China's Energy Policy Comes at a Price

That’s the title of a letter in the latest edition of Science. It nicely expands on some of my earlier concerns about China’s energy policy in the Clout & Climate Change war game and in reality. The author, Quiang Wang of the Guangzhou Institute of Geochemistry, writes,

China’s energy prices are mainly decided and controlled by the government. Because the government emphasizes social stability over scarcity of resources or environmental cost, it sets the energy prices very low. For example, Chinese gasoline and diesel prices rose by less than 10% in 2007, when global oil price nearly doubled. Moreover, in January 2008, the Chinese government decided to freeze energy prices in the near term, even as international crude oil futures have continued to surge.

Energy conservation and efficiency are hard to achieve because government-set prices encourage excessive energy consumption and waste. The low energy prices send a distorted market signal to consumers that there is no shortage of natural resources, indicating that enhancing energy efficiency is unnecessary and waste is justified.

A market-oriented energy-pricing mechanism is an inevitable requirement for China to address climate change, although the reform of the energy pricing mechanism means increased energy prices, which will bring public dissatisfaction and possibly social instability.

In 2005, I built a simple model of the Chinese electric power system, focused on coal-fired generation. One of the most beneficial strategies in the model is to make plant dispatch and power pricing more market-oriented, strengthening the incentive to install cleaner generation and retire or retrofit old dirties. That’s tough to implement as long as utilities wield more power than their regulators.

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