China's Green Energy Path
Image Credit: Flickr / Lhoon

China's Green Energy Path

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A growing number of Chinese scholars have trumpeted China as an emerging green giant for its clean energy production and its promises to aggressively cut carbon emissions. Yet as the “world’s factory,” China is the victim of heavy pollution, and releases more CO2 than any other nation. The time therefore seems ripe for a carbon tax and the strengthening of renewable energy subsidies in China, which would not only mitigate carbon emissions, but would also stimulate technological innovation.

Why is a carbon tax a good idea? For a start, some estimates suggest levying a carbon tax could help encourage improvements in industrial energy efficiency of anywhere from 5 percent to 25 percent. And levying a carbon tax can also help save energy by increasing fossil fuel prices. In 2009, Beijing’s municipal government imposed a carbon tax on gasolinefor the first time. Despite car numbers increasing by 40 percent, gasoline consumption increased by just a few percentage points, while diesel consumption fell.

Levying a carbon tax would also help reduce carbon emissions. China’s economy is expected to continue to be dominated by coal, which remains the cheapest and most readily available large-scale energy source in the country. A carbon tax would encourage both private and state-owned enterprises to reduce emissions.

There is a downside – carbon taxes are likely to be regressive, meaning the poor would ultimately likely be hit hardest as they saw prices rise. With this in mind, then, the Chinese government would do well to consider combining a carbon tax with other measures.

One option is to make renewable energy sources more competitive through the use of subsidies.Indeed, China has already been using subsidies to promote the use of wind and solar power as well as energy-efficient cars. In early 2009, the central government subsidized the adoption of clean vehicles in 13 megacities including Beijing, Shanghai, and Chongqing. The subsidies ranged from $7,350 for small hybrid vehicles to $87,700 for large fuel cell-based Buses. The subsidies are expected to see China’s “new energy” vehicle production increase dramatically, and by 2015 new energy vehicle sales are expected to top 1 million per annum.

China aims to have 15 percent of its energy come from non-fossil fuel sources such as nuclear and biofuel by 2020, up from 8 percent at present. In addition, it has pledged to reduce pollution and cut carbon emissions per U.S. dollar of economic output by 40 percent to 45 percent by 2020 compared with 2005 levels. But the current subsidies on three clean technologies – wind, solar, and electric vehicles – are insufficient for achieving these goals.

It’s true that chinese government funding of clean technology R&D has trended upward in the last decade. But there’s still limited private sector capacity in China, as well as a broader lack of innovation. Key reasons for this are an emphasis on quantity rather than quality (a legacy of the planned economy), a lack of managerial know-how, and a style of governance that doesn’t encourage managers to take risks in innovating. The government should therefore focus subsidies on the private sector, where there may be a better understanding of the likely commercial feasibility of green technologies.

The road to a low-carbon future and sustainable development is clear: a carbon tax levied on emissions coupled with subsidies for clean energy and private sector clean technology R&D. It will be a long road, requiring a great deal of government patience – there’s no shortcut for weaning China off fossil fuels. Which is why the next stage of the journey should be again as soon as possible.

Lin Shi is a teaching assistant at Columbia University in New York and a consultant at the World Bank Group in Washington.

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