Summary. Chinese, Japanese and American scholars, many of them environmental economists, discussed tech transfer, emissions trading and other strategies to limit greenhouse gas emissions at the NGO seminar “Technology Transfer for Greenhouse Gas Mitigation and Sustainable Development” held in Beijing on November 14 - 17. The participants agreed that transfer of advanced technology through the market on a commercial basis will enable China to solve its own problems of economic development and environmental pollution if a variety of structural and institutional barriers to foreign investment, tech transfer, indigenous technology development and tech diffusion can be overcome.
China, which ranks below 100th place in per capita GDP and has 80 million people without electricity must give first priority to development, said Qinghua University Prof. Liu Deshun. Chinese climate change, which Chinese experts predict will make northern China warmer and southern China slightly cooler, is a concern, but development comes first. Continued improvements in Chinese energy efficiency will require foreign tech transfer and funding, said Liu. Increasing the availability of long-term financing will enable Chinese business people to choose low life cycle cost but high initial cost advanced energy efficiency technology over low initial cost, high life cycle cost traditional technology. Japanese participants called for a multi-purpose approach that starts from the realization that development and local pollution mitigation have a much higher priority in developing countries than does climate change. Japanese participants called for a multi-purpose approach that starts from the realization that development and local pollution mitigation are much more important than climate change to developing countries. Seiki Katsuo called for emissions mitigation commitments by developing countries in order to stop growing mistrust between developing and developed countries. Weak environmental regulation enforcement, too much government intervention, systematic PRC weaknesses in technology development and commercialization, and institutional barriers greatly hinder the introduction of advanced foreign environmental technology, said Professors Qin Wanshan and Liu Xue of Beijing University. A survey of 35 U.S. companies investing in PRC power plants identified non-transparent government regulations, delays in the approval process, and poor contract enforcement as major impediments to foreign investment in the PRC power sector. That the medium-sized U.S-invested power plants were no more efficient than other PRC plants may raise questions about the link between foreign direct investment and technology transfer.
U.S. Embassy Beijing Environment, Science and Technology section officer attended the NGO seminar “International Technology Transfer for Greenhouse Gas Mitigation and Sustainable Development” held in Beijing on November 14 - 17. The Beijing Environment and Development Institute (China), Central Research Institute of the Electric Power Industry (Japan), and Resources for the Future (USA) organized the seminar which received support from several sponsors including the Central Research Institute of the Electric Power Industry (Japan), the Electric Power Research Institute (USA), and the Ford Motor Co.(China).
Professor Liu Deshun of the Qinghua University Institute of Nuclear Energy Technology discussed Chinese views on GHG emissions and their mitigation. Liu said that China ranks below 100th in per capita GNP and has over 80 million people without electricity and so must make development its top priority. Liu discussed Chinese research on 20th century climate change, the PRC government concerns about climate warming, and strategies for effective international cooperation on greenhouse gas mitigation.
According to Liu, the most significant warming was in the 1940s. Temperatures fluctuated thereafter, but with a warming trend since the 1970s, especially 1990 and 1994 but still lower than the 1940s.
China’s lack of specific emission mitigation commitments does not mean that China will not be harmed by global climate change. China will make great efforts to adapt to climate changes and to mitigate GHG emissions through measures such as energy conservation.
Several Japanese scholars attending the conference told ESTOFF that some Chinese see climate warming to be at least as beneficial as harmful to China. The Japanese team presented a multi-purpose no-regrets approach to GHG emission reduction that assumes that economic development and local pollution mitigation are much higher priorities in the developing countries than are greenhouse gas mitigation and climate change. See a report on the U.S. Embassy Beijing website at http://www.redfish.com/USEmbassy-China/sandt/sandt.htm for a review of Chinese scholarship on climate change.
An American environmental economist explained to ESTOFF that the great difference in tone (the Chinese studies are much less pessimistic about climate warming) between the Intergovernmental Panel report “Climate Change 1995” and the Chinese scholarship may be because “Climate Change 1995” relies entirely on research published in English. The next panel report, said the economist, will incorporate non-English language research and assess the mitigating effect adaptations will have on climate change impacts. Once adaptations are figured in the tone of the next Intergovernmental Panel report may be less pessimistic than the 1995 report, said the economist. [Note: An article in the November 7, 1997 issue of Science on climate warming and epidemics makes much the same point: that adaptations and policy responses will likely mitigate climate warming impacts. End note]
According to Liu, Chinese energy consumption grew much more slowly than economic growth (5.6 percent vs. 12.2 percent) during 1991 - 1994. This is clear evidence of energy efficiency progress. International cooperation to remove barriers to the transfer of clean and efficient energy technology, improve financial mechanisms and to enhance indigenous capacity building are indispensable to making even greater efficiency gains.
According to Liu, PRC concerns about Joint Implementation (JI) include:
[Note: Understanding Concerns About Joint Implementation a paper by Dr. Milton Russell (mrussel4@utk.edu) and others at the Joint Institute for Energy and Environment (Knoxville, TN, http://www.jiee.org) examines developing country concerns about JI “exploitation” and explores developed and developing country interests with respect to JI. End note]
PRC GHG sources in 1990:
PRC primary energy consumption structure (1995): coal (75 percent), oil (17.2 percent), hydropower (5.8 percent), natural gas (1.8 percent), nuclear (0.4 percent). This energy mix is expected to remain essentially the same over the next several decades, but a long-term energy conservation effort could lower the expected 2020 PRC energy consumption by about 13 percent.
According to Liu, the best energy conservation strategies for China include improving thermal generation plant efficiency (possible gains up to 45 percent); improved process technology that reduces the energy intensity of energy-intensive products such as continuous casting; and improved boiler efficiency.
Best alternative energy strategies include speeding up hydropower plant construction, building more nuclear power plants, increasing the biomass supply by planting high-yield trees, developing solar energy and wind power.
Problems: Geographic imbalance of resources types. Oil and natural gas supply can be increased by imports, as for example importing natural gas from Siberia. Fund shortage inhibits resource exploitation and technology imports. China needs to import new technology to leapfrog to much higher energy efficiency. China’s institutions are inadequate to the task. New institutions are needed to improve energy management and promote renewables.
Several Japanese scholars asked about the effect of energy security considerations on China’s primary energy mix that might make it more difficult to move away from coal. ESTOFF asked Liu if many Chinese energy experts shared the views of Chinese energy and former National People’s Congress Environmental Protection and Resources Conservation Committee Vice Chairman Yang Jike on China’s energy security. Yang wrote in his introduction to the 1997 edition of the China Energy Development Report [Zhongguo Nengyuyan Fazhan Baogao] that China should concentrate on the development of its coal resources so that the PRC will not have to increase its Middle East oil imports (which might get the PRC embroiled in the Middle East like the United States). Concentrating on energy from coal, Yang writes, would enable China to forego oil drilling in the South China Sea and in Xinjiang so as to avoid offending China’s South Asian neighbors and its Uighur minority in Xinjiang. Liu told ESTOFF that although Yang is a very prominent former leader and scientist and president of the China Energy Research Society, his views are not widely held. Non-economic policy considerations such as security on Chinese energy policy can be seen in recent Chinese bids on oil rights in Kazhakastan for which China paid far above market price, a U.S. oil company representative told ESTOFF in September.
Nagoya University engineering professor Hasatani Masanobu presented a survey of the advantages and practical limitations of a wide range of high efficiency energy production and utilization technologies and SOx, NOx, and carbon dioxide emission reduction technologies. Hasatani noted that optimal thermal power plant efficiency increased from 38 percent in 1960 to about 48 percent at present. Hasatani said that critical questions to be addressed include how to improve chemical gas turbine design so as to permit combustion at extremely high temperatures and improving energy storage systems so as to smooth out electric power supply and demand during the power plant operating day.
The Chinese, Japanese and U.S. scholars in their discussions several times came round to the point that since financing in the PRC is generally short-term it is hard for PRC business people to take a long term view. Longer term loans will make it easier for PRC business people to choose advanced technologies with a lower life cycle cost (but higher initial cost) over current PRC technologies which have a lower initial cost (but a higher life cycle cost). Institutional barriers also inhibit utilization of the best technology.
Seiki Katsuo (seiki@blue.ocn.ne.jp), executive director of the Global Industrial and Social Progress Institute, remarked that between 1990 and 1994, PRC energy consumption increased only 40 percent as rapidly as incomes. Structural reform, factory modernization spurred by large inflows of foreign direct investment (FDI), and higher PRC energy prices are probably the main reasons for efficiency gains. The private sector, and not government-to-government assistance, has become by far the most important player in technology transfer. This represents a big change from 1990, when the international flow of funds between developed and developing countries was equally divided between public and private funds. Today private funds flowing to the developing countries are several times larger than public funds. Accordingly, the system of incentives and regulatory regime the developing country receiving technology transfer has in place and building the capacity of the developing country to develop and commercialize indigenous new technology has become much more important. The Framework Convention on Climate Change focused on public funds. The issue today is how scarce public funds can serve as seed money for enormous flows of international direct foreign investments.
Like the U.S. senators, said Seiki, Japanese negotiators are concerned that developed country GHG mitigation efforts will be negated if large emitting nations such as China do nothing. More active participation from developing countries is needed if only to “stop the spiral of worsening distrust between the developed and the developing countries” which is making it hard for developing countries to commit to GHG mitigation targets.
Through the Japanese Green Aid Plan several demonstration desulphurization and carbon dioxide reduction projects have been implemented, but these projects have not achieved technology application and commercialization. The Environmental Committee of the Japan-China Economic Association are discussing private sector environmental technology cooperation but significant barriers such as the weakness of PRC environmental regulations and financial problems. Commercial environmental technology cooperation will depend upon stricter environmental regulations in recipient countries; developing environmental technology capacity including appropriate personnel training; development of incentives to encourage investment and the diffusion of environmental technologies throughout the Chinese market; and the promotion of Activities Implemented Jointly (AIJ), said Seiki.
Michael Toman (toman@rff.org), an environmental economist at Resources for the Future, said that “private sector incentives motivated by returns on investment” are much more likely than international government mandated programs to improve China’s economy and environment. Government programs to promote research and development and technology diffusion, including subsidies and regulations, can actually be counter-productive over the long term. So-called “market failures” which government policy often tries to redress is often not a true market failure but is caused by a shortcoming of the technology that has “failed”. Nonetheless, international cooperation through market-based strategies such as activities implemented jointly (AIJ) can promote important transfers of clean technology. Studies of technology transfer from developed to developing countries show that three-quarters of the tech is transferred through private trade, foreign direct investment about 15 percent and overseas development assistance (ODA) about 10 percent.
Professors Qin Wanshun and Liu Xue (qws(at)gsm.pku.edu.cn) of the Beijing University Guanghua School of Management discussed the evolution of China’s technology market and the transfer of environmentally sound technology. Liu first introduced the Chinese technology market in some detail in order to understand the difficulties of introducing foreign environmentally sound technology to China.
Qin and Liu noted in their paper that measuring PRC technology is very difficult. For example, local governments may fail to submit statistics; statistics may be falsified; and tax-free tech trade might be used by some enterprises or scientific institutes as a way to evade taxes on ordinary trade. Tech transfer statistics include high tech equipment as well as technology. Statistics on contracts are of signed rather than of implemented contracts. With these caveats in mind, Liu cautions that only a very general view of the Chinese high technology market can be developed.
Liu said that under the old centrally planned economy, there was no technology market since research institutes and enterprises merely passively carried out the central plan. Technology markets emerged from the reforms of the 1980s. The amount of new technology entering China as a result of foreign direct investment (FDI) has steadily increased since 1993. Technology sellers since 1986 breaks down as scientific research institutes (40 - 50 percent), technology trading organizations (20 - 30 percent) while industrial enterprises buy two-thirds of all technology contracts.
Liu said that technology developers have difficulty exploiting their technology so most companies prefer to be followers rather than leaders. Very few Chinese technology advances are patent-protected and most technology leaders use relatively low-input, low-risk technologies that are easy to imitate. Most Chinese companies and research institutes don’t know how to protect their intellectual property and don’t understand how to market their technology. Technology leader technology and capital investment is low, so followers emerge quickly. China’s investment in research and development was 0.72 percent of GDP in 1991 and has been dropping ever since although the PRC government has a goal of 1.5 percent by the year 2000. Chinese research assets are scattered across many small institutes that are very hard to coordinate.
Qin and Liu said that China is a rapidly developing country with high emissions (carbon dioxide emissions now 12 percent of the world total) and a high input, high emission, low output industrial structure. A growing energy shortage that may reach 400 million tons of coal equivalent in the year 2000. All these conditions favor the introduction of advanced high efficiency, low emission technology. The domestic Chinese environmental technology market is still small and immature. The average contract value of just USD 13,000. The shortcomings of the Chinese technology system discussed above inhibit the development of indigenous Chinese environmental technology.
Liu and Qin said that while there is great potential demand for foreign environmental technology, foreign technology still encounters many obstacles.
Sugiyama Tashi (sugiyama@criepi.denken.or.jp) of Japan's Central Research Institute of the Electric Power Industry (CRIEPI) said that multi-purpose policy begins with the interests of the developing economies. For the developing countries development and the improvement of the local environment, and not climate warming are the chief concerns. Considering economic development and local environmental improvement a "secondary benefit" implicitly puts the interests of the developed countries first -- an approach that is not likely to win the support of the developing countries. Multi-purpose policy, unlike joint implementation (JI) puts the concerns of the developing countries first and since, unlike JI it does not require a clearly defined baseline, it can include a wider range of international cooperation.
Multi-purpose environmental policy takes advantage of the follower's advantage of picking the technology and policy that have already been demonstrated to be successful in the developed countries. There are a variety of alreadycommercialized technologies and nearly-commercialized (solar, wind, some clean coal technology) which can solve many of China's environmental problems. Already commercialized technologies should be transferred first. Examples include coal power generation efficiency gains, reducing automobile exhaust and sulfur reduction. Sugiyama concludes that transferring commonplace cost-effective technologies would solve almost all environmental problems -- the main remaining obstacles would institutional and not technological or economic. One multi-purpose approach would be a scenario in which China commits to improve average thermal plant efficiency by a certain percentage by a target year, to restructure by closing small-scale inefficient power plants, and to open its market to the developed countries. Developed countries would help through funding and technology transfer.
Seminar participants commented that multi-purpose environmental policy closely resembles a developing country version of the "no regrets" approach of developed countries.
Two case studies illustrated how greenhouse gas reduction technologies can provide important economic benefits. Li Junfeng (lijf@public.bta.net.cn), director of the Center for Renewable Energy Development at the State Planning Commission discussed the economics of the conversion of organics in industrial waste to biogas and how a biomass energy project could be structured as an activities implemented jointly (AIJ) international cooperation project. Nitta Yoshitaka (y-nitta@criepi.or.jp) of the Central Research Institute of the Electric Power Industry (Japan) introduced a Japanese desulphurization pilot project at a coal-fired electric power plant in Shenyang City. A by-product of the desulphurization process is a finely powdered gypsum that greatly enhances the productivity of non-fertile highly alkaline soil. If this technology can be commercialized, selling the gypsum would bring down the cost of adding desulphurization equipment to Chinese power plants.
One U.S. participant remarked that China's needs are so vast that foreign funding and joint implementation will not have an important effect on China's economic development and GHG mitigation. The most important factors will be China's understanding of its own interest and the increased role of market forces as structural reform continues.
Prof. Zou Ji (zoujit@public.bta.net.cn) of the Beijing Environment and Development Institute and Renmin University examined rapid PRC institutional changes which affect the transfer of GHG mitigation technology to the PRC. Zou noted that the recently concluded Fifteenth Congress of the Chinese Communist Party calls for further decreases of the proportion of state ownership of the economy. The reorganization of state enterprises over the next several years will further separate the government's ownership of state enterprises from their management. As more of these state enterprises resemble private companies in their management decisions, the role of market mechanisms in promoting technology transfer will become even more important. The government interest in state corporations will be more that of a shareholder rather than a central planner. As these companies become more independent of government direction, government department in charge of industries are becoming weaker.
Institutional reform of the state-monopoly power sector creates conditions for enterprises themselves, and not the government, to make decisions based on their own self-interest. Only in this way can technology transfer be effective. Most new power technologies benefit both economic development and GHG mitigation can be transferred through ordinary commerce.
During the discussion, Zou said that Chinese domestic power plant technology typically has a lower initial cost but a higher life cycle cost than foreign technology. Long-term financing can bridge the gap. Zou said that recent reductions in tariff rates, the December 1996 PRC government decision to make the renminbi convertible on the current account both reduce the cost of technology imports. PRC government policies that seek to stimulate development in central and western China by directing FDI there effectively reduce investment since the return on investment is lower in the west. By investing in smaller plants (under 30 megawatts), localities can reduce their risk and sidestep the cumbersome approval process.
Local governments sometimes prefer to operate their own inefficient power plant rather than purchase power from a new, larger more efficient plant since the old plant provides the local government with income.
Another Chinese scholar mentioned a big new power plant in southern China that operates at just fifty percent capacity because local governments didn't want to purchase less expensive power from the new plant and close their own power plants. Another Chinese scholar said that visits to power plant customers are essential to understand power plant investment and economics since power companies often will not provide the correct power rates to outsiders. The soft budgets of state-owned enterprises reduce incentives created by environmental fines and fees by finding soft money to pay for them; thus the SOEs are less inclined to invest in new technology.
Alan Blackman (blackman@rff.org) of Resources for the Future examined barriers and opportunities to foreign direct investment in the Chinese power sector and the effect this FDI is likely to have on GHG mitigation. PRC electricity demand tripled between 1980 and 1994. Residential demand will grow quickly since one-third of all households are not yet on the power grid. PRC power supply falls today about 25 percent short of demand. Some economists calculate that the power shortage reduces PRC GDP by seven percent. Chinese power plants have an average thermal efficiency of 25 percent, much lower than the 35 percent typical of developed country thermal power plants.
Official and unofficial policies reduce the attractiveness of the PRC power sector to FDI. These policies include:
Blackman said that a small survey of 35 U.S. companies that have invested in PRC power plants (most of the foreign power plants are operated by U.S. companies) found that ambiguity of laws and regulations, delays in approval process, control of the rate of return, credit risk of the power purchaser, the enforcement of contracts and the control of electricity pricing are the most important problems perceived by U.S. that have invested in the PRC power sector. The U.S. companies reported that their mostly medium-sized plants are not significantly more efficient than the average PRC power plant and that using PRC equipment does not reduce energy efficiency. Blackman suggests that most FDI thus far has involved small power plants. Foreign invested larger plants using newer technology would likely be more efficient than their Chinese counterparts, said Blackman.
While China needs technology transfer if it is to build power plants that would be among the most advanced in the world. However, China already has the technology to build plants much more efficient than existing plants. Several participants made the point that seen in terms of life cycle costing, more efficient plants are actually cheaper than the low efficiency power plants of today. Foreign investors in Chinese power plants, exposed to the same disincentives and strictures as Chinese investors, may very well make the same rational evaluation of their business interests and not choose new more energy efficient and environmentally-friendly technologies. Why should foreign investors act differently than Chinese investors? The link often assumed between foreign investment and tech transfer, while it certainly exists in many cases, may not be generally true. The Chinese, Japanese and U.S. scholars see the mature energy efficient, environmentally friendly technology that China needs is already here and could be delivered by the market. An array of economic disincentives, institutional barriers and policies prevent technology transfer through the market from reaching its great potential to enable China to solve its own problems.
Tang Xiaoyan (xytang@ces.pku.cn), Vice President, Chinese Society for Environmental Sciences and Prof. at Peking U.
Ma Zhong (mazhong@public.bta.net.cn), Beijing Environment and Development Institute and Professor at Renmin University
Qin Wanshun (qws@gsm.pku.edu.cn) Guanghua School of Management, Peking University
Liu Xue (qws@gsm.pku.edu.cn) Guanghua School of Management, Peking University
Wei Zhizhong, Professor at Tsinghua University
Liu Deshun (liuds@mail.Tsinghua.edu.cn), Deputy Director of Energy Systems Analysis Div of Institute for Techno-Economics and Energy System Analysis at Tsinghua University
Li Junfeng, lijf@public.bta.net.cn, Center for Renewable Energy Development, Energy Research Institute, State Planning Commission
Ji Zou (zoujit@public.bta.net.cn), Deputy Director, Institute of Environmental Economics, Renmin University.
Nitta Yoshitaka (y-nitta@criepi.denken.or.jp, Planning Division Dir. of R and D Review at Central Research Institute of the Electric Power Industry. CRIEPI co-sponsored the seminar.
Sugiyama Taishi (sugiyama@criepi.denken.or.jp), Senior Researcher, Socio-Economic Research Center, Central Research Institute of the Electric Power Industry (CRIEPI web page at http://criepi.denken.or.jp)
Aoyagi Tadashi (aoyagi@mri.co.jp), Research Director, Energy and Natural Resources Dept. of Mitsubishi Research Institute (Mitsubishi Institute web page at http://www.mri.co.jp)
Seiki Katsuo (seiki@blue.ocn.ne.jp), Executive Director, Global Industrial and Social Progress Institute
Yamaji Kenji (yamaji@yamaji.t.u-tokyo.ac.jp) professor of Electrical Engineering, University of Tokyo. His home page at http://yukikura.t.u-tokyo.ac.jp
Hasatani Masanobu, Professor at Nagoya University
Kuroda Masahiro (kuroda@fbc.keio.ac.jp), professor on Faculty of Business and Commerce, Keio University
Suzuki Tatsujiro (tatsu@q.t.u-tokyo.ac.jp) visiting professor at University of Tokyo specializing in sociotechnics of nuclear energy
Itaya Yoshinori (yitaya@nuce.nagoya-u.ac.jp), professor in Dept. of Chemical Engineering, Nagoya University. Itaya researches SO and NO emission control and cross-border emission problems.
Kobayashi Noriyuki (hkoba@mhlab.nuce.nagoya-u.ac.jp), Dept. of Energy Engineering and Science, Nagoya University
Milton Russell (mrussel4@utk.edu), senior fellow and Former Director, Joint Institute for Energy and Environment (JIEE) in Knoxville, TN.
Gail McCarthy (mccarthy@epri.com), Director, Strategic Research and Development at the Electric Power Research Institute in Palo Alto, CA. EPRI co-sponsored the seminar.
Mike Toman (toman@rff.org), Director and Senior Fellow, Energy and Natural Resources Division at Resources for the Future in Washington, DC.
Joel Darmstadter (darmstad@rff.org), Senior Fellow, Energy and Natural Resources Division, Resources for the Future.
Allan Blackman (blackman@rff.org), Fellow, Quality of Environment Division and Co-Director of China Programs, Resources for the Future.