The Two Faces of China’s Energy Governance

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In my attempts to catch up on lots of literature published over the past year that I missed, I finally read the 2012 paper China’s Long Road to a Low-Carbon Economy: An Institutional Analysis by Philip Andrews-Speed, one of the first and foremost international commentators on China’s energy economy.  Naturally, its stuff worth reading (otherwise I wouldn’t be blogging about it) because it addresses the core factors of whether China will ever succeed in its quest for sustainability – its governance institutions, and more specifically, the tension between the tendency of such institutions to maintain the status quo and their capacity to adapt to change.  Andrews-Speed is ultimately pessimistic, but more interesting, I think, is his thought processes in reaching such a conclusion.

Andrews-Speed’s paper begins with a simple and powerful premise:  governance must be “at the heart of the low-carbon transition” because energy is an inherently political issue as it is embedded in practically all facets of society and any change to how much or how it is utilized requires a complex alignment of incentives with the norms, values and priorities of a multitude of stakeholders in society.

Implicit in this premise is that other factors such as technology or financing, while important, are factors of a lower order.  Its hard to disagree with such reasoning. Ultimately, technology innovation and capital mobilization exist within the context of institutions, i.e organizing rules, formal or informal, that govern how society functions.  Indeed, when one reads the recent 2012 energy white paper released by the State Council, one is struck by how much of it reads like a wish list of targets and goals, without any discussion of the timetable, resources or stakeholders that would be involved in achieving them.  Institutions, such as the government, laws and regulations, policy development and experimentation,  business customs, entrepreneurship and civil society, but to name a few, that underpin every aspect of political, economic and social life in society are what will shape such timetable, resources and stakeholder involvement.

Mr. Resistance and Mr. Adaptability

Andrews-Speed then observes that there are characteristics of institutions that make them resilient to change and lock in either the status quo or a kind of path dependency that constrains change.  In China, he notes, certain institutions such as centralization of power, the role of ideology and slogans, respect of hierarchy and preference for conformity and consensus, date back to hundreds or thousands of years.  Then there are other institution that date back more recently to the founding of the People’s Republic, most notably the fragmented Leninist state bureaucracies with a super ministry in charge of economic planning (the National Development and Reform Commission or 发改委 in current form) and national and industry-specific five year development plans, all which that fit awkwardly on top of additional layers of analogous provincial, municipal and county administrative entities, and ultimately, the people.  Powerful large state-owned enterprises, especially those in the energy sector, where a central Ministry-level agency does not exist, also exert substantial influence over government policy (or outrightly ignore it without fear of retribution).

On the other hand, there are other features that make institutions adaptive, flexible and responsive to change.  As Ed Steinfeld describes so eloquently in his book Playing Our Game, the Chinese leadership has proven itself since the reforms and opening up that its government is capable of the necessary political evolution to adjust to international norms and embed itself in international institutions such as the UN, WHO and WTO.  In the energy sphere, it has demonstrated the ability to import, assimilate, digest and re-innovate both foreign technologies and public policies to promote clean energy development domestically.  Furthermore, the citizens of China have found new voices in the internet and through public protests in expressing a desire for a cleaner environment, upsetting social stability much to the consternation of the leaders who feel pressured to react.  The fragmented nature of government institutions, particular as between central and local, also present an opportunity for local experimentation of innovative new policies.

Andrews-Speed rightly points out that there is a tension between the resilient and adaptive elements of China’s institutions that lead to “policy discontinuities,” as manifested by an incomplete transition from socialist to market-based economy.  For instance, coal that is produced at the mines are essentially subject to market pricing but retail electricity rates are capped at artificially low levels (this is gradually being liberalized) for social equity reasons, resulting in power utility companies that constantly run in the red financially. These policy discontinuities are either exacerbated or perhaps also caused by the large scale of rents available in the energy sector (such that large powerful incumbents such as the state-owned oil and coal companies are content with the status quo) and the lack of practical experience with policy tools beyond command-and-control, such as tax incentives and voluntary agreements between government and industry.  Such policy discontinuities, Andrews-Speed reasons, stand in the way of China realizing the full transformation to a low-carbon economy.  The sheer diversity of stakeholders make any sort of effective policy coordination and implementation extremely challenging.  Government, he observes, is good at promoting construction of infrastructure projects, but not very good at managing the negative effects such as individual rent-seeking (economic-speak for corruption) and environmental impacts.

Putting it All Together

The upshot is that initiatives have a higher likelihood of success if they are “driven through with abundant funding and the direct involvement of a small number of large state-owned enterprises.”  Andrews-Speed astutely observes that China’s natural gas, nuclear, hydropower and wind sectors are characteristic of this type of initiatives.  In contrast, policies and programs that involve behavior change among large numbers of citizens, local governments, enterprises are less likely to be successful.  Areas that fall in this category include energy efficiency efforts of all types, including the much publicized efforts to build “eco-cities,” which till today remain very much the stuff of lore rather than reality.

In the end, Andrews-Speed constructs a two-pronged prognosis for China’s sustainable energy efforts.  With the supply and demand side in mind, he observes that China’s efforts to create a sustainable energy future will consist of the following two main features:

1. Construction of infrastructure to produce and deliver (relatively) low-carbon energy will continue on a large scale, but this will be matched by ongoing growth of high-carbon energy sources such as coal and oil.  The decline in proportion of coal in the energy mix will on be gradual.

2. Efforts to constrain the total consumption of primary energy will encounter ever-increasing difficulties as the central government seeks to change the behaviors of local governments, industries, and households across the country.

In short, if China were to ever succeed, it would need “radical institutional change,” says Andrews-Speed.  By all indications, such radical change does not seem in the offing with the new Xi-Li leadership taking over.  While this is a grim indictment of China’s likelihood of success in transitioning towards a low-carbon economy, Andrews-Speed does acknowledge flashes of hope in various policy experimentation across the country. On my own part, I reserve final judgment until I’ve read Andrews-Speed’s full book The Governance of Energy in China: Transition to a Low-Carbon Economy from which the paper discussed here was excerpted from.

But one thing I am sure of – unlike the decision-making of Two Face, the villain in the Batman comics, it will take more than just a coin toss to decide the fate of China’s quest for sustainability.

Original Article on The Green Leap Forward

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