China's Energy Consumption and

Opportunities for U.S.-China Cooperation to

Address the Effects of China's Energy Use

**Statement by**

**Karen A. Harbert**

**Assistant Secretary**

**Office of Policy and International Affairs**

**United States Department of Energy**

Before

The US-China Economic and Security Review Commission

June 14, 2007

Madame Chairwoman, Mr. Vice Chairman and members of the Commission, I am
pleased to appear before you today to provide the update on the
Administration's engagement with China since our last testimony in
February 2007.

**CHINA'S ENERGY OUTLOOK**

China continues to be the world's second largest energy consumer after
the United States, and its impact on the global energy economy will
likely remain strong in the coming decades.

According to the International Energy Outlook 2007, released in May,
China consumed 40 percent less energy than the United States in 2004,
but is expected to consume 11 percent more by 2030. Of China's energy
use in 2030, 65 percent is projected to be provided by coal, 22 percent
by oil, 6 percent by natural gas, 5 percent by renewables, and 2 percent
by nuclear power.

In China, as well as in the United States, oil use is dominated by the
transportation sector. In 2030, 47 percent of China's oil use will be
for transport and 42 percent for industry.

Coal will remain the dominant fuel in China through 2030, with its use
concentrated in the industrial and electric power sectors. Consequently,
China will remain the world's largest producer and consumer of coal. In
the electric power sector, China's use of coal is projected to grow at
an average rate of 3.5 percent per year between 2004 and 2030.

Higher fossil fuel prices, energy security concerns, improved reactor
designs, and environmental considerations are expected to improve the
prospects for new nuclear power capacity in many parts of the world. In
China, electricity generation from nuclear power is projected to grow at
an average annual rate of 7.7 percent from 2004 to 2030. Of the 58
gigawatts of additional installed nuclear generating capacity projected
in developing economies of Asia, 36 gigawatts is projected for China.

With heavy reliance on fossil fuel, China will continue to have a major
impact on the global environment. By 2030, energy-related carbon dioxide
emissions from China are projected to account for 26 percent of the
world total. China will overtake the U.S. as the world's largest CO2
emitter **before** 2010. China's carbon dioxide emissions are projected
to exceed U.S. emissions by 4.6 percent in 2010 and by 41.4 percent in
2030. Coal-related emissions in particular are projected to grow by an
average of 3.3 percent annually. By 2030, China is projected to account
for 48 percent of the total coal-related emissions worldwide.

**US ENGAGEMENT WITH CHINA IN ENERGY**

DOE continues to engage China in energy policy, energy security, fossil
energy, energy efficiency, renewable energy, and nuclear energy and
nonproliferation. The primary mechanisms of engagement are the United
States-China Energy Policy Dialogue (EPD), the United States-China Oil
and Gas Industry Forum, the Protocol for Cooperation in the field of
Fossil Energy Technology Development and Utilization, the Peaceful Uses
of Nuclear Technologies Agreement (PUNT), and the United States-China
Strategic Economic Dialogue (SED). Since the Commission held its
hearings in February 2007, we have carried out cooperative activities
under several of these mechanisms, most notably the SED and PUNT.

[The second U.S.-China Strategic Economic Dialogue (SED)]{.underline}
met in Washington, DC, on May 22-23, 2007. Energy and the environment
continue to be important topics under the SED. Secretary of Energy
Samuel Bodman led discussions on the urgency for investment in the
energy sector, the importance of a diversified energy mix, and the power
of scientific and technological innovation in addressing climate change
issues. In the energy and environment session, chaired by Vice Premier
Wu Yi, Secretary Bodman, together with EPA Administrator Stephen
Johnson, Council on Environmental Quality Chairman James Connaughton,
and Deputy Secretary of State John Negroponte had frank discussions on
energy and environment issues with Chairman Ma from the National
Development and Reform Commission (NDRC) and Minister Zhou from the
State Environmental Protection Agency.

In the area of energy, the United States and China agreed to work
together in a pragmatic manner to actively participate in the World
Trade Organization multilateral negotiations on trade and environment,
and engage in discussions on the reduction or, as appropriate,
elimination of tariff and non-tariff barriers to environmental goods and
services. Also, the United States and China agreed to strengthen
cooperation in advancing clean coal technology, aiming to develop up to
15 large-scale coal-mine methane capture projects in China, providing
policy incentives to abolish cost barriers to full commercialization of
advanced coal technologies, and advancing the research and development
of carbon capture and storage technologies. Moreover, both countries
signed a Memorandum of Cooperation on Nuclear Safety which paved the way
for the Westinghouse AP1000 Nuclear Reactor project in China.

DOE and the NDRC also consulted on next steps to initiate the industrial
energy efficiency assessments agreed to during the first SED meeting in
December 2006.

Another major cooperative engagement was carried out under the Agreement
on Cooperation Concerning [Peaceful Uses of Nuclear
Technology]{.underline} (PUNT). The PUNT Agreement was signed in 1998 by
DOE and the State Development Planning Commission of China (now the
National Development and Reform Commission) and provides a framework for
long-term cooperation. The PUNT Agreement aims to advance a
non-proliferation agenda with China that includes control of exports of
nuclear materials, equipment and technologies; nuclear material control
and accounting; physical protection of nuclear materials and nuclear
facilities; nuclear reactor power plant safety, and nuclear safeguards
technology development. Since 2002, the United States and China have had
four Joint Coordinating Committee (JCC) meetings. The fourth JCC met in
Washington, on May 10-11, 2007. The two sides established a new working
group that focuses on nuclear emergency management; a new sub-group on
radiological source security in the nuclear security, emergency
management and safety working group; and the inclusion of export control
technical cooperation to jointly develop Chinese language nuclear
commodity guides to aid in China's export licensing and enforcement. The
PUNT JCC meetings continue to enhance the mutual cooperation and
understanding on nuclear nonproliferation assurance.

The above-mentioned mechanisms have complemented the Administration's
on-going efforts to advance key energy security initiatives with China.
These relate to energy efficiency, carbon sequestration, virtually
emissions-free fossil-fueled power production, second-generation
biofuels from non-food feedstocks, nuclear power, and strategic oil
stockpiles. I will offer a brief description of each of these
initiatives.

**Fossil Energy**

The Department has intensified its efforts to engage China in the
FutureGen Initiative, which is a multilateral project to build a
near-zero atmospheric emissions coal-fired power plant. In December
2006, China formally expressed its willingness to join the U.S. and
other international partners on the FutureGen Government Steering
Committee. The Department is currently leading negotiations among
interested countries to conclude a multilateral international agreement
so that the Government Steering Committee may launch a series of
collaborative activities towards the FutureGen goal. On April 30-May 2,
2007, policy and technical experts from DOE met with counterparts from
China, India, Japan and South Korea to review the proposed text of the
international agreement. The countries plan to meet again in July to
carry out further negotiations on the agreement. The final site
selection will likely occur towards the end of FY 2007 or the beginning
of FY 2008.

**Energy Efficiency and Renewable Energy**

As a means of reducing its strong demand for imported oil, the use of
biofuels and, particularly, the production of ethanol from cellulosic
feedstock have been of a particular interest to China, which is
sensitive to balancing energy security and food security. In recent
months, China's NDRC and Ministry of Science and Technology (MOST) have
been strongly interested in exploring R&D cooperation with the United
States in the area of biofuels, especially the production of ethanol
from cellulosic feedstock.

Following the successful renewal of the Energy Efficiency and Renewable
Energy Agreement in December 2006, DOE has been discussing with the NDRC
potential cooperation in the area of biofuels research and development.
Subsequently, the Secretary invited policy and technical experts from
the NDRC to visit the National Renewable Energy Laboratory (NREL), in
Golden, CO. On April 25, 2007, DOE, NREL and NDRC officials held
in-depth discussions at NREL on the future of bio-energy, and explored
possible cooperation on developing a biofuels roadmap for China, based
on the approach that was used for developing the U.S. roadmap.
Cooperation in biofuels road-mapping for China could potentially include
the following major activities: roadmap design, coordination, and
integrated analysis; resource assessment; technology and systems
assessment; life cycle and sustainability assessment; market and policy
assessment; and commercial partnerships.

Other renewable energies including wind, solar, and biomass also hold
promise. U.S. firms with technologies in these areas stand to benefit
from broader engagement with China. The elimination of tariffs and
non-tariff barriers for clean energy technologies is a key element to
expanding China's use of renewable energy sources.

The Department also supported the construction of Agenda 21 Building.
Completed in 2004 through a cooperative effort between the Department
and China's Ministry of Science and Technology, this green building has
obtained a Leadership in Energy and Environmental Design Gold rating and
demonstrated the potential contribution to energy conservation these
technologies could make to our countries.

Nuclear Energy

China continues to pursue the development of its civilian nuclear energy
program. The current plan calls for adding 40 GWe by 2020. The U.S.
Government continues to advocate U.S. industry's efforts to market its
nuclear power equipment and services in China. Westinghouse is nearing
completion of a commercial contract to build four AP1000 nuclear
reactors in China. This could potentially create new jobs in the U.S.
and improve the trade balance between the U.S. and China. The
Department, along with the State Department, has worked closely with
U.S. industry to ensure that they meet the legal and regulatory
requirements for this important contract. We encourage China's efforts
to responsibly increase the share of clean energy sources, such as
nuclear energy, in its energy mix.

Additionally, DOE continues to promote the Global Nuclear Energy
Partnership (GNEP) initiative. The goal of GNEP is the expansion of
nuclear energy for peaceful purposes worldwide in a manner that supports
reliable electricity production without air pollution or greenhouse
gases, while reducing the risk of nuclear proliferation. China's
participation in GNEP demonstrates its commitment to pursuing the
development of civilian nuclear program in a technologically safe and
economically viable manner. On May 21, 2007, Secretary Bodman hosted the
GNEP Ministerial meeting in Washington, DC, and met with representatives
from China, France, Japan and Russia. The United Kingdom and the
International Atomic Energy Agency also participated as observers to the
ministerial. China was represented by Minister Ma Kai, Chairman of the
National Development and Reform Commission. The representatives
discussed GNEP's path forward toward increasing the use of safe,
reliable and affordable nuclear power worldwide in a more
proliferation-resistant manner. The topics discussed included
infrastructure development needs for countries considering nuclear
power; development of advanced fuel cycle and safeguards technology;
establishment of reliable fuel services; spent fuel management; and
building the partnership and next steps to pursue this major global
initiative. While China's State Council, which is equivalent to our
Cabinet, has not yet determined whether or not to participate in GNEP,
DOE's Chinese counterparts have been supportive of the GNEP initiative.

**Energy Security and Strategic Oil Stockpiles**

In 2004, China identified four sites for its national petroleum reserves
tanks and began building its strategic petroleum reserve (SPR)---in
three phases, to be completed by 2020. The first phase, to be completed
by 2008, will hold 100 million barrels- equivalent to 25 days of China's
net oil imports. The second phase is planned to add 200 million barrels,
covering 42 days of net oil imports. The completion of the third phase
may increase the net storage capacity to 500 million barrels after 2010.
The high oil prices of recent years prompted China to delay oil
purchases to fill its strategic reserve until summer 2006. Only one of
the four sites in Phase I, consisting of 52 storage tanks- a total
capacity of 33 million barrels- has been filled. In addition to the
national SPR, the government will reportedly require major state-owned
oil companies to hold government-mandated oil stocks.

According to the Chinese official publications, the Chinese SPR will be
managed by the newly established State Oil Stockpiling Office and the
State Oil Stockpiling Center under the NDRC. The nature and structure of
these organizations remain unclear. Also, several reports indicate that
nearly half of the oil at the 52-tank SPR site has been leased to
Sinopec. China does not have legislation to govern its SPR. The
government has indicated that the SPR regulations will be part of a
comprehensive Energy Law, which is being drafted. China plans to
complete the draft law by the end of 2007.

At a Five-Country Energy Ministers Meeting in Beijing, in December 2006,
the Chinese leadership expressed its intention to use strategic stocks
only during physical supply disruptions, not as a market management
tool. China has also hinted at its intent to build reserves to equal 90
days of imports. As a consequence of these indications, we have been
urging China to make a public commitment to international coordination
of a SPR drawdown in the case of a severe supply disruption.

In December 2006, the Secretary invited NDRC Chairman Ma Kai to visit
the U.S.'s SPR facility before the SED II. In response, an NDRC
delegation visited the U.S. SPR facility in Bryan Mound, TX, on April
27. The Chinese delegation, led by Energy Bureau Deputy Director-General
Xu Yongsheng, included the head of the State Oil Stockpiling Office and
officials from China National Petroleum Corporation and Sinopec---two
state-owned oil/gas companies that have been put in charge of
constructing China's SPR sites. DOE provided briefings on operational
principles as well as technical issues associated with our SPR.

The Asia-Pacific Economic Cooperation (APEC) has developed a set of best
practices for oil stockpiling, and the U.S. hosted an APEC workshop on
the implementation of these best practices in 2005, which China
attended. At the second DOE-NDRC China Energy Policy Dialogue in
September 2006, I strongly urged China's energy policymakers, including
NDRC Vice Chairman Chen Deming, to use its SPR in accordance with
International Energy Agency principles. In January 2007, DOE sponsored
the International Petroleum Stockpiling Symposium in New Orleans,
drawing over 100 participants, including 50 from overseas. At the
conference, an official from the NDRC's Energy Bureau made a
presentation on the status of the Chinese program. His five-person
delegation asked numerous questions on the management of the U.S. SPR
and the use of contractors. DOE proactively shared information on our
facility management and oil acquisition approach, with a strong emphasis
on the need for sensitivity to the market. Also, in October 2006, the
IEA conducted a workshop on strategic reserves in Beijing, with active
Chinese participation.

In our bilateral discussions, we have sought to persuade China that
reliance on the deep and liquid international market for
petroleum---backed by robust strategic reserves as a hedge against
possible disruptions---provides the surest route to energy security. We
have encouraged Chinese officials to forgo energy investments in
problematic countries, such as Iran.

**Climate Change**

While a party to the UN Framework Convention on Climate Change and its
Kyoto Protocol, China has no obligations under Kyoto to reduce
greenhouse gas emissions, and it has shown no interest in adopting
binding emissions targets. China's view is that industrialized
countries, which are responsible for most of historical greenhouse gas
emissions, should take the lead in reducing these emissions under the UN
Framework Convention on Climate Change principle of "common but
differentiated responsibilities." The priority for China remains
sustainable development. It also places a great deal of emphasis on
energy security, adaptation and technology cooperation and transfer.

In early June, China unveiled the National Climate Change Program, as
part of China\'s obligations under the United Nations Framework
Convention on Climate Change. Under the plan, China will use hydropower,
nuclear energy, and biomass fuels and gas to help cut 950 million metric
tons (CO2 equivalent) per year of greenhouse gas emissions by 2010.
Specifically, China expects development of hydropower resources to cut
the emissions by 500 million tons by 2010, nuclear energy development to
account for 50 million tons of reduction, biomass energy to help reduce
emissions by 30 million tons, and other renewable power generation
(solar, wind, geothermal, and tidal energy) to reduce emissions by 60
million tons. Additionally, China expects more efficient thermal
electricity production and transmission to reduce emissions by 110
million tons, and the re-use of coal-bed and coal-mine methane for
electric power generation to lower them by 200 million tons.

The Administration is encouraged by China's strong drive to diversify
the types of energy resources it uses. Also, China, like the United
States, recognizes the pivotal role science and technology can play in
addressing climate change concerns. Against this background, the
Administration is successfully carrying out strong outreach to China to
join such initiatives as the FutureGen project and the Global Nuclear
Energy Partnership that would have a significant beneficial impact on
the global energy economy and environment. We also encourage China's
active participation in such existing fora as the Asia-Pacific
Partnership on Clean Development and Climate, the Carbon Sequestration
Leadership Forum, the Generation IV International Forum, the
Methane-to-Markets initiative, and the International Partnership on
Hydrogen Economy.

**Conclusion**

As two major energy consumers and economies in the world, the United
States and China have been cooperating to address energy security and
climate change issues, through both bilateral and multilateral
mechanisms. Over the course of recent years, the two countries have come
to recognize how interdependent our economic prosperities and energy
security have become. We are committed to continue engaging China
actively on a wide range of energy issues.

Thank you and I will be happy to take your questions.