China can and must achieve sustainable growth. Although the countryhas already charted an ambitious course to improve its energyefficiency and environment, a McKinsey study finds opportunities to doeven more. MAY 2009 • Martin Joerss, Jonathan R. Woetzel, and Haimeng Zhang Source: Climate Change Special Initiative
China’s rapid development over the pastthree decades has lifted hundreds of millions of people out of povertyand catapulted the country into the ranks of the world’s largesteconomies. Over the next several decades, as China’s economy continuesto grow and the pace of urbanization accelerates, the country must notonly ensure that it has sufficient and secure energy resources but alsomitigate the impact such growth will have on the environment.
China must address these issues without compromising its growth or theliving standards of its people. But the population’s huge size and thescale of the economy have created a uniquely challenging problem. Todeal with it, China’s policy makers have developed an extensive body ofregulations and policies to raise the energy efficiency of many sectorsand thereby reduce growth’s environmental consequences, includingcarbon emissions.
To help policy makers and business leaders identify and prioritizeadditional opportunities to raise energy efficiency in China and makeits growth more sustainable, we undertook a study of technologies,measuring their impact on greenhouse gas emissions. We looked only atapproaches that are technically feasible and likely to be commerciallyavailable no later than 2030.
Our findings indicate that by that year, the aggressive deployment of arange of new technologies—for instance, electric vehicles and newwaste-management approaches—would allow China to reduce its demand forimported oil by an additional 30 to 40 percent over the energyefficiency goals already identified. The country also could stabilizecoal demand at current levels. This approach would substantiallyimprove China’s already significant plans to improve energy securityand reduce carbon emissions. However, these goals will requireconsiderable capital investment. For the next two decades, China wouldneed to spend €150 billion to €200 billion a year—on top of currentlyplanned spending on energy efficiency—to realize the full potential ofthe technologies. What’s more, several barriers stand in their way,including social costs (such as layoffs) and retraining. And the windowof opportunity for capturing benefits is short: every building or powerplant constructed without these technologies subtracts from the totalenergy efficiency gains they could deliver.
Adopting them will require nothing less than a “green revolution” inthe generation of power, the fueling of vehicles, the management ofwaste, the design of buildings and cities, and the nurturing of forestsand agriculture. Policy makers will have to make the decisions, but todo so they must understand the opportunities and trade-offs.
The rising challenge of sustainabilityChina is home to one-fifth of the world’s population. In 2007, the country consumed about 2.7 billion tons1 of standard coal equivalent2and emitted about 7.5 gigatons of greenhouse gases. Indeed, it hasovertaken the United States as the world’s top emitter. China’s demandfor energy—and the emissions and pollution associated with its use inindustry, power generation, transport, and waste landfills—alsocontributes to other environmental ills. In northern China,desertification threatens arable land and grasslands. Water shortagesare a growing problem across the country.
China emits a greater proportion of greenhouse gases from itsindustrial sector than most other nations, developed or developing.These high levels reflect the massive industrialization China is nowundergoing. Emissions from the provision of electric power and heat tocommercial and residential buildings are a consequence of China’s rapidurban growth and rising living standards. The country’s moderate levelof transport-related emissions reflects the current low penetration ofmotor vehicles—about 4 vehicles per 100 people in 2008, compared withalmost 60 vehicles in Japan and 80 in the United States.
As China’s GDP grows in tandem with urbanization, the country’semission profile will change. Long-term projections based on aconsensus of leading Chinese economists suggest a 7 to 8 percent annualGDP growth rate.3By 2030, two-thirds of China’s roughly 1.5 billion people will live inurban areas (see sidebar, “Green mind-set”). To cope with thatincrease, China plans to build 50,000 new high-rise residentialbuildings and 170 new mass-transit rail and subway systems. (Bycomparison, Europe has only 70.) As the economy and the cities grow, sowill household incomes. Carbon emissions will rise as a result ofhigher consumption, including additional cars.
Suppose China made no efforts beyond what it is now doing to improveenergy efficiency and diversify its fuel supply, and there were noimprovements in technology. We call these admittedly unrealisticassumptions the frozen-technology scenario. Annual emissions ofgreenhouse gases in China would rise to 22.9 gigatons by 2030, from 6.8gigatons in 2005. In this scenario, demand for oil would increasefourfold by 2030, requiring imports of about one billion tons a year.Demand for coal would more than triple, requiring annual imports of 3.7billion to 4.2 billion tons.
The frozen-technology scenario was developed to serve as a hypotheticalbaseline. Actual emissions will probably be far lower because China isimproving its energy efficiency and reducing consumption ofcarbon-intensive sources of energy and emissions. For the past twodecades, the country’s carbon efficiency has gone up by 4.9 percent ayear, largely through higher industrial productivity.4 The government has set a goal of reducing the country’s energy intensity by 20 percent during the current five-year plan.5The measures now envisioned include adopting stricter, high-efficiencybuilding codes and higher fuel efficiency standards for vehicles,shuttering subscale capacity in energy-intensive sectors, and steppingup investments in renewable energy.
We estimate that China’s current efforts and recently enacted policiescould reduce the country’s energy intensity by 17 percent during everyfive-year interval from 2005 to 2030. Under what we call the policyscenario, China would emit 14.5 gigatons of carbon emissions annuallyby 2030. The gains in energy efficiency would come largely in theindustrial sector (through lower energy intensity and better wasterecovery) and in the generation of power (through increased use ofnuclear and renewable energy and improvements in coal-powerefficiency). More energy-efficient new buildings and better fuelefficiency in car fleets would help as well. These improvements wouldalso reduce the need for imported energy—by 30 percent for oil and 85percent for coal.
To achieve these gains, the government will have to make a significanteffort, rigorously enforcing policies and providing incentives forinvestments in energy efficiency across sectors.
A green revolutionChina has set ambitious goals for improving its energy efficiency. Yetwe found additional opportunities (Exhibit 1), including even greateruse of technologies or policies that China has already committed itselfto pursuing, such as building additional nuclear power plants andplanting forests. Other opportunities involve current and emergingtechnologies, such as electric vehicles, newsemiconductor-manufacturing equipment that’s better at controllingfluorocarbon emissions, and the use of agricultural waste as a fuel forco-firing with coal (to reduce coal consumption) in cement kilns.
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We identified five major categories of energy efficiency and greenhousegas–abatement opportunities that China could implement between now and2030. If China pursued them successfully, it could reduce itsdependence on imported oil by up to 30 percent more than the 30 percentreduction it currently hopes to achieve. The country could alsostabilize coal demand at current levels, substantially reducing theproportion of electric power generated by using this fossil fuel, to 34percent by 2030, down from 80 percent today. These efforts could enableChina to hold its greenhouse gas emissions to roughly eight gigatons by2030—roughly 10 percent higher than 2005 levels—without hinderinggrowth.
This would amount to nothing less than a green revolution in China.Let’s look in detail at each of the five categories of opportunities.
Green powerAs manufacturers ramp up the production of equipment for solar and windpower, the cost of implementing these technologies will decline. By2030, China could generate 8 percent of its energy through solar and 12percent though wind (compared with nearly nothing in each categorytoday), and the proportion of electricity generated by nuclear powercould rise to 16 percent, from 2 percent; by hydropower to 19 percent,from 16 percent; and by natural gas to 8 percent, from 1 percent(Exhibit 2).
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China is the world’s largest exporter of photovoltaic solar panels, andwe think it will hold that position for some time. The cost of theequipment used in China’s photovoltaic solar-power installations shouldfall almost 80 percent by 2030, given the country’s (and the world’s)projected photovoltaic capacity and this sector’s historical learningrate (cost reductions gained through experience as production volumesrise). As the technology improves, solar-power generating costs willfall to €0.045 per kilowatt-hour in 2030, making it just 50 percentmore costly than coal rather than five times, as it is today.
Similarly, China could have an installed nuclear capacity of 182gigawatts by 2030, an increase of 74 gigawatts over the policyscenario’s goal. China manufactures 70 percent of the equipmentnecessary for nuclear plants, and the cost for this equipment has beenfalling. If the country develops nuclear power to the fullest extent,by 2030 carbon emissions could fall by 470 million tons, at a cost of€3 per ton.
By 2030, carbon capture and storage could abate 730 megatons ofgreenhouse gas emissions from China’s most important fuel source, coal,at a cost of over €60 a ton. This technology is very expensive, butmore than 25 percent of China’s coal-based power plants—both new andretrofitted—could be equipped with it by that year.
Green transportCars and trucks are a relatively minor source of greenhouse gasemissions in China, but that’s about to change. By 2030, it couldreplace the United States as the nation with the most vehicles—over 330million of them. Let’s assume that internal-combustion engines have bythen become as fuel efficient as possible at a reasonable price. Still,China will have to rely on imports for 75 percent of its oil.
Our policy scenario estimates for energy efficiency from the adoptionof electrified vehicles are conservative. Suppose, however, that Chinabegan to adopt them widely starting in 2015 and ramped up the rate ofadoption to 100 percent of new vehicles by 2020. Our analysis showsthat demand for imported oil might fall 30 to 40 percent. China couldemerge as a global leader in this industry by leveraging the country’slow-cost labor supply, its fast-growing vehicle market, its success inrechargeable-battery technology, and its substantial investments (bothmade and committed) in R&D for electrified transport.
From 2016 through 2030, capital investments of over €70 billion a yearwould be needed for an extensive rollout of electrified vehicles andfor the recharging infrastructure China will need to accommodate them.
Green industryThe steel, chemical, cement, coal mining, and waste-management sectorsplay a crucial role in China’s economic development. All of them alsouse significant amounts of energy: they accounted for about one-thirdof total consumption and 44 percent of carbon emissions in 2005 and arealso a major source of air and water pollution. China is shutting downor consolidating subscale, inefficient facilities in each of thesesectors, has set energy-reduction targets for their largestenterprises, and is adopting global best practices in production. Theseand other government energy-saving efforts in the industrial sectorcould save 450 million tons of standard coal equivalent a year by 2030.
New quality standards for cement, introduced in 2008, set higherspecifications for clinker (the primary material in it) and stricterdefinitions for clinker substitute. We expect such measures to cut theuse of cement in concrete by 10 percent, cutting the cement industry’semissions proportionately. Similarly, China is setting standards toreduce the energy used in burning waste and in recovering and reusingcoal-bed methane—standards that would reduce the emissions from thoseactivities. Such policy scenario efforts would allow China to reduceemissions in these sectors to 4.8 gigatons by 2030.
China has ample opportunity to reduce each segment’s emissions belowthose envisioned in the policy scenario: new technologies and processimprovements could abate an additional 1.6 gigatons of greenhouse gasemissions. The cement industry, for instance, could use agriculturalwaste as an alternative fuel for co-firing with coal in kilns. In steelmaking, thin-strip direct casting (casting and rolling in a singlestep) could substantially reduce energy use and emissions.
The challenges of implementing new technologies include limited talentand funds for investment. The skilled technicians and engineers neededare scarce in China, and because its universities don’t teach some ofthe required skills (such as systems engineering), these limitationswill persist. In certain sectors, the opportunity cost of investment inenergy efficiency is high; in others, the total returns seem too low.Executives also dislike the idea of shutting down plants to improvethem or of accepting the losses associated with introducing noveltechnologies or processes. To pursue the additional efficiency andabatement opportunities, the government will have to address thesehurdles.
Green buildingsChina’s rapid urbanization will continue for several decades. Apartmenthouses, office buildings, and commercial centers are proliferating toaccommodate this massive migration and economic development. In thefrozen-technology scenario, total emissions from energy consumption inthe buildings sector will rise from 1.1 gigatons of greenhouse gases in2005 to 5.1 gigatons by 2030. Policy scenario moves to address thegrowth of the sector’s energy use and emissions could reduce them to3.2 gigatons by 2030. We estimate that implementing the full range ofpractical technologies would cut emissions to 1.6 gigatons annually.
Total floor space (including residential and commercial) will more thandouble in China, from 42 billion square meters in 2005 to 91 billion in2030. Rising income levels are pushing up energy use as households buymore appliances and air conditioners. To address these issues, thegovernment is setting targets so that more heat for urban buildingscomes from relatively energy-efficient sources, such as natural gas andcombined heat and power plants, rather than coal and diesel. Over time,natural gas will replace coal (or coal gas) for cooking and for heatingwater in many areas. The government is also imposing strict newenergy-efficiency rules for building codes, enforcing firmenergy-efficiency ratings for appliances, and rolling out subsidies toencourage the shift to more efficient lighting.
Beyond these government-directed efforts, the opportunities includereplacing low-efficiency community boiler systems in northern Chinawith large network district-heating systems6and retrofitting commercial buildings with automated systems and pumpsto regulate heating, ventilation, and air conditioning moreefficiently. China can also apply to new buildings the principles of“passive design”: reducing the energy used for heating and cooling bydesigning insulation, ventilation, and the use of natural light andshade at the same time. Older buildings can be retrofitted withenergy-saving materials such as insulation and replacement windows.
Such moves will exact a social cost. Higher energy-efficiency standardsfor heating controls and pumps could drive inefficient local playersfrom the market. More expensive heating systems and market-driven feesfor heating could make it unaffordable for lower-income Chinese unlessthey get subsidies. Enforcing higher building standards will drive upadministrative costs. Many of the government’s efforts so far haven’tbeen very effective. Despite awareness programs and subsidies, thepenetration of compact fluorescent lightbulbs (CFLs) has reached onlyabout 10 percent a decade after the bulbs were introduced. Thegovernment hasn’t banned incandescent bulbs from the market (asAustralia, for instance, has) and faces an uphill battle to persuadeconsumers that more expensive but energy-efficient CFLs pay off in thelong term.
Green ecosystemFarms and forests are carbon sinks. Although China has halted mostactivities that led to deforestation, virgin forests now cover only 11percent of the country’s total land area. By our estimates, governmentforestation and reforestation programs will raise forest coverage to 20percent of China’s total land area by 2010. China is also trying tolimit grazing on grasslands (90 percent of its 400 million hectares ofgrassland is degraded or at risk), to introduce sustainableagriculture, and to promote the use of methane from animal manure forheating and cooking in rural areas. (Some 23 million rural familiesheat their homes and cook with methane.) By 2030, these policies willreduce emissions by 0.29 gigatons annually.
Additional abatement opportunities along similar lines could provide0.64 gigatons of possible abatements by 2030. These include increasingthe forest cover to 25 percent rather than 20 percent, raising moreanimals in enclosures rather than letting them graze on grasslands, andpromoting agricultural practices such as conservation tillage and theuse of the latest fertilizers. These opportunities could also haveknock-on effects: improved land-management practices, for example,control desertification and use water supplies more productively.
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To realize the full potential of the additional opportunities, Chinawould need to start now; even waiting a few years would reduce thepossibilities for raising energy efficiency and abating emissions. Tocapture the full abatement potential in the power-generation sector,for instance, China must start implementing by 2010 most of themeasures we recommend. China builds new plants continually. Coal-firedones brought on line next year, if not retrofitted with expensivecarbon-capture technologies, will emit greenhouse gases for the next 30to 40 years. A simple sensitivity analysis shows that postponing theimplementation of cleaner power technologies for just five years wouldcut the abatement potential by up to 1.5 gigatons of greenhousegases—over 50 percent of what’s possible (Exhibit 3). A ten-year delaywould reduce the abatement potential by 80 percent.
By starting now to embrace the technologies for a green revolution,China can create a future with greater energy security and lower energyemissions—without compromising economic growth and the living standardsof its people. 
About the AuthorsMartin Joerss is a principal in McKinsey’s Beijing office; Jonathan Woetzel is a director in the Shanghai office, where Haimeng Zhang is an associate principal.
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Notes 1Metric tons: 1 metric ton = 2,205 pounds.
2One kilogram of standard coal equivalent = 7,000 kilocalories.
3In this report, 7.8 percent is used as long-term GDP growth rate for China.
4Carbon efficiency measures the amount of GDP produced per unit of greenhouse gas emissions.
5Energy intensity, which measures the energy efficiency of a nation’s economy, is calculated as units of energy per unit of GDP.
6Coal plants that heat water and channel it to buildings. |
