TODAY’S STUDY: NEW ENERGY IN CHINA

China’s Green Long March: A Synthesis Report; A Study of Renewable Energy, Environmental Industry And Cement Sectors

December 2013 (United Nations Environment Programme)

Executive Summary

In the last decade, China has witnessed growth in a wide range of sectors that have contributed to a green economy transition – from wind, solar and other renewable energies, to the environmental industry. In all these sectors, however, significant challenges remain to ensure further progress.

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China has invested heavily across the clean energy and environmental industry sectors, particularly following the post-financial crisis stimulus plan.

China has become the world leader in renewable technology investment. China has the world’s largest installed capacity of wind farms. It is the world’s leading manufacturer of solar PV modules, and it produces more hydroelectricity than any other country (BP, 2012). In 2012, renewable energy investment in China stood at US$67.7 billion (BNEF, 2013), the highest in the world, and double the level of investments in 2009 (see Chapters 2, 3 and 4 for further information).

During the 11th Five-Year Plan (2006-2010), significant investments were made in industrial energy efficiency. These efforts resulted in a 19.1 per cent fall in energy intensity per unit of GDP (Yuan et al, 2011). The cement sector, in particular, was successful at increasing its efficiency. Over the 11th Five-Year Plan, the amount of energy required to produce a tonne of cement fell by 41 per cent (see Chapter 5).

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‘Green’ investment formed a significant part of China’s RMB 4 trillion (US$570 billion)1 post-financial crisis stimulus plan. Following the onset of the global financial crisis, the Chinese government launched a large-scale investment programme to avert an economic slowdown. An estimated 5 per cent of the stimulus, or RMB 210 billion, was directly spent on the environmental industry2 (WWF/DRC, 2010).

As a result of this stimulus, the environmental industry has grown, and now represents over 3 per cent of GDP (Feng, 2010). Annual investment in the water treatment and forestry sector almost doubled from 2009 to 2011, while investment in the urban environmental sector increased by 70 per cent between 2008 and 2009 (MEP, 2010, see Chapter 6).

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China still faces significant environmental challenges, from a carbon-intensive energy mix to local water and air pollution.

China is the world’s largest emitter of greenhouse gases (GHG). Due to China’s heavy reliance on coal and oil – which accounts for nearly 90 per cent of energy consumption (BP, 2012) – China emits more carbon dioxide (C02) than any other country. In 2011, China’s GDP accounted for only 10 per cent of the world‘s C02 output, yet it consumed 60 per cent of the cement, 49 per cent of the iron and steel and 20 per cent of the energy (China Environment News, 2012). Without action, large levels of C02 emissions will result in dangerous climate change, to which China is predictably vulnerable (Cruz et al., 2007).

China’s development requirements mean that without the necessary policies, economic growth will continue to put a strain on the environment. Despite high GDP growth rates, China remains a middle income country with Gross National Income (GNI) per capita still well under the US$10,000, the benchmark for high income country status (World Bank, 2013). Most economists predict further growth, resulting in even greater demand for energy, cement, steel and other resource-intensive products.

Local pollution, particularly to air and water, is significant in China. It is estimated that 90 per cent of the urban water bodies are polluted, and outdoor air pollution is estimated to contribute to 1.2 million premature deaths per year (Cohen et al., 2005). Moreover, it is estimated that 10 million hectares of farmland are contaminated (Chen, 2009), and the amount of waste sent to landfills is also rising. Local pollution is serious, and negatively impacts the daily lives of Chinese citizens. Each year, local environmental protests have increased by 29 per cent (Feng and Wang, 2012), demonstrating the high levels of public concern related to the environment.

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China’s government has a series of ambitious targets that aim to tackle these significant environmental challenges.

China aims to reduce the carbon intensity per unit of GDP by 40-45 per cent by 2020 compared to 2005 levels. For the first time, under the 12th Five-Year Plan, China has established a target and under the Copenhagen Accord, submitted it to the United Nations Framework Convention on Climate Change (UNFCCC) (UNFCCC, 2010).

China plans to produce 15 per cent of its energy from non-fossil fuel sources by 2020 (State Council, 2011). The government has set ambitious targets across the green energy sector. In addition to the above target, China aims to have 140 GW of wind capacity and 21 GW of solar by 2015 (National Energy Administration, 2012).

The 12th Five-Year plan (2011-2015) puts emphasis on green investment. Across industries, ambitious green investment development plans are evident. For example, in the cement sector, China aims to phase out 250 million tonnes of inefficient capacity (CBMF, 2012). Table 1 shows the split of planned investment across key sectors.

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China has a strong policy framework to support a green economy transition.

Feed-in tariffs have spurred clean energy investment. In China, producers of renewable energy receive a price above the rate given for electricity generated from traditional sources. In the case of solar energy, the tariff is more than double the amount paid for electricity from coal-fired plants, while biomass projects receive a 50 per cent premium (Ma, 2011). Wind previously received a high tariff but as costs have fallen, the tariff is now at a similar rate to other energy sources (see Chapter 3 for a full discussion).

At both the local and central government levels, significant subsidies and tax advantages exist to stimulate green investment. For example, Energy Management Companies (EMCs), such as those that invest in energy reduction measures in the cement sector, can make a claim for 100 per cent reimbursement of the VAT and a three-year income tax waiver, followed by a three-year half corporate income tax reduction (Ministry of Finance, 2010). This helps drive energy efficiency in the cement sector, as seen in Chapter 5.

Regulation also plays a role in helping China transition to a green economy. In the cement sector, strict regulations resulted in a large-scale phasing out of inefficient plants. In the environmental industry sector, increasingly strict regulations on water pollution, air quality and waste management are driving investment (see Chapters 5 and 6).

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This report finds that across the sectors analysed, significant challenges remain.

There is often a divergence of interests between local and national authorities. As the world’s most populous country, China faces governance challenges, including disparities between central government demands and action at the local level. In particular, local governments are often more focused on short-term economic growth rather than longer-term environmental concerns or broader national priorities. This difference in interests has contributed to, amongst other impacts, a non-enforcement of certain environmental regulations and a lack of investment in the environmental industry. Resolving the contradictions between local and central interests remains an important policy challenge.

China requires increased investment in research and development (R&D), both to tackle the country’s significant environmental challenges and to ensure that its green industries can compete globally. Across every sector studied, a technology gap between Chinese firms and their industrialised-world competitors exists. The government needs to encourage longer term investment in R&D, and further support domestic innovation.

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The government needs to send clearer policy signals, particularly through fiscal incentives, to guarantee green investment. Where the Chinese authorities have established clear policies, such as feed-in tariffs in the wind, biomass and solar sectors, or regulations to eliminate inefficient capacity in the cement industry, green investment has followed. However in other areas, such as grid capacity construction, sewage treatment and local pollution of the cement sector, stronger policy measures are required to drive green development in these sectors.

Stricter enforcement of environmental regulations is also required. In the solar, cement and the environmental industry sectors, local-level enforcement of environmental regulations remains a long-standing issue. Poor enforcement results in underinvestment in environmental technologies and environmental damage…

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Conclusion

The report synthesizes the studies in five sectors to gain an insight into China’s green economy transition. Overall, China has seen spectacular green development in all these industries over the last decade. China leads the world in wind energy production and has witnessed rapid growth in the solar, bioenergy and environmental industries. In the cement sector, greening measures have taken place to increase the industry’s energy efficiency and reduce pollution.

The growth in these sectors has been driven by a strong policy framework. In renewable energy, strong feed-in tariffs combined with falling costs have led to growth in the installed capacity in the wind, solar, biomass and biomethane projects. Increasingly stringent regulations are also driving energy efficiency measures and investment across the environmental industry.

However, across the sectors studied major challenges remain. China’s carbon emissions are the largest in the world. Despite recent advances in renewable energy, China still relies on coal and oil for 90 per cent of their energy needs. Air and water pollution damage the quality of life and health of people. An underdeveloped waste management sector poses further environmental risks. Finally, Chinese firms across the sectors studied still remain below the international technology frontier.

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The paper finds a number of policy challenges that will need to be addressed to continue China’s green economy march. Firstly, a divergence in interests between local governments and national institutions has, amongst other impacts, slowed growth in the environmental industry and caused underinvestment in grid capacity in the wind industry. Secondly, weak enforcement of environmental regulations means firms are not incentivised to invest in environmental protection technologies. Finally, underinvestment in R&D means Chinese firms are behind the international technology frontier in most of the industries studied.

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The paper finds that the Chinese authorities are already taking measures to address these issues, such as the recent announcements from Premier Li Keqiang on new regulations to reduce air pollution. Continuing efforts are required to ensure China’s green economy transition. However the paper finds that the Chinese authorities are already taking measures to address these issues, such as the recent announcements from Premier Li Keqiang on new regulations to reduce air pollution. With such measures, China’s green march will continue to improve the lives of the Chinese people, and the environment in which they live in.

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