China’s contradictory energy measures

China is talking up its efforts to reduce its energy intensity (the amount of energy used per unit of GDP) as it looks like it could miss its targets for the 2005 – 2010 period.

The big questions have always been; how serious is it, and how effective will those measures be?

Several commentators are sceptical, as we wrote in a recent post describing claims that China’s carbon (not energy) intensity efforts were not really efforts at all; just business as usual. This drew an interesting comment from NRDC’s David Cohen-Tanugi, who argues, among other things, that:

For a country like China that has already taken significant actions to reduce the growth of its energy demand and emissions, the difference between continuing existing policies and business as usual (i.e. doing nothing to address climate change) is considerable.

It’s a good point. But determining what’s a genuine energy reduction policy and what’s ‘business as usual’ can be complex, especially in an economy where government explicitly wants to move higher up the value chain anyway. Shifting this way tends to reduce energy intensity regardless.

So should we only “count” China’s energy-related policies, or its broader economic policies too?

It’s much more clouded by the fact that some stimulus measures introduced during the past few years have encouraged greater energy intensity (China’s economy, remember, is already fairly high on this scale.)

The withdrawal this week of export tax rebates for 406 commodities highlights this. Such rebates had been increased several times in 2008 and 2009 to ward off economic slowdown (rather successfully, it seems).

And as the FT points out, those sorts of measures are thought to have thwarted China’s efforts meet its energy intensity reduction targets, by supporting industries such as cement and construction.

So the winding back of those measures could actually be a concrete step towards China catching up on its energy targets.

Indeed Goldman Sachs analysts, who believe the move is bullish for commodities prices, point out that all 406 commodities to lose the rebate are energy-intensive:

As opposed to creating a domestic glut of these commodities, the aim is to reduce supply from energy-intensive industries.

The less preferential treatments on energy-intensive industries will likely create a reduction in the supply for the respective commodities (such as steel and aluminium).

Chinese analysts also expect it to reduce energy intensity. From the FT:

“The profit margin is very low now, in general in the range of 5 per cent. So if you cut the 9 per cent rebate, a lot of mills will make losses,” said Xu Zhongbo, president of Beijing Metal Consulting, a private consulting group. He said the rebate cuts would help the government “control” the steel industry and improve energy efficiency by driving outdated mills out of production.

Back to Goldman, who also believe that the targeted energy-intensity rules will also affect commodities markets:

However, on the flip side, we believe less energy-efficient commodities (such as coal) used
as energy inputs in the production process will likely have negative demand shocks from the government’s energy-reduction efforts.

The really big China policy news of the past few days, however, is the shift of its yuan valuation policy.

Merrill Lynch analysts conclude that that too, will reduce oil demand.  A stronger yuan will lead to more oil imports in the short term, but weaker exports, a development they say is historically correlated to oil demand:

So China could get closer to its energy targets yet, through whatever means – or at least, reduce its emissions.

Related links:

Will China’s environmental problems affect its growth? FT Energy Source

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