China's NDPC Reorganizes Energy

China’s National People’s Congress convened last month for its annual session and made two organizational changes in the sectors of energy and the environment. As expected, China’s State Environmental Protection Agency was upgraded to ministerial status. Also, as expected, the Congress failed to create an energy ministry. This article looks at the impact of these decisions on China’s goals of reducing the economic and environmental impact of its rapidly rising energy demand . During the current Five Year Plan (2006-2010), China has committed to reduce energy consumption per unit of GDP by 20 percent and drop with discharges of key pollutants 10 percent.
The elevation of China’s State Environmental Protection Agency (SEPA) will put it in a stronger position when arguing its objectives against those of major economic ministries. This reflects the increasing importance China places on addressing the environmental impact of energy production and use, as well as pollution from other industrial process that has degraded China’s air, land and water. Addressing pollution is particularly acute for China, which continues to rely on coal to fuel some two-thirds of its energy demand and nearly three-quarters of its electricity generation. China is the world’s largest producer and consumer of coal and, despite efforts to increase nuclear and renewable energy, China’s use of coal is forecast to double by 2020. Last year The World Bank reported that “China is home to 20 of the world’s 30 most polluted cities due largely to high use of coal for energy. Serious soil erosion, acid rain and polluted waterways also affect the lives of millions. The national economy is dominated by manufacturing rather than services, which adds to environmental pressure.”
Speaking at a meeting of China’s State Council or cabinet last October, Premier Wen Jiabao called for a brake on investment in energy-intensive industries that create additional environmental burdens. "Currently, new projects are expanding too quickly. We must strictly control them, especially energy-intensive, highly polluting projects as well as those in sectors where there is over-capacity," Wen said. In addition to emissions of sulfur dioxides, nitrous oxides and particulate matter, it is widely believed that China surpassed the United States in 2007 in the emission of greenhouse gases. The premier was more categorical in March 2007, calling China’s economy "unstable, unbalanced, uncoordinated, and unsustainable."
While ministerial status will help in the bureaucratic infighting, more vital is the question of resources. SEPA’s staffing is variously reported as 300-450 in Beijing. By way of comparison, the State Environmental Protection Agency of California has an annual budget of $1.7 billion, which supports 4,781 personnel positions, while the U.S. federal EPA employs some 17,500 and spends about $7.5 billion annually. SEPA reportedly can call on some 60,000 local officials, but whether they further or frustrate environmental enforcement is a question.
This leads to the second problem not resolved by SEPA’s ministerial status: the lack of enforcement of environmental regulations at the provincial and township and village levels. With townships and villages frequently dependent on a few or even a single industry, local officials are loathe to levy fines for non-compliance. As Prof. Kenneth Lieberthal of the University of Michigan—and former Asia Director at the National Security Council—has reported, even when fines are assessed, local authorities sometimes reduce taxes or other fees on non-compliant companies to offset the fines. Finally, fines rarely reach, let alone exceed, the cost of compliance, so the financial incentive is to pay the fines, rather than make the changes needed to comply with environmental directives.
The failure to set fines sufficiently high to encourages compliance demonstrates the final failure, i.e. China’s continuing aversion to letting markets resolve environmental and energy issues. Not only is there not a market incentive to comply with environmental regulations, but continuing subsidies for many fuels stokes artificially high demand for energy, with resulting greater negative environmental impacts.
The National People’s Congress was even more timid in “restructuring” the energy portfolio. The failure to create an energy ministry came as no surprise. The Chinese state press organs for the last several months have been printing commentaries suggesting that bureaucratic infighting among the agencies that would be absorbed into an energy ministry made it unlikely that the 2008 Congress would approve such a reorganization. Western press commentaries carried contradictory reports on the views of major Chinese energy companies regarding an energy “mega-ministry.” Some reports said the companies would welcome a central agency to avoid the welter of mandates and regulations coming from disparate agencies, just as U.S. companies generally prefer national regulations rather than various state regulations. Other reports suggested that the companies opposed the consolidation of power into a single ministry. In any event, one needs to understand that Chinese companies cannot escape close supervision by the government, whatever its bureaucratic guise. Unlike international oil companies, Chinese companies are owned by the Government of China. Even a giant like PetroChina, which made headlines last November when its market capitalization reached over US$1 trillion-- more than double that of ExxonMobil, floats less than 30 percent of its shares. The rest of its shares are owned by its wholly government-owned parent China National Petroleum Corp. Also, the majority shareholder, i.e. the Communist Party of China, picks the heads of these companies. Although PetroChina Chairman and President Jiang Jiemin has 30 years experience in the oil and gas business, before he was named PetroChina vice chairman in May 2004, he served four years as deputy governor of Qinghai Province.
China last had an energy ministry from 1988 to 1993, when it was dissolved and devolved into separate ministries for petroleum, coal and electric power. Since 1993 China has lacked a central energy policy-making body, although the State Planning Commission (later the State Development Planning Commission and now the National Development and Reform Commission--NDRC) exerted de facto control of the energy sector because it had to authorize all major capital spending projects. The Ministries of Coal and Power remained until 1998, when further restructuring diffused policy-making by disbanding these ministries and delegating their power among several agencies, including the NDRC, and by default to state energy corporations. Recognizing the lack of a central energy policy body, in 2005, China created a National Energy Leading Group (NELG) to study major policy issues concerning China’s national energy development strategy, energy development, conservation, energy security, and emergency responses as well as international energy cooperation. It was responsible for providing advice and policy recommendations to the State Council. At the same time, it established a National Energy Office within the NDRC, led by NDRC Chairman Ma Kai, and reporting to the NELG, to implement policy and monitor progress on energy security issues.
The energy ministry most recently proposed presumably would have brought together the authorities of the NDRC as well as all or parts of the Ministry of Land and Resources; the Ministry of Water Resources; the Ministry of Commerce; the Ministry of Science and Technology (MOST); the State Commission of Science, Technology and Industry for National Defense (COSTIND); the Chinese Academy of Engineering; the State Electricity Regulatory Commission (SERC); and the State Assets Management Commission.
The decision of the 11th National People’s Congress created a high-level national energy commission, with a national bureau of energy set up as the commission’s working office under the NDRC. The new bureau is intended to integrate the NDRC’s present functions on energy management, the functions of the National Energy Leading Group (which is to be disbanded) and the nuclear power management of the Commission of Science, Technology and Industry for National Defense. Other than giving the NDRC authority over nuclear power management, it is not immediately evident how this set up differs from the one it replaces. And like the case of SEPA, moving the boxes about does not address central issues that stymie a unified and effective energy security policy.
As with the case of SEPA, funding and staffing are key constraints. NDRC vice chairman for energy Zhang Guobao never tired of asking American Secretaries of Energy how many people staffed the U.S. Department of Energy. When told that the USDOE had some 18,000 staff—about 4,000 directly engaged in energy, Zhang would note that the NDRC’s energy bureau consisted of some 60 staffers.
Like the SEPA, the NDRC also has officials in provincial and municipal Development and Reform Commissions to carry out national mandates, but as in the environmental sphere, in the energy field national mandates for greater energy efficiency and less intensive industrial development often fall on deaf ears at local levels due to the desire to keep plants running and fueling local economic growth. For example, the central government has had a policy for several years of shutting down small coal mines, not only because they pollute much more than larger, newer mines, but also because these small local operations account for a disproportionately large number of mining accidents and fatalities. But no sooner are they shut down, than they spring back into operation. More recently, the central government has increased pressure on local and provincial officials by evaluating them on their contributions to increasing energy efficiency and reducing pollution, not merely on increasing economic growth.
Finally, as in the environmental arena, energy efficiency efforts are thwarted by the lack of a market that communicates the full value of energy resources and the associated environmental costs of their use. With nation-wide inflation in China having reached 7.1 percent in January and 8.7 percent in February, well above the government’s 4.8 percent target , efforts to contain inflation trump long-term goals of moving energy prices to market levels. Putting price (and export) controls on energy is one method that may effectively restrain price pressures in the short term. Chinese authorities have raised refined oil prices eight times since 2005, most recently with 10 percent increases last year in both May and November. But the growing gap between world oil prices and Chinese petroleum prices is dramatically reflected in the whopping 12.3 billion yuan (US$ 1.7 billion) subsidy that state oil company Sinopec received for its 2007 losses in the refinery business from buying crude at world prices and selling into the Chinese market at controlled prices. These subsidized oil product prices also help explain why China only managed to reduce its energy/GDP ratio by 1.23 percent in 2006 and 3.27 percent in 2007, compared to its goal over the 2006-2010 period of 4 percent every year. These lower fuel prices, as has long been the case in the U.S., encourage purchases of inefficient vehicles that stay in the fleet for years. In 2007, car sales in China rose 22 percent over 2006, but sales of small cars declined 30 percent while SUV sales jumped by 58 percent.
The organizational changes made by the 11th National People’s Congress will give the State Environmental Protection Agency additional heft in interagency debates; it is less clear that the restructuring of the energy sector will make any difference. To achieve its ambitious environmental and energy security goals, China must
• increase staffing and funding for these agencies,
• create greater accountability for provincial and local government and industry officials in cutting the growth of energy use and emissions, and
• move more rapidly to market pricing.
What is needed is not organizational change, but organic change. Until this happens, China remains unlikely to meet its ambitious targets to reduce energy intensity and environmental damage.