Mindshare 2016: Examining China’s energy market

Text on screen: [Mindshare logo, Inspired thinking on the future of energy]

Text on screen: [Economic Growth, Energy Consumption and Environmental Consequence: The Case for China]

Text on screen: {Junjie Zhang: Associate Professor, School of Global Policy and Strategy, University of California, San Diego]

Junjie Zhang:  Thank you for having me. And my topic actually is huge, but I will narrow down to a number of specific questions at the end of the talk.

So the first question is why should we care about the China’s energy consumption. Well, of course the world is connected. The energy market is connected. And the environmental consequence of energy use is also connected. So I will give you two examples. When the Chinese economy booms, it is of course there’s the bonus for the global energy market, and the people in Alberta must be very happy. But for the Chinese, the rich people, because of the air pollution in China, and the rich people, they have money, so they come to Canada to buy a house in Vancouver, in Toronto. So the home buyer feel the pain. But when the Chinese economy slows down, then the problem is that global energy price tanks. Then the people in many resource-rich country feel the pain. So the world is connected, why we should care about the energy market in China.

So my talk will be three parts: mainly reveal the history; what’s the consequence; then looking forward. So for the energy consumption in China, actually it took off in early 2000, when China joined WTO. So in – I have three panels of figures here. I compare China with the United States because I know these two countries very well. Does not mean that the United States will be used as a benchmark, right, because the energy and environment, the climate change, in both countries they have their own problems. So the United States is not a role model for China. So the – China’s energy consumption took off in early 2000, and then has been increasing dramatically. It now becomes the world’s largest energy consumer. And in terms of the per capita energy consume—consumption, well, although China is low, but it’s not that low anymore. And so this is a very strong signal, and we are considering: will China continue to increase energy consumption, or will China level off its energy consumption? We will try to answer this question later.

So China’s energy consumption is mainly driven by the industrial energy use. If you look at the change of the total energy consumption in China, compare China and the United States, in the United States, on the right panel, it’s quite stable for its total energy consumption for different shares. But for China, the major change was from the industrial energy consumption. So in China, the vast majority of energy is consumed in its vast manufacturing industry. In terms of the residential use, yes, for households, at different income groups, we have observed a dramatical change in energy consumption. This is divided by different income groups. The top tier, the top quintile, spends about twice as much as the bottom quintile spend on energy. But it would still – this leaves a huge room for future energy use. Because for Chinese households, their energy consumption is still at a relatively low level, especially for the vast majority of the population, who live at the bottom of the second quintile. They still use a very small share of energy. So this is a roo—leaves room for future energy consumption growth.

The energy consumption is very unbalanced. It depends on the region. There are regions with abundant natural resources, for example northern part of China, right? In the Mongolia. It’s like China’s Alberta. It’s very rich in natural resources. But it uses a lot of energy. And – but for – for the major economic activity, it’s actually on the east coast of China. So there’s a huge imbalance, unbalanced regional distribution of natural resources and energy consumption activities. This will – when China defines its policy on energy, will consider that into consideration.

Coal still dominates China’s energy use. It has come down. Compared to the United States, coal still accounts for 66 percent of total primary energy consumption, and it has come down a little bit but it’s still at a very high level. So all the energy problem in China is main – I should say the main energy problem in China is actually caused by coal. So in the next part, when we talk about the environmental consequence of energy use, many of these problems are related to the coal problem.

Air pollution is the major concern. Well, why is – one adj—one of the main reason, right, why many Chinese, they come to Canada, come to southern California, where I live, in San Diego. They buy houses. Very often they cited the reason of air pollution. So air pollution is very much linked to energy consumption. Well, this is a very concern to Beijing citizen. He does not trust in the government data about the air pollution data. So he took picture from out of his window every day in the same time of the day, and for 365 days in the year. So he tried to count number of blue sky days. Well, there are a couple of days, right? You’ll see. It’s not the malfunctioning of the camera; it’s actually this is the air parclaves (ph), this is the air pollution.

So air pollution has caused a huge concern among the middle class in China, those who live in the city. This – what – of course this is a very casual observation of air quality. So if we don’t believe in the camera, if we don’t believe in the government data, well, there’s something that we can believe. So we have done a study that use the sevel-aye (ph) data try to assess the air pollution in China. We find that if we use the WHO standard, 1.3 people – this is about 99 percent of Chinese that live in the polluted environment for over half a year. So air pollution has become the main constraint of energy consumption in China. So if China decided to limits its energy use, it’s not because we are short of energy; this is because of the environmental consequence of energy use.

So we assessed what’s the cost of the energy use. Well, one of the major costs of the energy use – this is a study that we finished. One of the major costs – the costs of air pollution, it’s mainly health; could it be the fiscal effects, could it be on the economy? It’s very broad economic effects. But if we just investigate the costs of air pollution on face mask alone, we found if one day of air pollution can cost 187 million of US dollar on mask expenditure alone. So this is the – this is just a small share of the cost of air pollution. And as you can understand, many Chinese people, they are very unhappy because of the air pollution issue. Then it spills over to the energy policy. Now the major rationality of the energy policy is actually from the environmental concern.

China has become – well, these are the local and regional problem for air pollution. Of course studies find that air pollution in China, they can transport to the west coast of the United States. So the US has its own share of the air pollution in China. But the main problem of energy use in China for – on the global environment is on – it’s the emission of carbon dioxide. Since 2005, China has take—overtaken the United States to become the world’s largest climate polluter. And China – Chinese per capita still to emission used to be low, but not anymore. And last year the Chinese per capital carbon dioxide emission is higher than the European Union. So this is alarming signal. It’s high per capita level, given its huge population, and it’s growing fast.

So what about the future? Energy use, it’s air pollution and global climate change. Then we try to look forward and make some predictions. Well, economists – I’m an economist by training. But economists, generally we don’t make forecasts. But this is the exception here. So we tried to forecast China’s energy consumption and emissions up to 2020 using, you know, metric models. So it’s quite a complicated way. Millions of models we have run in order. So we – don’t take the number literally; just look at the trend. China’s total energy consumption will continue to rise up to 2020. However, the energy intensity measured by the energy consumption per unit of GDP will decline. Well, when we do the research, it’s actually we try to evaluate China’s likelihood of complying with its commitment in Copenhagen Accord. We found that, in terms of the carbon emissions for China, it will continue to rise. And it’s very unlikely that for China will comply its commitment in the Copenhagen Accord. And this is – we don’t see a peak before 2020. Of course China promises to peak its emission before 2030 with the United States, and in the Paris agreement. So it’s our next question to evaluate that, but it’s not in this talk.

Economists make mistakes, make a lot of mistakes, in forecasting the energy use. The main problem is that we really don’t know what’s the future of China’s economic growth. If we look at the economic growth, compare China and the United States in the past two decades, we’ll find that the – in – especially since China joined WTO, the economic growth really picked up. Can China maintain this fast economic growth? I see many people shook their head. This is crap, right? This – it can’t. So they – actually there are two complications. The first: what’s the future economic growth rate for China, then its energy consumption. Second: what’s the real economic growth rate in China. There’s huge debates in China, right, what’s going on in China. So it’s not just in our casual talks we are thinking what – wondering what’s the economic growth rate. For financial analysts, they’re also wondering. So seven percent is the Chinese government official figure, but for different firms they have very different estimates. So this has constitute a major uncertainty in our energy forecasting for China in the future. It’s a lar—very large uncertainty.

So this is something. I will give you an example that we are doing, linking energy and economic growth. On the left panel is the – the red line is the economic growth rate. The red line, electricity consumption. So during the shaded area is the great financial crisis, the last financial crisis. So during that period, Chinese reported the GDP growth is – was about 22 percent. However, if we look at the electricity consumption, it’s increased only 5.5 percent. If we look at the NOx emission, it’s actually decreased 7.8 percent. So that’s very likely. Well, the trend shows up again, right? This is the difficulty of China’s economic growth. However, its reported economic growth rate is still very smooth. So does that infer something? This is what we are investigating now in order to improve our understanding of China’s energy use and its link with the economic growth rate. This is still very much our work in progress.

So in order to conclude, of course I don’t have a conclusion, right? These conclusion are suggestive. Will China continue its energy use in the future, at least in the near future? I – my answer is yes. Because if we look at the numerous Chinese family, they still use very little energy. My parents, in their house, the home, they have air conditioner, but they seldom use that. They only use the air conditioner when we came home, right, when we went home. So look at there are numerous families in China that use energy in this fashion although they have a lot of energy appliances in their home. So the future energy growth is not from – mainly from the manufacturing, not from the industry, but from the residential sector, from transportation.

Has coal consumption peaked? Probably yes, I would say. It’s mainly because the pressure of the environmental consequence, because of air pollution. Can China peak its carbon dioxide before 2020? This is no. Twenty-thirty? Maybe. So this really depends how will China grow its economy. Because in recent years – not in recent years; in the last year and in the early this year – there’s something very troubling. Chinese government, in order to protect its job opportunities in the fossil fuel industry, so the limit the generation of renewable energy. So we are still observing its progress.

So lastly –

Text on screen: [Mindshare logo, Inspired thinking on the future of energy]

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