China's Search for A New Energy Strategy

Time To Liberalize Energy Prices

Much like the United States, China has an “all of the above” energy strategy: it plans to continue to rely on traditional sources of energy even as it makes the transition to cleaner fuels. And this is only natural. Both countries are continent-sized economies with diverse energy needs and geographically dispersed resources.

But China’s energy situation differs from that of the United States in several notable ways. For starters, the Chinese state’s role in energy looms large, and its hand is seen and deeply felt when it comes to prices. Even more important, China’s per capita resource availability is below the world average -- and even below that of some other developing countries -- yet its total energy consumption could potentially be the largest in history. It is little wonder that China’s energy strategy has been guided by the need to supply enough fuel to power an economy that grew from under $1 trillion in 1997 to more than $8 trillion in 2012.

Over that same 15-year span, China has become staggeringly dependent on imported energy: today, nearly 60 percent of its oil and almost 30 percent of its natural gas is imported. These developments have all but supplanted Beijing’s traditional concept of equating energy security with energy self-sufficiency. But China has little alternative, as just about the only resource it possesses in abundance is coal. (China now devours about four billion tons per year, or nearly half the world’s annual coal output. The bulk of those needs are met by domestic production.)

China’s rampant consumption of coal and fossil fuels has imposed an exorbitant cost on the country’s economic development, including severe environmental despoliation and thousands of deaths in coal mines. These environmental and pollution hazards have been regularly chronicled, and they are eroding the already limited resource base on which future growth depends. Resource scarcity, unfortunately, is a daily reality that China cannot evade.

Such constraints on future economic development are reflections of the growth model according to which the Chinese economy was built. While this model has come in for criticism from many angles, few have appreciated one of its most important features: cheap and highly regulated energy prices. But it is these suppressed prices that drive China’s uncontrolled energy consumption and its negative side effects.

MUCH ADO ABOUT INDUSTRIALIZATION

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