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Cameron Hill
Energy Law, Fall 2011
Professor Palmiter
China’s Super “Powers”
ABSTRACT
The energy policy for any country is a critical element for future economic growth and
energy security. With dwindling resources and the threat of rapid climate change due to the
use of fossil fuels, a sound energy policy that incorporates efficiency, renewable energy
requirements, and protective environmental laws will help shape the future of the world's
next super powers. This Paper focuses on what is arguably the United States biggest energy
competitor, China, and how this country is developing an ever-evolving energy strategy that, if
successful, will allow the country to become the world's next super power. China's energy
policy is becoming a model for other countries looking to secure a clean, energy-efficient
future without the need to rely on CO2-emitting fuels. China's energy policy encourages
investment into new infrastructure, new energy sources, and calls for a decrease in the use of
coal, which makes up a large majority of China's energy consumption. In order to stay
competitive against China's energy model and environmental policy, the United States must
increase investment into renewable energy resources, decrease demand of CO2 heavy fuels,
and maintain investment incentives in the form of cash grants and tax credits so that these
renewable energy generators remain a profitable venture for private investors. Renewable
Portfolio Standards and feed-in tariffs will supplement these goals.
INTRODUCTION
The polar ice caps are melting, carbon dioxide emissions have increased
dramatically over the last century, and the once-non-existent term “energy security” is now
ubiquitous throughout the world. In times of need, Americans are probably used to turning
to their own country for world-wide solutions. But just as the earth’s climate is changing,
the trend to turn to the world’s current superpowers is also in flux. Ten years ago, the
chances were slim that any person would suggest turning to China for answers on how to
run an energy-reliant economy, how to operate an environmental legal system, or how to
be one of the most innovative renewable energy countries in the world. However, over the
past decade, China has emerged as a world leader in energy consumption, environmental
innovation, and future energy and environmental planning. It is only a matter of time
before China’s super powers provide a medium for the country to become a super power
itself. China recently became the world leader in energy consumption and is currently the
highest-producing country for CO2 emissions. While these factors in themselves are not
indications of world dominance, it is China’s response to these trends that gives credence to
the claim that China’s lead is the one to follow.
This Paper will discuss the new implications of China’s developing status as the
leading energy consumer in the world and how China’s response to these developments
should be admired, followed, and, ideally, considered a competitive threat for other
nations; a threat in need of a response. Part I will briefly address China’s history and the
latest status of the country’s development as an economic power. Part II will cover the
energy demand of the growing Chinese population and economy and some of the problems
that coincide with such growth. Part III will discuss China’s response to environmental
Cameron Hill
Energy Law, Fall 2011
Professor Palmiter
concerns and energy demand problems. Part IV will discuss what the US has done in
response to similar problems and what the US needs to do in the future to be a world
leader in renewable energy investment and energy security.
I. A BRIEF LOOK INTO CHINA’S PAST
While China’s population growth—attributed most directly to Chairman Mao
Zedong—has been significant over the past 60 years, China’s adoption of Communism was
anything but a signal of a growing economic threat. The threat of a Russian Communist
neighbor created high tensions between the two nations. China’s state-centralized
economy did not allow private individuals to own a business, and quotas and production
methods were strictly regulated. It was not until 1978 and the push from Deng Xiaoping
toward a market-based, private-party economy that the China known today truly began its
quest toward a developed world power.
Since the implementation of the new economic policy, China’s economy has grown
90 fold, with a GDP growth rate averaging over 10% per year. China is currently the world’s
fastest growing economy, and, as of recently, China surpassed Japan in terms of annual
GDP. This rapid growth has had both positive and negative effects. Some of the more
notable improvements include a higher literacy rate—which allows China to capitalize on
its human equity—and China’s poverty rate has dropped markedly over the past decades
due to the influx of wealth from the market economy. However, despite these
improvements, China’s demand for energy to fuel this growth has had a huge impact on
China and the rest of the world.
II. ENERGY AND CHINA
With this growth comes a corresponding growth in the demand for energy. Over the
summer of 2010, China became the largest consumer of energy, surpassing the United
States. When compared to the US in terms of oil equivalent energy sources (meaning an
aggregate of energy consumed including crude oil, coal, nuclear power, renewable
resources, and natural gas), China consumed over 2.25 billion tons of oil equivalent in
2009, an amount 4% higher than the United States. The United States held the “Highest
Energy Consumer” title since the beginning of the 1900’s. Most surprising, however, is not
that China overcame the US in this metric; rather, China’s accomplishment occurred
swiftly—the country’s consumption of energy doubled in less than 10 years. This growth
can be attributed to, mostly, the energy-intensive growth of heavy industry and
infrastructure, which, in 2006, accounted for nearly 70% of all of China's energy
consumption and sulfur dioxide emissions.
The most significant problem with the newly-generated supply of energy is the
energy’s source—coal. China derives a little over 70% of all of its energy from the burning
of coal. As of 2009, this amounted to 7.71 billion metric tons of CO2 emissions, an increase
of over 267% from just 10 years earlier. According to the Energy Information
Administration, China’s significant output of CO2 contributes to over 25.3% of the total
Cameron Hill
Energy Law, Fall 2011
Professor Palmiter
global CO2 emissions. Not surprisingly, 16 of the world’s 20 most-polluted cities are in
China.
CHINA’S CO2 EMISSIONS COMPARED TO THE US AND THE WORLD (kt)
III. CHINA’S RESPONSE TO ENERGY DEMANDS
China’s responses to the effects of energy are multi-faceted. China’s plans include
aspects of regulation, efficiency, and alternative-source production. The combination of
these three facets will dramatically reduce the carbon footprint of China and, ideally, lead
to a renewable energy portfolio that will become a model for other developing, and even
developed, countries.
A.
Efficiency
Typically, increased energy demand correlates with an increase in consumer
demand; however, a significant portion of China’s increased demand for energy comes
from China’s need to improve its infrastructure and develop its heavy industry. A useful
metric in determining how efficient a country is relative to its energy use is the “energy
intensity” calculation. By dividing the GDP of China by units of energy consumed by the
country (set to a constant 2005 Price Purchasing Power dollar per kg of oil equivalent),
China’s energy intensity equal $3.60 USD per kg of oil equivalent. This is below the world
average, and compared to some members of the Organization for Economic Cooperation
and Development ("OECD"), for example, the US and the UK, which have an energy
efficiency of $5.90 and $10 USD, respectively, the amount of units of energy China uses to
produce a unit of economic output is quite low.
Cameron Hill
Energy Law, Fall 2011
Professor Palmiter
ENERGY INTENSITY BY COUNTRY
2005 PRICE PURCHASING POWER DOLLAR PER KG OF OIL EQUIVALENT
China's National Development and Reform Commission and several other
government agencies announced the General Work Plan for Energy Conservation and
Pollutant Discharge Reduction. This plan was announced after China failed to reach its goal
of reducing energy consumption per unit of GDP by 4% in 2006. Coupled with China's
increased energy demand in electricity, steel, nonferrous metals, construction materials, oil
processing, and chemicals, all of which "grew excessively fast" in the first quarter of 2007,
the failure to reduce energy consumption by 4% per unit of GDP led to several sweeping
changes.
China’s first step, and the main goal of the Work Plan, is to reduce the total energy
consumption per unit of GDP by 20% before 2010. While data is currently unavailable from
China's Climate Policy Initiative, 2009 data indicates that China was well on its way to meet
the reduction in energy consumption. Part of this progress has been attributed to energy
efficiency found in hydro-electric and solar power facilities. These facilities are being
constructed because of a renewable energy plan, discussed below, that spurs development
of such renewable energy generators. The plan also encourages the construction of more
efficient power plants. An increase in efficiency means the amount of energy required for a
unit of GDP will conversely decrease.
Second, the plan also holds company and government leaders accountable for not
meeting energy efficiency requirements. The plan emphasizes energy efficiency and
pollutant discharge indices as important variables in the leaders' evaluations. These factors
are so important, in fact, that the leader will receive a negative performance review if he
fails to reach his goals; effectively rendering all other areas of the evaluation moot, even if
performance in those other areas is exceptional.
Cameron Hill
Energy Law, Fall 2011
B.
Professor Palmiter
Environmental Law and Policy
In March of 2011, the National People's Congress approved the latest 5-year plan
("5YP"), the 12th 5YP implemented since Mao ZeDong first implemented the 5YP strategy.
This latest 5YP includes seven key investment areas, three of which are focused primarily
on energy—clean energy, energy conservation, and clean energy cars. China, similar to the
last 5YP, set ambitious goals to achieve by 2015.
1. Policy
One of China's goals is to again reduce energy intensity by 16% before 2015. China
also plans to reduce carbon emissions 17% by 2015; this step comports with China's goal
to reduce carbon intensity (based upon carbon units emitted per unit of GDP) by 40-45%
by the year 2020 from 2005 levels. This energy-intensity element will be supported by the
production of more energy efficient power generators, including wind, hydro-electric,
nuclear and more efficient coal-powered plants. In fact, China has an additional goal to
acquire at least 15% of its energy use from non-fossil fuel sources by 2020, with a goal in
the interim of 11.4% by 2015. Another method, consolidation, is being used to make energy
production more efficient. By consolidating China's coal companies, China hopes to achieve
upstream energy efficiency at the production level.
China also outlined an extensive, investment-heavy plan to revitalize its energy
distribution and generation capabilities. In the next ten years, China plans to invest 11.1
trillion RMB ($1.745 trillion USD) into its power industry. Between 2011 and 2015,
approximately 5.3 trillion RMB (equivalent to $833 billion USD) will be spent on the
construction and modification of China’s power infrastructure, with 2.55 trillion RMB of
this initial investment going toward the improvement of China's power grid. The remaining
2.75 trillion RMB will go to the construction of new power plants, mainly nuclear and
hydropower. Currently, China has 14 nuclear power plants in operation and another 25
under construction. Earlier this year, China suspended construction of its power plants due
to Japan’s Fukushima accident. However, following an inspection by Chinese safety
personnel, China’s nuclear power plants received an all-clear safety analysis, allowing
China to pursue another ambitious goal—100 nuclear power reactors by 2020.
Additionally, China plans to construct large-scale hydropower plants in Southern China,
effectively reaching 284 gigawatts of pure hydro-power capacity by 2015 and up to 330
gigawatts by 2020.
2. Law
As discussed, China is the largest emitter of carbon dioxide in the world. In 2009,
China contributed 25.3% of worldwide CO2 emissions. In response to this large
contribution, China recently considered implementing a carbon cap-and-trade regime by
2015 to limit the emissions of CO2 from specific industries. Part of China's plan to reduce
carbon intensity will help China reach its goal of a 40-45% reduction by 2020, but the
carbon cap will be a regulatory requirement that will put significant pressure on certain
emitters. China's National Development and Reform Commission indicated that it plans to
Cameron Hill
Energy Law, Fall 2011
Professor Palmiter
implement mandatory regional cap-and-trade programs by 2013.Some claim that this plan
is too ambitious without immediate, drastic action given China's exceedingly high reliance
on coal and China's increased demand for electricity.
WORLD CO2 EMISSIONS BY COUNTRY (2008)
China has a multitude of laws that regulate environmental concerns. These laws
include the Prevention and Control of Atmospheric Pollution, Prevention and Control of
Environmental Pollution by Solid Waste, and Prevention and Control of Water Pollution.
While most of these laws are not groundbreaking, there is a significant, arguably drastic,
implication for emitters of pollution. By applying Article 115 of China's Criminal Code to a
violation of an environmental law, it is possible for a person found liable for polluting to
also be found guilty of violating China's Criminal Code because the Article makes it criminal
for a person to “spread[] poison.” The punishment for violating Article 115 can include long
jail sentences and even death. In 2009, a China-based company, Biaoxin Chemical, was
found to be responsible for polluting part of Yancheng, Jiangsu Province's water supply. Hu
Wenbiao, Biaoxin's chairman, was charged with and found guilty of "spreading poison"
under Article 115, and he was sentenced to 11 years in prison.
C.
Renewable Energy Law, Policy, and Industry
China's most admirable contribution to the development of climate change policy
can be found in its initiatives to develop renewable energy. China's growth in this sector is
outpacing even developed countries, and this policy is one of the key strategic advantages
China will be able to capitalize on in the future. China already plans to have 15% of its
entire energy consumption produced by renewable energy resources, and China has
incorporated the development of these resources into its economic stimulus plan.
Cameron Hill
Energy Law, Fall 2011
Professor Palmiter
COMPARISON OF CHINA’S 2008 ENERGY SOURCES TO UNITED STATES’ 2010 ENERGY SOURCES
1. Law and Policy
Becoming effective in 2005, China's Renewable Energy Law will require China to
reach the 15% renewable energy consumption goal by 2020. This will require China to
produce 137 gigawatts of renewable power generation, and this renewable energy must be
composed of at least 15% vehicle fuel. Further plans were adopted by China's National
Development and Reform Commission ("NDRC") in 2007. The NDRC plan requires
renewable energy sources to attain the following levels of production:

Small hydropower – 75 GW
Cameron Hill
Energy Law, Fall 2011



Professor Palmiter
Wind – 30 GW
Biomass – 30 GW
Solar – 1.8 GW
In order to help reach these long-term goals, China will mandate several
requirements. First, the costs of the renewable sources will be funded by “taxpayers”
nation-wide, with a significant contribution coming from current utilities in the form of
feed-in tariffs. Second, renewable sources have industry-specific mandates. For example,
China's windmill industry—an industry that produces over 3% of all of the world's
windmills—must derive at least 70% of the parts and resources in each windmill from
Chinese-based producers. China also encourages wind power production by implementing
wind concession programs to developers to spur investment.
2. Industry
In 2009, China, now the world leader in renewable energy investments, invested
over $34.6 billion USD in renewable energies. This was almost twice as much as the United
States, trailing in second (and a distant second at that) with $18.6 billion. Adding to the
disparity between these top two investors is the fact that the $34.6 billion USD China
invested in 2009 does not include China’s government’s contribution—the money came
from only private investors. It has been estimated that this investment will be almost $50
billion by 2014. This projection also estimates that the US and Canada, combined, will not
reach this level of investment until 2020.
China's wind and solar industries have seen significant growth over the past decade
thanks to heavy investment by the Chinese government and its renewable energy policies.
Aside from an abundant supply of wind resources, China is the world's largest windmill
turbine manufacturer, supplying 3% of the world’s turbines. [is this right?] China also
supplies a large portion of its own windmill use, with over 40% of in-use windmills
originating from China-based companies. It has been estimated that demand for China's
wind turbines will increase to 13% of all global demand by 2013. Coupled with China's
renewable energy policy, China's extensive investment in wind technology will help China
continue to reduce its energy and carbon intensities, maintain its position as the number
one windmill turbine manufacturer in the world, and, as some researchers anticipate, lead
China into an age where wind power replaces coal use.
China's solar industry has seen similar success. In 2010, China accounted for at least
half of the world's solar cell production. China's three biggest power companies—Suntech
Power, Yingli Green Energy, and Trina Solar—all had increases in sales of between 33 and
63% over the prior year's figures. China's dominance, however, is being challenged.
Recently, many US firms alleged that China is dumping solar products or selling them
below costs. The companies allege that China's subsidies of solar production allow the
Chinese companies to undercut the prices of the US firms, putting them out of business,
which has happened to several prominent US firms. Very recently, the Commerce
Cameron Hill
Energy Law, Fall 2011
Professor Palmiter
Department said it was considering an anti-dumping tariff on Chinese solar panels. These
tariffs could be between 50 and 250%.
IV. WHAT THE US MUST DO
There is no doubt that China is one of the biggest, if not the biggest, threats to the US
in terms of energy security. In this global economy, and with the ease in which
commodities and resources are traded, the growing Chinese demand for energy influences
market prices and affects the world economy, which directly affects US energy policy and
security. For a specific example, in 2010, China's oil demand increased 28% compared to
one year earlier. Obviously, this increased demand of the world's most important natural
resource affects world prices significantly, and any potential decrease in price per barrel
could easily be offset by China's and other developing countries' growth.
A.
Maintain Tax Incentives and Cash Grants to Encourage Investment
The US is a market-based economy and it responds to price fluctuations like any
economic model predicts. Tax incentives and tax credits for renewable energy production
is likely the most influential way for investors to look to both alternative energy sources
and demand a change in US energy policy.
1. Extend Production Tax Credits and Investment Tax Credits
Several tax incentives available since the American Recovery and Reinvestment Act
passed in 2009 are set to expire in 2013. Section 45 of the Internal Revenue Code provides
10-year, inflation-adjusted Production Tax Credits ("PTC") for certain types of renewable
energy projects. The PTC is only available for projects that begin operation before the
expiration of the credit. The PTCs for most renewable energy sources—closed- and openlooped biomass, geothermal, landfill gas, municipal solid waste, and marine and kinetic
facilities—expire December 31, 2013. The PTC for wind, however, expires December 31,
2012. It is essential that these PTCs remain available to investors because PTCs help
maintain momentum in the industry. The planning, development, funding, and permitting
process underlying the development of renewable energy projects can take several years
before the facility is operational. If the PTC deadline is not extended soon, there will be
fewer investments since the pending uncertainty stalls plans for development.
Another aspect of this momentum is that the underlying industries and employment
opportunities become cyclical as the PTCs are available. In other words, the human capital
and efficiency found in these industries are lost when PTCs expire, and these resources
have to be reinvigorated when PTCs are once again available. This "spinning up" of
resources causes needless delay and is incredibly inefficient. By granting long-term
extensions to these tax credits, investor concerns will ease, and the industry's current
momentum will be sustained.
Section 48 of the Internal Revenue Code provides an Investment Tax Credit ("ITC")
which allows certain types of energy projects to receive up to 30% in tax incentives. The
Cameron Hill
Energy Law, Fall 2011
Professor Palmiter
ITCs are realized the year the project begins, but it vests linearly over a period of five years.
These ITCs are helpful for an investor who has enough tax liability to offset the 30% tax
credits. Though, if the investor does not have the necessary tax liability, she will have to
rely on tax equity investors. These investors are difficult to find and these complex
agreements can increase transaction costs so as to make the deal less promising. Still, ITCs
provide an incentive for investment, and their December 31, 2016 expiration comes too
soon.
2. Implement Long-Term Extensions to Section 1603 Cash Grants
Another looming expiration date involves Section 1603 cash grants. Section 1603
cash grants provide grants equal to up to 30% of a project's costs. This is a huge incentive
for investors who are looking for funds to finance a renewable energy project because
these cash grants are direct infusions of cash and do not vest over extended periods of
time. There is another important benefit to the availability of Section 1603 grants—they
provide a "second option" for investors who are unable to take advantage of ITCs. Since
ITCs require a certain level of tax liability, investors who are unable to meet this liability
threshold may instead opt in for the same benefits—30% of a project's cost—through a
Section 1603 grant.
The expiration of Section 1603 grants ends this year. Without this additional
method of incentivizing investment into a renewable energy project, investors will shy
away from such decisions and will be less likely to even start developing a project, as the
project inception to completion horizon extends over several years. The answer is not just
a short, temporary extension. Only long-term extensions to Section 1603 grants will
provide investors with certainty, more financial options, and a nod from the federal
government that renewable energy is a top priority for the US to achieve energy security.
B.
Encourage the Formation of Renewable Portfolio Standards and Feed-In Tariffs
Implementing and encouraging the formation of Renewable Portfolio Standards
("RPSs") will spur investment into renewable energy. Current RPSs have shown an increase
in renewable energy innovation: approximately 45% of the wind power installed in the
United States between 2001 and 2004 was motivated by RPS programs. This market-based
approach to renewable energy will help find the most efficient and effective sources of
renewable energy.
Feed-in tariffs can supplement RPS strategy by guaranteeing renewable energy
projects specific prices for the energy they produce. The long-term contracts involved in
feed-in tariffs provide alternative certainty to investors that the energy they produce,
regardless of the reasonable costs, will be sold at a certain price. With a set compensation
and long-term contracts, feed-in tariffs are another important incentive to promote
continued renewable energy investment since they may be more cost effective than RPSs in
given circumstances.
Cameron Hill
Energy Law, Fall 2011
Professor Palmiter
CONCLUSION
China's model strategy for the future of renewable energy, energy independence,
and reduced carbon emissions is a prime example of where US policy should be headed and
what the US needs to improve upon in order to attain energy security. While China is still
the largest emitter of CO2 and while the country still faces many hurdles before it reaches
the status of a developed country, the Chinese government's forward thinking,
implementation of strict environmental laws, and its substantial investment into and
promotion of renewable energy is admirable. China's renewable energy industries—its
"super powers"—may be just the leverage China needs to move away from being the
number one polluting country and move toward being the number one renewable energy
producer in the world. The US should be taking notes.