1. Introduction2. Methods3. Results: Sources of Emergent Energy Demand in ChinaImprovements in Overall Energy EfficiencyWTO Accession and Structural TransitionsHousehold Energy Use and the Saturation EffectExports and Energy Sustainability4. Conclusions5. Referencesi SResearch Papers on Research Paper No. 07082001 Growth and Structural Change in China’s Energy Economy Fritz Kahrl David Roland‐Holst August, 2007 CENTER FOR ENERGY, RESOURCES, AND ECONOMIC SUSTAINABILTY 338 GIANNINI HALL UNIVERSITY OF CALOFORNIA BERKELEY, CA 94707 PHONE: (1) 510-643-6362ii Research Papers in Energy, Resources, and Economic Sustainability This report is part of a series of research studies into alternative energy pathways for the global economy. In addition to disseminating original research findings, these studies are intended to contribute to policy dialogue and public awareness about environment-economy linkages and sustainable growth. All opinions expressed here are those of the authors and should not be attributed to their affiliated institutions.1 Growth and Structural Change in China’s Energy Economy Fredrich Kahrl and David Roland‐Holst1 UC Berkeley August, 2007 Abstract China’s energy economy underwent significant shifts from 1995‐2005. We examine changes in energy demand patterns in China using national input‐output and energy input tables from 1997, 2002, and 2004. Our results indicate four overarching trends. First, the energy intensity of the Chinese economy declined significantly from 1997‐2004. Second, this longer‐term decline masks a minimum in 2002, as more energy inte nsive domestic consumption and exports drove increases in economy‐wide energy intensity from 2002‐2004. Third, for urban households embodied energy intensity appears to be rising at lower incomes and falling at higher incomes, suggesting a nascent saturation effect for household energy requirements in China. Fourth, meteoric export growth following China’s accession to the WTO has led to a convergence of total energy embodied in domestic (household) and foreign (export) consumption. Keywords: Chinese energy policy, energy intensity, energy transition 1 Energy and Resources Group and Department of Agricultural and Resource Economics, respectively. Correspondence: [email protected]. 1. Introduction China has been the world’s most vibrant economy and its largest source of energy demand growth over the past two decades, acco unting for more than one quarter of net growth in global primary energy consum ption from 1980‐2004 (EIA, 2006). To sustain economic growth and rising living standards, China needs effective policies that anticipate and shape the country’s future energy requirements. In this paper, we use energy supply chain analysis to examine detailed official data over the last decade for insights into China’s changing energy use patterns. Our results indicate that incipient structural changes in the Chinese energy economy and sustained economic and energy demand growth in China will pose important, and different, challenges for policymakers. Growth and Structural Change Figure 1. Energy Intensity and Energy Use in China, 1980‐2005 Sources: Energy and GDP data are from NBS, various years; GDP data are in 1990 yuan, using the IMF’s deflators for China 2 3 China’s energy economy has undergone significant changes since the turn of the millennium. A combination of sustained absolute growth (i.e., higher economic growth inducing higher energy demand growth) and structural shifts (i.e., rising energy intensity requiring more energy per unit of economic growth) is responsible for these changes. From 2001‐2005 China’s primary energy demand growth (23.5 EJ, 9% annual growth ) exceeded 1980‐2000 primary energy demand growth (22.9 EJ, 4% annual growth) (NBS, 2006). After declining steadily from 1980‐2000, the Chinese economy’s energy intensity began to increase in 2001 (Figure 1). The externalities associated with changing energy demand patterns in China are considerable. From 1990‐2000 China accounted for 16 percent of the gross growth in global energy‐related CO2 emissions; from 2001‐2004 this share rose to 41 percent (EIA, 2006). While we do not attempt to separate out the effects of absolute growth and structural change, it is important to note that these two effects have different implications and pose different challenges for Chinese and OECD policymakers. The interplay between growth and intensity is particularly important in the context of international climate negotiations. Rapidly growing countries like China have high uncertainty in economic and attendant energy demand growth. Thus they are less likely to commit to binding, absolute reduction targets that do not account for growth uncertainty. Chinese government proposals to reduce carbon dioxide (CO2) emissions, to the extent that they have mentioned targets, have indeed focused on CO2 intensity targets rather than absolute reduction targets.2 Quite apart from international climate negotiations, in response to the huge surge in energy demand during its 10th Five‐Year Plan (2001‐2005) the Chinese central government set a binding goal of reducing the energy intensity of the country’s GDP by 20 percent during its 11th Five‐Year Plan (2006‐2010). However, without a clearer understanding of the drivers of rising energy intensity in China, it remains unclear what kinds of policies will be most effective for reducing it. Explanations for the 2001‐2002 shift in the Chinese economy’s energy intensity have thus far focused on supply‐side forces, including a marked increase in the share of heavy industry in 2 The draft of China’s First National Climate Change Assessment reportedly includes a goal of reducing the energy intensity of the Chinese economy by 40% by 2020 and 80% by 2050 (Herzog, 2007). The final draft of China’s National Climate Change Programme (NDRC, 2007) contains no mention of any targets. 4 China’s economic output since 2002