Climate change: national and local policy opportunities in China

Abstract

Climate change poses many severe threats to China. This aggravates the existing vulnerability of China and is a serious challenge for the Chinese government. Adaptation programmes and projects are being developed and implemented at national and local level. Although mitigation is not a priority, it has been explicitly integrated into national and local development plans. This paper addresses the question: What is the policy space for climate change mitigation and adaptation policy at national and local level and what is already being done? It examines national policies, the division of responsibility with local level and then looks at three case studies at local level: Beijing, Guangdong and Shanghai. These case studies confirm that integrating mitigation into local development policy can reduce the rate of growth of GHGs and pollutants at local level, but that finance remains a big constraint.

Keywords:

• Climate change
• local policy
• national policy
• mitigation

1. Introduction

Global climate change is a common concern of the international community, which has and will continue to have significant negative impacts on socio-economic development and on the global, national and local ecosystems. Developing countries and poor people living in developed countries will be hit hardest by its negative impacts. Although climate change is already an urgent issue, China has other priorities including enhancing energy supply rapidly to meet national needs and combating local environmental degradation. Since energy efficiency and local environmental protection are priorities of the government, efforts to promote energy conservation and reduce pollution also lead to reduced greenhouse gases (GHGs) and thereby contribute to the global GHG reduction efforts. The central government has an ambitious target to meet the challenge, but inconsistent activities of the lower governments may prevent the attempt from succeeding.

The local policy to cope with climate change can be either top-down and/or bottom-up. A top-down policy is generally prescribed by the central government and enforced by the local authority. The most challenging issue for top-down policy is the efficiency of enforcement by the local authority, because the local authority may have different objectives as compared to the central government (e.g. local authorities may focus on economic growth at local level). Unlike top-down policy, bottom-up policy is often self-enforced by the local authority, but the effective enforcement of such bottom-up policy needs joint or co-ordinated action among all local governments to avoid ‘leakage’ issues. Thus, a well-designed climate policy should involve both central government and lower governments. In the language of agency theory, the central government should play the role of ‘principal’ to provide a ‘contract’ to the local authorities (the agents) and fulfil the common interests of the local community and the central government.

This work attempts to understand the role of national and local governments in addressing climate change in China. Do local governments simply implement national policy, or do they have their own local interest to take initiatives that could complement national initiatives? Do they block national policy because of the conflicts between local and national interests? Is it possible to ensure that incentives at all levels of governance are compatible? In order to address these questions, this work surveys the literature, policies and practices in China, and is based on primary data collection. It discusses China's climate policy at a national level (section 2), the division of responsibilities between the central and lower governments (section 3), case studies of Beijing, Guangdong and Shanghai (sections 4 – 6), before presenting conclusions.

2 China's national policies to cope with climate change

The trend of climate change in China corresponds to the general trend of global climate change. The average surface air temperature in China has increased by between 0.5 and 0.8 degrees centigrade over the 20th century with increases more marked in North China and the Tibetan Plateau compared to southern regions (PMO 2003; CCNARCC 2007). In China, adaptation to climate change is a priority. China has also made positive contributions to reducing the rate of increase of GHGs by developing a no regrets policy driven by energy efficiency and environmental considerations.

Adaptation is a big challenge, not only because of the current heavy investment in infrastructure as part of the development process, but also because of the growing water shortages caused by temperature increases in the northern region, which will also require investment in reservoirs and diversion systems to manage the dwindling water resources. Although there is no systematic adaptation strategy in place, some adaptation activities have been partly integrated into development policy and planning at country level. To climate-proof buildings and infrastructure, an annual additional investment of 188 – 376 billion RMB (1 – 2% of GDP) will be needed (NBSC 2006; The World Bank 2006), compared to 0.05 – 0.5% of GDP in the OECD countries (Nicholas 2007). For example, the recent Qinghai-Tibet railway track crosses 550 km of permafrost and the costs of adaptive measures to take the potential melting of permafrost into account is very high. The ventilative sheet-stone roadbed, only one of many roadbed-cooling systems to be put in place, will cost more than 300 million RMB (1% of the total cost) (Xinhua Net 2003).

Hydro projects form another significant part of extra spending for adaptation. For example, the South-North Water Diversion Project (SNWDP) initiated in 2002 to meet the water needs of North China, will cost about 500 billion RMB. Stronger flood defence systems will account for about 40% of the total hydro investment or about 30 billion RMB in 2005 (MWR 2005). Other adaptation activities in agriculture, terrestrial ecosystems and coastal zones will most likely imply a large GDP loss for China.

China, the biggest developing country, has been able to achieve high-speed economic development and lower energy demand. In 2005, the GDP in China reached 1,830 billion RMB and the share of primary, secondary and tertiary industry was 13, 48 and 40% respectively. Compared with 1985, the energy demand has increased 2.9 times (see Figure 1).

Figure 1. China economic structure comparison (1985 and 2005). Data source: http://www.stats.gov.cn/.

China has developed ambitious policies to reduce the rate of growth of its GHG emissions. China aims at ‘developing and conserving energy simultaneously, with conservation put in the first place’ (PMO 2003). Since the 1980s, the State Council and government departments in charge at various levels have implemented energy conservation rules, set up a three-tier energy conservation management system at the central, local/industrial and enterprise levels and promoted energy conservation technologies. Between 1990 and 2002, China's energy intensity of GDP went down by an average annual rate of 5.6% (NDRC 2005).

The new National 11th Five-Year Plan (2006 – 2010) (SC 2006) aims to ensure that energy consumption per unit of GDP will decrease by 20% within 5 years (see section 3). Provincial data of energy consumption in 2005 can be used as a baseline for calculating the provincial energy consumption reduction rate per unit of GDP during the 11th Five-Year Plan period. The national energy intensity per 10⁴ yuan RMB is 1.22 tce in 2005 (based on prices in 2005), which means the national target of energy consumption per 10⁴ yuan RMB GDP will be 0.976 tonnes in 2010 (based on 2005 prices).

Currently, there are 10 provinces, mostly located in East China, whose energy consumption per unit of GDP is lower than the national level (see Figure 2). Most of them have a high economic growth rate and can adopt advanced technology to adjust the energy mix and promote energy efficiency.

Figure 2. Energy intensity of different province in China. Source: National Bureau of Statistics and various provincial bureaus of statistics.

Dealing with urban pollutants will also impact on GHG emissions. For example, SO₂ is one of the major pollutants in the city of China and almost half of the SO₂ emissions come from coal-fired power plants. Reducing SO₂ emissions under the 11th five year plan will also imply a reduction of carbon emissions.

With 37 registered projects and more than 40 Mts of annual CO₂e reductions, China is the biggest supplier of certified emission reductions within the Clean Development Mechanism (CDM) and this is promoted by government policy which prioritizes energy efficiency improvement, the development and utilization of new and renewable energy and methane recovery and utilization (NDRC 2003). The government taxes the credit revenue from CDM projects (65% for HFC23 project, 30% for NO₂ and 2% for others) (NDRC 2003) to fund nation wide actions to address climate change. Rules for this fund are being developed.

The present energy law system in China consists of four laws on renewable energy (2005), conservation (2000), electricity (1995) and the coal industry (1996) and other auxiliary regulations. Nevertheless, China lacks a basic energy law which reflects the national energy strategy and coordinates between energy and energy-related activities. There are no laws on oil, natural gas and atomic energy. An inter-ministerial team is presently drafting a comprehensive energy law and amending the conservation laws.

In 2005, the Medium and Long-term Energy Conservation Plan (CMLECP) (NDRC 2005) was adopted which covers two phases: 2005 – 2010 and 2010 – 2020. This plan includes energy conservation targets and promotes ten key projects (on coal-fired boiler renovation, regional cogeneration, waste heat and pressure utilization, petroleum conservation and substitution, motor system energy conservation, energy system optimization, building energy conservation, green lighting, energy conservation in governmental agencies and the creation of energy conservation monitoring and technical service systems) and 98 other projects. It is estimated that these projects can save 7.2 million tce or around 20 Mt of CO₂.

In March 2006, NDRC and four other governmental agencies jointly issued a Notice on strengthening resource conservation in governmental agencies to reduce energy consumption by 20%. In April 2006, the NDRC also launched the Top-1000 Enterprise Energy Conservation Action Plan, which identifies 1008 enterprises who have to improve their energy efficiency to achieve a 100 million tce saving by 2010.

In March 2005, a joint Energy Efficiency Labelling Management Directive was adopted to help consumers by providing energy labels on household refrigerators and air conditioners (see Figure 3).

Figure 3. China energy label.

Incentives in these regulations include pricing, taxation and financial support. They provide guidance for pricing renewable energy: the price of wind energy is based on a bidding procedure while that of biomass generation is set as the average feed-in tariff plus a 25 cents subsidy per kWh. The government provides tax deductions to projects covered by the Guidance Catalogue for the Development of Renewable Energy. For example, the value added tax (VAT) is 3% for artificial gas projects and 6% for hydropower, while the current general VAT is 17%. The central government also provides funds, interest subsidies or treasury loans to renewable projects covered by the Guidance Catalogue.

3 Sharing responsibility between central and lower governments

3.1 Institutional arrangements

China has a five-tier hierarchical structure with the central government in Beijing at the top followed by the provincial-level government, the prefecture-level government, the county-level government and the township-level government. At the national level, the NDRC and State Environment Protection Agency (SEPA) are the ministries responsible for energy and environmental planning and policies. Such policies include laws and general guidance adopted by the central government, development and action plans decided by the central government, but delegated to sub-national government, and practical or managerial guidelines that are always adopted by the sub-national governments.

At the national level, the inner-ministerial National Climate Change Policy Coordinating Committee established in 1990 makes climate policies, but there is no clear division of responsibilities with lower level organizations. Some provinces have adopted climate policy and some have not. The local EPA and DRC implement national energy, environment and future climate policy at local level. They are supervised by local government and the same department at higher government levels (e.g. SEPA and NDRC), although employment issues are under the local government.

The fiscal system also has five levels. The central government has a direct relation with provincial governments while the provincial governments determine their relations with sub-provincial governments. The central government determines the assignment of expenditure responsibilities between national and sub-national governments. Environmental protection and its budget is a purely sub-national responsibility that is assigned further to prefecture, county and township governments.

3.2 Target plan and its decomposition to local level

The sharing of environmental responsibility between the central and lower governments is the institutional basis for decomposing a national energy reduction target and targets on pollutants to sub-national level.

The 11th five year plan included a 20% reduction in energy intensity and a 10% reduction in major pollutants and six other legally binding targets to be implemented by NDRC and SEPA, respectively. These two targets are also translated into targets for provincial level and range from a 30% reduction target for Jilin province to a 12% reduction target for Tibet. In September 2006, the State Council approved the NDRC's reduction target plan for energy intensity and asked the provincial governments to further allocate targets to city and county level, as well as to industry and major enterprises. A communiqué system will also be established to publish the provincial energy intensity and data on pollutants every half year. In August 2006, the SEPA, National Bureau of Statistics of China (NBSC), NDRC and Office of National Energy Leading Group (ONELG) published the communiqué of energy intensity and major pollutants in the first half of 2006. Although these targets are legally binding, there was a 0.8% increase in energy intensity in the first half year which makes the 4% reduction target for 2006 more difficult to achieve. The 0.8% increase can be partly attributed to high energy intensity projects planned in the 10th five year plan, which started operating in 2006. Besides, the current system of local government organization and finance are not always supportive.

3.3 Local fiscal system and implementation of policies at local level

Local construction and environmental protection are local responsibilities funded by local finance. The Chinese fiscal system has a tax sharing scheme (TSS) where taxes are divided into central government taxes, local government taxes and taxes shared between the two. The revenue of local government mainly comes from taxes assigned to local government and other extra-budgetary revenues. Shared taxes which come from domestic value added tax (VAT, 75% for central government and 25% for local government) and income tax (60% for central government and 40% for local government) are a major revenue for local government (MOF 2007). The central government also returns part of its tax revenue to local government as an intergovernmental fiscal transfer.

Local income tax is a major source of local revenue, which gives an improper incentive for local government to protect the local industry, even when inconsistent with the national policy. The TSS provides strong incentives for local government to focus on local development and investments to enlarge their tax base and improve the performance evaluation of local officials which is a major consideration for promotion. Hence, the local government pursues local development, regardless of environmental damage and the energy efficiency target, because the system for evaluating the performance of officials consists of 17 items with only one dedicated to the environment and none for energy efficiency.

A new evaluation system is being developed in three provinces to give more weight to environmental concerns and to relate them to the performance of local officials. The State Council has also asked the Ministry of Personnel to include the energy intensity reduction target and the targets for specific pollutants into this performance evaluation system. These changes may provide sufficient incentives for local governments to implement national policies.

3.4 Barriers and obstacles at local level

The central government has been reforming the performance evaluation system and the “Green GDP” is used by the leadership to account for local environmental damage. Local governments are changing their behaviour, because environmental issues are becoming increasingly political, especially in the coastal regions. The financial disparities between west and east China make the reduction target more difficult for local government in the western region, since the energy intensity reduction and environmental protection target also means a heavy investment in the renovation of existing facilities and new investment in energy sectors. The barriers and possible solutions include:

	Lack of an independent issue related budget at local level: To finance energy saving, environment protection and adaptation projects consistently, an independent budget for such activities is necessary.
	Lack of an intergovernmental transfer mechanism to improve energy efficiency and environmental standards in the west: Since western China has limited local revenue and capacity, a special intergovernmental transfer aiming at energy efficiency and environment quality improvement is necessary.
	Lack of financing mechanism to support SMEs to improve their energy and environmental performance: Since half of the emissions and pollution come from Small and Medium Enterprises (SMEs) with limited ability and resources, the government should provide special financial and capacity building support to SMEs.

Each region has different incentives and barriers to take action. This brings us to the case studies.

4 Case study 1: Beijing

Beijing, the capital of China with more than 15 million inhabitants, had a GDP of 772 billion RMB in 2005 or more than $6,000 per capita (DRCBM 2003). The local revenue of Beijing government in 2005 was 111.7 billion RMB. Air quality is the major challenge for the municipal government that should meet the World Health Organization (WHO) standard before 2008 according to the bidding commitment for the Olympics. Dust pollution and vehicle emissions also need to be controlled.

4.1 Green Olympic action plan and the 11th five year plan of Beijing

In 2002, Beijing released the first Olympic Action Plan (DRCBM 2003), which includes readjustment of the primary energy structure in ‘a cost-effective manner in the fuel switch from coal-dominance to more shares of clean energy’, restructuring of the industrial and product structure to reduce the growth rate of energy consumption and improve energy efficiency by promoting the application of new and quality technologies. The energy mix readjustment aims to decrease the share of coal and coke in the energy mix. The 11th five year plan of Beijing Municipality has local goals and policies for energy switching and conservation with six sub plans (DRCBM 2004a). For example, in the sub-plan for Electricity Development, the share of renewable energy capacity should increase to around 6% of total capacity and Beijing will accordingly invest about 13 billion RMB (DRCBM 2004b).

4.2 Local policies on energy efficiency and pollutant control

The Beijing government is committed to adopt policies to improve energy efficiency and reduce energy intensity. Regulations and guidelines have been adopted for the building and transport sectors. The building sector accounts for 28% of the total energy consumption in Beijing (DRCBM 2004c). From 2005 to 2010, 175 million m² of low energy building will be built, while 40% will be designed to meet a 30% energy savings target compared with no energy efficiency measures and another 60% will be designed based on a 50% energy saving target. The Beijing government's energy efficiency design standard is stricter than the national one, and the target of 65% energy savings will be met by new public buildings in 2010. On transport, Beijing has adopted the Euro IV standard 1 from January 2007 while Euro I, II and III standards were already adopted in 1999, 2003 and 2005, respectively. An environment labelling system for vehicles has been launched and the label of vehicles will determine the permitted region for driving. A tight fuel quality standard (National Standard III) has also been implemented since 2005.

Financial subsidies will be used to promote specific projects. Between 2004 and 2007, the Beijing government provided a 30% subsidy for consumers who purchased energy saving lamps, leading to 1.8 million lamps installed in public toilets, schools and metro stations. This Green Lighting Project saves 39 GWh per year or around 40,000 tonnes of CO₂ reduction annually. Furthermore, since 1998, the Beijing government has invested in the renovation of about 10,000 coal-fired boilers with boilers using gas or electricity. During the 11th five year plan years, the remaining 2800 coal-fired boilers will be renovated. The government subsidizes the use of heat pumps and clean energy (e.g natural gas) in buildings. Finally, in the area of public transport, Beijing promoted the use of Compressed Natural Gas (CNG) in buses and taxis and the building of CNG fuelling stations in the 10th five year plan period. There are around 3000 CNG buses in Beijing's public transportation system.

4.3 Inferences

Climate change is not a direct priority of Beijing city. However, air quality and environmental quality goals and policy implementation to prepare Beijing to host the Olympic Games of 2008 will also lead to the reduction of the rate of growth of GHGs. The relatively high local revenue of Beijing makes it possible to invest heavily in renewable energy and to provide subsidies to public transportation. In August 2006, Beijing Statistics Bureau concluded that the energy intensity in the first half of 2006 was 0.8 tce/10⁴ RMB, 7% lower than that in 2005 (BMBS 2006).

The green Olympic action plan of Beijing is a good example of bottom-up local policy. The 11th five-year plan, energy efficiency and pollution control policy in Beijing can be regarded as top-down policies. In the Beijing case, the agent and principal have the common objective in relation to pollution control and the improvement of energy efficiency. This enhances the chances of effective enforcement at local level.

5 Case study 2: Guangdong Province

In the first national communiqué on provincial energy intensity, Guangdong province had the lowest energy intensity of 0.69 tce per 10⁴ RMB of GDP and 66% of the national average. At the per capita level, Guangdong's reserve of conventional energy is only 1/20th that of the nation and 90% of its energy needs are imported from other provinces or aboard. The lack of local energy resources has meant that the retail electricity price in Guangdong is about 0.65 RMB/kWh, the highest in China and 30% higher than the national average. The low energy reserve and high energy price is the key incentive for Guangdong to innovate in energy conservation.

5.1 11th five year plan of Guangdong Province

In the 1990s, Guangdong's industrial blueprint was directed towards lower energy consuming and high-tech industries and the growth of service industries has outstripped that of the manufacturing industry. In the 11th five year plan, the Guangdong government aims to increase the share of high-tech industries in the GDP from 9% in 2005 to 18% in 2010. The energy intensity will be reduced by 13% for the same years, lower than the national target. The government promotes ‘high effect and low energy consumption’ industries like automobiles, electronic appliances, information technology and medicine. Together with the Closer Economic Partnership Arrangement (CEPA) and the concept of ‘Pan Pearl Delta Cooperation’, Guangdong aims to be the centre of the service industry along with Hong Kong.

5.2 LNG project in Guangdong Province

As a relatively rich region (GDP per capita is more than $3,000 in 2006), Guangdong has suffered from air pollution caused by coal-fired plants and is planning to diversify its generation capacity at an affordable cost. Since 1993, the government has undertaken research into the Liquefied Natural Gas (LNG) market and in 1998, it submitted a proposal to develop LNG terminals and transmission systems together with the National Offshore Oil Corporation (CNOOC). That year, the central government approved the pilot LNG project, but asked for a supplementary proposal on gas utilization projects. Five LNG power plants and four city gas projects were grouped together to meet this requirement. The NDRC approved the LNG power project with the requirement that they must compete with other conventional coal fired power plants in the Southern China grid. The higher generation cost of LNG plants (30% higher coal-fired plant even 10% higher than nuclear plant) make them less competitive and the government is seeking funding from the CDM, since compared with conventional coal-fired power plants, these LNG plants can reduce 5 Mt of CO₂ annually.

5.3 Local policies

The Southern Daily (2006) reports that the Provincial government adopted a regulation on energy saving in 2003 and is presently amending it to include legally binding energy standards for high energy consuming industries (e.g. iron and steel, chemicals and paper). Guangdong will also adopt the Euro III emission standard for vehicles in July 2007.

Although Guangdong government is among the richest in China, it apparently relies more on macro policies and market-based mechanisms than on subsidies. It is planning to subsidize energy conservation projects to achieve the assigned energy intensity target, but the scale of such financial subsidies is not clear. At city level, some cities have planned to subsidize energy conservation activities (e.g. Shenzhen and Zhuhai).

Since cross border pollution is a concern of Hongkong and Guangdong, in April 2002, the two governments signed an agreement to reduce SO₂ emissions by 40%, nitrogen oxide by 20% and suspended particulate matter (SPM) by 55% by 2010 through a market-based trading system which should start in 2010. These will also have the co-benefit of reducing GHG emissions.

5.4 Inferences

Unlike the Beijing case, the interest of Guangdong government is more diversified: low energy resources, high energy prices and local pollutants are all local concerns of the Guangdong government. These common interests ensure that the local government has the incentive to invest in energy switching and conservation and environmental protection. But unlike Beijing, the government relies more on macro policies and market-based mechanisms.

6 Case study 3: Shanghai

Shanghai, the biggest city in China and one of the richest, had a GDP of 915,418 billion yuan RMB in 2005, while the total energy consumption was about 80.69 million tce with an annual growth rate of 8% since 2000 (DRCSM 2006). The total energy consumption and total electricity demand of Shanghai city increases annually by about 5% and 7%, respectively. Coal accounts for 52.82% of the energy mix. With limited local energy resources and increasing environmental pressure, the Shanghai government adopted regulations and public awareness policies to promote energy conscious behaviour. In the year 2005, the energy intensity in Shanghai was 0.88 tce/10⁴ yuan, about 16.5% lower than that in 2000 (DRCSM 2004).

6.1 Regulations and guidelines

Shanghai uses regulations and guidelines to promote energy conservation. It has published distributed heating system engineering technology standards. It promotes public awareness on energy issues and has asked every department to take the lead in saving energy and thereby set a good example. In Shanghai, the air-conditioners are required to be set at a temperature not lower than 26°C in summer and not higher than 20°C in winter. The aim of the 26°C action is not only to save electricity during peak times, but also to make citizens aware.

Authorized by the local government, Shanghai Energy Conservation Supervision Center (SECSC) is the first non-profit energy conservation administrative organization in China (SECSC 2007). It disseminates energy conservation information, good practices, and provides technological advice and training, etc. It has been given the title of the advanced unit of energy conservation in Shanghai and in China.

6.2 Financial subsidies

The Shanghai Green Electricity Scheme offers local electricity consumers who wish to contribute to a sustainable future, the opportunity to ‘green’ their electricity consumption against a premium. The scheme was developed with the support of the Municipal Government, the electric power company and consumers. This scheme may help Shanghai achieve its promise as host for the World Expo to be held in 2010, namely that: ‘City makes life more perfect’ (SCP 2007). The Municipal Government guarantees that the additional revenues from this scheme will be used to develop renewable electricity generating capacity. The Shanghai Energy Conservation Supervision Centre will monitor the scheme. Participants will be awarded a certificate of participation to show that they care about the environment.

7 Analysis and conclusion

The Chinese government's energy strategy to address the country's current energy shortage and environmental degradation issues includes ambitious energy intensity and pollutant related targets. Although climate change is not a priority for the national government, there are opportunities to achieve GHG reductions through integrating emission reduction into locally relevant energy and environment targets.

The central and local governments in China have distinct policy making responsibilities. While the central government sets national targets, laws and guidelines, lower governments implement these. The existing fiscal system and performance evaluation system promotes economic development, but provides few incentives for greening this development and reforms are being presently considered.

Where the climate change problem calls for action by both central government and sub-national authorities, these authorities should first identify a common objective and then seek collaborative arrangements to make the national and local policy mutually compatible and enforceable. The case studies reveal that at local level different incentives may exist for proactive action on energy conservation and environmental pollution, while the Olympics provide incentives to Beijing, lack of local energy resources and high energy prices are the key incentive in Guangdong. Each locality has different policies – Beijing focuses on subsidies, Guangdong on market based instruments and Shanghai on public awareness. While these are relatively rich regions and can finance measures or access finance, the western provinces are much poorer and lack of resources and capacity will have to be compensated for. The windows of opportunity in environmental policymaking differ as a result of local circumstances and local policies occasionally go beyond implementation to complement national policy.

Acknowledgements

This work has been produced within the Climate Change Management (CLIMA) Project, with the financial assistance of the European Union AsiaLink Programme. The contents of this document are the sole responsibility of the authors and can under no circumstances be regarded as reflecting the position of the European Union. The authors gratefully acknowledge the Euro-Asian Research and Training in CLIMA, which organized the first training session in Amsterdam, the Netherlands. The authors also thank Prof. Joyeeta Gupta and anonymous reviewers for their valuable suggestions on this work.