CIAO DATE: 04/01

Impact On Global Warming Of Development And Structural Changes In The Electricity Sector Of Guangdong Province, China

This paper examines the impact on global warming of development and structural changes in the electricity sector of Guangdong Province, China, together with the possible effect of international instruments such as are generated by the Kyoto Protocol on that impact. The purpose of the paper is three—fold: to examine and analyze the data available, to put that data into an explanatory economic and institutional framework, and to analyze the possible application of international instruments such as CDMs in that locality. Our plans are to supplement this work with similar work elsewhere in China.

Guangdong Province has led China in economic growth since the market reforms started in 1979. For more than a decade, this growth was constrained by a severe shortage of electricity. Following the central government’s electricity sector policy change in the mid—1980s, Guangdong’s utility sector expanded rapidly. Guangdong is now the richest Chinese province, with the most market—oriented economy, and the largest electricity industry judged by per capita installed capacity and per capita electricity consumption.

The development of new capacity has been accompanied by changes in the fuel structure and energy efficiency pattern. The new policy and sectoral reforms have also changed market mechanisms and institutional factors for the electricity sector. These changes represent a step towards reducing carbon emissions per unit electricity consumed, but the growth raises concerns about potential increase in total emissions in the future.

This research contributes to two groups of existing studies. First, several researchers have studied China’s energy industry, including the utility sector, in the context of global greenhouse gas emissions and abatement policies. These studies either look at China’s energy development and its global warming impact in large economic models (Garbaccio, et al., 1999; Ho, et al., 1998; Zhang, 1998; IAEE, 1999), or the utility sector at the highly aggregated national level (Zu, et al., 1999; Guo, et al., 1998; Holt, 1998; Andrew—Speed and Dow, 1998; Shao, et al., 1997; World Bank, 1994). Not much attention has been paid to the electricity sectoral development at the sub—national level and its regional differences. Yet, important decisions are taken and important constraints operate at the sub—national level.

Second, since the Kyoto Protocol provided for the Clean Development Mechanism (CDM) as a policy instrument to involve developing countries in carbon emissions abatement in 1997, a number of studies have focused on the operation of CDM (Heller, 1998; Chomitz, 1998; Meyers, 1999; Hargrave, et al. 1998; Kelly, 1999; Lazarus, et al., 1999). Applying CDM is challenging because its rule of additionality requires that a “baseline” estimate be made of what developing countries, including China, would do to reduce carbon emissions in the absence of CDM. Minimizing moral hazard and other incentive problems is a daunting task. The studies to date have focused on discussions of general embedded problems and desirable principles for applying the additionality rule.1 However, how to identify baseline factors in specific economies and evaluate their impact on the energy sector decisions in terms of transaction or institutional costs remain unsettled questions (Heller, 1998).

This study is a first step towards filling that gap. By investigating Guangdong’s electricity sector, we hope to highlight new characteristics of Guangdong’s electricity market and institutions, which may have been neglected from large model and highly aggregated approaches. At the same time, by examining the economic and institutional features of the decision making process in Guangdong’s electricity sector, we hope to get a better understanding of the factors affecting possible baselines and to draw some preliminary implications for CDM and other carbon abatement policy instruments. This study may also provide a reference for other regional analyses and permit some preliminary implications for baseline and abatement policy studies to be drawn.

The paper is organized as follows. Section II reviews electricity sector growth, fuel structure change and energy efficiency patterns in thermal power generation, as well as market structure and institutional changes in Guangdong Province between 1990 and 1998. In Section III, we first characterize qualitatively the emerging market mechanisms, and then link the new power supply arrangement as well as financial market and policy factors with changes in energy efficiency performance across three vintages of technologies. Section IV examines the global warming impact of the Guangdong electricity development, and the implications of our study for the application of CDM and similar international policy instruments. In particular, we discuss our disaggregated and vintage technology approach to baseline determination in the context of the baseline methodology debate, and the principle factors that are likely to affect the future baseline carbon emissions in Guangdong’s electricity sector.

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