Executive Summary

CHARGE TO THE COMMITTEE

As we enter the next millennium, with the world’s population and economic expectations still growing, we recognize that today’s energy resource utilization likely will undergo profound changes early in the next century. The importance of such a transition should not be understated. Our nations must cooperate to provide clean, affordable energy for economic growth and social development, and work to minimize future energy security concerns, environmental threats to our global society, and the health and economic impacts of energy production and use. This report focuses on collaborative opportunities between China and the United States—two large and influential nations—but the lessons learned here also can serve the larger global community.

Both countries share the common goal of prosperity, peace, and good environmental quality for citizens of all countries and future generations. Energy and its utilization are core components of pursuing this goal and are the focus of this joint committee work. Current and projected trends in resource production, distribution, and use pose uncertainties and challenges for the near, medium, and long terms. Collaboration with regard to technology, policies, and institutions can help to make the uncertainties less threatening, and help to overcome the challenges. The objective of the current effort was to identify both challenges and opportunities where collaboration on the accelerated development and deployment of energy technologies and appropriate institutional innovations can contribute to meeting the goals of both countries. In particular, the committee has worked to identify mutual benefits that can be derived from jointly pursuing some of these opportunities.



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Cooperation in the Energy Futures of China and the United States Executive Summary CHARGE TO THE COMMITTEE As we enter the next millennium, with the world’s population and economic expectations still growing, we recognize that today’s energy resource utilization likely will undergo profound changes early in the next century. The importance of such a transition should not be understated. Our nations must cooperate to provide clean, affordable energy for economic growth and social development, and work to minimize future energy security concerns, environmental threats to our global society, and the health and economic impacts of energy production and use. This report focuses on collaborative opportunities between China and the United States—two large and influential nations—but the lessons learned here also can serve the larger global community. Both countries share the common goal of prosperity, peace, and good environmental quality for citizens of all countries and future generations. Energy and its utilization are core components of pursuing this goal and are the focus of this joint committee work. Current and projected trends in resource production, distribution, and use pose uncertainties and challenges for the near, medium, and long terms. Collaboration with regard to technology, policies, and institutions can help to make the uncertainties less threatening, and help to overcome the challenges. The objective of the current effort was to identify both challenges and opportunities where collaboration on the accelerated development and deployment of energy technologies and appropriate institutional innovations can contribute to meeting the goals of both countries. In particular, the committee has worked to identify mutual benefits that can be derived from jointly pursuing some of these opportunities.

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Cooperation in the Energy Futures of China and the United States The Academies of Sciences and Engineering in China and the United States convened this joint Committee on Cooperation in the Energy Futures of China and the United States (CCEF) to address these issues. NATIONAL CONTEXT FOR THIS REPORT The primary audiences for the committee’s work are the governments of both countries, whose collaboration in science and technology, when initiated in 1978, became the foundation for meaningful interaction between the United States and China. The importance of this interaction has not been forgotten, nor has it diminished in the past two decades; on the contrary, more collaboration in science and technology between the two countries is being undertaken now than ever before. The reason for this increase in international cooperative efforts has become apparent in recent years: each government understands that the actions taken within its national boundaries have impacts far from its borders. This is apparent with the globalization of our national economies, the global nature of technological innovation, the amount of attention being given to environmental change and resource sustainability, and the worldwide nature of the environment. In the course of their interaction, the two governments have faced many difficulties, a reasonable expectation given the breadth of interests and views. The relationship between China and the United States is currently in a period of some tension over both political and economic issues. However, it is the firm belief of this committee that our common interests and the solutions to our problems lie in better understanding and an increased interaction between the two nations. This committee worked to better address common needs and concerns in the energy sector. The committee conducted its work shortly after a series of meetings at the highest political levels in both governments, and this report attempts to capture the spirit of those interactions and assist in institutionalizing the many opportunities present in the energy sector. CHALLENGES AND OPPORTUNITIES The United States and China share a primary challenge of providing—in a period of projected growth—adequate and reliable energy services in both the near and long term while minimizing adverse health, economic, and environmental impacts associated with energy production and use. Components of this challenge include: growing oil dependence, and in particular, increasing dependence on petroleum imports; adverse local, regional, and global economic, health, and environmental implications of energy-related emissions, particularly from coal use;

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Cooperation in the Energy Futures of China and the United States proliferation, cost, safety, and waste management concerns associated with use of nuclear resources; and economic barriers for developing and deploying new clean, efficient technologies and renewable energy sources. China faces additional challenges, both as a developing country and by virtue of its geography and natural resources, including: limited developed energy resources per capita and an inaccessibility of energy resources—this is particularly true in the abundance of coal and hydropower resources far from population centers; limited use of high-quality energy resources, particularly the lack of access by about 40 million people to commercial sources of electricity; an incomplete energy infrastructure, especially for electric power and natural gas; and high energy intensity—the energy use per unit of economic output; and limited availability of capital to meet growing energy needs. Challenges specific to the United States include: the uncertain future of commercial nuclear power; the absence of political consensus on the need for, and means to, address global climate change, especially in light of the potential retirement of U.S. nuclear power plants; and growth in energy use and emissions in the transportation sector, due to larger vehicle fleet and increased vehicle use. Cooperation—governmental, academic, scientific, nongovernmental, commercial, and financial—offers opportunities to address these challenges through: increased use of energy-efficient technologies currently available; moving to cleaner, more efficient combustion of fossil fuels; increased use of higher-quality fuels, including electric power; expanded research, development, and demonstration (RD&D) of technologies; mutually beneficial and collaborative transfers of capital, knowledge, and technology; and collaborative economic and environmental initiatives that benefit mutual national interests and those of the global community. STRUCTURE OF THE REPORT The report is divided into three chapters: Chapter 1 is a sector-by-sector overview of the current and projected energy developments for both countries. It

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Cooperation in the Energy Futures of China and the United States contains subsections on baseline projections for each country, variations from these baselines—through deployment of advanced technologies, creation of markets, different economic growth cases, and so on—as well as a brief sketch of existing international collaborative efforts within the energy sector. Chapter 1 is based on work done by both governments, as well as by outside groups. It is not editorial in nature, but sets the stage for the two remaining chapters. Chapter 2 offers perspectives and commentary by the committee. It was surprising to many of the members that the challenges faced by both countries are so similar, despite the many differences in the energy sectors of each country. Also, the opportunities also have important similarities. Because the charge was to develop collaborative opportunities, the committee attempted to identify the options in the development of the energy sectors of both countries whereby each would benefit. In the first part of Chapter 3, the committee focuses on the mechanisms by which the Academies of Sciences and Engineering in the United States and China might structure further work to provide continuing input in the crucial energy area. The cross-cutting recommendations address issues having impacts across the entire energy sector: the use of market mechanisms to accelerate the development and deployment of advanced technologies; how best to utilize existing financial institutions to increase application of advanced technologies; and research, development, and demonstration of advanced technologies. In each of these areas there are specific opportunities, for example, development of advanced renewable energy technologies, and these have been highlighted as subpoints to the broad cross-cutting recommendations. In the sections that follow the initial cross-cutting recommendations, the committee identifies collaborative opportunities through initiatives particular to a specific portion of the energy sector. These initiatives highlight specific technology opportunities or institutional mechanisms that could be strengthened through increased collaboration between public- and private-sector institutions in both countries. Recommendations to governments share a common principle: increased public-private collaboration. In both the United States and China, many of the technologies whose applications are desirable reside in the private sector; one of the challenges in our public sectors is to create the market conditions necessary for effective development and deployment of these technologies. NATURE OF THE RECOMMENDATIONS The recommendations contained in this report are made by a committee selected by the four Academies of Sciences and Engineering and are intended for institutions in both countries. In some cases, specific changes in policy are noted for a particular government, but these suggestions are being made by a joint committee.

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Cooperation in the Energy Futures of China and the United States HIGHLIGHTS OF FINDINGS AND RECOMMENDATIONS The committee focused on initiatives to meet the challenges in the energy sector through a period ending in 2020, recommending: promoting investment in new technology development in both countries and the possibilities for collaborative research, development, and demonstration; cooperation and collaborative knowledge transfer to facilitate sound planning for cleaner and more efficient energy services in China and the United States; and increasing cooperation between China and the United States in the accelerated use of advanced energy technologies. These recommendations are both institutional and technical: they address what type of market conditions are necessary to encourage deployment of advanced technologies, and the portfolio of technologies that show promise for the time period covered by this study. The rapid growth and modernization of the Chinese energy and transportation systems offers opportunities for other nations to share new technologies and to learn from the insights that come from early deployments. This can truly be a mutually beneficial collaboration. The committee also notes some of the ongoing collaboration in the energy sectors between the United States and China and offers recommendations on high-priority areas with existing institutional relationships. As the scope of work was so broad, the recommendations developed are numerous, in some cases detailed, and cover many different aspects of the energy sector. The committee places importance on all recommendations. Some, however, deserve special emphasis and priority because of their significance to both countries. By virtue of their breadth and potential impact across the entire energy sector, all three of the cross-cutting recommendations merit this special emphasis. The second clean coal recommendation (pertaining to technology adaptations), the second energy efficiency recommendation (strengthening and expanding research, development, and demonstration of energy efficiency technologies), and the natural gas recommendation also deserve high priority. In order to promote the cooperation between China and the United States, a primary task is to find ways to institutionalize the opportunities and initiatives. The committee believes that a long-term cooperative program in the energy area among the Chinese Academy of Sciences, the Chinese Academy of Engineering, and the U.S. National Academies could help to sustain joint programs on new and ambitious opportunities and to institutionalize the exchange of information and interaction between governments and industry. Regular communications are vital, and they represent an important component of our institutions’ ability to provide scientific and technical policy advice to our governments.

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Cooperation in the Energy Futures of China and the United States CROSS-CUTTING AND ACADEMY INITIATIVES The CCEF recommends that a standing committee be established among the four Academies to identify opportunities for research, development, demonstration, and deployment of cleaner and more efficient energy technologies. (A1) The committee identified two possible subcommittees to begin the task of structuring such an interaction. The committee also suggested that this new standing group establish an “Academies-Industry Forum” to convene top-level energy industry representatives, researchers, and government agencies from the United States and China. Considering the national importance placed on the reduction of greenhouse gases by many countries, including the United States, and on economic development and local and regional environmental control by China, our governments should initiate a dialogue on incentive programs to accelerate the deployment of advanced energy technologies which would become cost-effective in the expected economic environment. (A2) Initial support for new and advanced technologies is necessary due to the difficulty in achieving immediate competitive economic results compared to costs of existing deployments. The committee further suggested that our governments consider collaborating on a technology demonstration project to illustrate the mutual benefits of the Clean Development Mechanism as established under the 1997 Kyoto Protocol to the 1992 United Nations Framework Convention on Climate Change. The CCEF recommends a broad participation by agencies from both countries in energy cooperation, with financing agencies and facilities specifically emphasizing their support for energy efficiency, renewable energy, and other advanced clean-energy technologies. (A3) Initial support for new and advanced technologies is necessary due to the difficulty in achieving immediate competitive economic results compared to costs of existing deployments. In a series of subrecommendations the committee identified U.S. government agencies and programs that, if authorized to undertake activities in China, could have significant benefits in both countries as well as globally. First among these is the U.S. Agency for International Development (USAID) whose activities in institutional and market reform, technical training, building and transferring experience with new technologies and management techniques could do much to further our common development goals. The committee also noted the high potential value of the activities of the U.S. Trade and Development Agency (TDA) and Overseas Private Investment Corporation (OPIC) if they were authorized to undertake activities in China. The potential impact of these institutions undertaking collaborative work with China spans all of subsequent areas of discussion. In deliberations leading to the drafting of this report, the committee noted the political sensitivity of these recommendations but felt that this consideration was more than

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Cooperation in the Energy Futures of China and the United States counterbalanced by the scale of common interests involved and by the critical impacts of the energy sector on health, the economy, and the environment. ENERGY USE AND END-USE EFFICIENCY The recent passage of the Energy Conservation Law in China presents a wide variety of opportunities for collaborative work. The initiatives here are intended to assist in the implementation of this important legislation. The CCEF notes the inadequate support to date for investment and trade in advanced energy efficiency technologies between the two countries and recommends that new resources be devoted to expanding these activities. (B1) The committee makes a subrecommendation to create or strengthen a mechanism to increase information exchange on energy efficiency—with a particular emphasis on financing mechanisms for efficiency projects. It also recommends a high-level bilateral study of institutional innovations to promote trade and investment in energy efficiency technologies. The CCEF recommends significantly strengthening and expanding the existing program of collaborative precompetitive research, development, and demonstration of energy efficiency technologies between the two countries. (B2) The committee also endorses the activities of the Sino-U.S. Working Group on Energy Efficiency and its subgroups, and recommended expanding and strengthening this Working Group as a means of carrying out the initiatives on technology research, development, demonstration, and policy assessment. CLEAN COAL The CCEF recommends that the U.S. Department of Energy and the Chinese Ministry of Science and Technology review and strengthen the programs and processes for utilizing and disseminating clean coal technologies (CCTs) in China. (C1) In a subrecommendation, the committee advocates support of an independent information center and clearinghouse on CCTs and also provides preliminary topics of interest. The CCEF recommends that both governments convene a group representing public and private interests to assess the variety of clean coal technologies, to determine their suitability for China’s market, and to identify adaptations that will be required for each technology to make it more suitable for near-term use. (C2) The product of such an interaction would be a detailed research and implementation plan both to accelerate near-term use and to encourage continued technology improvement for long-term sustainability. The committee also suggests several high-priority areas with which such a group might begin their discussion.

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Cooperation in the Energy Futures of China and the United States NATURAL GAS The CCEF recommends that both governments work collaboratively to explore possibilities in developing an overall strategy for accelerated natural gas development in China that includes production of domestic natural gas and coalbed methane, and imports of piped natural gas and liquefied natural gas. (D1) Such a strategy would address both technology and policy components, including market development, environmental reform, and financing. In all of these activities there may be a role for U.S. government entities not currently authorized to work in China (see Recommendation A3). The committee also notes that increased activity in the coalbed methane (CBM) industry in China could speed the development of China’s natural gas industry. China’s experience with coalbed methane (CBM) could be valuable in the future, as the utilization of natural gas and CBM involves many of the same techniques and infrastructure, both physical and institutional. The CCEF also recommends that China consider distributed electric power generation options using remote sources of natural gas or CBM from smaller fields to meet the energy needs of remote populations currently without access to commercial energy, and to augment existing services through increased reliability and lower total cost. PETROLEUM The CCEF endorses the objectives of the ongoing “Oil and Gas Forum” initiated in 1997, and recommends that the following major areas for cooperation in the petroleum sector between China and the United States be on the agenda of this continuing bilateral dialogue: restructuring issues; long-term sector strategies; exploration and resources assessment; refining technologies; transportation fuels; and environmental protection. (E1) The CCEF found common energy security concerns that stem from each country becoming more dependent on petroleum imports (E2) and proposes that China and the United States collaborate in a comprehensive analysis of the potential and merits of national and regional strategic petroleum reserve systems. The CCEF recommends that the U.S. and Chinese governments and industry establish a dialogue on light transport vehicles, including alternatives to petroleum transport fuels, and cooperate on both technology development and market creation. (E3) RENEWABLE ENERGY For commercial and near-commercial technologies the committee found that the focus of renewable energy cooperation (primarily a private sector responsibility) should be on lowering costs; for demonstration technologies the focus should be on introducing their advantages and reducing costs through scale-up and ex-

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Cooperation in the Energy Futures of China and the United States perience. The committee also sees value in cooperative efforts in precompetitive cooperative R&D for technologies expected to be of considerable importance beyond the time frame of this study. The CCEF finds that U.S.-Chinese cooperation in the following renewable energy areas would be especially helpful: establishing a policy framework; developing technology and market assessments; strengthening research and development cooperation; and training. (F1) The committee also identifies USAID, TDA, and OPIC as having experience in renewable energy technologies and recommends that their programs be undertaken in China to further efforts in the above areas. The CCEF recommends that both governments establish periodic reviews of renewable energy collaboration to better meet strategic objectives of both countries. (F2) A regular review of the progress of renewable energy collaborations—and frequent information exchange among all parties—would result in a better coordination of programs. NUCLEAR ENERGY For a sustainable energy future, preservation of nuclear energy as a power generation option is important: this is particularly so given heavy coal dependence in both countries. The CCEF found that the following priorities for our governments concerning a commercial nuclear power program are similar: the ability to prevent proliferation of fissile materials and handle spent fuel and waste; safety in the design and operation of nuclear plants; and a desire to improve the economics of nuclear plants. (G1) The committee recommends collaboration on the standardization of plant design and operation, and on a specific effort to demonstrate long term storage and disposal for spent fuel and high-level waste. Our governments and industry should play a leadership role in international organizations, such as the International Atomic Energy Agency and the World Association of Nuclear Operators, to assure that international commitments, regulations, and appropriate measures are defined and implemented. (G2) The committee emphasizes the importance of bilateral cooperation and endorses the framework of the Agreement on Intent of Cooperation Concerning Peaceful Uses of Nuclear Technology (PUNT) signed by both governments in 1997. (G3) The committee also encourages expanding programs such as the Nuclear Energy Research Initiative to include China and recognizes the need for high-quality personnel at each country’s nuclear facilities. ELECTRICITY TRANSMISSION AND DISTRIBUTION SYSTEMS The trend in both China and the United States is toward deregulation of electric power markets. Though the two countries are at different stages, both intend

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Cooperation in the Energy Futures of China and the United States to separate power generation from transmission and distribution. This intention presents an important opportunity for collaboration between the two countries. There is also the need for a closer coordination with the international financial institutions who are providing support to China in efforts to create a competitive generation market, one that includes independent power producers. The CCEF recommends that the governments of the United States and China collaborate on measures to foster the development of a successful electric power sector, including: planning for interconnection and further development of the electric power grid encouraging international financial institution financing for the electric power grid in China, examining the conditions necessary to promote increased interest in independent power production in China, and improving the adequacy, quality and reliability of electric power in China. (H1) The committee also notes the importance of ongoing efforts to restructure China’s energy sector and made several cross-cutting recommendations to that effect, above. Technology collaboration—both public and private—between China and the United States could contribute to optimizing the electric power grid and increasing reliability under circumstances in which both countries would benefit. The key component in ensuring successful private sector collaboration is the formation of a transparent and competent regulatory process in which all parties have confidence. A structured exchange between the Electric Power Research Institutes in each country would provide significant opportunities for information exchange and could provide insight into advanced technology deployment in the United States especially in flexible alternating current transmission, the performance of clean coal technologies, and distributed generation deployment. Such a relationship could also provide the connection necessary to build on the experience gained in the United States in providing power to outlying rural areas. China and the United States share an interest in developing more economically viable distributed power sources for remote areas and should identify cooperative activities that advance this interest. (H2) China’s ongoing efforts to provide energy services to its large rural population provide a significant opportunity to examine the role of non-grid connected systems, especially those that incorporate a renewable energy component.