1 R ICE U NIVERSITY Energy and Environment in China Kenneth B Medlock III Senior Research Fellow in Energy Studies, James A Baker III Institute for Public Policy Visiting Professor, Economics Department Rice University

2 R ICE U NIVERSITY Framing the discussion n The following appeared in a recent article in the Washington Post, “…the water in five of China’s largest rivers is so polluted it is dangerous to touch because it causes skin diseases; the Huai River, in the fertile province of Anhui, is filled with garbage, yellow foam and piles of dead fish. Several of the country’s main waterways, including the Yellow River, a vital artery, run dry before reaching the sea. More than 600 million Chinese, roughly half the country’s population, now drink water contaminated with animal and human waste…” n While these statements may contain an element of shock value, they should nonetheless raise awareness that China has challenges to face if it is to continue its torrid pace of economic development.

3 R ICE U NIVERSITY Framing the discussion n The attainment of higher standards of living for all citizens is a prime factor in motivating economic progress. n Energy is crucial to economic progress. n Most energy services are facilitated by the combustion of fossil fuels (petroleum, natural gas, and coal)… about 86% globally in n The combustion of fossil fuels releases sulfur and nitrogen compounds, and soot and particulate matter, and carbon monoxide. These present immediate health risks. n The combustion of fossil fuels also releases carbon dioxide. (However, it is unlikely this ranks high on the list of priorities.)

4 R ICE U NIVERSITY Energy, Environment, and Economic Development n Energy use per person increases with GDP per person

5 R ICE U NIVERSITY Energy, Environment, and Economic Development n Emissions are a function of total energy consumption u Emissions rise with energy use, absent the introduction of technologies aimed at reducing emissions per unit energy consumed n Emissions are a function of primary fuel composition u Coal combustion results in greater emissions of SO x, NO x, particulate matter, and CO 2 per BTU of energy output than either petroleum or natural gas u Natural gas is the cleanest of the fossil fuels u Hydro and Nuclear are “zero” emissions energy sources, but each comes with its own costs n Emissions are a function of the technology employed in energy-using capital equipment

6 R ICE U NIVERSITY China: Energy Today n Per capita energy use in China is only one-tenth of that in the US…

7 R ICE U NIVERSITY China: Energy Today n …but an enormous population means that total energy use is just under one-half of that in the US.

8 R ICE U NIVERSITY China: Energy Today n Coal dominates China’s energy mix u Coal use in China is about 65% of total primary energy requirement. u While coal’s share is down from 10 years ago, total coal use is still on the rise.

9 R ICE U NIVERSITY China: Environment Today n “Environment pollution from coal combustion is damaging human health, air and water quality, agriculture, and ultimately the economy.” – excerpt from “China: Environmental Issues” in the EIA’s Country Analysis Briefs n A 1998 report by the World Health Organization placed 7 of the 10 most polluted cities in the world in China. As of 2003, this was still true. n Carbon emissions in China rank second in the World behind the US, accounting for about 14% of the world’s total.

10 R ICE U NIVERSITY China: In Context n China is at the base of the energy-development curve. Next 20 years at 6% growth

11 R ICE U NIVERSITY A Challenge Ahead n Current pollution problems must be addressed n Per capita energy use in China will increase as economic growth progresses… (“Per capita” is crucial as China is home to 1.3 billion people) n Much of the projected increase in energy demand will come from the transportation sector as private motor vehicle stocks increase Development path

12 R ICE U NIVERSITY A Challenge Ahead n However, there is no reason that energy use patterns in China must follow those of the industrialized world, particularly in transportation and electricity generation u Energy-capital relationship dictates that energy use will rise as energy-using capital stocks grow, holding utilization rates and efficiency constant. Most projections allow very little change in this respect. u Efficiency gains can more than offset increases in stocks and utilization. (Case study: US motor vehicle stocks and fuel use from 1978 to 1991.) u Similar arguments hold for installed MW of generation capacity

13 R ICE U NIVERSITY A Challenge Ahead n The potential for emissions of SO x, NO x, particulates, and CO 2 will rise n The realization of this potential is subject to many factors u Coal consumption u Technology u Government policy u International pressures/assistance n An important point: We consume energy for the service it provides.

14 R ICE U NIVERSITY Meeting the Challenge n Pollution imposes a cost to society, which, when large enough, can slow economic growth… u Rising health care costs, rising water treatment costs, rising land costs as scarcity rents for arable/habitable land increase u These external costs of industrial activities can become large enough to divert resources from other activities that promote economic growth n …the problem of pollution must be addressed if long term progress is to be sustainable.

15 R ICE U NIVERSITY Key Aspects of Meeting the Challenge n Coal u Ample domestic supply… about 11.7% of the World’s estimated recoverable coal reserves u Its use provides energy security benefits u It is the most polluting of the fossil fuels n Technology u Electricity generation l clean coal technologies (IGCC, coal gasification, coal liquefaction) l alternatives (Hydro, nuclear, wind) l natural gas u Transportation l hybrid engine motor vehicles l hydrogen powered vehicles l mass transportation u Policy action l tradable allowances with strictly enforced realistic limits l installation of “scrubbing” equipment l encouragement of shift to alternative fuel sources

16 R ICE U NIVERSITY Key Aspects of Meeting the Challenge n Policy u Improved pollution controls on power plants to reduce SO x and NO x u Encourage high efficiency standards in transportation u Encourage growth in natural gas-fired generation l Domestic resources adequate for the near term l Imports an eventual necessity (LNG versus pipe) u Encourage the development of hydroelectric capacity l Three Gorges Dam planned for 18.2 GW of capacity l Yellow River Hydroelectric Development plans an eventual 15.8 GW of capacity u Encourage wind power development l Largest potential on east coast l Second highest in Inner Mongolia and northern Gansu Province u Development of large-scale electricity transmission and natural gas distribution grids l Enable production of electricity near fuel sources l Eliminate need for residential coal and/or waste combustion