This past weekend at the China Development Forum in Beijing, a key strategy towards building a xiaokang society, a resource- efficient society, was discussed. While much attention is paid to traditional economic resources such as coal and oil, the environment itself is not often thought of as a critical resource.

However, polluted water is not a drinking water resource. Polluted air damages traditional economic resources through acid rain and climate change. Both harm the health of the Chinese people. Resource efficiency must include not only energy, water and land, but also the use and consumption of environmental resources.

Even though energy production to propel China's rapid economic growth has increased dramatically in recent years, there are still energy shortages. At the same time, we read reports that more than 50 per cent of China's 500 cities do not meet air quality standards largely as a result of the emissions from fossil fuel combustion. Energy demand is expected to double in China by 2020 with a resulting doubling in carbon dioxide (CO2) emissions.

How should the growing demand for electricity from the expanding economy be addressed?

At present, China seems to have embarked on a policy of increasing fossil energy use to meet the demands of its growing economy. But this is not the only way to grow.

The traditional approach is to simply continue to supply energy to meet projected demand increases. The second strategic approach does not take demand growth as given, but rather focuses on opportunities to alter demand by changing consumption and use patterns.

By reducing demand growth, but providing the same level of energy services, the economy grows at the same pace, but without the same contribution to new increases in greenhouse gases and other harmful emissions.

But what difference does energy efficiency make?

In 2000, the major electric generating stations in the Yangtze River Delta emitted 141.5 million tons of CO2. If electricity demand increases by 35 per cent in this period, then CO2 emissions would rise to 189.6 million tons. If demand growth is reduced by 10 per cent, then 30 per cent of the CO2 increase would be avoided. This is equivalent to eliminating the need to build almost four new 600- megawatt coal-fired generating units. With the government so concerned about over-investment and the over-heating of the economy, this should come as welcome news.

Sulphur dioxide (SO2), the chief cause of acid rain, is another major pollutant that could be reduced through energy efficiency. If power generation is increased by 35 per cent from 2000 levels, SO2 emissions would increase by 181,760 tons per year in the Yangtze River Delta. But in the 10th Five-Year Plan period (2001-05), these sources are supposed to reduce their emissions by 20 per cent below 2000 levels, a reduction of 110,000 tons per year. Sources would then have to control almost 300,000 tons of SO2 emissions annually.

However, 32 per cent of the emissions increase could be avoided if energy efficiency improved 1.6 per cent per year. Instead, SO2 emissions are likely to rise above 2000 levels as companies have rushed to build new power plants to cash in on the energy shortage. Energy efficiency can go a long way towards reducing the burden faced by sources in meeting both their pollution control obligations and electricity demand.

How should the government promote efficiency?

The government, like many around the world, has adopted plenty of regulations concerning energy, environmental protection, and natural resource use. However, when we look at the outcomes from this body of requirements, we are still faced with rising energy demands and decreasing environmental quality. Why?

The primary cause is the lack of policy integration. We need to think of government policies as a machine in which each component must work smoothly with the other in order to create a resource- efficient society to change the behaviour of the economy's key actors.

Not long ago, there was an environmental storm concerning 30 projects that had not received official approval of their environmental impact assessment prior to construction. However, the maximum penalty for failing to secure the necessary permit is 200,000 yuan (US$24,100). These projects were each worth many billions of yuan. The financial consequence is simply too low to deter non-compliance. The costs of project delay are simply too high in comparison and a key tool in the circular economy is short- circuited.

Is there a path forward?

A comprehensive policy view is the main requirement. While the energy sector must be directly addressed to promote energy efficiency through new standards, energy policy alone is not a substitute for an effectively functioning environmental management system.

The government needs to use both carrots and sticks to achieve its goals. Hard targets for environmental performance should be coupled with the carrot of flexible market-based compliance systems like emissions trading. The abysmally low penalty structure must be changed to give polluters real financial consequences if they fail to comply. Strengthened enforcement would ensure accountability for both the new efficiency standards as well as their emissions control responsibilities.

At the same time, electric generators should be given the incentive to undertake efficiency programmes and to be paid for these as if they were still generating electricity. After all, electricity consumers are interested in the service that the energy provides and not the energy itself per se.

We should break the cycle of dependence between demand increases, new plant construction, increased revenues, and new environmental burdens. We should make the right thing easy and the wrong thing hard.

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