The unprecedented volatility in energy prices of the last few years and the global imperative to reduce greenhouse gas (GHG) emissions have produced deep uncertainty about the future of energy, and especially about the future of fossil fuels. A broad shift toward lower-carbon alternatives (“the energy shift”) is now well under way, but the current rate of progress is insufficient to achieve the reductions in emissions that scientists consider essential to slowing the pace of global warming.

A particular challenge is posed by developing economies. On the one hand, they must stay focused on growth and development—for the sake of their citizens, the health of the global economy, and their political stability. On the other hand, their growth will produce enormous amounts of additional GHG emissions.
 
The situation in China is especially acute. As is the case elsewhere, China’s GDP growth is matched by its growth in energy demand; however, the broader shift away from fossil fuels that is taking hold in other developed (and even some developing) economies is largely absent in China. In fact, virtually all of China’s new industrial, commercial, and residential growth is underpinned by aging, fossil fuel–based technologies. A new coal-fired power station is being built every single week in China—using technology that largely precludes any possibility of future retrofitting for, say, carbon capture and sequestration (CCS).
 
With the support of the rest of the world, notably the myriad multinational corporations actively and profitably supporting China’s growth, China can take immediate steps toward more sustainable economic development that also reduces its GHG emissions. Moreover, it has a unique opportunity to go even further by applying currently available technology and cutting-edge thinking to leapfrog developed nations that remain hampered by investments and decisions made earlier in their own economic development cycle. A leapfrogging strategy entails taking steps to influence the primary energy mix, promote energy efficiency, and encourage smart infrastructure development. Collectively, these steps could potentially cut China’s emissions growth in half.
 
A Realistic Approach
 
Practically speaking, any leapfrogging scenario for China must incorporate several simple truths. First, China will not bet heavily on renewable energy technologies such as solar power or electric vehicles that are both expensive and immature. Simply put, its economy will not wait. Renewables will figure significantly in the long term, say, post-2030, but will play a relatively modest role for now. Second, China has an abundant supply of low-cost indigenous coal reserves that it will deploy for power generation. Third, China will not leapfrog developed nations in accepting a cap on GHG emissions, nor should it; U.S. emissions per capita, for example, are still about four times those of China.
 
Against that backdrop, China and its senior leaders have communicated a seriousness of purpose about cleaner energy, in part because they already see the troubling effects of climate change. For example, melting glaciers in the Himalayas are already causing rising sea levels and storm surges and threatening water supplies in the region. And that sense of purpose about using cleaner energy has translated into some steps in the right direction. The auto fleet in China is more fuel efficient than that in the United States. China is developing and installing more fuel-efficient power lines and is expected to be the world’s largest (though still a modest) producer of wind and solar energy by 2010.
 
Yet China’s current ambition to grow GDP by between 6 and 8 percent per year for the next decade could cause its GHG emissions to double by 2020 and increase another 50 percent by 2030. Given its size and growth trajectory, what happens in China will have an inordinate impact on overall global efforts to turn the dial on GHG emissions. In other words, if China remains on its current development path, the rest of the world’s actions will be insufficient to counteract China’s influence on the pace of climate change.
 
Moving Away from Conventional Coal
 
Much of the popular debate about controlling emissions revolves around transportation solutions, but most of the reductions in the short to intermediate term will need to come from the power generation sector. In the scramble to meet intense demand for ever more power—and avoid inconvenient and at times incapacitating blackouts—the Chinese government, working hand in glove with industry, has favored fast and cheap power generation expansion based on older technologies and using conventional coal as the primary fuel source.
 
The mix of fuels used to generate electricity has perhaps the greatest impact on GHG emissions. For China, that means tapering its use of conventional coal. The building of new coal-fired power stations alone (although it is down from two per week two years ago) dwarfs the positive impact of all China’s fuel efficiency efforts combined. On the one hand, coal remains a natural choice to cover baseload growth in China: base coal technology is relatively easy to master locally, the economics are attractive, and power can often be linked to domestic coal supplies. On the other hand, sharply rising estimates of commercial gas reserves in China and globally, coupled with corresponding price decreases, support a larger role for gas, which produces roughly half the GHG emissions of conventional coal. An influx of new coal-to-gas conversion technologies further supports making the switch.
 
A substantive shift away from coal won’t happen in China without a shift in government priorities. For example, whereas most of China’s gas reserves are in the interior of the country, most of its growth has been along the southern coast. By increasing investment in liquefied natural gas terminals and pipelines, China can transport gas supply to areas where it is needed most. Furthermore, by constructing international gas pipelines, China could relatively inexpensively tap into vast reserves of gas now stranded in Siberia and elsewhere in Russia.
 
Curbing Demand through Energy Efficiency
 
Meanwhile, the Chinese government might better tackle its supply challenges by pulling the opposite lever—curbing demand through more aggressive energy efficiency programs. We recently worked to help a national Chinese industrial company reduce CO2 emissions by 30 percent rather than face government-imposed tax penalties.
 
The potential impact of increasing energy efficiency alone cannot be overstated. We like to say that energy efficiency is like picking $1,000 bills up off the ground. Given the vast amount of new growth that has yet to unfold, the Chinese government still has a unique opportunity to leapfrog developed economies by explicitly enmeshing energy efficiency across the board—in urban planning, construction, transportation, industrial development, etc.—through energy management policies and regulations.
 
First, with respect to power generation, more efficient energy usage will reduce the number of new plants needed to satisfy demand. This will free up investment capital, which may then be redirected to building fewer but more carbon-efficient plants (e.g., coal with carbon capture, nuclear power, or coal-to-gas conversion). Although these modern plants require a substantially larger up-front investment—two to three times as large—under many mid-term and long-term energy scenarios they will pay for themselves through substantially lower operating, environmental, and life-cycle costs.
 
Beyond power generation, we see potential near-term leapfrogging opportunities in:
 
  • City planning that favors walkable distances and convenient access to swift public transport
  • Expanded high-speed rail connections (Japan’s post–World War II focus on developing a rail network ahead of its road infrastructure may serve as a guidepost)
  • Energy-efficient building design and construction (residential, commercial, and industrial)
  • An emphasis on energy efficiency in industrial processes
  • Use of inducements like taxation and regulation to steer consumers toward purchasing small cars with the most efficient internal combustion engines (while also supporting electric vehicle development)
 
The present situation in China in all these areas is not unlike that which we see in power generation—the race to meet demand quickly and cheaply incurs tremendous waste and comes at the expense of long-term sustainability and affordability. For example, energy-efficient buildings, whether residential, industrial, or commercial, demand more up-front capital and take longer to build, yet they quickly pay for themselves and help change the vector of energy demand driven by GDP growth.
 
2020 and Beyond
 
Nuclear energy in its latest commercial incarnation is a strong economic alternative to coal, but only if the state assumes the exorbitant costs of long-term storage of highly radioactive nuclear waste. Government backing and commitment to nuclear power—coupled with high levels of transparency necessitated by compliance with nuclear proliferation treaties—are crucial to success. A global nuclear boom with roots in Asia is likely in the long term, but the highly concentrated industry will need time to ramp up.
 
Renewables are another potentially important energy source in the long term, but they are simply not cost competitive in the current environment. Government policy can work to accelerate technological advancement and underwrite emerging value chains in renewable energy, but it will still take decades for renewables to mature.
 
Conclusion
 
In most respects, developed countries serve as poor models for sustainable development—with a couple of notable exceptions. For example, according to the CIA’s World Factbook, only nine countries on the planet have a GDP larger than California’s. Yet through a combination of strict regulation, tax incentives, and other government policies, California now has energy demand per GDP that is significantly below that of other U.S. states and most developed countries in the world. Meanwhile, Japan’s crude oil consumption is in long-term decline; it has declined even in years when its GDP grew 2 to 3 percent. (Of course, as an official from Japan’s Ministry of Economy, Trade, and Industry once confided: Given all the energy efficiency program targets Japan has set over the past several decades, it should be energy free by now.)
 
Political priorities, economics, cash constraints, speed of development, and other factors have nearly always surpassed sustainability as driving objectives. So it’s no surprise that China and other developing economies bristle at pressure to prioritize sustainability, especially when they perceive it as coming at the expense of growth.
 
These two objectives need not be mutually exclusive; a leapfrogging approach allows China to have both. But that means making intelligent development choices—for everybody’s sake, but primarily for its own.
 
 
About the Authors
Eric Spiegel (eric.spiegel@booz.com) is a Booz & Company senior partner based in McLean, Va. He leads the firm’s work for global energy and utilities clients. He has over 25 years of energy and utility consulting industry experience leading major energy client assignments in Asia, the Middle East, Europe, and the United States. Spiegel is coauthor of the book Energy Shift.
 
Paul Duerloo (paul.duerloo@booz.com) is a Booz & Company partner based in Tokyo, where he heads the firm’s North Asia energy, chemicals and utility practice. For over 15 years, Duerloo has applied his thought leadership to strategic, organization, and operation issues for leading oil & gas companies and ventures, chemical conglomerates, utilities, and governments in Europe, the United States, Africa, and the Middle East.