This huge increase in energy use, along with abundant and cheap labor, allowed China to become a major exporter of industrial and consumer goods and this stimulated its economic development. Although the Chinese people’s lives have improved tremendously, the approach has also been associated with excessive energy utilization, energy shortages, and extreme environmental pollution. China’s energy intensity (i.e., energy use per unit of the GDP) has been much higher than that of the US. And while China’s energy intensity is improving, cheap energy -- subsidized and controlled by the government -- has prolonged the country’s inefficient use of energy and weakened the nation’s development.

Worse yet, since 2000, energy intensity, instead of decreasing, has started to increase, an eminently undesirable event. Although China uses only about 75% as much energy as the US (about 75 quadrillion Btu vs 100 quadrillion Btu in the US) the country’s energy intensity -- measured in how much energy it takes to generate one dollar of GDP -- puts China at a significant disadvantage: 13,800 vs 8,800 Btu/$ GDP. In other words, China uses about 60% more energy per unit of GDP than the US. Also, note that on a per-capita basis, China’s consumption is about one-sixth that of the prevailing rate in the US.

Energy intensity of China and US

Clearly, the Chinese economy has to be sharpened significantly to compete with developed nations, especially as imported energy prices will continue their upward trend and as increasing Chinese labor costs no longer offer major advantages.

China’s government-controlled energy prices do not reflect the true energy cost or the balance between energy supply and demand. The government has taken a series of actions to relieve the situation for over a decade, such as reorganizing the national oil and gas industry in 1998, separating the ownership of power plants and the transmission grid in 2002, and introducing the coal industry into market competition in 2005. Those measures have had some positive effects on the domestic energy market, but the roots of the problem, a partially planned economy and controlled energy prices, are still hampering effective energy utilization.

After importing more and more energy from foreign sources at much higher prices than the controlled domestic ones, China can no longer afford to subsidize all energy components. Reforming energy pricing, or to be clear, raising energy prices, has becomes inevitable. In fact, some of the wealthier areas of the country, such as Shanghai, are already seeing higher prices. Of course, raising energy prices has long been the plan, but implementing it has not been easy. During good economic times, the government is afraid of market inflation and during the current economic downturn, personal and business financial sustainability is a big concern which is very much tied to social stability.

The international financial crisis has led to a decrease in international energy prices. China’s Consumer Price Index and Producer Price Index have had negative increases since then mid-2008. Beijing’s Tianze Economic Research Institute CEO Zhang Shuguang believes that the downturn provides a golden opportunity for China to reform energy pricing and to let China’s energy prices be more consistent with international ones. As China's industrial growth has slowed, the conflict between energy supply and demand has eased, making it easier to initiate energy pricing reform. Zhang also thinks that the removal of governmental controls can improve competition.

Analysts believe the reforms should begin with electricity prices and oil prices. After that, the government should increase the resource tax and use strict environmental-protection and energy-saving regulations to punish inefficient industries. In the long run, while increasing the energy cost to realistic levels, China needs to use technology to enhance its competitiveness in the international market and extricate the nation from the appalling pollution problems that predominate throughout the country. This may translate to fewer “made in China” products in the world market.

Liu Kegu, an advisor for the National Development Bank, thinks that raising the energy tax may slightly increase production costs, but it won’t cause a major jump in inflation. He believes higher energy prices will stimulate energy efficiency, technological improvement, and reduce costs. That said, Liu also admits that efficiency improvement may neither reduce overall energy consumption, nor decrease pollutants and greenhouse gas emission.

Nevertheless, it is apparent that China’s leaders have few options at hand. Cheap energy appears to be a thing of the past for China.