Arthur Kroeber’s book on China’s economy includes an excellent section on energy but a rather selective account of its environmental issues.

Arthur Kroeber’s book China’s Economy in Oxford University Press’s What Everyone Needs to Know series (1) deserves a wide readership.  Admittedly it’s rather dry: those who like their reading on serious and important topics to be spiced with anecdotes or cultural references had better look elsewhere.  But for the general reader (in English) who wants to understand China’s development and possible future – to go beyond journalistic impressionism and simplistic or politically-motivated judgment – I doubt whether there is anything better.  This is a properly researched book at a well-chosen level, a serious piece of description and analysis which avoids over-technicality.  The chapter on ‘Changing the Growth Model’, for example, makes extensive use of key ratios such as the capital-output ratio while avoiding the complexities of, say, total factor productivity.  The tables and charts are helpful and not overdone. Also helpful is the division of each chapter into sections headed by questions.  Sensitive issues such as corruption and possible exchange rate manipulation are treated in a fair-minded and temperate manner.

A full review would be beyond the scope of this blog, but I offer here some comments on Chapter 8 entitled Energy and the Environment.

Starting with energy, I commend the book for using consistent, well-defined and sensible units (p 150).  Writings on energy often confuse matters by switching between different units, using vague units (“enough to power a million homes”) or, worst of all, failing to distinguish between units of energy and units of power (2).  By contrast, Kroeber sets out very clearly the main facts of China’s energy use. The total in 2014 was 22 billion barrels of oil equivalent, as compared with 17 for the US, 12 for the European Union and 95 for the whole world. Of China’s 22, 14 are from coal (which is about half of world coal consumption) and another 5 from other fossil fuels, underlining the importance of China in worldwide efforts to address climate change by limiting greenhouse gas emissions.

Kroeber also presents two important per unit measures of energy use.  As might be expected given China’s huge population, its per capita energy use is not especially high: much less than the US, less than the EU, and only slightly above the world average. More surprisingly, perhaps, China’s energy use per unit of output (GDP), also termed energy intensity, is more than twice that of the US and the EU, and almost twice the world average.  This is despite considerable improvements in energy intensity already achieved, eg a 19% improvement during 2005-2010 after the government had set energy efficiency targets for large firms in heavy industry (p 160).

China’s high energy intensity calls for explanation, and Kroeber identifies three causes (pp 150-2 & 161).  One is the structure of its economy, with industry accounting for a high proportion of output, agriculture smaller proportionally than in many poorer countries, and services as yet smaller proportionally than in most developed countries.  Because industry is more energy-intensive than agriculture or services, and because a high proportion of China’s industry consists of especially energy-intensive heavy industry such as steel and cement manufacturing supporting its housing and infrastructure boom, its overall energy-intensity is high.  A second cause is China’s unusually high reliance on coal, which is a less efficient energy source than natural gas for generating electricity.  This is a consequence of the geographical accident that it has large reserves of coal but much less oil and gas.  The third cause relates to the efficiency with which China uses its energy sources. Here the picture is mixed.  Many of China’s coal-fired power stations have been built relatively recently to modern standards, and are somewhat more efficient than older power stations in the US.  Its fuel efficiency standards for vehicles compare reasonably well with those in developed countries. However, the energy efficiency of homes and offices is often poor, and many old, unprofitable and energy-intensive industrial plants have been kept open by local governments seeking to maintain employment and tax revenues.  Energy prices, though not especially low by international standards, are subject to controls which can reduce incentives to make energy-saving investments.

Kroeber does not attempt to quantify the overall effect of these causes, but it does seem plausible that together they go a long way towards explaining China’s high energy intensity.  A point he might have added is that the annual temperature range in much of China is such that homes need both heating in winter and air-conditioning in summer.

Like many countries, China has sought to diversify its energy sources in order to reduce its reliance on coal which is both a major source of local air pollution and a major contributor to global greenhouse gas emissions (pp 152-4).  It has become a major oil importer (although the IEA’s statistics do not seem to support Kroeber’s claim that in 2013 it became the world’s largest (3)).  It also imports natural gas.  Over the last decade, China has more than doubled its output of nuclear power and hydropower, and increased its output of electricity from renewables almost twentyfold.  However, the effect of all this in reducing coal’s share of China’s energy mix has been relatively small. In absolute terms coal consumption has continued to grow (from which it may be inferred that China’s overall energy use has also been growing).  Its coal consumption may now be close to peaking, although Kroeber advises caution on this point, both because of the short-term effect of macroeconomic fluctuations on energy demand, and because of possible under-reporting of output by smaller coal mines.

Kroeber states, correctly, that China produces over 90% of the coal it uses, and that its coal imports are only a modest proportion of its total use.  It might be added that in the context of world trade in coal, China is nevertheless a major player, and was the largest importer in 2014 (4).  Because its imports are the difference between two huge numbers (its demand and its domestic production), there is considerable potential for fluctuations in its imports to have a major impact on the pattern of trade in coal.

Because of its huge energy consumption and reliance on fossil fuels, China is the world’s largest emitter of greenhouse gases, accounting in 2012 for 24% of the global total.  Kroeber considers, but seems to me to do less than justice to, the fact that some of China’s emissions relate to the production of goods for export, and arguably should be attributed to the importing countries in any international apportionment of responsibility for climate change (pp 154-5).  I cannot see why he links the issue to that of multinational companies moving their production to China, as if exports produced by Chinese companies are irrelevant in this context.  He also states that most of China’s emissions relate to heavy industries supporting domestic construction and not to export industries.  It would have been useful to have quantified or given a source for this claim, and to have noted that domestic construction includes construction of factories producing goods for export and transport links to carry such goods.

Turning to other environmental issues, the book focuses mainly on the much-publicised issue of air pollution, treating other issues only indirectly via an environmental performance index.  Understandably perhaps given the broad scope of the book, it says little about soil and water other than noting their “extreme degradation” due to industrialisation (p 155).  A fuller treatment would have considered each of the following, and efforts to address them: soil erosion (5), soil pollution (6), reduced river flows (7), depletion of groundwater (8), and water pollution (9).  These are not minor or merely local issues.  Unless effectively addressed, they have the potential to constrain China’s food production and so increase its demand for food imports with impacts on world food prices (10); and the costs of addressing them are likely to divert significant resources from elsewhere in the economy.

As in other countries, air pollution in China includes both gases – notably sulphur dioxide – and particulates of various sizes.  Over 50% is attributable to burning of coal, 15-20% to vehicle emissions, and the remainder to other sources (pp 159 & 161).  Although Kroeber seems to suggest that the problem is most serious in Beijing and other northern cities (pp 155 & 161), he does not offer a systematic description of the geographical pattern of air pollution.  If, as seems likely, the air is cleaner in much of the countryside, then that surely needs to be taken into account in any assessment of rural-urban inequality (a topic discussed by Kroeber elsewhere in the book (pp 30-5))?

China has made some progress in addressing air pollution in that emissions of sulphur dioxide have been reduced, although concentrations of small particulates have continued to rise (p 161).  What progress there has been seems to have been achieved largely via improvements in energy efficiency and some diversification away from coal as described above.

Kroeber rightly rejects the idea that China’s environmental problems are “uniquely attributable” to its growth model or political system, pointing out that Japan, the UK and the US all experienced severe air pollution in the mid-twentieth century (p 156).  He argues however that its problems are particularly severe for a country at its stage of development.  As evidence for this he presents a version of the Environmental Kuznets Curve (a formulation of the tendency for countries to give a higher priority to environmental issues as they become richer), plotting scores on Yale University’s Environmental Performance Index (EPI) (11) against gross national income for 30 of the world’s most important countries (p 157).  This shows a fairly clear relation between EPI and income, albeit with, as is to be expected, some spread of points about the line of best fit.  China’s EPI  score is some 14% less than might be predicted from its income level.

Kroeber suggests that this can be explained in terms of China’s political system, its ‘East Asian’ approach to development, with an unusually high premium on maximising economic growth, and its aspiration to be a superpower (pp 157-8).  This seems questionable.  A possible alternative explanation starts from the fact that environmental improvement is usually a gradual process. This is for various reasons: some pollutants have a finite life over which they gradually degrade; fish stocks take time to recover from a pollution incident; newly planted trees take many years to mature; and so on.  When a country initiates the sort of environmental improvements typical of its income level, therefore, it is likely to take some years for the full benefit to be realised.  If the country’s economy has grown rapidly, as China’s has, then this time lag may result in a lower EPI score than that of another country which has a similar income level but has reached that level more gradually.  If for example countries A and B have similar income levels but A’s economy has grown annually at 8%  and B’s at 1%, then an average time lag of about 2 years would be sufficient to give A a score 14% below B.

Looking to the future, addressing air pollution is now a stated priority of the Chinese government (p 159).  The main policy instruments likely to be used are stricter environment laws and stricter enforcement.  Other approaches used in western countries, such as emissions trading schemes and class-action lawsuits against polluting companies, Kroeber suggests, are unlikely to be successful in the Chinese context (p 158).  On the other hand, the fact that a high proportion of emissions are from a small number of heavy industries may make the problem easier to address, especially, it might be added, as some of the companies in those industries are state-owned (p 100).  At any rate, Kroeber is optimistic that the next few years will see accelerated progress against air pollution.

Notes and References

1. Kroeber, A R (2016) China’s Economy: What Everyone Needs to Know Oxford University Press.  Page references in the text are to this book.
2. Difference Between Energy and Power http://www.differencebetween.net/science/difference-between-energy-and-power/
3. International Energy Agency Key World Energy Statistics 2015  p 11 ftp://ftp.energia.bme.hu/pub/energetikai_alapismeretek/KeyWorld_Statistics_2015.pdf
4. International Energy Agency, as 3 above, p 15
5. Xinhuanet (15/3/2017) Central China Province to Spend 2 Billion Yuan on Erosion Control http://news.xinhuanet.com/english/2017-03/15/c_136131474.htm
6. Xinhuanet (18/1/2017) China Sets Up Lifelong Accountability System to Control Soil Pollution http://news.xinhuanet.com/english/2017-01/18/c_135994290.htm
7. Earth Observatory Yellow River Delta https://earthobservatory.nasa.gov/Features/WorldOfChange/yellow_river.php
8. Qiu J (13/7/2010) China Faces Up to Groundwater Crisis Nature News  http://www.nature.com/news/2010/100713/full/466308a.html
9. Xinhuanet (22/4/2014) China’s Underground Water Quality Worsens: Report http://news.xinhuanet.com/english/china/2014-04/22/c_126421022.htm
10. OECD-FAO (2013) Agricultural Outlook 2013-2022 Chapter 2 Feeding China: Prospects and Challenges in the Next Decade  See especially Risks and Uncertainties pp 83-7  http://www.oecd.org/berlin/OECD-FAO%20Highlights_FINAL_with_Covers%20(3).pdf
11. Yale University Environmental Performance Index  http://epi.yale.edu/