Choices lie ahead in world that is green

For developing countries such as China, growth over next 10 years will require big policy shifts

The 18th National Congress of the Communist Party of China that has just finished in Beijing will affect the country's social and economic development for at least the next 10 years. Many people will be interested in how the congress will affect China's green development.

China has a large population with still relatively low per capita energy consumption. The country is now at a stage that requires a lot of energy to support growth, and it has a coal-dominated energy structure that will be difficult to change soon.

The development of green energy in China has great potential. Renewable energy such as wind and solar have experienced rapid growth in the past few years. At the end of last year China's wind power generation capacity amounted to 47 gigawatts, and the figure for photovoltaic generation was 2.14 gW. They account for only about 4.45 percent and 0.2 percent of the total power generation capacity. However, together they produce less than 2 percent of the country's electricity. Renewable energy is used on a small scale, mainly because the cost is much higher than that of other energy sources.

After intensive discussion in recent years, the leadership should have a good understanding of the link between energy security and climate change. This will help everyone appreciate the role of green development in China's future prosperity.

The rapid economic growth in countries such as China requires sufficient and cheap energy to ensure their energy security. However, China's large energy demand makes reducing emissions more difficult and more costly. Right now, the country's economic structure with low energy efficiency, high energy consumption and high emissions is problematic.

For developing countries such as China to balance economic growth and efficiency is fraught with difficulties, and development over the next 10 years will require big policy shifts.

Both climate change and having enough energy require government policies that encourage all forms of green energy technology. From China's perspective, economic growth needs to be sustained by sufficient energy supply, one that simultaneously meets environmental constraints.

With China's growing appetite to oil imports, and its increasing coal consumption, it should have sufficient motivation to exploit green energy in an effort to ensure energy supplies and to deal with environmental problems. That means it is crucial to develop green energy technology and green energy.

But what policies do we need? Given China's emphasis on social stability, energy costs are highly sensitive, which presents difficult policy choices when it comes to energy supplies and green development.

The next 10 years will be critical, because smart globalization will pave the way for green-energy technologies, which in turn will affect green development worldwide.

In the past few years investment has surged in China's renewable energy industry, but since this year, affected by excess capacity (lower prices), the European debt crisis (smaller market), and the investigations by the US and the European Union (an even smaller market), there will be severe challenges in developing renewables, such as solar and wind energy.

The government and renewable-energy enterprises need to reevaluate their strategies and manage market risks. It is important that enterprises and the government, particularly local governments, understand their proper roles. Because of the size of China's population and large energy demand, the country's huge market could provide green-energy industries with sufficient space to expand and should offer adequate profit margins for green-energy technologies and investment.

The next 10 years require further international cooperation to deal with increasing trade conflicts from which no country stands to benefit. An international consensus on supporting renewable energy development is needed. We should view renewable development not only from an economic perspective, but also as a global approach to eliminating carbon emissions.

Trade barriers could slow down the development of renewables to a large extent. So it may be necessary to make a distinction between traditional energy technologies and renewable ones; and more tolerance and space could be given to the renewables trade and renewable-technology transfer across borders.

In the next 10 years the government should work out a strategy and plan to guide green investment. The government should focus on research and development and end use, and leave equipment manufacturing to the market. Green-energy products are still expensive, so their development costs need to be reduced. This requires a well-designed green-development strategy and program.

Future green development in China requires at least two more important things. One is the right pricing of fossil fuels to increase competitiveness of green energy, and the other is cooperation between researchers and enterprises to promote technology. What is needed is a sound pricing mechanism and reasonable subsidy policies. An effective power pricing system could provide the right signal for renewable energy investment, and properly guide foreign and private investment in green development projects.

The Chinese government has established on-grid benchmark tariffs in recent years for renewables, including wind and solar. Setting the benchmark price is clearly a right first step, and it has driven a rapid growth of wind power in recent years. Although benchmark tariffs make profitability of renewable energy relatively stable, the returns on renewable energy are still relatively low, and the confidence of investors is not high enough. That means the longer-term problems of renewable energy to ensure green development need to be tackled.

To raise the competitiveness of green energy in China, government subsidies are required in the short run, but in the long run, prices of electricity generated by fossil fuels need to be adjusted to reflect the cost of the scarcity of resources and of environmental pollution, so greener energy can have a level playing field of competition. In addition to favorable policies, the government needs to encourage cooperation between researchers and enterprises to encourage technological transformation for green development.

Future policy measures and development plans need to focus on protecting intellectual property rights, encouraging innovation and attracting more skilled personnel to the renewable energy industry.

In addition, green development needs appropriate laws and regulations.

Private-sector participation is an important aspect. The country has been troubled recently on how to encourage private investment in energy, and the government has tried hard, but with little success. Policies encouraging private investment in energy without complementary policy reforms, such as energy pricing reforms, are of little use.

From a sustainable development perspective, green development in China is inevitable, but it requires an approach that puts a premium on low costs. Government financial support is needed in the short run, but longer-term development will require reforms in pricing and managing energy. If the government continues to control energy prices, a better system of subsidies is required. However, the government's efforts to keep a rein on energy costs, demonstrated in the problem of raising electricity prices, reduces potential for energy conservation and green development.

The author is director of the China Center for Energy Economics Research at Xiamen University. The views do not necessarily reflect those of China Daily. Contact the writer at bqlin@xmu.edu.cn

(China Daily 11/16/2012 page11)