Promises and pitfalls

Forging a new partnership between the United States and China can help address climate change, but only if regulatory and market shortcomings can be overcome. Elizabeth Balkan reports.

A new alignment on energy and the environment between China and the United States sounds like a formula capable of delivering real solutions on climate-change issues. China’s abundant scientific research-and-development resources and manufacturing capacity not only help carbon sink testing and the scaling up of renewable energies become more feasible, but also less costly.

However, the potential cost effectiveness of reducing emissions in China could prove more of a liability than a benefit where the environment is concerned. Systemic regulatory and market shortcomings demonstrate the difficulty of managing and preventing environmental degradation and guaranteeing public health in a developing country context. One example is in the power sector, where in some cases emissions performance has not matched infrastructure upgrades as expected because the use of low-grade coal has gone unmonitored. Does the new US administration have the will to face the prospect that a low-cost approach might be inimical to a low-carbon strategy? Will they ensure careful planning and responsible oversight?

The recent release of a joint Asia Society and Pew Center on Global Climate Change report (see “Road to rapprochement” by Banning Garrett and Jonathan Adams), followed by secretary of state Hillary Clinton’s trip to China, generated considerable US interest in enhancing US-China coordination on energy and the environment.

Grand bilateral collaboration undoubtedly can help reduce the rate of growth of emissions in both countries, and bring much needed efficiency improvements to China’s outdated power production and transmission infrastructure. And a powerful US-China nexus may help break post-Kyoto gridlock at Copenhagen in December. However, a partnership between the world’s largest carbon dioxide emitters is not the “holy grail” for preventing further environmental degradation. Though full of promise, the “China advantage” comes with its own pitfalls.

The China advantage, from the perspective of an emissions mitigation-minded policymaker, is in the development and deployment of clean technologies more cheaply than in the US. This is due to several factors. First, as a 2007 McKinsey report demonstrated, building new, cleaner power plants in places like China is usually cheaper than retrofitting old plants, such as those in the US.

Second, savings come from lower legal costs. Legal considerations that would stall or altogether prevent certain activities in the US are absent in China. For example, attempts to test clean technologies in the US are often riddled with logistical, political and legal obstacles. Nascent and feeble private property laws in China de facto enable the government to exercise eminent domain without significant legal pushback or the same expense as in the US. This makes China a comparatively attractive place to test new technologies, including ambitious clean energy demonstrations of carbon capture and sequestration and an advanced electric grid.

However, the lack of legal barriers can present significant environmental liabilities. For instance, the structure of the Chinese legal system makes it difficult or impossible for individuals to file and succeed in a lawsuit against the state or a private company; and, further, the rules of civil procedure do not permit individuals to file class action lawsuits. In the absence of individual legal recourse, there is little incentive for the private or state actors involved to minimise the risk of pollution associated with such demonstrations.

Finally, China’s manufacturing sector offers a cost-cutting strategy. It is no secret that China’s manufacturing capacity far outstrips that of the US, in terms of cost, across many industries. Optimists often fantasise about the conversion of China’s existing widget factories into production sites of clean energy and energy efficiency equipment. However, the reality is that China’s manufacturing sector offers a cost advantage precisely because environmental costs like treatment of industrial waste are often not factored in to the cost of production. This is due, in part, to lax local government monitoring and enforcement of environmental regulations. Indeed, instances of environmental negligence exist even amongst power producers who have invested considerable capital in efficiency upgrades and cleanup technologies.

“Greener Plants, Greyer Skies?” [pdf], a year long study by MIT’s Industrial Performance Center, surveyed 85 power plants (with a total of 299 generating units) across 14 provinces in China. Through a survey of plant managers and specialised personnel, the researchers found that although a sizable share of power plants have installed state-of-the-art equipment, disuse or misuse had compromised the effectiveness of their efforts.

The report overturns the assumption often held by outsiders that the problem lies in lacking or ineffective governance. Rather, the pervasiveness of expensive equipment – almost 80% of the plants had installed “clean coal” SOx scrubbers on at least one of their power generating units – suggests that commercial and political levers are providing the needed pressure for improvements in infrastructure.

The problem, it turned out, was how energy infrastructure was being operated and the types of coal used.

Rising fuel costs and government-set feed-in pricing have strained power producers considerably, prompting them to seek cost-cutting measures. One way plants do this is by substituting cheaper, substandard coal. However, when lower quality coal runs through the generating units, the capacity of cleanup systems is degraded. Likewise, emissions "depend almost entirely on the quality of the coal they use,” said the report’s lead author, Edward Steinfeld, rising when lower quality, high-sulphur coal is burned.

The report also found that smokestack scrubbers and other equipment, which accounted for upwards of one-third of total plant expenses to operate, were idled to save costs.

Substantial improvements in standards are not enough. Moreover, pouring money into Chinese infrastructure improvements, which the US may already be considering, will be a wasted opportunity unless the government can enforce rules on operation and fuel procurement. The ability to monitor plant operations, combined with energy pricing reform (by setting the price of power artificially low, the government actually punishes cleaner, more efficient producers that are less unprofitable), are crucial prerequisites for environmental improvements in China’s power sector.

Looking ahead

Washington has awoken from an eight-year slumber and begun to consider international solutions appropriate to an international problem. The new administration has already demonstrated its intentions to take decisive action on climate policy; namely, by including one of the world’s major stakeholders and emitters. However, we have yet to see whether collaboration on energy and climate will involve appropriate monitoring and regulation in order to ensure responsible, effective environmental solutions.

The nature of the US-China engagement currently under discussion demands the establishment and enforcement of tougher standards more stringent than those governing other bilateral arrangements, such as trade agreements. Already, China has sent the encouraging signal of a commitment to make progress on environmental protection legislation. Since 2007, Beijing has formulated power sector standards on SOx emissions and energy efficiency. In coming years, the government plans to decommission old plants and implement stringent emissions requirements for new plants that come online.

However, as the MIT study demonstrates, these standards will be meaningless without on-the-ground capacity to monitor and evaluate policy outcomes. The US should understand the market conditions and other limitations in China and help to build institutional capacity. Of course, anchoring bilateral activities with better oversight would eliminate some of the cost advantage that makes China an appealing partner on energy and climate collaboration. But the alternative would mean a cost of wholly greater proportions, which neither the environment nor humanity is prepared to bear.

Elizabeth Balkan advises private and public stakeholders on energy and climate policy, and cleantech investment strategies in China.

Homepage image by Bret Arnett