China’s economic stimulus package: implications for climate change and energy efficiency

Reading the tea leaves of China’s economic and energy policy rhetoric is never easy, but early November has seen an unusually high degree of apparent internal contradiction. On 7th and 8th November, the UN held a high level meeting in Beijing on technology development and technology transfer relating to climate change. At this meeting, China’s Prime Minister re-iterated the government’s commitment to address the causes and consequences of climate change, as well as calling for richer states to transfer their technologies to poorer ones. This speech builds on China’s ‘National Climate Programme’ published by the National Development and Reform Commission in July 2007 and the White Paper on ‘China’s Policies and Actions for Addressing Climate Change’ issued by the State Council in October 2008.

Yet on day following this Climate Change meeting, the 10th November, the government announced its much anticipated economic stimulus package. And what lies at the heart of this package? – housing and infrastructure. According to the Chinese press, the Prime Minister made special mention of the need to boost the production of iron, steel and cement production. He might also have added plate glass.


These two policy pronouncements, one on climate change and the other on the need to boost economic growth, have the potential to be in outright contradiction to each other, unless the government is very careful. Why? Because the sudden increase in energy consumption, in energy intensity and in greenhouse gas emissions in China which started in 2002 was driven by a similar economic stimulus package directed at housing and infrastructure.

Since 2004, energy efficiency and energy conservation have been near the top of the government agenda, and significant steps have been taken to reverse the trend of rising energy intensity. The government set a target of reducing energy intensity by 20% between 2005 and 2010.  Inefficient industrial plants have been closed, efforts have been made to enforce existing building codes, vehicle fuel efficiency standards have been raised, energy efficiency performance measures have been established for large companies and local governments, and public awareness has been raised. The government has also been discussing the need to progressively change the structure of the economy away from its dependence on heavy industry. At the same time, recent years have seen significant investment in renewable energy. These measures succeeded in reducing energy intensity by 1.8% in 2006 and 3.7% in 2007.

The economic slowdown which has emerged during 2008 has already seen a substantial decline in China both of economic activity and of the rate of growth of demand for energy. Many steel and cement plants lie idle. This may be bad for the economy but such a slowdown could provide a chance for the government to further consolidate the energy efficiency gains already made. More inefficient plants could be closed. Mergers and acquisitions would allow better companies to improve the energy performance of the less efficient ones. The uncontrolled construction of inefficient industrial plant would cease. Government officials and company managers could focus their attentions more on improving energy efficiency than worrying about whether to build more capacity to deliver energy.

At first sight the new economic stimulus package appears to make such a scenario unlikely. Rather than seek to continue efforts to change the structure of the economy and to boost consumer spending, the package looks rather traditional and old fashioned, but with some notable exceptions.

The ten identified priorities in the stimulus package are: welfare housing, rural infrastructure, key public infrastructure projects, social services, environmental services, promotion of new industrial sectors to change the structure of the economy, economic reconstruction in areas hit by natural disasters, income assistance for the poor, VAT reform, and increased lending by banks.

All of these priorities are entirely consistent with the need to stimulate economic growth and to address pressing social concerns, which is why the package has received such a welcome from around the world. But the contents of the plan do appear to indicate that energy conservation and energy efficiency have dropped down the list of government priorities. That this has happened in China is not surprising, for I am sure that every government around the world is focusing its attention on rescuing their country’s economy and financial systems, and on seeking to retain their political power, if necessary at the expense of energy conservation.

If China’s government wishes to ensure that the surge of energy demand and energy intensity seen in recent years is not repeated and if it wishes to achieve its goal of reducing energy intensity by 20% by 2010, it will have to put in place instruments to control the behaviour of local governments and of enterprises; for it was the almost complete lack of control over local governments and enterprises which led to the surge in energy intensity between 2002 and 2005. Local governments colluded with enterprises to build power plants, steel mills, cement plants, coal mines, office blocks and apartment buildings, many without the required approvals and many with low technical standards. Unless the central government continues to press ahead with existing energy efficiency policies and to bring in new measures to constrain unwanted behaviour, the country faces the risk of a repetition of the last few years. Local government officials and enterprise managers will see the opportunity for new profits, and energy efficiency and environmental protection will be set aside. As a result, the recently-achieved favourable trends in energy intensity and greenhouse gas emissions may be reversed.

An additional potential threat to China’s performance with respect to energy efficiency and greenhouse gas emissions lies outside the country. As the world’s developed nations grapple with severe economic and financial challenges, there is a high risk that energy efficiency and climate change slip down their agendas. In addition, there is a near certainty than the financial capacity of the developed nations to help developing nations with their energy and environmental challenges will be temporarily diminished. The private equity funds may indeed have funds available for investments in new and renewable energy and in energy efficiency, but the major banks, the international financial institutions and national governments are likely to have other priorities. Likewise multinational energy companies which had been seeking involvement in such projects may turn their attention back to ‘core’ activities, and leave new and desirable ‘clean’ initiatives for the future.

As a consequence, we face the unpleasant possibility that China’s economic stimulus package undoes much of the good that has been achieved in the last four years with respect to energy efficiency and emissions. However, we must wait to see the details of the package before drawing the conclusion that such an outcome is inevitable. In addition, we must keep an eye on the systems of national governance in order to assess the extent to which China’s central government does indeed retain control over policy implementation.

Philip Andrews-Speed is Director of the Centre for Energy, Petroleum and Mineral Law and Policy at the University of Dundee, UK

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