COLUMN-Shades of Carter in Xi's China energy revolution: Clyde Russell

Tue Jun 17, 2014 1:58am EDT

-- Clyde Russell is a Reuters columnist. The views expressed are his own. --

By Clyde Russell

LAUNCESTON, Australia, June 17 (Reuters) - Are there echoes of former U.S. President Jimmy Carter in the call by Chinese President Xi Jinping for a revolution in the way China produces and consumes energy?

Carter was widely ridiculed for his 1977 speech calling for energy independence and another in 1979 in which he pledged that U.S. dependence on oil imports would "never" rise.

For almost three decades after he lost to Ronald Reagan, the United States found itself consuming more imported oil, coupled with a declining trend in domestic crude and natural gas output.

Some of Carter's ideas were impractical, such as oil import quotas, and some were not exactly environmentally friendly, such as promoting the use of coal for power generation.

But even back in 1979 he identified shale oil and unconventional gas as resources that needed to be developed, calling for massive investment.

It took the jump in prices in the early part of the 2000s, partly sparked by China's surging economy, to make Carter's vision a reality, and the current debate in the United States is whether to allow oil exports and also how much liquefied natural gas (LNG) should be sent to energy-hungry Asia.

Xi's address to a meeting of officials of his ruling Communist Party on June 13 hasn't quite gathered the attention that Carter's televised speeches did in the late 1970s, but it may turn out to be a reference point for the future.

"Although our country's energy development has achieved great successes, we are facing challenges including huge demand pressures, supply restraints, serious environmental losses caused by the production and consumption of energy and technological backwardness," the official Xinhua new agency quoted Xi as saying.

Xi said China, already the world's largest energy consumer, needed to "restrain irrational energy consumption" and impose controls on overall energy use, Xinhua reported.

The Chinese president also called for a diversification away from coal, which currently meets about two-thirds of primary energy demand, increased cooperation with oil and gas producing regions and increased nuclear power development along the heavily populated eastern seaboard.

The key question is what shape and form will actual policies take, how long will they take to be implemented and how effectively will they be enforced and regulated.

China's record on energy policies is patchy at best, with provincial and local authorities often acting against directives from Beijing, preferring to prioritise jobs over energy efficiency and limiting pollution.

The announced goals are also modest, with the 2011-2015 economic plan calling for total energy consumption to be limited to 4 billion tonnes of coal equivalent, but the target isn't mandatory and is still 23 percent above 2010 demand.

Energy from coal is also expected to drop to 65 percent of the total from 66 percent by the end of this year, again, a modest decline but one that does show some commitment to reducing the burning of the fuel that is blamed for much of China's pollution issues.

How can China give practical impetus to Xi's call for an energy revolution?

There are things that can be done fairly quickly, such as enforcing the use of scrubbers that remove pollutants on coal-fired power plants.

Another is to accelerate the closure of older and inefficient power plants, steel mills, aluminium smelters and other heavy coal users.

Boosting the use of natural gas through the more rapid development of unconventional sources such as shale gas, and increasing LNG imports is another.

Using central government powers and subsidies to increase renewable energy such as solar panels, smart grids and more modern factory equipment is another.

MONEY THE LIKELY STICKING POINT

However, the point is all of these things cost money, and if implemented will raise the cost of manufacturing, thereby cutting China's competitiveness on global markets.

For example, raising natural gas prices to encourage development of local supplies and LNG imports will most likely have to be accompanied by enforceable government targets for use of the fuel, otherwise consumers will simply stick with cheaper coal.

Cutting the use of coal will require that it becomes relatively more expensive compared to other fuels, and this could be accomplished by imposing additional taxes or by mandating quality levels.

The cost of doing this will be to raise power prices, force the closure or small mines and cut imports of cheap, low-rank Indonesian coal.

For industries such as steel, copper and aluminium, the focus will have to be on improving efficiency and perhaps importing more refined materials, rather than raw ores that require substantial energy to process into finished products.

This requires a change in the existing operating mindset of many Chinese state-owned companies, and again, will require the closure of older plants, and the consequent loss of jobs.

For Xi's energy revolution to be successful, the Chinese government has to be prepared to inflict pain on some sectors, and deal with any political and social disquiet that may result.

There is also a lesson to be learned from Carter's plans for the United States.

It wasn't government action and regulations that ultimately achieved the goal of energy independence, it was rising prices for fossil fuels that eventually led to something that I would call innovation through desperation.

Fracking for shale oil and gas wasn't new technology, but in the mid-2000s it became economically viable because oil prices surged to a record $147 a barrel.

However, it's possible China won't face a price motivator for its energy revolution, it's rather more likely that it's a social motivator as the populace becomes increasingly unsettled by rising pollution and environmental degradation.

But the common factor between the United States and China on energy policy could be that rapid changes became possible when the cost of not doing anything became too high. (Editing by Himani Sarkar)