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China's Quest for Energy

Cooperation and coordination will help the United States avoid an energy-policy confrontation.

Fortnightly Magazine - February 2006

the post-Katrina era, with Henry Hub prices around $14.”

At the same time, several large hydropower facilities are in the process of starting up, making hydro electric China’s second-largest electricity generation resource. Several new nuclear reactors also have begun operation in the past few years. China aims to have 27 GW of nuclear capacity operating by 2020. But even with this aggressive development schedule, nuclear power will account for less than 5 percent of China’s total installed capacity.

Thus, even with plans to increase power generation from other sources, coal likely will remain king in China, meeting two-thirds of the country’s power demands for the foreseeable future.

In this context, China is trying to channel investment toward large power plants rather than small ones, which have mushroomed in an environment of power shortages and limited regulatory enforcement. “China first will focus on development of large-scale power plants, because they are more efficient and environmentally friendly than smaller ones,” Zhu says. “Second, from now on, desulfurization is a must for any coal-fired project, and the Environmental Protection Bureau will enforce new standards for air emissions.”

Kyoto Comes to China

Environmental factors are becoming a key driver of policy and investment in China, as government leaders respond to public discontent over the country’s severe environmental degradation. China’s environmental regulation efforts focus on pollution affecting local communities. “Climate change is talked about, but it is still not a major issue here,” Zhu says. “Instead, the government has focused on reducing sulfur and nitrogen oxides.”

Global market pressures and political trends, however, might be changing that.

At a chlor-alkali facility in Jiangsu province, equipment is being installed that will capture nearly 9 million tons of CO 2 equivalent per year. More precisely, the project will capture trifluoromethane (HFC-23), a fluorocarbon compound that is 11,700 times more potent than CO 2 in contributing to greenhouse warming.

The project, at Jiangsu Meilan Chemical Co. Ltd. in Taizhou City, is one of 18 in China that have been approved under the Clean Development Mechanism (CDM), an international arrangement under the Kyoto Protocol on climate change. The CDM approach allows companies from industrialized nations to invest in greenhouse gas-reduction projects in developing countries, including China, to help meet their Kyoto-compliance obligations.

China represents one of the world’s most fertile markets for developing CDM projects, because its 200 million tons of CO 2 emissions over the next five years represents almost half of the potential global market for tradable carbon credits. Furthermore, a large share of China’s emissions come from antiquated and inefficient systems. As such, they represent low-hanging fruit in terms of greenhouse-gas (GHG) reductions and productivity benefits as well.

“With the CDM, China has become the most promising supplier in the global emission market for greenhouse gas,” stated Marc Stuart, a director with EcoSecurities Ltd. in Dublin, Ireland, an investment firm specializing in emissions-trading deals. “It will also harvest great profit from the CDM projects.”

The Asian Development Bank estimates the potential market for Chinese emissions-reduction credits exceeds $13 billion a year. As a result, investments are beginning to