period 1980]1997 have been calculated based on fossil fuel consumption and by using the CO emission coefficients given in Table 2 that are measured in tons of 2 Ž . carbon per ton of coal equivalent tCrtce and are generally considered suitable for China. As shown in Table 3, the total CO emissions in China rose from 358.60 2 MtC in 1980 to 847.25 MtC in 1997, with an average annual growth rate of 5.2. This ranks China as the world’s second largest CO emitter only behind the US. 2 Ž . But on a per capita basis, China’s CO emissions of 0.69 tons of carbon tC in 2 Ž . 1997 see Table 3 were very low, only approximately half the world average. The breakdown of CO emissions by fuel is shown in Fig. 2. Because of the 2 coal-dominant structure of Chinese energy consumption, it is not surprising that coal predominates, accounting for 81.3 of the total emissions in 1997. This share has remained almost unchanged over the past two decades. Based on the relevant time-series data in Table 3, we calculate the historical contributions of inter-fuel switching, energy conservation, economic growth, and population expansion to CO emissions growth over the period 1980]1997, as 2 shown in Table 4. Given that China has been the most rapidly expanding economy over the past 17 years, it is not surprising that economic growth measured in per capita GDP was overwhelming. This factor alone resulted in an increase of 799.13 MtC. During the corresponding period, through its strict family planning pro- grammes, China experienced a very low rate of population growth in comparison with other countries at China’s income level, which in turn contributed to a smaller Z.X. Zhang r Energy Economics 22 2000 587 ] 614 592 Table 3 a Determining factors for CO emissions in China 2 b e Year POP C GDP TEC FEC GDPrPOP TECr FECr CrFEC TECrPOP CrPOP CrGDP c d Ž . Ž . Ž . Ž . Ž . Ž . Ž . Ž . million MtC Mtce Mtce US GDP TEC tCrtce tce tC 1980 987.05 358.60 3011.87 602.75 578.70 305 2.001 0.960 0.620 0.611 0.363 1.191 1981 1000.72 352.63 3170.25 594.47 567.66 317 1.875 0.955 0.621 0.594 0.352 1.112 1982 1016.54 367.82 3455.86 620.67 590.51 340 1.796 0.951 0.623 0.611 0.362 1.064 1983 1030.08 390.39 3832.34 660.40 625.66 372 1.723 0.947 0.624 0.641 0.379 1.019 1984 1043.57 421.41 4413.94 709.04 674.23 423 1.606 0.951 0.625 0.679 0.404 0.955 1985 1058.51 456.58 5008.53 766.82 729.63 473 1.531 0.952 0.626 0.724 0.431 0.912 1986 1075.07 482.01 5452.52 808.50 770.42 507 1.483 0.953 0.626 0.752 0.448 0.884 1987 1093.00 517.32 6083.45 866.32 826.12 557 1.424 0.954 0.626 0.793 0.473 0.850 1988 1110.26 554.98 6768.91 929.97 886.08 610 1.374 0.953 0.626 0.838 0.500 0.820 1989 1127.04 577.37 7044.13 969.34 921.94 625 1.376 0.951 0.626 0.860 0.512 0.820 1990 1143.33 586.87 7314.16 987.03 936.40 640 1.349 0.949 0.627 0.863 0.513 0.802 1991 1158.23 618.90 7986.64 1037.83 988.01 690 1.299 0.952 0.626 0.896 0.534 0.775 1992 1171.71 650.12 9123.88 1091.70 1038.21 779 1.197 0.951 0.626 0.932 0.555 0.713 1993 1185.17 687.61 10354.59 1159.93 1099.61 874 1.120 0.948 0.625 0.979 0.580 0.664 1994 1198.50 724.65 11665.79 1227.37 1157.41 973 1.052 0.943 0.626 1.024 0.605 0.621 1995 1211.21 771.24 12891.31 1311.76 1231.74 1064 1.018 0.939 0.626 1.083 0.637 0.598 1996 1223.89 820.71 14127.21 1389.48 1313.06 1154 0.984 0.945 0.625 1.135 0.671 0.581 1997 1236.26 847.25 15370.91 1440.00 1357.92 1243 0.937 0.943 0.624 1.165 0.685 0.551 a Ž . Sources: Calculated based on data from the State Statistical Bureau 1992, 1998 . C, CO emissions; FEC, total fossil fuel consumption; TEC, total 2 commercial energy consumption; POP, population. b Measured in 100 million US at 1980 prices and at the average exchange rate 1 US s 1.5 Chinese yuan. c At 1980 prices. d Measured in tce per thousand US at 1980 prices. e Measured in tC per thousand US at 1980 prices. Z.X. Zhang r Energy Economics 22 2000 587]614 593 Fig. 2. China’s CO emissions by fuel. 2 increase in China’s CO emissions than would otherwise have been the case. 3 As a 2 result, population expansion was responsible for an increase of 128.39 MtC, an increase in emissions considered to be modest given its population size. Also, the Ž . change in fossil fuel mix contributed to an increase in emissions 3.93 MtC , but its role was very limited because the share of coal use in total commercial energy consumption increased only slightly during the period. By contrast, a reduction in energy intensity tended to push CO emissions down. 2 Since the early 1980s, the Chinese government has been placing great emphasis on energy conservation and has formulated and implemented approximately 30 energy conservation laws concerning the administrative, legislative, economic and techno- logical aspects of energy conservation. After years of preparation, China’s Energy Conservation Law was enacted on 1 November 1997 and came into force on 1 January 1998. In order to efficiently use energy, China has significantly reduced Table 4 a Ž . Breakdown of the contributions to CO emissions growth, 1980]1997 MtC 2 Due to change Due to Due to change Due to Due to Total change in fossil fuel penetration of in energy economic population in CO 2 carbon carbon free intensity growth expansion emissions intensity fuel q 3.93 y 10.48 y 432.32 q 799.13 q 128.39 q 488.65 a A positive sign indicates an increase; a negative sign indicates a decline. Source: Own calculations. 3 During the period 1980]1997, the annual average growth rate of population in China was 1.33. In Ž . contrast, the corresponding figure for low-income economies excluding China between 1980 and 1995 Ž . was 2.35, and the world average was 1.66 World Bank, 1997c . Z.X. Zhang r Energy Economics 22 2000 587]614 594 Table 5 a Ž . The composition of GDP in China, Japan and the US percentage of GDP Japan US China 1995 1995 1980 1990 1997 Agriculture 30.1 27.1 18.7 2 2 Industry 48.5 41.6 49.2 38 26 Services 21.4 31.3 32.1 60 72 a Ž . Ž . Sources: World Bank 1997c and State Statistical Bureau 1998 . subsidies for energy consumption, with coal subsidy rates falling from 61 in 1984 to 37 in 1990 and to 29 in 1995, and petroleum subsidy rates falling from 55 Ž . in 1990 to 2 in 1995 Kosmo, 1987; World Bank, 1997a . Currently, coal prices are largely decided by the market and vary significantly depending on the destina- tion of the coal. 4 Energy pricing reforms may have already proceeded to the point where the bottlenecks to more adoption of efficiency measures have less to do with Ž . energy prices than other factors Sinton et al., 1998 . Along with the economic reforms that, among other achievements, have spurred investment in more energy efficient production technologies, the Chinese government has also played a crucial role both in promoting a shift of economic structure towards less energy-intensive Ž . services see Table 5 and a shift of product mix towards high value-added products, and in encouraging imports of energy-intensive products. 5 Furthermore, efforts have been made towards implementing nationwide energy conservation programmes. For example, state capital construction loans for efficiency are at an interest rate of 30 lower than commercial loans, and state technological renova- Ž tion loans for efficiency are with 50 of the interest subsidised Sinton et al., . 1998 . The creation of over 200 energy conservation technology service centres throughout the country, which have worked most closely with the end-users of the efficient technologies, devices and practices that the government sought to pro- mote, has been extremely valuable. In power industry, efforts have been made towards developing large-size coal-fired power plants. In 1987, only 11 power Ž . stations had an unit capacity of 1 gigawatt GW and above. The combined capacity of these power stations was approximately 15 GW, accounting for one-seventh of the nation’s total. By 1994, there were 34 power stations having an unit capacity of 1 GW and above, with a combined capacity of 43 GW, accounting for 21.4 of the Ž . nation’s total SETC, 1996 . In the meantime, the share of generating units having a capacity of 100 MW and above increased from 32.5 in 1984 to 57.2 in 1994 Ž . MOEP, 1985; SETC, 1996 . Along with these large units commissioned into 4 For example, the mine-mouth price of Datong mixed coal was 128 yuan per ton in June 1994. The same coal retailed for 230 yuan per ton in Shanghai, 262 yuan per ton in Nanjing, 280 yuan per ton in Ž . Guangzhou, and 340 yuan per ton in Xiamen SETC, 1996 . 5 Approximately 10 of the total energy savings during the period 1981]1988 were attributed to Ž . imports of energy-intensive products Zhang, 1997a . Z.X. Zhang r Energy Economics 22 2000 587]614 595 Table 6 Growth rates of GDP and energy consumption, and the income elasticity of energy consumption among a different economies, 1980]1994 Annual growth Annual growth of energy Income elasticity of Ž . Ž . of GDP consumption energy consumption b Low-income economies 2.5 3.3 1.32 China 11.0 4.5 0.41 India 5.2 6.3 1.21 Upper-middle-income economies 2.5 3.9 1.56 High-income economies 2.8 1.1 0.39 a Ž . Source: Calculated based on data from the World Bank 1996 . b Excluding China and India. operation, the average generation efficiency of thermal power increased from 28.5 in 1984 to 29.7 in 1994. Given the sheer size of the Chinese power industry, even this small efficiency improvement translates into large coal savings when multiplied by tens of GW of capacity installed. Clearly, it is by implementing these policies and measures that great progress in decoupling China’s GDP growth from energy consumption has been made, with an annual growth of 10.06 for the former but only 5.26 for the latter during the period 1980]1997. This achievement corresponds to an income elasticity of energy consumption of 0.52 and to an annual energy saving rate of 4.37. 6 Given the fact that most developing countries at China’s income level have the income elasticity Ž . of energy consumption well above one see Table 6 , this makes China’s achieve- ment unique in the developing world. 7 As a result, a reduction of 432.32 MtC was achieved. In other words, without the above policies and measures towards energy conservation, China’s CO emissions in 1997 would have been 432.32 MtC higher, 2 or more than 50 higher, than its actual emissions. In addition to energy conservation, the penetration of carbon-free fuels con- Ž . tributed to a small reduction in CO emissions y10.48 MtC . This is mainly due 2 to the underdevelopment of hydropower, and partly because the development of nuclear power in China is still at the initial start-up stage. From the preceding analysis, it follows that China has made significant contribu- tion to reducing global CO emissions, although none of these carbon savings have 2 resulted from conscious domestic climate mitigation policies. Unfortunately, China’s 6 The income elasticity of energy consumption is defined as the change in energy consumption divided by the change in economic growth. 7 As shown in Table 6, the income elasticity of energy consumption in China is quite low by international standards. In addition to energy conservation, there are other two possible explanations for this. First, the growth of energy consumption is underestimated relative to the GDP growth. Second, quantitative restrictions have kept energy consumption from rising as would otherwise have occurred. Ž . Drawing on the analysis of rationing by Neary and Roberts 1980 , the quantitative restrictions act like an implicit energy tax levied at rates varying with use and fuel. Generally speaking, households face a higher implicit tax than industrial users, and oil and natural gas are taxed at a higher rate than coal. Z.X. Zhang r Energy Economics 22 2000 587]614 596 Table 7 a Ž . Changes in CO emissions from fossil fuel among selected countries and regions 2 1990]1996 1995]1996 b OECD q 7.8 q 2.6 European Union q 0.9 q 2.3 Denmark q 41.0 q 20.6 Germany y 7.8 q 2.1 Netherlands q 10.0 q 2.6 United Kingdom y 1.0 q 2.9 United States q 8.4 q 3.3 Canada q 5.5 q 1.6 Japan q 14.3 q 1.8 Australia q 9.5 q 2.2 New Zealand q 10.7 q 4.0 Norway q 14.5 q 7.3 CIS and C E Europe y 31.0 y 2.6 Developing countries q 32.0 q 5.1 World q 6.4 q 2.7 a Ž . Source: Jefferson 1997 . A positive sign indicates an increase; A negative sign indicates a decline. b Excluding Mexico, Korea, Hungary and Poland. contribution has been too little appreciated. While China is making such an impressive achievement, we might ask how the OECD countries perform in this regard. They accounted for 50.3 of global CO emissions in 1996 compared with 2 Ž . 49.6 in 1990 Jefferson, 1997 and promised at the Earth Summit in June 1992 to individually or jointly stabilise emissions of CO and other greenhouse gases at 2 their 1990 levels by 2000. As shown in Table 7, the total CO emissions in the 2 OECD countries rose by 7.8 between 1990 and 1996. On their current trends, CO emissions in the US and EU would be 18 and 8 above the promised targets 2 Ž . in 2000, respectively Jefferson, 1997; Energy Information Administration, 1999 . Therefore, it is fair to say that, with few exceptions, most of the OECD countries are unlikely to meet their voluntary commitments to stabilising CO emissions at 2 their 1990 levels by 2000.

3. Economic effects of future carbon limits for China