One-Size-Does-Not-Fit-All

By Louisa Mitchell, CWR 9 June, 2011

Can bottom-up target setting and devolution of control deliver ‘Quality Growth’? Mitchell finds out.

In 2006 the 11^th FYP was hailed as the first governmental planning document to put resource constraints at its centre. But things move fast in China and now it merely looks like a launch pad for the ambitious environmental targets, polices and market mechanisms proposed in this 12^th FYP.

With ‘scientific development’ at its core, the 12^th FYP calls for a total transformation of China’s economic structure which incorporates new limits on energy consumption and targets for reducing pollution. This is complicated. Multiple provincial, sectoral and special plans require careful and co-ordinated implementation. Yet, as is usual in these FYPs, there was little detail regarding this implementation.

The chaos created by temporary power downs conducted by local officials desperate to meet their 11^th FYP energy efficiency targets is still fresh in peoples’ minds. In Hebei last year, for example, some hospitals, homes and farms had their electricity cut off in August and some factories were closed in September. Energy and carbon targets were laudably met but the measures taken to do so were not sustainable – farmers could not irrigate their crops and factories lost market share or were fined for missing processing deadlines.

So the enormous ambition of the 12^th FYP, without a detailed roadmap of how to get there, prompts nagging questions as to ‘how’, particularly in the face of rising consumption and inflation.

Nonetheless, few doubt that China will do it. At a debate in Hong Kong, Shui Sin-por, Hong Kong Central Policy Unit Advisor, provocatively called it ‘Mission Impossible’…the mission which always succeeds but needs a Tom Cruise to get it done.

Energy targets

Delivery of targets forms the backbone of the Chinese leadership’s legitimacy and careers depend on achieving them. Although just how binding they are is unclear since the Chinese language in the FYP is said to be ambiguous on this.

In order to try to avoid a repeat of the last FYP-related events such as those described above in Hebei, the target setting for the 12^th FYP is said to have had more bottom-up input than before.  This process also aims to remove the potential for forecasts having to be revised. Last year Jilin province misunderstood the implications of the energy efficiency target, set itself one that was far too ambitious and had to have it revised half way through the FYP period.

The 12^th FYP’s overall energy efficiency target was established after a three stage back and forth process between the 31 provincial governments and central government. Although 16 per cent is an overall goal, it has been adjusted by province depending on stage of development. Far Western provinces still in an early stage of development have the lowest target of 10 per cent whilst eastern and central provinces, who have already benefited from rapid growth which they must now reign in, have 16 per cent or higher.

Incentives for implementation have been further decentralized. The last FYPs’ Top 1,000 Enterprises Programme which enabled provinces to enforce energy efficiency in local cities and companies has been ramped up to a 10,000 Enterprises Program, although details have not yet been released.

However, the sincerity of the bottom-up process has been questioned because some provinces were reported as submitting conservative targets which were then talked up. For instance, Ningxia submitted a 2.1 per cent target but ended up at 15 per cent. Was Ningxia playing a game of cat and mouse to secure an achievable target or is 16 per cent problematic?

There has been much debate over the do-ability of the energy efficiency target. Both Greenpeace and WWF have argued that 16 per cent is too low given China has easily achieved 18 per cent in the last five years and has momentum. Yet the Chinese Academy of Social Science’s Pan Jihua fears an overambitious target will create issues for implementation at the local level again.

His concern is that the government has already exhausted the low hanging fruit, closing antiquated plants and consolidating small plants in the power and heavy industry sectors. Consequently, increased energy efficiency in future will rely on economic restructuring and innovation which take time.

The target of 11.4 per cent for the non-fossil fuels proportion of the energy mix has also generated debate. The aim is to reduce reliance on coal from the current 73 per cent of the installed capacity of power generation to 65 per cent.

However, Professor Wangyi of the Chinese Academy of Sciences commented at a recent event in Hong Kong that the non-fossil fuels proportion is due to come mostly from hydropower (a further 140 GW) and nuclear (a further 40 GW) which ‘sounds impressive but is problematic’. Nuclear plant plans are to be reviewed again for safety post Fukishima. Hydropower causes concerns for conservationists because environmentally crucial sites are often negatively affected.

China is already number one in the world in terms of wind capacity, having exceeded it’s 2010 target by over 4x, and boasts seven of the ten largest solar panel manufacturers, but these sources will only make up a small proportion of the energy mix (70 GW of wind and 5 GW of solar). In addition as development of  the Smart Grid continues apace, ongoing  problems with grid access for renewables need to be resolved, yet the FYP does not, for instance, include any mention of the feed-in tariffs desired by the solar sector .

Nonetheless, the race is on and the China Electricity Regulatory Commission (CERC) has recently announced that the price of power from renewable sources will be raised in order to stimulate investment.

As for the carbon intensity reduction target of 17 per cent, this was raised from 16 per cent initially put forward in a draft plan and is in line with China’s goal to reduce its carbon intensity by 40-45 per cent confirmed in Cancun last year.

There is, however, disappointment that a ‘total’ carbon emissions target was not included in the final plan. An expectation had been set that energy consumption would be capped at 4 billion tonnes of coal equivalent, up from 3.25 billion tonnes of coal equivalent in 2010 and all eyes will be on the energy-sector plan when it is released later this year.

The energy intensity and carbon emission reduction targets have significant implications for water use. Circle of Blue has calculated that if carbon emissions are cut by 17 per cent and energy consumption by 16 per cent per unit of GDP then that means that for each new dollar of economic growth, water use must decline by nearly a fifth.

The FYP target for reduction of water intensity remains the same as the last one at 30 per cent. It was planned to be 25 per cent, however this was moved up after the last FYP’s target was easily surpassed at 37 per cent holding growth in water use at about 1 per cent annually. But the plan also envisions record levels of water use, rising to 620 billion cubic meters by 2015—up from 599 billion cubic meters in 2010.

Similar to energy intensity, water intensity targets are said to have been made directly with provinces in a back and forth process. Targets and incentives have been adjusted by province. For example, in the Yellow River Basin provinces, a specific limit on water use has been introduced as opposed to water use not exceeding supply.

New pollution targets were in the plan as expected and established in response to data collected in the first national pollution survey released in 2010. The 10 per cent ammonium nitrate (a fertilizer) and Chemical Oxygen Demand (COD, a measure of water pollution) reductions were set in response to the finding that over 40 per cent of China’s COD, and over 55% of nitrogen discharges  comes from agricultural sources. However, the impact these targets may have on food production and security is unclear.

The 15 per cent reduction in heavy metals – lead, mercury, chromium, cadmium and arsenic by 2015 from 2007 levels was in response to data showing that China discharged 900 tones of the five metals in 2007.

The 10 per cent target for nitrogen oxides is meant to help control the use of coal and therefore water since coal production is the largest industrial consumer of fresh water, although there is some debate as to whether this is high enough to do so.

New policies and market mechanisms depend on careful planning and strict enforcement

Just as with bottom-up target setting, the inclusion of market mechanisms is part of the gradual devolution away from central control. The carrot and stick approach proposed in the plan will reform resource pricing and payment for environmental services.

The competitive advantage that exists from addressing climate change is not lost on the Chinese government. The Strategic Emerging Industries (SEIs) listed in the table below are identified as core to the new growth plan and are expected to account for 8% of China’s GDP in 2015 and 15% by 2020.

A Climate Group/HSBC report on the 12th FYP found four common approaches to fiscal and financial support for SEI plans in different regions: specified funds, preferential tax rates, financial system reform to favour industries, funding pilot demonstration programmes such as emissions trading and low carbon zone pilots.  Pilot emissions trading schemes have subsequently been announced for Beijing, Chongqing, Shanghai, Tianjin and the provinces of Hubei and Guangdong before the end of 2013 with the goal of scaling up to a global platform by the end of 2015.

But there are structural concerns, such as how these emissions trading platforms function without a mandatory total cap on carbon and how to improve a weak track record on enforcement – examples include the lack of enforcement of the Renewable Energy Law’s stipulation that the State Grid must purchase energy generated from renewables.

The Climate Group/HSBC report identifies ‘limited continuous oversight, lack of energy data and minimal real-time punitive measures for violation of guidelines and regulations’ as key challenges, but concedes that these issues ‘continue to improve’.

To address this, the FYP commits to establishing well-equipped monitoring systems for greenhouse gas emissions and energy conservation so that the new policies can be tracked and market mechanisms implemented.

The water crisis is clearly recognized in the plan which urges that the construction of water conservation structures is enhanced, irrigation is improved and rivers/lakes are cleaned up and properly treated. It also proposes accelerating the construction of wastewater treatment and recycling pipes.

However, Global Water Intelligence (GWI) recently highlighted that the budget of US$51 billion for new investment in wastewater, drainage piping , water reuse and sludge treatment  is only marginally higher than the 11^th FYP budget  and the investment in wastewater treatment may tail off as the emphasis shifts to sludge treatment, expected to be the fastest growing sector during the 12^th FYP period, and water reuse. Desal will also gain profile as a dedicated sector FYP is currently being drafted by a team of experts put together by the NDRC. The following table was published by GWI but with the caveat that it is not the end of the wastewater story as there will still be opportunities for industrial parks:

Planned prefecture-level wastewater treatment and reuse investment

Source: Ministry of Housing and Urban-Rural Development, P.R.C

Prior to the plan there were indications that investment in water management and infrastructure construction would double in the next decade and innovative incentives were proposed such as 10 per cent of a new tax on land sales being used to strengthen water management in rural areas.

Encouragingly, concrete financial measures appear to be being released already. A document published by the Ministry of Finance and Ministry of Water Resources just after the 12^th FYP approval suggests a water fee collection structure at the central and local level to ‘implement the most stringent water management system’.

The crucial detail is yet to come

China has rightly been given credit for this first major effort to decouple economic growth from the increased depletion of natural resources. But the approval of the FYP is just a step in the process. As local level and sector specific plans are gradually released, the critical co-ordination and detail of the pathways for implementation will become clearer.

Targets and policies have been proposed after more consultation and data analysis at the central and local level than ever before. In order to address the crisis of water scarcity and pollution in China and to slow the looming water-energy collision, water efficiency must be the highest possible in all new energy projects delivered as part of this plan and the pollutant targets must be met.

China’s ambitious 12^th FYP has captured maximum attention around the world and every sectoral, provincial and special plan will be scrutinized as it emerges over the coming months.