Growth and structural change in China’s energy economy Fredrich Kahrl a , David Roland-Holst b, * a Energy and Resources Group, University of California, Berkeley, CA, USA b Department of Agricultural and Resource Economics, University of California, Berkeley, CA, USA article info Article history: Received 12 September 2007 Received in revised form 20 March 2009 Accepted 21 March 2009 Available online xxx Keywords: China Chinese economy Chinese energy use Energy intensity abstract China has been the world’s most vibrant economy and its largest source of energy demand growth over the past two decades, accounting for more than one-quarter of net growth in global primary energy consumption from 1980 to 2005. To sustain economic growth and rising living standards, China needs effective policies that anticipate and shape the country’s future energy requirements. In this paper, we examine China’s national economic and energy accounts over the past decade for insights into changing energy use patterns and their relationship to economic structure. Our results indicate that incipient structural changes in the Chinese energy economy and sustained economic and energy demand growth in China will pose important, and different, challenges for policymakers. Ó 2008 Elsevier Ltd. All rights reserved. 1. Growth and structural change in China’s energy economy The Chinese economy’s energy needs have increased dramati- cally since the turn of the millennium. A combination of sustained high rates of economic growth and structural shifts in energy use in the lead up to and following China’s accession to the World Trade Organization (WTO) in December 2001 is responsible for this rapid growth in energy demand. From 2002 to 2006 China’s primary energy demand growth (27.7 EJ, 13% annual average growth) exceeded the country’s primary energy demand growth over the previous two decades (26.8 EJ, 4% annual average growth from 1980 to 2002) (NBS [1]). After declining steadily from 1980 to 2002, the Chinese economy’s energy intensity began to increase after 2002 (Fig. 1). The externalities associated with changing energy demand patterns in China are considerable. From 1980 to 2002 China accounted for 30% of the net growth in global energy-related CO 2 emissions; from 2002 to 2005 this share rose to 53% (EIA [2]). Changes in the Chinese economy’s energy use after 2002 have been paralleled by two major changes in economic structure. First, investment increased dramatically after 2001 and overtook household consumption as the largest component of China’s GDP in 2004. By 2006, investment had reached 43% of real GDP (1990 yuan) (NBS [1]). Second, trade (both imports and exports) grew substantially, from 43% of GDP in 2002 to 64% of GDP in 2006 (NBS [1]). Export growth was particularly robust, with the real value of exports rising to near parity with domestic household consumption in 2006 (Fig. 2). In short, a significant portion of China’s post-2001 GDP growth has been driven by investment and export growth. Since 2001 investment and exports have grown faster than aggre- gate GDP (Fig. 3a), while household and government consumption have grown at rates near or slower than overall GDP growth (Fig. 3b). As we demonstrate below, these compositional changes in the Chinese economy are important determinants of energy use and its associated externalities. Growth and structural change in China have different implica- tions and pose different challenges for policymakers, both in China and abroad. The interplay between growth and intensity is partic- ularly important in the context of international climate negotia- tions. Rapidly growing countries like China have high uncertainty in economic and attendant energy demand growth. These countries are less likely to commit to binding, absolute reduction targets that do not account for growth uncertainty. Chinese government proposals to reduce CO 2 emissions, to the extent that they have mentioned targets, have indeed focused on CO 2 intensity targets rather than absolute reduction targets. 1 Quite apart from interna- tional climate negotiations, in response to the unexpected surge in energy demand during its 10th Five-Year Plan (2001–2005) the Chinese central government set a binding goal of reducing the * Corresponding author. Tel.: þ1 510 643 6362; fax: þ1 510 524 4591. E-mail address: dwrh@are.berkeley.edu (D. Roland-Holst). 1 The draft of China’s First National Climate Change Assessment reportedly includes a goal of reducing the carbon intensity of the Chinese economy by 40% by 2020 and 80% by 2050 (Herzog [3]). The final draft of China’s National Climate Change Programme (NDRC [4]) contains no mention of any targets. Contents lists available at ScienceDirect Energy journal homepage: www.elsevier.com/locate/energy ARTICLE IN PRESS 0360-5442/$ – see front matter Ó 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.energy.2009.03.009 Energy xxx (2009) 1–10 Please cite this article in press as: Kahrl F, Roland-Holst D, Growth and structural change in China’s energy economy, Energy (2009), doi:10.1016/ j.energy.2009.03.009