China and Global Energy Security: Inevitable Conflict? (3)

(This is the third of a series of articles on China's impact on the global energy market. )

It has been a popular belief that energy is one of the “commanding heights” of the economy – an area of particular national interest, where government control and policy can have an unusually beneficial influence on stability and growth. The idea is that there are “Commanding Heights” in the economy and that the government is capable of commanding them.

I don’t believe in a ‘commanding heights’ vision of the economy – but that question aside, we should ask questions about the capacity of government agencies to govern China’s dynamic energy industries. Government should improve its own expertise, so it does not rely so much on companies for regulatory expertise. Then, government can be a competent and impartial market rule-maker, rather than depending on advice from companies on how to directly intervene in markets. Government officials will also find that the government can improve its “governing capability” through greater policy-making transparency and a system of policy-making checks and balances, as well as public debate during the policy making process. There have already been very significant changes in these areas in China. Regulations and ideas that survive these tests will generally be more fully developed, and will tend to avoid unintended consequences, compared to those that are formed by small groups in relative secrecy.

Many Chinese officials also hold that energy security means trying to create large, national champion energy firms. There are clearly benefits from having financially stable, technically competent firms with the scale to undertake large investments. But the desire to create strong energy companies should be balanced by an equally strong commitment to the interests of Chinese consumers.

This does not mean simply cheap energy prices – rather, it means encouraging competition among suppliers, and engaging in sustainable energy practices – including fuel mix diversification, sustainable industrial, urban construction, and transport policies, and energy prices that reflect the true social cost of using energy.

Here is some of my recommendations and some thoughts on implications for the evolving relationships among the EU, China, and the United States.

Energy and environmental issues are essential to the comprehensive security of all three sides here. Despite significant domestic resources, all three sides are most fundamentally major energy markets, not global energy suppliers. There are powerful common interests among us. As China rises, there will also be conflict and competition among us. This will be played out by actors or very senior levels – ministers, generals, and CEOs. But there is still a possibility that our most senior leaders can try to shape increasingly intense competition towards healthy areas. In energy, we can choose to focus our international competition on the race for commercial, industrial, and technological leadership of the next generation of energy technologies, and away from a belief that we must compete for control of old generation energy resources and their supply chains. This would be difficult to do, and would require significant domestic and international political trade-offs and leadership among all three players. It is not certain that the two most important players, the US and China, are capable of doing this. However, the benefits of such leadership and such choices would be very great indeed.