 Welcome to CSIS, and I'm really thrilled to see so many of you despite the weather. I mean, that, you know, the turnout tends to suffer when there's bad weather, but I think it's a sort of a testament to the importance and timeliness of the topics that we'll be discussing today. My name is Jane Nakano. I'm the Senior Fellow with CSIS Energy Program. And before I do talk a little more about this event, just a quick emergency or procedure, protocol announcement. We're not expecting any emergency, but if anything happens, I want all of you to know that you certainly can exit this room through those glass doors. And there is a staircase that will take you to outside behind those elevators. And you can also exit from here to your right behind the stage. And that will also take you through the staircase to outside. But we're not expecting anything, so we should really enjoy the next 90 minutes sort of talking about these very important developments in China. China has become one of the major global play economic players as well as energy consumers and greenhouse gas emitters in the world. Chinese undertakings in the both the energy and climate space are closely watched by so many of us inside and outside China both in the private and public sectors due to, you know, their potential significant impact on both the global energy economy and the climate change dialogues that we're having. We're now seeing two major political goals animating change in China's energy sector. One is the drive for energy market and pricing reform. The other is the goal of picking CO2 emissions on or before 2030. As these two goals are running on separate tracks, it remains uncertain to what extent they might have some synergetic effects and help each other or they might come into conflict at times. We'll spend the next 90 minutes to explore changes to China's energy sector from the perspective of both energy market reform and climate policy. And we have an excellent panel of speakers today to help address questions such as what action China will need to take to meet its climate targets in the power sector and in the broader energy market. And what these reform goal and climate goal may mean in the broader context of Chinese politics and domestic economic reforms. Since you do have detailed bio on each of these experts and their bios are extremely impressive, I'm not going to read them. I rather keep saving enough room, enough time for Q&A afterwards. But quickly, Rick Weston to my immediate right, to from you immediate left is principal and the China program director with the regulatory assistance project also known as RAP. RAP is a well regarded organization that works on a range of power sector issues and has many former regulators and power sector experts among its staff. In his capacity as the China program director, Rick advises Chinese decision makers in both central and provincial governments on power sector issues, including governance and regulation, system operations, wholesale and retail pricing among others. I just learned this morning that he's been traveling to China almost every, at least once a year since 2000, year 2000 to engage with his counterparts there on many of these issues. Rick will discuss the Chinese power sector's role in climate change and energy reform as well as the current status of the power sector and the reforms needed for both economic and climate goals. He also, we have also asked him to share his perspectives on both challenges and opportunities associated with the reform. Thank you for joining us today. And to his right is Trevor Hauser. Trevor is partner with the Rodeum Group and leads the firm's energy and natural resources work. Trevor has been working on international energy and environmental issues in both the public and private sector capacities, including his time at the State Department's Office of Special Envoy for Climate Change as a senior advisor. And more importantly, he's been a long-time colleague to many of us in the CSIS energy program. And we're very grateful that he's back to join us in this exciting discussions today. And last, not least, you probably have realized that it's not Chris, but it's Scott. Scott Kennedy is the Deputy Director of the Freeman Chair in the China Studies and Director of the Project on Chinese Business and Political Economy here at CSIS. He's the leading authority on China's economic policy and its global economic relations. We're very grateful that Scott has graciously agreed to filling for Chris Johnson, who was stuck in London due to airplane technical maintenance issues. So he was not going to be able to make any time to join us, but we're very happy that Scott was available to join us. And Scott will discuss the political context of China's energy reform and climate goals and share his perspective on some of the key political economic factors that may affect the success of both energy sector reform and climate goal. Thank you, Scott, for joining us on such a short notice. So without further ado, Rick, please. Thank you very much, Jane, Trevor, Scott. It's great to be here. It's a real honor to be here. Thank you very much. As Jane said, I'm going to talk mostly about the power sector. That's because that's what I and my colleagues focus on, but it's also because I'll argue that while the power sector is a big part of the problem, it's also going to be a big part of the solution. I want to begin with a few facts setting the stage here. Facts you probably are already pretty well aware of, but it's good to start with them. The world burns some 8.2 billion short tons of coal per year. 25% of that goes to produce electricity in China. 80% of China's electricity is produced by burning coal. Roughly, it's getting, the numbers are changing now, but roughly just short of 80%, I think. Another 25% of that goes to heating and industrial processes in China. So half of the world's coal is burnt in China. Global CO2 emissions totaled roughly 32 gigatons in 2013. That was about 2.5% higher than the year before and 61% higher than in 1990. And of course, the lion's share of that jump came from increased energy consumption in Asia, primarily China but also India. So China is the leading producer of CO2 emissions at roughly 20%, 28% of the world's annual total. The U.S. is number two at about 15%, but we still win when it comes to per capita emissions. China's electricity sector is the largest in the world and it is responsible for a disproportionate share as I've just said of global carbon emissions and also of regional air pollutants that are affecting the Pacific and in fact are affecting the western United States and North America. The geopolitical implications of this fact, of these facts, you appreciate, I'm sure, better than I do, as the world's largest consumer of energy and the world's largest emitter of energy related pollutants, it makes China and of course the United States the real focus of environmental efforts today. The extraordinary, on the one hand, there's the extraordinary demand for coal and we know that petroleum demand in China is going up as well. It in fact exceeds the country's ability to supply its own coal. As you know, there's been a great deal of imports from the United States and Australia, but it also has real implications for the substitutes for coal. So where does uranium for nuclear power come from, for example? Who produces the wind towers and the PV modules? Where will natural gas come from? And what are the implications for global markets? These are all obviously extremely relevant questions. As I said, the regional pollutants are a real issue. You all know, for those of you who've seen the photographs, living in Beijing can be a real challenge. But the transport of those pollutants is trans-oceanic now. So again, a real issue for all of us and of course the greenhouse gas emissions are everybody's problem. I don't need to tell you that these are national security issues for the United States and for other countries. In my view, addressing them justifies singular attention on the accelerated transformation of not only China's power sector, but of our power sector and the power sectors of other countries from ones that rely primarily on fossil fuels to ones that rely primarily on non-emitting, mostly renewable energy resources. Every country will be better off in the long run, both economically and environmentally, by adapting a strategy of deep decarbonization. That's the expression we use these days. Decarbonization of its power sector. This is critical because it's only through decarbonizing the electric sector that we can decarbonize industry and transportation through electrification. And these strategies are absolutely necessary, in my view, if we're going to meet our climate goals by 2050. China has set some very aggressive energy and environmental goals for itself in the last five years. I'd like to go through some of them pretty quickly, if I may. It has a long-term target to reduce the carbon intensity, the amount of carbon per unit of GDP of its economy by 40 to 45 percent, below 2005 levels by 2020. In 2015, it expects a 17 percent reduction in carbon intensity, so it's got, in the next five years, it's got another half to go. It has binding targets to reduce energy intensity from 16 percent of, from 2010 to 2015, and carbon intensity by 17 percent. I guess I said that already, so I'm just repeating myself. Forgive me. By 2020, it expects to have 15 percent of its primary energy supplied by renewable resources. Obviously, hydro. Wind power in 2010 totaled 31 gigawatts, gigawatts, 1,000 megawatts. 31 gigawatts is roughly the size of the power system in New England. I'll give you an idea of scale. 200 gigawatts by 2015. This year, they'll make that 150 by 2017 and 200 by 2020. For solar, going from 0.86 gigawatts in 2010 to over 35 this year, they'll make that and 70 gigawatts by 2017. So 70 gigawatts larger than the Californian power system. To put that in perspective, the total capacity of the Chinese power system in 2010 was 970 gigawatts, smaller than the U.S. system at the time. This year, it'll top out at nearly 1,500 gigawatts, so larger than the U.S. system. That's a 53 percent increase in five years. They have built in every year three New Englands in power. As a percentage of its total primary energy, it expects China wants to reduce its coal consumption to 65 percent. It's set absolute caps on coal consumption for three major eastern regions, the Beijing and Enviroans region, Shanghai and the Yangtze River Delta and the Pearl River Delta. Those are absolute caps, but because there's not yet a national cap on coal consumption, there is the possibility for shifting coal consumption outside of those regions. And that's obviously a major concern for greenhouse gas emissions and for regional air pollutants. Trevor will touch on this, I think, in his talk. These targets, of course, don't mean that emissions are going to go down. It's just that they will go down as a unit of GDP. In the last three years, the country has issued some important and increasingly stringent air quality guidelines. Still has a very long way to go, but they're making some progress and they're giving some enforcement teeth to those regulations. Jurisdictional issues between the central government and the provincial government remains an issue. What's of particular interest to me in those regulations is that renewable energy and end-use energy efficiency are treated as tools of air quality management, which makes China unique in the world. This past November, as you know, the Obama-Shi agreement on post-2020 climate targets came out. Those targets are that the U.S. pledged to cut greenhouse gas emissions by 26 to 28 percent below 2005 levels by 2025. And China agreed to a peak in its carbon dioxide emissions around 2030 with the hope of peaking sooner and to increase the non-fossil fuel share of its energy used to around 20 percent by 2030. The modeling that we've seen suggests that not only can this be done, it can be done sooner, and that typically a peak in cold consumption has to occur some number of years earlier, say about five years before a peak in emissions occurs. Okay, so just last month, a long-awaited announcement on power sector reform came out. It's a joint statement by the State Council and the Chinese Communist Party. It's called Deepening Reform of the Power Sector. We've been waiting for it. We're hoping that it would, you know, it will drive some progressive change in China, and I'm optimistic that it will. In brief, it touches on five major areas for reform, or at least for government attention in the power sector. One is the need, the continuing need for reliability. In China, if you're in Beijing, power is reliable. You can count on it. Other parts of the country, perhaps not as much, and you may know that when demand is high and availability of power is short, they've cut off power through administrative means. What we would call demand management or load management by administratively determining who will operate and who will not. So factories will be shut down. You today, you tomorrow in order to assure that the overall supply and system reliability is maintained. There are not market mechanisms at this point for doing that. So the reform document calls for increased use of market mechanisms. What that means, we'll see. It also calls for the protection of residential and agricultural consumers. Now, this is an interesting point because with the increased use of market mechanisms, they're talking about allowing large customers, large industrial customers, to contract directly with generators for power. There's a pilot in the Shenzhen in which this is going on. And what that means is the purchasing power of large consumers may justify discounts for them protecting the remaining consumers on the monopoly system will be of particular importance. Energy savings, emissions reductions, and increased use of renewable and distributed generation are also targeted in the reform. This is good. Energy savings in particular is noted. And then lastly, better governance and regulation, including better planning and strengthened capacity of the regulatory agencies. Okay, since then, there have been a couple implementation documents that have come out and I haven't had a chance to look at them too closely. This has all been happening very quickly. This reform is a very important first step. We're really hoping that it sets up and opens up opportunities for progressive change and we hope to be able to help the Chinese think about that. But let me just take a few moments to talk about some of the challenges we see. The overall objectives of the reforms remain vague and there's a lack of detail on how they'll be achieved and what the, as I say, what the overall objectives are. High level, this is typical in Chinese policymaking. High level statements are often made and the details are left to the relevant agencies to work out in the years that follow. Very often creative solutions emerge from this approach but sometimes the policy aspirations aren't met. In my view what's missing here is that there is not a explicit recognition of the importance of the power sector and reforms in the power sector for really meeting the environmental goals that China has set for itself. There's a disconnect there at this point. The relationship between environmental policy and energy planning has not yet been fully appreciated. This is not a problem only in China, of course. This is a problem everywhere. And we're hopeful given, as I just noted, some of the environmental policies that have recently come out. Okay. We know that deep decarbonization is both possible and cost-effective and inexpensive. We know this, there's been lots of modeling done in the United States, in China, in Europe, okay? The barriers to it are not technological. They are largely economic and political, okay? In particular, they're financial. The incumbent players have a lot to lose if the transformation isn't carried out appropriately. Where the transformation is happening, we can talk about Europe. We can talk about the parts of the United States. And beginning to happen it's because public policy is driving it and it is doing it in ways that address the reasonable concerns of the incumbent players. So what needs to happen in China? As I said, it requires political will. But it can't happen until some foundational reforms and policy changes are made. And these are in China's interests even if environmental stewardship and protection aren't the driving motives. Okay, to name a few. The Chinese power sector is operated in a way that no other power sector in the world is. We can talk about this during the Q&A, but let me just say that the manner for now, the manner in which the thermal, the cold generators are paid and operated, dispatched as the term of art, has no analog anywhere. The relative economics of the different generators does not drive operational decisions. This is what happens in markets around the world and in regulated, vertically integrated systems that the relative economics determine the operational decisions. It's not true in China. They're driven by contractual requirements that were put in place so as to assure reasonable capital cost recovery of the generators. It's called Equal Shares Dispatch. It has a wonderfully socialist ring. It's driven by fairness and one can appreciate that. But there are ways to reorder dispatch and protect the financial viability of the generators and to do so in a way that saves everybody money. And by doing that, you enable the integration of non-emitting renewable resources more easily into the system. So there's just an immediate financial and operational barrier to the integration of renewables into the system. Chinese power sector is also planned like no other system in the world, in part because of the problems that I've just described. Certainly regulatory and governance oversight reforms are needed. Regulation is not strong in China. The power companies have a monopoly on information and make sure they hold on to that. Amongst other things, there are other things we could talk about environmental regulation as well. Policy support for renewables through pricing, these dispatch reforms, environmental regulations is critical, the Chinese, as we just talked about, as I just mentioned, have invested heavily in renewables. They've done a terrific job. But again, integrating them into the system has been a problem so that there are significant curtailments of renewable generation much higher than you see anywhere else in the world. Likewise, support for end-use energy efficiency is needed in China. Again, China invests heavily in end-use energy efficiency, but it doesn't do so in a way that recognizes that efficiency and other demand-side resource investments are critical for the power system and are substitutes for transmission, generation, and other investments. They don't see efficiency as an alternative to more expensive supply, and that's something that we've been spending some time trying to help them think about. Lastly, let me say that markets are not by themselves the answer to the problems, at least not yet. One always has to ask, what problem are you trying to solve? I don't think that the underlying regulatory institutions in China are yet ready to deal with market oversight. Look, we've been at it for 15 and 20 years here in the United States, and we still haven't gotten it completely right. So there's no reason to think that a swift shift to wholesale competition in China would be successful or even a good idea, or advance the environmental and energy objectives that this country has set for itself. Markets only deliver desired outcomes when they are designed to do so, and that's a hard policy challenge. So I would just say that these fundamental changes we can work on before we move to markets and they're all on the road to markets if that's where China really wants to go. Let me close by saying that despite some of the concerns I've mentioned, you know, progress, as I say, is less of a policy issue. There is political will. There is a desire to do good things than a regulatory one, which is to say it's less of a question of what needs to be done than of how to do it. And there are many opportunities for engagement that I would encourage you all to take advantage of, the S and the ED for one, all kinds of meaningful and, you know, helpful opportunities for engagement. And I thoroughly encourage you to take advantage of them. Challenges are great, as are the opportunities. I'd say that if we fail to confront these issues together, our nations, as the central economic and environmental challenges that we face, I don't think we're going to solve the problems. Thank you very much. And I look forward to the questions and answers. Thank you so much, Rick. That was a lot of information. And certainly the Chinese policymakers, both at the central level and provincial level, have quite a bit that they need to work on. But it's encouraging to hear that the way that I think they're engaging external experts and perhaps, you know, as well as, you know, internal sort of Chinese experts, some quite comprehensive and perhaps, you know, at times it's the matter of also sequencing some of these sort of steps, right? As well as just, you know, knowing what the issues are, but also how to move different pieces forward. But anyway, next is Trevor. Thanks, Shane. Thanks, Rick. It's great to be at CSIS. And I was telling Scott, I love Chris Johnson, but I was also delighted to that he got stuck in Asia. So I get to share the stage with Scott. So let's see. So I'm going to try to complement what the comments, Rick, made by discussing some of the broader political and economic trends in China and how that will shape power market outcomes and then talk about specific regulatory and political developments outside of the power sector, but in the energy sector. We'll try to do that in like 10 minutes. So China has reached a pretty tenuous point of economic development that is known as the middle income trap. So it's relatively easy to get from 1,000 per capita GDP to 10,000 per capita GDP. It's a lot harder to get from 10,000 per capita GDP to 30,000 per capita GDP. So the Asian Tigers in Japan did it pretty well. Latin America did not. And it requires some very politically difficult structural reforms to your economy to break through that trap and reach upper income status. And that's what China is staring at today. That is the, I would argue, the kind of singular focus of President Xi's administration is economic reform that will get China through this tenuous period of its development so that it can emerge on the other side as an upper income country. The elements of that reform that are most material to the electric power sector and the energy sector is, first, on the demand side, all of those really like eye-popping electric power capacity numbers that Rick just laid out, those were due less to the pace of Chinese economic growth over the last decade and a half and more due to the structure of Chinese economic growth. So China's gotten to 10,000 per capita GDP on a very investment and heavy industry intensive strategy of economic growth. So a lot of steel and cement and aluminum production, 70 percent of energy demand in China comes from industry. That's been the driver to date. And it's made Chinese economic activity much more energy intensive than economic activity in pure economies. What that means is that as China seeks to restructure their economy now and rebalance growth from investment in heavy industry towards higher value-added manufacturing, services, consumption activity, the energy profile of the Chinese economy is going to change a lot. So overall Chinese economic growth is going to slow, even in the best case scenario. The choices, I grew up in Wyoming so I speak entirely in ski metaphors, the choice for China in kind of economic terms is whether they take the bunny slope path down the mountain, which is like the Korea, Japan, Taiwan, slowly decelerating growth where maybe we get to 6 percent GDP growth by 2020. That's a pretty good scenario. Or whether they take the double black diamond path straight into the middle income trap. That's the Mexico path and other Latin American economies from the 70s and 80s. And it's maker break time. Like that's going to be decided in the next few years. What matters though within that kind of soft landing 6 percent growth scenario is the structure of that growth from an energy standpoint. And you could have 6 percent economic growth in China that is very energy intensive or 6 percent growth that is considerably less energy intensive. Odds are that to deliver that 6 percent growth, the nature of that growth will need to be less energy intensive. That China will need to rebalance the drivers of growth towards consumption and light manufacturing and services. What that means, and this is already showing up in the energy sector in China, is significantly slower economic growth. So we started about a year and a half ago starting getting calls from commodities traders asking. They're saying we're reading GDP numbers from China that are 7 percent, 8 percent GDP growth, not horrible. What we're feeling in the commodities market is like the Chinese economy has just gone straight into the toilet. Like demand has completely dried up for iron ore, for coal, for lots of other inputs. And the conclusion that they derive from that is that the Chinese government must be lying about its GDP. Our Rodium Group, our company spent past like a year and a half, two years with CSIS really kicking the tires on China's national income statistics, bottom up doing like a thorough audit of how accurate those GDP numbers are. I don't know when that comes out, soonish, right? Soonish. And the kind of insight that I'm happy to share here is that the drop in commodities demand that we've seen from China is not due to blatant lying about headline GDP, it's due to that change in the structure of the Chinese economy that I talked about a minute ago. So rapid deceleration and fixed asset investment and heavy industrial production. There's been super bad news for Asian coal markets. It's been super bad news for electricity demand in China that was growing at like double digit rates for a decade and a half and is now growing at low single digit rates. That has implications for the power sector, obviously, as the pace of demand growth slows and as the geographic location of demand changes, right? So most of the demand growth to date has been in coastal China. Demand growth in the future is going to be in the central and western parts of the country which has significant implications for the power sector which Rick can talk about in the Q&A. So overall pace of reform matters a lot for electricity. The other two are not specific to electricity but are important for electricity and that's price reform and SOE reform. And throughout the energy sector, I would say that Chinese government's doing pretty well on price reform, pretty bad on SOE reform so far. So let me talk about why those are important. So price reform, you know, we're going from a Chinese economy where every price was set by the government. And if you were a state-owned enterprise, you were told how much input you would buy and at what price and how much output you would sell and at what price, right? We've come a long way from there. The vast majority of prices are liberalized in China. Energy sector prices in a number of areas are still set by the government like electricity prices and refined petroleum prices and natural gas prices. It's important to note that electricity prices are set by the government in many parts of the world including the United States. That in and of itself is not evidence of subsidization, right? And there have been improvements in the way end-use energy prices are set that aligns incentives and makes the market function better. There's still a long way to go, particularly in electric power but when I read that kind of informal reform circular on the power sector that Rick mentioned, there's a pretty positive indication about pricing reform and making pricing more rational. Slower progress on SOE reform, right? The energy sector is probably the most statist outside of, I guess, railroads and missile launchers. Probably the most statist sector left in China and particularly in electric power where we have a grid company that controls all the transmission and distribution system in all but five southern Chinese provinces. Policymakers have very little visibility into the operations of that company. It's very politically powerful. The generating company is similarly so. Over time, what in my view is going to be the most important for China from an energy standpoint and more broadly is to move from to date being a owner of the means of production, right? To being a regulator of production activity on the behalf of consumers, to maximize consumer welfare. That's a really tough cultural and institutional transition and it's really hard in the energy sector where the past couple decades of rapid economic growth have left us with some very powerful vested interests in state-owned enterprises. So that's probably the part of the reform agenda that's really going to be the toughest and I think to date the indications there are less encouraging than on the price reform side. We don't see a lot of indication of significant restructuring or reform of state-owned enterprises like the state grid. Rather, efforts to better regulate them as state-owned enterprises. In the oil and gas sector, and maybe I'll use this as my segue, the oil and gas sector, upstream oil and gas production in China is still pretty much a duopoly where Sinopec and CNPC are the only companies that have the ability to produce with the exception of some really bad acreage that has been offered to local Hubei provincial companies that don't know what to do with it. And meaningful oil and gas sector reform will ultimately require increased competition and contestability, right? There have been some fairly aggressive corruption investigations into existing national oil companies, better governance of those oil companies, but again doesn't seem to be a lot of appetite for significantly improving the contestability of that market by other companies or privatizing those SOEs, so I think slightly less encouraging there. Let's see, on the oil and gas side, the price reform, like with electric power, has been relatively positive. The new natural gas consumption in China is pretty much market-set. It's oil indexed, which right now with oil prices where they are makes natural gas a better deal both on the domestic production and on the imported side. And the oil sector in terms of prices has been pretty well liberalized for a while. Let's see, so covered oil and gas, electric power, maybe a couple of comments on coal markets and then I'll pass it over to Scott. Yeah, I mean Chinese coal markets are really hurting right now. As are coal markets everywhere because coal demand growth has slowed dramatically globally. In the U.S. due to shale gas and increased environmental concerns and in China due to increased environmental concerns and structural rebalancing in the economy. The coal markets have probably been the most liberalized to date and are likely to see the most consolidation as a result of the current market distress. Let's see, maybe the kind of final point that I would make just kind of building on a couple of things that Rick said. So aside from kind of his meta-themes of reform, aside from the government switching from being an owner of the means of production to a regulator, the other really important development and moving to a more mature energy market is increasing the role of civil society and contestability and in the legal process. And I think on that front, developments have actually been relatively encouraging in China up late. The amount of leash that the producer of Under the Dome got making the documentary, the length of time it took before sensors got uncomfortable with the 200, 300 million Weibo tweets immediately after whatever the traffic volume on that was. The new environmental law and kind of increased role for civil society to put pressure on state-owned enterprises and provincial officials to improve environmental outcomes I think is a pretty positive development. So it may well be that while leadership doesn't have the appetite for serious SOE reform, that that pressure may end up percolating up through the bottom through increased civil society participation in the process. I know that's a lot, but first for the middle for us to talk about in the Q&A. Great. Thank you so much, Trevor. Certainly at me a lot. But then, you know, I'm glad that you started talking about, you know, the other parts of the reform such as SOE. I mean, you know, there are a lot of sort of interested parties and, you know, this, you know, certainly provide a great segue to Scott's area of expertise and love to hear a lot more about, you know, your thoughts on the relationship between saying the policymakers like NDRC and then state-owned enterprises in the energy sector. So thank you, Scott. Thanks. I'm happy to be here. It was a little bit of surprise, but I'm happy to talk on this topic. In the 1990s, when I was doing research on business lobbying in China, one of the sectors I focused on was the steel industry. And one of the key areas at the time was their response to increasing environmental regulations. And in Beijing, where I was looking, there was a growing movement about how do you get capital iron and steel out of Beijing? And that was a bottom-up policy move. But there was also the firms themselves were dealing with, you know, environmental regulations. So it's something that I've continued to follow. And as someone who spends a lot of time in Beijing breathing air and looking at my cell phone and the readings, it's something that you got to pay attention to. And really, this speaks to just sort of central elements of China's political economy and grasping. And I think the comments that I want to make about sort of the broader political economy story of energy and climate change are very consistent with what Rick and Trevor said. And I'll just add a few things to round out the picture. There might be a couple areas where we might be slightly more or less optimistic. But I think the picture is going to be consistent across because if it's not, that means I'm wrong because they're the experts on energy and climate change. So the, you know, I guess the starting point for China is its basic political economy is not one that is directed toward pursuing sustainable development. That's not true for sure. It's a country by, of and for industry. It's been that way. It is still largely that way. And it's secondly by, of and for the Communist Party and keeping it in power. Those are the two dominant truths that one has to face in dealing with any policy issue in China. And certainly those are critical for dealing with energy and climate change issues. So the extent to which serving those interests also leads you to reduce energy usage or the type of energy usage or change of structure, deal with climate change, the better. But those things have to align with each other. If they don't align with each other, we know what's going to win out in that tug of war. And, you know, and that's why, you know, China is got these strange contradictions. It is the world's largest producer of green technologies. It is the world's largest polluter. It will have those two number ones for a long time, I suspect. It's also the number one patentor in the world and the number one violator of IP. It has all of these contradictions across its political economy and energy and climate change. It's just so visible. But of course this is, you know, with Xi Jinping coming into power in November 2012, they have pushed in a variety of ways which you all have started to elaborate. And, you know, I'll just touch upon sort of the top economic policy priorities and then the institutions which are critical to addressing these problems. So they have on paper shifted their goal from rapid growth to sustainable growth. And that's the right goal. And you could have seen that before they came into power with the China 2030 report and then in the third Plenum document. We've seen it in speeches since and we'll see it in the 13th Five Year Plan that comes out a year, just a little under a year from now. The 10th Five Year Plan had one target related to the environment. The 11th Five Year Plan had eight targets related to the environment. The 12th Five Year Plan had 12 targets. They're going in the right direction and they are becoming more specific, more detailed. And I think that's what, that's the direction I'm pretty sure we'll see in the 13th Five Year Plan. In addition, they won't just identify goals that they want to achieve. I think they'll be clear about the ways they want to achieve those goals. And so I think, you know, at the broader, at the broad level, the policy direction is definitely shifting overall. But regardless of that big change, this is still a country that needs growth. They still need to create 9 to 10 million new jobs a year. Even if population growth we think is slow by developing country standards, when you start with 1.3 and a half billion people, a small increment of growth, that's still 9 to 10 million jobs you need to create. They still have to create growth not only to provide jobs and services, but to deal with the debt problem that they have because you can't address the debt problems that they have unless you generate rapid enough growth to deal with that as well. So there's going to constantly be this challenge of balancing reform and growth because if they, and if they don't balance it, then it's down the double diamond slope, right? It's not down the bunny slope. I ski too, so. East Coast Hills, not West Coast Hills. And since the Chinese are probably going to be hosting the Olympics, they're going to get the Winter Olympics. They're going to, at one point in their lives, understand this analogy. Maybe not right now. If you think about the sort of overall view of the role of the market versus the state, you know, again, that's shifting in the right direction to talk about the role of the market plan, the market plan, a decisive role. And that will, that is already meaning less of a role for the NDRC, the National Development Reform Commission, the Center of Planning in China, MIIT, the Ministry of Industry and Information Technology. That ministry may have a short life. It may not exist in a few years, even though it's taken on some important, it does some important things. And these also may translate into lower explicit and implicit subsidies for fossil fuels and energy-intensive sectors. And in going to some of these companies in the power generation sector, I was in a project with Lauren Brandt who's at the University of Toronto, these are very innovative companies. They will give you fantastic PowerPoint presentations and descriptions of all the different types of technologies which they are developing and bringing online. And these are, and some of these are innovations, like with high voltage energy, which aren't, we don't even have here. So there are, there is genuine innovation and perhaps that shift to the market will help encourage it. At the same time, on the negative side, I am concerned about, you know, you know, the price of electricity. I know, and energy, I know that it's relatively complicated and that there's more to the effect how much energy, what type of energy is used besides price. But there's still a gap essentially, especially with all of the excess capacity of iron ore and coal and everything. And so that's a challenge. And so as Rick was saying, we're not gonna get there strictly by just letting the market do its magic. You actually have to, markets have to have regulators and politicians structure the market and create the incentives. These are not naturally occurring phenomena. So that's gonna be critical that the interventions are the right kinds of interventions that send the right kind of signals to participants. One of the things that hasn't been talked about, I guess we talked about the movement of energy intensive sectors within China, particularly if they don't have these caps nationally. But the other thing is even if you have them nationally, China is rolling out the New Silk Road initiatives. One possibility is that some of these, the over capacity and high energy intensive industries that are inefficient get pushed outside China to the rest of Asia. And so the New Silk Roads may become the New Dirty Silk Roads. And so that may help China reach its peak out emissions earlier, but globally it wouldn't necessarily change things so much. And then at the end of the day, I think actually that's really what the issue is, not specifically what region it comes from because they all go into the same atmosphere, right? In terms of institutions, we've also seen significant changes under Xi Jinping with the centralization of policymaking. In the party, in his hands, he's the head of 10 leading groups and he's got a business card. It must be huge. I don't know how he carries these things around to hand out to people because he's got so many jobs now. He's as powerful as Deng Xiaoping. Deng Xiaoping was a vice premier and the honorary president of the Bridge Club. So politics in China has changed and so the way he's accumulated power is quite different. But having that power in some ways helps potentially reduce the stove piping problem in China, unifying goals and the challenges between unifying policies that are about electric and energy and climate change may be able to because they meet in this person's brain and he has a more direct line in setting policies. At the same time, by centralizing things in the party, you're taking a lot of authority outside the standard bureaucracy. And China has a huge government with several million employees that are now just waiting to hear what to do and they have to be a part of the solution. Your power regulators and others, they have to be proactively involved. The Ministry of Environmental Protection is more powerful and these new laws help it but it's not more powerful than the NDRC. It's increased fines. We've seen a lot of those but you know, I don't think we're in the new normal in terms of the relative power of the ministries vis-a-vis each other and I don't know if that's really bending the curve overall. It's excellent newspaper coverage but I don't know how big an effect it's having. In terms of incentives for individual bureaucrats, it's really easy to have an incentive which is, here's the growth number you need to hit every year. Shifting to a different type of incentive structure for bureaucrats is less easy. I've finally seen recently in the Chinese press and the government a discussion of green GDP. It was a concept that was discussed in 2003, 4, and 5 and they issued data. Huangang and others issued data on green GDP and then it got smushed and suppressed. Now we're seeing that again. So maybe that's the new type of target that we'll see a way you can combine a couple things together but that's still not easy. SOE reform, the primary SOE reform tool to date is anti-corruption and the energy sector has been the number one target of this. If you're in the coal industry in Shanxi, life is really horrible for you right now. Really, really horrible. At CNPC, in talking to people in the sector, you know, half of Wang Qishan's staff are like running through the CNPC headquarters and all of its offices around the country. The company basically can't make any investments or do anything. And so in some ways that's good because it's reducing a lot, it made a lot of horrible investments. But these companies, again, the companies have to be part of the solution not just targets for control. And so they're already massively risk-averse folks. So they're just going to be more risk-averse. And so something, so this anti-corruption campaign has to have a new phase from squashing folks to actually setting the new normal and sort of letting everyone come out of their shells so that they can behave according to the new guidelines that are supposed to be sent. We're just not there yet. Last part of the equation, Trevor touched upon are societal actors and their role. And we know globally there's not a country on the planet that has become much more environmentally friendly and greener without a significant nonprofit sector and NGOs and the public significantly pushing. There's just not any example. And although China has, there are a lot of NGOs in China and environmental NGOs and the number two target of philanthropy in China is environment. Education is number one. You know, the signals that we see, you know, maybe it's these are just the headline ones, but you know, there's just extensive clamping down on NGO activity in this sector and others. We just, you know, the case of the five women who were arrested for advocating for women's rights and things that's very high pressure and a signal sent to everybody and squashing under the dome even though the maker of that documentary thought that she had top level support including from the ministry. It was like the minister's first day on the job having come from Tsinghua University and he got overturned apparently. And so we know that these reforms are going to move at Xi Jinping's pace and not at our pace. So the importance of making sure that he believes this and the people directly around him are critical because what we do on the streets and the newspapers, those type of external types of accountability mechanisms, that just rubs them the wrong way. And I think that's a problem way down the road to make this very sustainable. So I'm still, you know, I could say to some extent I'm agnostic. I'm still, you know, I'm on the relatively highly concerned side about this even though the economics make sense even though Trevor and Rick have all the right answers. I think from the politics, that should make sense but from the politics of it given the political economy, you know, I'm just doing some advertising for you. So, but it's still super hard. I'll just stop there. Fantastic. Wow, so much information and a lot of thought-provoking points. If I may, before I do open the floor for questions from the audience, I wanted to ask each of you a question and then in the order of your presentation. So while the others are talking then, you know, you can sort of think more about what your perspectives may be. Starting with Rick, if I may, you know, you engage the Chinese on a range of power sector issues and what are some of the areas where some of the U.S. experiences have become quite relevant and I know that there's no cookie cutter solution. But then along that line though, I think energy efficiency has been one of the, sort of as some of the former energy secretaries used to say, sort of a low hanging fruit, it's a very important area. But in their system, and we haven't, I don't think really found the solution here in the U.S. or in the West, but you know, how would you, you know, what are some of your advice to the Chinese on how to structure incentives for the utilities to take on the efficiency gains part of the story. And then to Trevor, you know, I think the, in the past couple years or until very recently, I think the energy input prices have been quite high and as many of you have said, the power price has been fixed. So there have been a huge gap between the price of coal, you know, input such as coal and the electricity prices. And I think that the government has been very afraid of economic instabilities and also consumer sort of, I guess I'm breast, I don't know if that's the perfect word, but by sort of letting the power sector or the pricing get deregulated quickly. Now that a lot of the energy input prices have come down, particularly coal is the time ripe for the government to, is that why we're seeing more statements? And I guess even if they're rather vague, but some of the more efforts coming out of the government. And then to Scott, to follow up on your sort of excess capacity discussion, I thought that was very fascinating that in a sense, I mean, there's, you know, sort of an economic slowdown and then, you know, given the domestic consumption of some of these high carbon energy sources slowing down as well may inadvertently create a perfect storm for China to start exporting, I guess, pollution in a way. Related to that is the role of policy banks. If you could touch upon any changes that you expect in the government thoughts on, I guess, how the policy balance should, I guess, behave or should, you know, relate to these excess capacity questions. That would be a great thing. Okay. Let me just start with the, and I'll treat it as a broader question than perhaps you asked it. What practices, what examples from the United States have value in China can be used to assist Chinese policymaking? I'll go beyond end-use energy efficiency and talk about, just very briefly, work that we're also doing in environmental regulation. And of course, what's critical here is to make sure that whatever you do to clean up smokestacks to improve the local air that you do in a way that we call climate-friendly, because you can clean up the air, but create a heavy carbon penalty for doing so, because you're using energy to take the pollutants out of the effluent. So we spend a lot of time with provincial and municipal regulators. As you mentioned earlier, Scott, MEP, the Ministry of Environmental Protection, has been given more authority, but it still lacks a certain amount of enforcement authority and implementation authority, which resides in the hands of the local Environmental Protection Bureau. And so working with the provincial folks is critical here. So we talk a lot about how you can go about and, you know, regulating environmental improvement in the provinces and cities. And there's a lot there about inventories, emissions inventories, you know, how to go after the point source, mobile source, the whole thing. So we spend a lot of time doing that. We don't necessarily say that what the U.S. has done is the way to do it. In fact, we often say don't do what we did. Here's the mistake that we made, or we did this because of our federal state jurisdictional split. And with the Federal Energy Regulatory Commission, that's, every time they go to China, that's the message, okay? We have this history. We have the Commerce Clause. We have the Constitution. You don't, you can work it differently in China. So oftentimes we're suggesting what not to do. And that has real value. With respect to end-use energy efficiency, I want to be clear. We're not encouraging the Chinese to require the grid companies, the distribution companies or the transmission companies, but mostly the distribution companies, to invest in consumers, consumer-sighted efficiency. That's been a model in the United States for a long time. And in fact, there is a grid company obligation to invest in energy efficiency. It requires that 0.3 percent of energy and 0.3 percent of peak demand be met by end-use energy efficiency investments each year. And that's great. The most important thing about that obligation is that it puts into the minds of the planners, we hope, a recognition that here's a resource that we can use to meet consumers' demand for energy services. And it's less expensive than the alternatives. This is really about thinking, we really want to start thinking about the economic value of this resource. But in China, that's not actually how it's thought about, and this is still a long road to hoe, but we'll see. We will see if there's more moving on it. In fact, the grid companies responded to the obligation by creating energy services companies, and they just said, go get some energy efficiency for us and don't bother us. And that's not really solving the problem. I'd be more than happy to have anybody invest in energy efficiency so long as it's driven by the resource needs of the sector. And of course, the environmental outcomes we're searching for. So we spent some time talking about that. The United States has been a leader on investment in, you know, power sector driven investment in energy efficiency. There's lots to talk about there. But there are some great examples elsewhere, Australia, Korea. We try not to focus on what the U.S. has done and try to be more global about it. So. Great. Thank you. So electricity prices. So the question is not comparing. People often go astray by comparing the absolute price of electricity in one country to another. If you did that, electricity prices in China are 60%, 70% higher than they are in the U.S. They're considerably higher. The question isn't that. It's what is the price relative to the input cost? There's no direct fiscal subsidy. So then it comes down to our power generation companies making sufficient profit to recover their investment costs. Given what coal costs and given what they can sell power at. I have a decade long running debate with my colleague, Nick Artie at the Peterson Institute on this very question that we haven't yet come to terms on. But certainly I think the extent of the discount relative to what a fully competitive full cost recovery model would have been is low. Certainly compared to what the oil companies absorbed when crude prices were really high in 2007, 2008. But your point is right that to the extent that that discrepancy existed with the drop in coal prices, it's pretty much gone away. And so the same as the low coal oil and gas prices create an opportunity for fossil fuel subsidy reform, which we see Japan and Indonesia and Malaysia doing. They create an opportunity for electricity price reform in China, which again because it's electricity doesn't mean liberalization. It just means changing the way the electricity is priced. And that's I think in large part why we're seeing some pretty encouraging developments in that direction. You know, as Rick mentioned briefly and he said it really briefly so people probably didn't catch it, but it's really important. The challenge for China has been China cross subsidizes residential electricity consumers on the backs of industry, right? Which seems like we have this kind of image of like a massively energy subsidized Chinese industrial juggernaut when industry pays more than full cost recovery for their power so that the 25% of electricity that goes to households can be sold at a cheap rate, right? Because the political sensitivity is much more around household electricity expenditures than industrial electricity expenditures. The electricity reforms indicate a increased appetite to allow large industrial consumers to negotiate contracts directly with generators, which there is a pretty strong incentive for them to do because that allows them to get around this implicit cross subsidization to households. So it's kind of a similar dynamic to what we're seeing in California right now with rooftop solar, right? Where if I have pretty good, I will probably do it sometime this year in my house in California, we'll probably put solar panels on it because for me as a household the incentives are pretty good to do that, right? When I do that, the share of the transmission and distribution fixed costs that I pay for is reduced to the grid company and those costs then have to be spread to other consumers and that's forcing a pretty fundamental change in the way people think about a utility business model and it will be interesting to see if a similar type of dynamic occurs where as you allow large consumers to start negotiating contracts directly with generators it no longer becomes a choice of whether you're going to and that's a comment I was making about the kind of bottom-up driven reform that as you start to allow increased market contestability different types of participation it's kind of forced moves in design space then suddenly you need to do some reforms that might have been very difficult before so I think we could see that on the electric power side. Sure, on the issue of excess capacity China's economic development model really summed up in a short phrase build it and they will come, right? Provide support for building as much as you can in essentially every single industry and in infrastructure and that there's essentially unlimited demand, right? And there's unlimited financial support especially for SOEs so you can get that from banks but more important over the last 10 to 15 years have been retained earnings of state-owned enterprises they don't have a high return on assets but they have a lot of cash and they use that, they've invested that and then they can issue bonds and of course list on the stock market and every time, so every time they simply need funds they can and so fulfilling that build and they will come model but when you've been growing at 9 to 11, 12, 13 percent year after year they just got a rude awakening that oh, uh-oh, actually no one's coming so that's why there's so much excess capacity and in many sectors because the demand just wasn't there because it's institutional design of production as opposed to every individual market participant making a judgment about what they think demand is going to be in their specific area over time there was sort of just a broad commitment that the demand will be there because if individuals didn't buy the state would, right? But that model is leading to this middle-income trap and the need to get out of it is now highly recognized so I think reducing the excess capacity problem probably at the end of the day is about the financial incentives and how the financial system works to give signaling to companies about what they should invest in and I think, you know, to some extent it's an SOE problem but I think actually it's really just a competition problem more than an ownership problem I guess in some ways you could say that's a chicken egg issue but in sectors in China where SOEs compete with a lot of other private companies and foreign companies they are much more efficient, for example, in telecom equipment for example, so I think fixing the financial incentives is probably critical to that and then that will, you know, probably help deal with over excess capacity issue and that's obviously important for the amount of energy the type of energy folks use I would say in addition to, you know, just electric generation on the conservation side I think one of the, you know, correct me if my statistics are wrong but one of the places where China uses a lot of excess energy or energy that it didn't need to is because in construction the materials used for building particularly commercial facilities doesn't have the proper insulation in it so we're sitting in like a lead five star building here almost, we create almost no energy carbon footprint because essentially the energy in this building is created by having a lot of glass, your bodies and our computers right and so whether it's summer, winter, whatever we have we're in a great building China that's not how most construction occurs in China and you would just save, you want to have a bending the curve that is just a critical area and perhaps changing the financial incentives in the way the financial system works will translate in the way the companies invest which may make dealing with that problem a little bit easier. Let me just add one statistic. Great, fantastic. Now I'd like to invite audience to jump in and ask questions. Just a few ground rules. One is please state who you are and who you're with and ask the question in a form of questions. Sorry, please wait for the microphone. Hi, Tucker Van Aken with Albright Stonebridge Group. Just something that seems to under guard the discussion we just had was the need for SOE reform to sort of push ahead a lot of the reforms that are needed to the energy sector the power sector writ large and just a recent example, State Council reduced the price that large industrial firms have to pay to the grid for electricity. There's been some speculation that this was to sort of prop up the aluminum industry which is suffering a great deal in China right now and with the NPC we saw the creation of an SOE small leading group. I'm not sure if that's led by Xi Jinping or Li Keqiang, my instinct is its shape. But I just wanted to ask a question about looking to the future. What do we think the path of SOE reform will be? Will it be more something like a tamasic sort of holding company in the Singapore model or do you see alternate routes and do you think we'll actually see progress on this this year? So thank you. A couple of quick thoughts on this. I mean first again with electricity prices if your input costs have fallen in half the fact that you've then raised the lower the output price a little bit is not necessarily a signal of anything other than your input prices have fallen by. If you have a liberalized market that's what you would want to happen. You would want the prices to fall when input prices fall and rise when input prices rise. So it's really that gap between the two that matters. In terms of, I'll just speak to energy sector SOE reform and then Scott can comment more broadly. I think it's in some ways it's too early to tell if I'd like that based on early indications. I mean certainly I don't expect within 2015 large scale energy SOE reform continued corruption investigations which I do think has I think the chilling effect that Scott mentioned on investment is actually really important. It wouldn't matter if it was a contestable space like if we're in the U.S. and one large company is subject of a corruption investigation their competitors going to eat their lunch and steal all their clients, right? The problem in like oil and gas in China is that nobody's there to benefit from CMPC's current troubles and investment stalemates. So my gut if I had to bet was that in the energy sector what we'll see is rather than breaking up or fundamentally reforming SOEs we'll see improved regulation and gradually improving increasing the share of the market that's contestable and that other firms can participate in is a way to make the space more competitive make SOEs better run without tackling head-on politically powerful SOEs for overall reform. I think I could just say I agree and I do. I don't think there's any I don't think there's any light at all between us just I think the question is what is SOE reform? And I think there's still a debate about it part of it is about just internal governance of the firms themselves how the leadership is appointed how they make investment decisions probably to how they what their board of supervisors or board of directors do do they have a role? You could that would also include you know shareholder governance right the role of minority shareholder so there's something about sort of the governance of the firms and you know I think we're seeing some on that but again I don't think that's actually the most important part of addressing these problems I think it is more participants in these markets so either new entrants so private or foreign companies being allowed into these spaces and we've seen some gradual movement on that front in some sectors but not a lot particularly in energy in places in new places and then it is sort of the company structure right mergers in industry structure allowing mergers and acquisitions or breaking up the companies and we've heard about potential mergers for example in nuclear power it could happen you know it happened in rail it could happen other places but unless those are unless you allow hostile essentially hostile takeovers of these firms which then you change the management you change their investment strategy and things that's probably not that's probably not super likely breakups again I haven't heard that is a big policy option right now I guess the last is just the input side the finance side of how much what type of access to capital from banks from bonds from stock markets etc that they have and that they have to be responsible for those that they can't just pass along the problem to the to the local government or to the central government so I I don't think we're going to see anything massive this year I would agree to some extent I think we're going to see they're going to increase minority shareholder ship cases examples which is relatively easy since minority shareholders in China have no power so you can do that you can allow marginal involvement at the very edges of these sectors but I still think we're ways away from them wanting to you know fundamentally change the way these organizations are internally governed and changing allowing entrance into the core business areas and since a lot of these in some of the ways these are utilities and public goods in many countries you just don't have free flung competition anyway so that may some the outcome may be somewhat dictated not just by China's distinctive characteristics but by the nature of some of these areas parts of which are natural maybe you might call natural monopolies I very quickly one additional point I'm a regulator so I tend not to think as much about ownership of a of a firm as others do and perhaps I should when I was a regulator we we regulated the investor owned utilities the same way we regulated the consumer and municipal owned utilities and and they did what we told them to do it was it was fun but I do want to I want to tell this story and that is a subtext to power sector reform for a lot of policymakers in China is the breaking up of state grid state grid controls the wires the transmission and distribution for about 85% of the country's electric service and it is the largest utility in the world it's a behemoth and they're very interested in growing internationally but they naturally create a terrific barrier to to certain kinds of reforms right and so underneath all this is this desire to break up state grid which may or may not be good for the objectives we'd like to see achieved but it is something that the folks talk about so many hands that really right there and then sir you next and then back there and then terrific panel thank you this Kenneth Lieberthal of the Brookings institution I have one quick question for Trevor and one for Scott if I may for Trevor I this may be a kind of glass half full glass half empty issue I was really struck that your characterization of the space allowed for civil society to promote environmental improvements had grown recently I my sense was more what I sense Scott was saying which is to say it's really been more constrained so I'm wondering what you're whether you have any metrics for that or how you're reaching that conclusion for Scott a big issue that you raised was in basically incentives for performance of bureaucrats I would include local party leaders in that you commented that green GB green GDP is now again being mentioned I've seen that it died in 2006 2007 because of complaints about legacy measurements responsibility etc. Have they figured out how to deal with that is another way of getting at how do you specify operational incentives for people who affect these outcomes as you go down through the multi-layer Chinese bureaucratic system thank you hold on just a second I'm sorry let me take a couple of questions in the interest of time I think that gentlemen right by I David Wu former member of Congress who had the pleasure of voting on the climate change bill I wanted to ask a panel question of the panel but perhaps primarily to Scott because it's a partially political question about transparency and that's a problem in China it's not just in China but it's here right when we try to regulate large utilities or large financial industries and there isn't sufficient transparency there is more room for to use a technical term hanky-panky and you know if we increase transparency we reduce those opportunities to what extent does increased transparency give opportunities to drive energy reform from the bottom up because the tendency it seems has been to drive the reforms from top down and would increase transparency a be permitted and permit a better combination of reform pressures against what's sure to be pushed back and then two more the other person by now and there's thank you I am Takamoto Suzuki of CSIS originally from a Malibu Corporation are one of the biggest energy supply company in Japan and my question is Chinese economic goals or energy goals one is energy saving but another goal is less dependency on import energy so how to balance Chinese government the less import energy with energy saving because what shall I say Chinese government offer big subsidy to SOE energy companies due to making inland investigation for new energy or investing in natural resources so I don't know how to balance subsidy for new investigation and saving energy my name is Suzanne Frattra I'm a graduate student at CSIS thank you for the panel very very interesting Mr. Weston you mentioned that due to the Equal Chairs Dispatch organization or way of framing it that economic relative economics do not drive operational decisions how in the framework of a local prices would you then see the shift the energy mix shifting in China particular towards renewables thank you thanks Ken and just for those of you don't know Ken Lee was the Dean of China political economy energy analysis invented the field and on whose shoulders the rest of us stand so I'm eager to hear your thoughts on it as well Ken but so look this my comments were absolutely specifically on environmental civil society activity and part of it is derived from the sharp contrast I see in government treatment on environmental NGO activity right now versus human rights women's rights right there's a very notable difference in how those groups are being treated in the amount of political space that they're being given that I think is indicative of a broader feeling among leadership both of the ability to put this issue back in the bag because unlike you know democracy NGO you find leaders you send him a Xinjiang they spend the rest of their life breaking breaking big rocks into small rocks nobody ever hears from them again everybody can see the air you know you can hide the people but you can't hide the air so I think there's a difference in the ability to control and I think that there's a difference in leadership's view of the political utility for reform objectives of civil society activity in this space right so there's we had a very lively internal debate about motives of why I don't ascribe the kind of leash that under the dome got exclusively to the new MEP minister I think there is zero chance they would have gotten that kind of NDRC and SOE access and have gotten that far through the sensors without higher level support and we had a nice office pool going on weather and no none of us none of us can know but the kind of competing theories were that you had a a reform oriented faction within the government that wanted to leverage civil society pressure to achieve broader environmental objectives which is super provocative if that's true I mean just think about how different that is right like really employing public sentiment in a factional battle the other was that government what what's striking to me about under the dome is the amount of focus put on the disproportionate focus put on the oil and gas companies as a source of air pollution disproportionate to their role right and so the competing theory the like more cynical theory is that if you see this truck hurling down the tracks that you have public outrage over air trying to steer that to an SOE that you may be also have interest in rooting out and reforming for other reasons so that was that was the kind of more you know a cloak and dagger explanation but I think either of those if they're correct are really remarkable statements about the that either civil society activity in this space has too far out of the bag to put back in and I think like censoring under the dome once it had reached like epic status does not change that to me does not change that that reading or that you have factions that are are really trying to employ civil society pressure in a new way I'm not a political economist or political scientists and so I mean this I think this would be like a super fascinating grad student project for for the next year so I think that's a good glass half full interpretation of the treatment of under the dome and and maybe that's the way it is with sort of civil society development in China in general is it civil society or civil society with Chinese characteristics meaning no civil society when you look as far as we had we've had I've been leading a project on China and global governance and some of the research looking at the role of environmental NGOs and climate change showed that in looking at the way Chinese environment NGOs participate in discussing climate change is relatively different from how they act abroad they do a lot of research provide a lot of information they do very little advocacy especially public advocacy so when you go to Copenhagen or other places when you go to parrot once when you guys go to Paris I'm not going to get to go to Paris but when you guys get to go there may be some Chinese environment NGOs there but they are going to be more like government organized NGOs and it would be unlikely that they will be putting pressure on the participants to that to that meeting so I still don't I so I think maybe at the at the margins there's some utilization or manipulation of these groups but the overall situation for them is is still one that that's disadvantageous for them where it's their status is based on sort of the policy preference as opposed to sort of fundamental rule of law environment that makes them feel stable green GDP you know I don't know enough about that debate to say whether but I think you pointed to the right is it about a stock or flow problem and does that existing infrastructure how much that penalize you when calculating the what your overall performances I imagine that that's if they want to go that way that's a product of negotiations and since it's a dollar figure in China or rem in beef figure those are type of negotiations where where they're quite often willing to split the difference if they wanted want to do that and I encourage them because any movement in that direction in in measuring incentives if you can come up with a figure is better than what they've been doing in terms of transparency it's one of the mechanisms I think that could be help that is helpful transparency in terms of toward the producers that we and we've been focusing on the producers primarily today has been about the role of the party in when they didn't have enough transparency to go into the firm carry out these investigations lift up the hood do what they they need to to just to determine what's going on that's something which can't last forever so it has to be supplemented by information that these companies most of which are listed these these large energy companies put in their reports when they they're you know stock they're on the stock market so they're supposed to put up information about their investments and the returns etc it also needs media NGOs also need to be able to have the ability to to report and write about these companies without penalty but I think also part of the transparency question is also from the perspective of the users transparency there's very interesting experiment done I believe it was in Sacramento a while ago I came from Indiana University in Eleanor Ostrom did a ton of research on this area when I was there and one of the things that that she and her team did is they they looked at energy bills like if you got an energy bill and it showed how much energy usage if it just showed what you did and how much you did over how much energy usage increased over the previous month people like no big deal but if you said my neighbor in 3B used 10% less than me then that would change behavior usage behavior people would turn up people would turn off their AC or open the windows or things like that so when when when you can have transparency that employs reputational effects relative to those in your community it actually has a very significant effect so I think there needs to be transparency not just on the producers but on the users as well just in the interest of debate one small rejoinder to Scott so I think that there's two things I think the appropriate metric is not how does China's civil society compared to an advanced democracy civil society the metric is how does Chinese civil society today compared to where it was five years ago and specifically how does treatment of environmental NGOs differ from treatment of other civil society groups and does that tell us anything and I'd also when I talk about civil society I'm thinking much more broadly than and there's special concerns around organized NGO activity political concerns but just as an example so if you compare the treatment Greenpeace India is getting from Greenpeace China Greenpeace India is now banned from operation in the country because there was a national security advisory board report that that suggested that Greenpeace was advocating for the closure of coal plants that were going to shrink Indian economic growth Greenpeace China it was the China rep for Greenpeace was publicly skeptical critical of the joint U.S. China announcement in the press right after doing the same thing that Greenpeace U.S. does which is saying you should go farther this isn't enough and in Greenpeace China continues to operate as an independent NGO advocating explicitly for the closure of coal plants doing name and shame on companies I mean that's like that's very different than what would been in 2006 when you weren't as a civil society NGO even allow it was only gongos right I mean this is just a very different world now and I think the difference in environmental tree members as others is is indicative off of the webcast sorry okay in China they write contracts for their or tariffs but essentially contracts for their thermal generators they get paid on a per megawatt hour of output and that price is intended to cover both the operational cost of the machine and return some capacity cost you know capital cost for the machine and the number that you get paid sixty dollars a megawatt hour or whatever it is is based on an expected number of hours of operation per year so that you can spread the capital cost across all those megawatt hours and you should be reasonably assured that your debt service coverage for the year will be covered forty five hundred hours a year something like that all the machines all the thermal generators have these kinds of contracts they're very good at making sure that you operate and become as efficient as possible that's those incentives are terrific and what China has done to improve the efficiency of its electric sector the the thermal operations of its electric sector over the last thirty years is remarkable no other country in the world has done what China has done in the last thirty years however those contracts also create some perverse incentives one of which is that the system operator doesn't care which machine it turns on at any one time it only cares if all the machines get their hours of operation per year so Trevor he's a six cent or sixty dollar machine and I'm a fifty dollar machine Trevor's operational costs are twenty dollars and mine are thirty dollars he should operate more than I do simple straight efficiency economic efficiency that's not what happens in China we both operate the same amount and there's no choice being made based on the economic characteristics of our machines a system that dispatch that's what it's called dispatch the machines according to their variable costs would have an immediate reduction in total cost for the sector we've just we're just about to publish a report on this that we've done with a professor from the North China Electric Power University and it would have an immediate effect on emissions because of course the more efficient generators are the less emitting generators would also have another effect now this you'd have to we have to rewrite the contracts and that's a longer story but there are ways to do this that will not harm the financial integrity of the incumbent generators but yet allow them to operate more or less according to their operational costs if you do that suddenly the zero operational cost machines operate first and you let them operate okay we want all the renewables we can get will take all the low cost nukes we can get will take all the hydro we can get and then the thermal generators operate later that happens the financial incentives are better aligned with the longer term economic and environmental obligations now there are other things that have to happen but that's foundational thank you I do have one last question I'm actually surprised that no one in the audience has asked this question so my question is just quickly I wanted to get the panel thought on this US China climate talks I'm grateful that I sort of Trevor also mentioned this to what extent do you think that this you know bilateral US China climate talks actually help generate material change in how China decovernizes its power sector is it more about sort of a foreign policy PR or foreign relations PR or does it actually support those within China that do want to push climate goal I mean does it matter more to them I mean does it matter more to us than to them so I think what is Xi Jinping has a really crowded agenda it's got a lot of things he's trying to do they're all going to be really hard politically whether it's financial sector reform SOE reform anti-corruption investigations he's going to be goring a lot of boxes and so to me what's most significant from a domestic Chinese policy standpoint Scott talked about how Xi Jinping has kind of expanded the bounds of what the premier the president traditionally controls and economic policy and so climate change is something that should be a leak a chong issue like it's a it's a premier issue right this is not president level issue so him owning it and making it a pillar of the bilateral relationship with the US and core to his kind of view of what a new model of great power relations I think will unlock a level of domestic policy action because everybody's kind of interpreting what's the signal from the top what are the priorities right and it's a clear statement of priority from one of the most powerful Chinese presidents we've had in a long time that I think will have have significant impacts as the ministry start battling out competing policy priorities there is there are a lot of challenges about before the Chinese policy makers I'm glad that we're actually wrapping this you know up on a very positive note that you know we seem to have a very you know leader you know leader that wants to you know keep addressing these issues in the president Xi Jinping and so anyways well I would it would be a remiss if I do not acknowledge how much Michelle Melton one of my colleagues has put in to come up with this fantastic panel so if you could Michelle stand up quickly and please join me and last but not least please join me in thanking this excellent panel for their thoughts and also some of the thought provoking issue comments as well