1. Assessing China’s Energy and Environmental Outlook : Can Hong Kong Play a Key Role? By Patrick Cheung July 9, 2007 In-house Discussion with Vision 2047 Foundation Members

2. 2 Issues to be Discussed Will China continue to rely on fossil fuels for its energy consumption, only more of them? Will the air get even dirtier? Can China transform itself to be much more energy efficient and cleaner? What are the challenges and opportunities? Can Hong Kong play a meaningful role in this transformation?

3. 3 Characteristics of China’s Energy Consumption Demand Continuing urbanization (40 to 70% ?) and industrialization Growing service economy Personal wealth increase, e.g. car ownership Supply Limited domestic production of oil and natural gas Nuclear/Alternative energy development helpful only at the margin Abundant coal resource Impact on Energy Use Light products demand growth, e.g. gasoline, jet fuel, diesel, etc. Imports of liquid fuels to increase Strong electricity demand growth Unprecedented power generation capacity additions Coal use dominant and swing fuel China will continue to rely on fossil fuels to drive its economy Total potential emissions to increase substantially

4. 4 Primary Energy Consumption to 2030 EIA Reference Case 2004201020202030 CAGR % 2004-2030 Total Consumption (Quads) USA China World 100.7 59.6 446.7 106.5 82.6 511.1 118.2 112.8 607.0 131.2 145.4 701.6 1.0% 3.5% 1.8% Liquids (mm barrels a day) USA China World 20.7 6.4 82.5 21.4 9.4 90.7 23.8 11.9 103.7 26.6 15.7 117.6 1.0% 3.5% 1.4% Coal (Quads) USA China World 22.6 41.1 114.5 24.2 55.3 136.4 27.3 75.5 167.2 34.1 95.2 199.1 1.6% 3.3% 2.2% Coal as % of Energy Consumption USA China World 22.4 69.0 25.6 22.7 66.9 26.7 23.1 66.9 27.5 26.0 65.5 28.4 N/A

5. 5 Primary Energy Consumption to 2030 EIA Reference Case (cont’d) 2004201020202030 CAGR % 2004-2030 Population (millions) USA China World 294 1,307 6,388 310 1,355 6,841 337 1,424 7,577 365 1,446 8,203 0.8% 0.4% 1.0% GDP (2000$ trillions) USA China World 10.7 1.7 34.9 12.8 2.9 42.9 17.1 5.3 57.8 22.5 8.8 76.9 2.9% 6.5% 3.1% Per Capita Energy Use (mm BTUs / person) USA China World 34,250 4,560 6,993 34,355 6,096 7,473 35,074 8,301 8,011 35,945 10,055 8,533 0.2% 3.1% 1.8%

6. 6 Primary Energy Consumption to 2030 EIA Reference Case (cont’d) 2004201020202030 CAGR % 2004-2030 Energy Intensity (BTUs / $GDP) USA China World 9,411 35,059 12,799 8,320 28,483 11,914 6,912 21,283 10,502 5,831 16,523 9,124 -1.8% -2.9% -1.3% CO 2 Emissions (million tons) USA China World 5,923 4,707 26,922 6,214 6,497 30,860 6,944 8,795 36,854 7,950 11,239 42,880 1.1% 3.4% 1.8%

7. 7 Energy Intensity Pattern (2004 Data) 0100200300400 10 20 30 40 (‘000) Energy Use Intensity (BTU/$GDP (2000)) Per Capita Energy Consumption mm BTU / person x China x India x South Africa x Ethiopia x Bangladesh x Nigeria x South Korea Denmark x Hong Kong x Japan x Germany Norway x Canada x x USA x x Russia

8. 8 China’s Energy and Environmental Quandary Ever greater Dependence on fossil fuels CHINA Insatiable energy demand to sustain economic growth Worrying impact on - air quality - CO 2 emissions - resource cost which could stifle growth Transformational Challenge - How to increase economy wide energy use efficiency - How to create and implement comprehensive solutions to clean up air quality and reduce CO 2 emissions

9. 9 Standards /-Lax standards Regulations-Tightening standards increase cost -Lack comprehensive policy/regulatory framework Technology-Stock turnover -Adoption of best practices -Technology transfer -Cost Enforcement-Difficult to monitor diffused sources of emissions, e.g. electricity shortage induced micro-generation -Economic competition -Corruption -Competence China’s Transformational Obstacles Fuel input Combustion Process / Equipment and Delivery Output - Energy - Emission

10. 10 Transformation of a Complex System Wealth Creation - Affordability - Financibility Blue Sky China Technology Transfer Economic Re-structuring Shared Values - Will to implement Knowledge base - Policies and regulations - System management

11. 11 The opportunity set is huge. Now Future China’s Objective X X HighLow High Quality (value added) Quantity (Energy Input) NowFuture Value added Raw Energy Cost And improving quality is inherently high - value added Technology driven Information based Service economy Managing complexity Cross-border facilitation

12. 12 Hong Kong’s advantages are visible. Adapt in traditional cross-border facilitation role. Preferred base for foreign companies in energy and environmental sectors. Financing will be a key part, at which Hong Kong excels : –Equipment/Project financing –Capital raising –Emissions or carbon trading Opportunity set is largely a sophisticated service sector which can leverage Hong Kong’s soft and hard infrastructure and professional services culture.

13. 13 Hong Kong not necessarily centre of gravity for this opportunity set Limited energy economy Its internal problems less complex Energy not a dominant sector No technology base Little thought leadership on policies, regulation, research, knowledge base, etc. Initial thoughts on what Hong Kong can do Build critical mass of thought leadership –Quality think tanks –University funded research –Strengthen/ Create related university departments –Centre for seminars and conferences –Widespread education to create shared values Identify potential niches of opportunities, e.g. –Urban planning –Environmental consulting –Air quality monitoring –Regulatory policies –PRD environmental systems management –Energy projects and equipment financing –Carbon and emissions trading? China itself likely to become More pro-active and organized “Its their own problem” International pressures directly felt Top government initiatives likely to create large support infrastructure R&D and subsidies available But, it’s not an automatic slam dunk either.

14. 14 China’s energy demand will continue to increase substantially and will continue to rely on coal and oil for its needs. China faces an uphill battle to become more energy efficient and clean up its environment, while sustaining economic growth. Wealth creation and creating the capability and will to manage complex solutions are pivotal. Huge commercial opportunities exist in this transformational challenge. Hong Kong will need to work hard to play a meaningful role. Conclusions