VZCZCXRO5044
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #2459/01 3620358
ZNR UUUUU ZZH
R 280358Z DEC 06
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 5622
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAEPA/HQ EPA WASHDC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 04 GUANGZHOU 032459 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR 4420/ITA/MAC/MCQUEEN 
USDOE FOR INTERNATIONAL AFFAIRS/DPUMPHREY/RSPRICE 
USDOE FOR FOSSIL POLICY AND ENERGY/MSMITH/ADUCCA 
STATE FOR EAP/CM, EB/CBA, AND EB/ESC/IEC 
STATE FOR OES/GC, OES/ENV, AND OES/PCI/STEWART 
STATE ALSO PASS USTR FOR CHINA OFFICE 
EPA FOR INTERNATIONAL/THOMPSON 
USPACOM FOR FPA 
 
E.O. 12958: N/A 
TAGS: ENRG ECON SENV CH
SUBJECT: How Will China Achieve Its Energy Efficiency 
Target? 
 
REF: A) Guangzhou 32430 
 
(U) THIS CABLE IS SENSITIVE BUT UNCLASSIFIED.  PLEASE 
PROTECT ACCORDINGLY.  NOT FOR INTERNET DISTRIBUTION. 
 
SUMMARY 
------- 
 
¶1. (SBU) China must use energy efficient products and 
technologies, implement structural changes in its high 
energy-consuming industries, and improve its management of 
energy conservation efforts, according to government 
officials and experts who gathered in Hainan Province in 
November 2006 for the Forum on Implementing China's 2010 
20% Energy Efficiency Target.  Commercial and investment 
opportunities exist for U.S. companies that provide energy 
efficient equipment and services for the steel, cement, 
glass, chemical, and power industries.  Energy conservation 
efforts will focus on the construction, transportation, and 
industrial sectors.  Challenges that will hinder Chinese 
efforts include: local governments' motivation to pursue 
higher economic growth rates rather than energy efficiency, 
lack of proper methodology for disaggregating energy 
efficiency targets, the presence of high energy-consuming 
small enterprises that are hard to oversee, lack of proper 
incentive strategies, and insufficient financing or 
investment systems.  China's energy demand will likely 
reach 3.36 billion tons of coal by 2010, up 70.6% from the 
2004 level of 1.97 billion tons of coal.  END SUMMARY. 
 
BACKGROUND 
---------- 
 
¶2. (U) China's 11th Five-Year Plan calls for a massive 
program to improve energy efficiency nationwide, including 
a national energy intensity target which would reduce 
energy consumption per unit of gross domestic product (GDP) 
20% by 2010.  The National Development and Reform 
Commission (NDRC) is taking the lead on (1) allocating 
reduction targets among provinces and industrial sectors, 
and (2) adopting energy efficiency improvement criteria for 
evaluating the job performance of local government 
officials. 
 
¶3. (SBU) The NDRC has signed "accountability contracts" 
with 30 provincial, autonomous region, and municipal 
governments, assigning them their respective targets.  The 
majority of contracts specify a 20% reduction in energy 
intensity, while a few contracts specify higher or lower 
targets depending on the particular circumstances of the 
province or region. 
 
¶4. (U) The Forum's sponsor, The China Sustainable Energy 
Program, is the joint creation of The David and Lucile 
Packard Foundation, The William and Flora Hewlett 
Foundation, and the Energy Foundation.  Participants in the 
November Forum included officials from the NDRC, China 
Academy of Social Sciences, Energy Research Institute, 
State Council Research Office, Tsinghua University, 
Ministry of Construction, State Environmental Protection 
Administration (SEPA), and the National People's Congress 
(NPC), among others. 
 
THREE BASIC PRINCIPLES 
---------------------- 
 
¶5. (U) Participants agreed that to achieve the Five-year 
Plan targets, the government must combine market-based, 
legal, and administrative mechanisms, couple short- and 
long-term goals, and link the efforts of central and local 
governments. 
 
TARGETED SECTORS 
---------------- 
 
GUANGZHOU 00032459  002 OF 004 
 
 
 
¶6. (U) Energy conservation efforts will focus on the 
construction, transportation, and industrial sectors. 
Companies in the steel, non-ferrous metal, coal, 
electricity, chemical, petro-chemical, construction 
material, textile, paper, and pulp industries are 
specifically targeted for improvement. 
 
TECHNOLOGICAL IMPROVEMENTS 
-------------------------- 
 
¶7. (SBU) Technological improvements suggested by the 
Forum's participants could create export opportunities for 
U.S. companies, particularly for companies that provide 
energy efficiency equipment and services for the steel, 
cement, glass, chemical, and power industries.  However, 
Tsinghua University's He Jiankun cautioned that China 
 
SIPDIS 
"cannot blindly import foreign technology and standards." 
 
¶8. (SBU) Recommendations include: 
 
  a) Phase out outdated production processes, technology, 
and equipment in the steel, cement, glass, chemical, and 
power industries.  Promote high-grade materials and blast 
furnaces.  Retrofit coal-fired industrial boilers and 
kilns.  Promote advanced flotation process and full 
insulation furnace technology in the glass industry. 
Develop large-scale combined cycle power plant technology. 
 
  b) Accelerate research and development for advanced 
energy conservation technology and products, as well as 
their dissemination and application. 
 
  c) Develop renewable and alternative energy technology. 
 
  d) Encourage international exchanges and cooperation. 
 
STRUCTURAL ADJUSTMENTS 
---------------------- 
 
¶9. (SBU) Recommendations for structural changes in China's 
high energy-consuming industries include: 
 
  a) Promote the service sector; restrain the high energy 
consuming manufacturing and industrial sectors.  He 
Bingguang from the NDRC's Department of Resource 
Conservation and Environmental Protection used the phrase 
"active readjustment" to describe this shift towards 
tertiary industries. 
 
  b) Promote high-tech industries. 
 
  c) Diversify energy base; reduce coal consumption. 
 
MANAGEMENT IMPROVEMENTS 
----------------------- 
 
¶10. (SBU) Recommendations for China's management of energy 
conservation efforts include: 
 
  a) Improve energy efficiency legal regulations and 
standards.  Amend the Energy Conservation Law; a proposal 
will be submitted to the NPC Standing Committee for review 
in 2007.  Amendments will focus on the energy conservation 
management system, primary energy conservation regulations, 
energy savings incentives, liability issues, energy 
conservation in commercial and residential buildings, as 
well as in transportation. 
 
  b) Use energy conservation and environmental protection 
targets to evaluate local government performance and 
establish a dynamic evaluation and monitoring system. 
 
  c) Establish an energy efficiency evaluation framework 
 
GUANGZHOU 00032459  003 OF 004 
 
 
for fixed-capital investment projects. 
 
  d) Strengthen energy efficiency management in energy- 
intensive enterprises. 
 
  e) Improve energy efficiency labeling and product 
certification.  Implement compulsory energy efficiency 
standards for household appliances, lighting, and 
industrial facilities. 
 
  f) Strengthen demand-side management (DSM) and electric 
power distribution management. 
 
  g) Reform the energy pricing system to reflect resource 
availability, market demand, and environmental 
externalities.  Pricing reform would include electricity, 
petroleum, natural gas, and coal.  It would likely increase 
the cost of energy consumption that exceeds a certain 
quota. 
 
  h) Implement preferential energy efficiency tax policies. 
Develop a list of energy efficiency products, discourage 
exports of high energy intensity or highly polluting 
products, develop a fuel tax system, and reform the 
resource tax. 
 
  i) Strengthen oversight and inspection.  Increase 
pollution penalties such that the cost of polluting exceeds 
the cost of cleaner production. 
 
  j) Implement emissions trading schemes. 
 
  k) Improve the collection of energy statistics.  Increase 
support for Statistics Departments, recruit more trained 
staff, and improve statistical methods.  Strengthen energy 
intensity statistics audit and verification.  Participants 
mentioned several key indicators and statistics that should 
be analyzed on the local, provincial, and national level: 
GDP (total and per capita), energy consumption (total and 
per capita), energy consumption elasticity coefficient, 
energy mix, energy input/output, energy consumption per RMB 
10,000 (USD 1,275), energy price, investment rate, and per 
capita income. 
 
  l) Establish a national energy conservation center which 
would integrate current institutions, carry out policy 
studies, evaluate energy conservation aspects of capital 
investment projects, disseminate energy conservation 
techniques, conduct training, provide information, and 
manage international exchanges and cooperation. 
 
  m) Improve energy efficiency in government agencies. 
Retrofit government buildings' heating, air conditioning, 
and lighting systems.  Encourage government procurement of 
energy conservation products.  Integrate energy 
conservation into daily work habits. 
 
  n) Broaden sources of funding to provide stable energy 
efficiency investment.  Opportunities for U.S. investment 
in energy conservation projects will likely multiply. 
Establish a special energy conservation fund.  Encourage 
enterprises to self-finance or use loans from international 
financial organizations and foreign governments.  Encourage 
financial institutions to increase current lending for 
energy efficiency. 
 
  o) Implement further energy efficiency publicity, 
education, and training.  Publish energy consumption 
indexes. 
 
CHALLENGES 
---------- 
 
¶11. (U) Forum participants outlined several challenges that 
 
GUANGZHOU 00032459  004 OF 004 
 
 
will hinder China's energy conservation efforts. 
 
¶12. (SBU) Professor Yao Yufang from China's Academy of 
Social Sciences estimated that structural and technological 
improvements would only result in 13.7% energy savings by 
2010, falling well short of the 20% goal.  If no 
improvements are made and the current economic growth 
continues, energy intensity would increase by 4.6%, 
according to Yao. 
 
¶13. (SBU) Zhou Dadi from the Energy Research Institute 
identified four main challenges: (1) lower levels of 
government still had greater motivation to pursue higher 
growth rates rather than focus on energy conservation, (2) 
officials lack proper "scientific" methodology for 
disaggregating energy efficiency targets, (3) energy 
conservation information services cannot meet the demand of 
local government and enterprises concerning energy-saving 
technologies and products, and (4) high energy-consuming 
and high polluting small enterprises are widespread and 
hard to oversee; environmental pollution from 
industrialization has spread from cities to rural villages. 
 
¶14. (SBU) Zhou emphasized that local implementation of 
energy efficiency measures is key, adding that China would 
not likely meet the energy conservation target for 2006. 
 
¶15. (SBU) Wu Yong from the Ministry of Construction noted 
that developers lack the will or incentive to build energy 
efficient buildings, and that residents do not actively 
conserve energy.  Wu also mentioned legal and financial 
difficulties in retrofitting existing buildings, such as 
varied types of building ownership and insufficient 
financing or investment systems. 
 
STATISTICAL PREDICTIONS 
----------------------- 
 
¶16. (SBU) Zhou predicted that by 2010, China's GDP growth 
rate will be 9.9%, the total energy demand will be 3.36 
billion tons of coal (up 70.6% from the 2004 level), and 
the energy consumption elasticity coefficient (an indicator 
to show the relationship between the growth rate of energy 
consumption and the growth rate of the national economy) 
will be 0.52. 
 
COMMENT 
------- 
 
¶17. (SBU) While the Forum was sponsored by NGOs, many of 
the recommendations from its influential participants will 
almost certainly be implemented.  Some participants were 
openly skeptical that the 11th Five-year Plan's ambitious 
energy intensity targets will be met.  The Forum provided 
an opportunity for a frank discussion of methods and 
challenges among officials, experts, and civil society. 
 
GOLDBERG