Electric power shortages in China

China is again facing electric power shortages since 2004. This is being caused by their tremendous growth in the past couple of years and the inability for them to create enough new power generating capacity. A lot of this power is being used for industrial production. Power is now being rationed in many areas. They are reported to be opening a new coal-fired power plant each week and still can’t keep up.

Parts of China, particularly in the industrialized SE coastal areas are rationing power to customer. Power rationing causes many industrial companies to switch on back-up diesel generators which are less efficient than many central power systems. This not only releases more carbon into the atmosphere, but increases China’s consumption of oil and diesel fuel. This can drive up the price of oil and diesel world-wide.

The shortage of electricity is caused in part by price controls on electric power and schemes offering preferential electricity prices to energy-intensive industries. China has a national policy of promoting production and manufacturing as a means to create jobs for the hundreds of millions of Chinese that are still living in poverty. China sells electric power and diesel fuel below free-market prices to facilitate the growth of its industries. Because of low costs, Chinese companies are not very efficient power users. The government has told local authorities to enforce energy efficiency standards and to scrap locally conceived schemes offering preferential electric rates to energy-intensive companies. Raising prices would probably be more effective.

By distorting the market pricing mechanism on energy cost and by keeping their currency artificially weak against the currencies of their trading partners, Chinese industrial production is climbing rapidly. About 80% of Chinese electric production comes from very dirty coal, which emits a huge amount of carbon into the atmosphere. By creating incentives to produce more, China increases its carbon emissions faster than other countries. Some of the production that is moving to China is coming from production decreases in countries that are more energy efficient and emit less carbon per unit of production than China.

China is a large producer of aluminum. Aluminum production is very energy intensive. Electricity is used to reduce bauxite (remove the oxygen from the aluminum) and create pure metal. This is typically done in places where there is abundant and cheap electric power. Iceland produces a lot of aluminum because it has very cheap electric power from hydroelectric plants. Iceland is too far away from anyone to sell the power directly, so they use it to produce aluminum which is easy to export. China, in contrast, is short of electricity but continues to produce aluminum. If an industrial plant is running backup diesel generator so China can produce aluminum, it is effectively using very expensive diesel fuel to produce aluminum.

China is expanding it manufacturing partly by keeping its costs down. Energy is subsidized. Companies in China do not have to pay the environmental costs that manufacturers would typically have in other countries. Electricity is produced in cheap, inefficient plants that produce huge amounts of toxic emissions along with large quantities of carbon dioxide. Waste does not get treated and gets dumped into rivers polluting the water for everyone downstream. Until environmental awareness in China rises, this will continue to be business as usual.

What can we do about this problem?

First, we should encourage the Chinese to stop setting energy prices at low levels. Resetting these prices higher (to world levels) will cause manufacturing production to drop, especially for industries that are very energy efficient. Electric prices will stabilize at a price where they might have enough capacity so they won’t have to ration power. This could cut their demand for diesel fuel and would help lower world prices.

Second, as I discussed in the article “US Tax Code Promotes Global Warming”, we should implement a tax system based on consumption taxes instead of income taxes. That is basically what China and most other countries do for the purpose of promoting exports. They add a consumption tax to both domestically produced goods and imports. Exports go out of the country tax free. An exporting company may even recover consumption taxes already paid when they export goods. This acts as an incentive to increase exports. We tax our producers and saddle then with expensive mandates like health insurance which work to decrease production and eventually force these companies to move their production to countries like China. I read recently where Chrysler is looking to change from manufacturing cars in this country to importing its cars from foreign companies to sell and service here. Chrysler announced deals to import cars from a Japanese car company and a Chinese car company. We have been loosing manufacturing jobs for years and it amazes me that very few people see this as a problem and are willing to do anything about it.

When we loose manufacturing to a country like China, global carbon emissions go up because they are much less carbon efficient than we are. We should be proactive in creating renewable energy sources for our industries and create a tax system that improves the competitiveness of our manufacturing companies. How about a consumption tax that is used to pay for national health care? This would allow us to put a tax on all imports so that foreign companies would effectively be helping to pay for our health care. We would also be buying less from overseas which would lower the amount of oil used to ship goods to this country. A consumption tax would also lower the amount of goods we consume in total, which would also reduce global warming.