China’s calls for global energy governance: implications for East Asia

In January 2012, China’s Premier, Wen Jiabao, used the 2012 World Future Energy Summit in Abu Dhabi to urge countries to work towards a better framework of international energy governance to tackle the global issues of energy efficiency, security and transitioning to clean technologies. He also used the forum to propose the establishment of an energy market governance mechanism within the G20 framework. Given that energy is one of the key bottlenecks for China’s growth, it is hardly surprising that China is throwing its support behind such a proposal. Against the backdrop of Iranian oil sanctions and the narrow maritime chokepoint that is the Malacca Straits, China undoubtedly feels that its energy security is vulnerable. And while China hopes to put energy at the forefront of the global discussion agenda in order to address issues that impact the stable supply of energy to the Middle Kingdom, there could be wider implications for East Asia.

East Asia’s spectacular economic growth has transformed household wealth in the region, with China’s burgeoning middle-class expected to reach 700 million by 2020. While this is undoubtedly an incredible story of poverty alleviation, the implications for energy demand are immense with recent research showing a non-linear relationship between increasing household wealth and energy consumption. The University of California Berkeley research demonstrates that there is actually an inordinately large increase in energy consumption as households move out of poverty and into the middle-class, driven by the purchase of energy-intensive items such as personal electronics, whitegoods and automobiles. Given that many Asian countries are in this intense phase of energy consumption growth, it is little wonder that Asia’s share of primary energy demand globally will reach 40% by 2030, up from 31% in 2008. Meeting the growing energy demands of the region, therefore, will undoubtedly be a key and recurring challenge of the 21^st Century.

The world’s lack of an institutional energy framework is leaving East Asia ill-equipped to institute a coordinated response to this increasing energy demand. Viewed in this light, China’s proposal seems to address a longstanding deficiency in the world’s institutional energy governance framework. While the trade of agricultural commodities is widely discussed at key international fora such as the G20 and the WTO, energy governance largely remains polarised between net importing and net exporting nations. Presently, the International Atomic Energy Agency is the only energy body with an unlimited geographic scope. The Organisation of Petroleum Exporting Countries and the International Energy Agency remain exclusively representative of energy exporters and importers respectively, with no overlap in membership. China, the world’s biggest energy user, is a member of neither. As a result, the rush to fuel the East Asia’s growth has seen the emergence of a raft of energy-related problems including diplomatic conflict, national budget burden, social unrest and environmental harm.

In East Asia, the South China Sea dispute typifies the diplomatic fallout caused by the world’s patchwork energy framework. The dispute has become an international relations flashpoint, with the energy-hungry nations of China and India, along with Malaysia, Vietnam, Brunei and the Philippines, vying to control a portion of the estimated 60 - 100 billion barrels of oil contained in the South China Sea. Underpinning this dispute is the need for all of these countries to supply energy to the more than one billion people in East Asia and the Pacific who, according to the World Bank, “still lack the most basic access to electricity”.

Also of regional concern is the sensitivity of consumers and governments to energy price volatility. This is a key issue for governments across East Asia that are exposed to shifting energy prices, which can be heavily impacted by global events outside the control of governments. In Indonesia, energy subsidies have long left the government exposed to fluctuating energy prices, with consumers paying a below-market fixed price for energy and taxpayers paying a floating market rate to suppliers. The difference between these two prices is covered by subsidies that must float with energy prices, leaving the government budget particularly vulnerable. South Korea, too, as an importer of 96.4% of its energy, is similarly sensitive to energy price shocks.

Managing East Asia’s pollution and greenhouse gas emissions are also important regional energy challenges, highlighting the need for broader institutional engagement with the concept of the ‘water-food-energy-climate nexus’. When considering the need for many governments across East Asia to deliver economic growth to ensure political legitimacy, it is unsurprising that environmental issues can be put aside, particularly if the perceived choice is between minimising environmental impact or power shortages. This issue has gained particular prominence China, where protesting in Haimen in December 2011 against the construction of a coal-fired power plant showed the depth of popular concern over pollution. Vocal anti-nuclear campaigns around the world following the Fukushima incident in Japan also illustrated the challenge that governments face in balancing the need to provide reliable power generation and mitigate environmental impact.

Global energy governance can play a role in addressing the disconnect between energy-producing nations and energy-consuming nations. It can do so by resolving the present institutional stand-off and developing the global framework required to deal with the raft of emerging issues involved in energy production, transportation and consumption. If implemented correctly, a shift towards global energy governance may have significant benefits for the East Asian region, which is lacking impactful governance and constructive dialogue on energy. Given that this is such a bold initiative and there is so much at stake, China’s proposal deserves much more than the scarce reporting and even scarcer analysis that it has received to date.