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McKinsey Maps Out China's Options For Going Green

Date: 26-Feb-09
Country: CHINA
Author: Tom Miles

BEIJING - China could become hugely more energy-efficient in the next 20 years, but even if it did all it could, a growing economy means its carbon footprint would still increase, says a study by McKinsey to be released on Thursday.

China is the world's biggest emitter of greenhouse gases, largely thanks to its reliance on coal-powered electricity and its huge heavy industries, such as metals and petrochemicals. It also increasingly depends on imported oil.

By using every policy and technology available to improve efficiency and cut emissions, China could take a big bite out of foreign oil imports and halve the likely level of greenhouse gas emissions, while cutting coal to as little as 34 percent of its power supply from 80 percent now.

"Making the leap would require a green revolution," said Jonathan Woetzel, a director in McKinsey & Co's Shanghai office and a co-author of the report.

"And as one famous communist said, a revolution is not a tea party. But the opportunity, from a technical perspective, is there," he told Reuters ahead of the report's release.

China is already improving its energy intensity, the amount of energy used per unit of gross domestic product, and has used a 4 trillion yuan economic stimulus plan to fund more nuclear power and improvements of the state power grid. It is also pushing for a clean up of the coal sector and has ramped up taxes on fuel to curb excessive consumption.

"I think the Chinese government has real commitment to energy efficiency," said Woetzel.

Woetzel and his co-author Martin Joerss, a partner in McKinsey's Beijing office, said China's current efforts could halve energy intensity by 2030, but emissions of greenhouse gases would more than double. And China would have to import almost 80 percent of the oil it needs, up from around half now.

POWER POTENTIAL

In 2005, 44 percent of China's total emissions came from polluting industries such as steel, chemicals and cement. With concerted action, their emissions in 2030 could be 2.7 gigatons instead of 4.8 gigatons of carbon dioxide equivalent.

But the area with most potential of all is the power sector, which -- assuming the maximum effort -- could produce only 1.6 gigatons in 2030 instead of 5.4 gigatons, according to the study, entitled "China's Green Revolution."

For the "baseline" scenario, the authors assumed China would already be taking steps toward cutting emissions, such as improving waste management, extracting methane directly from coal seams, upgrading power generation and bringing in new standards for domestic appliances.

To achieve the maximum effect, China would need to do much more, including using solar power as well as even more nuclear and wind, ensuring buildings and cars are as efficient as possible, and turning desertified land back into green forest.

But even with maximum efforts, China would emit 8 gigatons of carbon dioxide in 2030, 10 percent more than in 2005, and coal demand would be 2.6 billion tons, unchanged from now.

"Another way to look at that is China will have increased its carbon productivity faster than any other country in the world," said Woetzel.

And the price could be prohibitive. Only a third of the measures needed for the most benefit would pay for themselves, while another third would have a "substantial" economic cost.

"We estimate that China will need up to 150 billion euros to 200 billion euros ($257 billion) on average each year in incremental capital investment over the next 20 years," the study said.

Another snag is most of the quick wins and top-down policies are already factored into the study's baseline scenario. The measures needed for maximum impact would be harder to push through, with more action needed at an individual level.

And in many areas, such as building standards and education, the benefits will only be felt if work gets underway very soon.

"Right now is a good time to think about the type of system you really want," said Woetzel.

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