China Environmental Law

Looks like some bad boys have gone out and taken advantage of China’s subsidized energy prices: “State Council: Energy consuming industries developing too fast in China” reports Xinhua. Isn’t that always the way it is, you keep energy prices artificially low to preserve social harmony, and someone goes out and starts buying the stuff like there’s no tomorrow?

Industries with high energy consumption and emissions are developing too fast in China, along with the quick economic growth, the State Council, or Cabinet, warned on Tuesday.

Not only are the “wrong” kind of industries flourishing, but the kind of entities China wants to encourage “the service sector and high-tech manufacturing” fell in terms of their proportion in the national economy, members of the State Council’s leading group on energy saving and emission reduction (not to be confused with either the old National Energy Leading Group or the new National Energy Commission) were informed yesterday.

As a result,

Meeting the energy saving and emission reduction targets set in the 11th Five-Year Plan (2006-2010) remained an arduous task, they agreed.

However, efforts will continue apace to achieve the goal

performances in conserving energy and reducing pollutant emissions [have been] introduced into administrative evaluation, those who fail to meet the goals are to be put under public scrutiny.

and

This year should see the closure of small thermal power plants with a generation capacity of 13 million kilowatts. Outdated production capacity in cement, aluminum electrolysis, paper-making, iron and steel industries should be eliminated.

Industries with high energy consumption and pollution should be resolutely curbed, and the land use, energy consumption and environment impact assessment should be considered in approving new projects, the State Council warned.

A new article in the Far Eastern Economic Review, “China’s Energy Woes“ argues that

More than ever, the Chinese economy needs market signals to allocate costly resources. The government has played a central role in that respect, but as to be expected, it has not allocated efficiently. Unproductive, unworthy state-owned enterprises have squandered resources, while more efficient factories and industries have gone wanting for optimal supplies. . . .

Companies that cannot stay afloat without subsidized energy should be allowed to go under. If they can’t manage with today’s energy prices, they will always be a drag on the economy. And the sooner they exit the market, the sooner the efficient producers will strengthen.

Of course higher energy prices and a stronger currency would likely reduce foreign demand for Chinese exports, and would encourage Chinese consumption of imports. Achieving greater trade balance and shifting the focus of the Chinese economy away from exports and toward greater consumption has been a stated goal of the leadership.

These points seems so obvious and undoubtedly the Chinese leadership understands the economics (although in researching my recent post on Pan Yue there was a report that he had only discovered Adam Smith two years ago, so maybe not), but there are a host of other issues at play mainly real and perceived issues of social stability, that make precipitous moves dangerous and unlikely to garner the necessary consensus in leadership circles. While the recent deletion of the provision in the draft Circular Economy law calling for the gradual increase of utility fees is not a good omen, I think that China will gradually move toward market pricing or at least more proactively manage prices based on international market signals, but market set energy prices in the near future are about as likely as a free-floating yuan.