Monday, November 29, 2010

Diesel Famine in China

         I recently read some news about carbon emission reduction practices in China that reminded me of perverse incentive. To reflect something I read in Policy Paradox (by Deborah Stone), I’d like to discuss about this case in details.
         The Chinese central government – the State Council issued an Executive Order (2010-12) in May 2010, which urges the provincial and local governments to achieve the 20% carbon emission reduction goal (based on carbon emission per dollar of GDP) in the Eleventh Five-year Plan. The Eleventh Five-year plan ends in 2010, but the overall carbon emission reduction up to the date of order issuance is only 13.14%. To have a stake in international climate negotiations, central government stresses that the achievement of the carbon emission reduction goal is directly related to local government officials’ performance evaluation. Mayors who could not meet the target face the risk of downgrading.
         Because of this Executive Order, many local government officials, in order to keep their positions, started to cut electricity supply to manufacturing factories. With no other alternative, the factory owners had to buy diesel engines to generate electricity by themselves. The demand of diesel shot up in the last several months, which, together with some supply shortage and speculative storage, created a famine of diesel in the 4th quarter of 2010 over the whole country. In some cities, the buses stopped their services. Hundreds of small private owned gas stations closed down (the majority gas stations in China are chain stores of the mega state own companies, like CNPC, CPCC, and CNOOC. they were not impacted). Some truck drivers even take the diesel from oil tank with them when they get off from work to prevent it from being stolen.
         Ironically, diesel is no cleaner than the electricity generated by coal power plants, in terms of carbon dioxide emission. Small scale diesel generators with no pollution control measures cause even more serious air pollution problem locally. The Executive Order, which intended to expedite emission reduction pace, leads to an opposite outcome – much worse than carbon dioxide emission itself. It is imaginable that if there is no central government intervention, after the check-up of the Eleventh Five-year Plan, the factories (if they could survive from this cut-off) would get their electricity from local governments again and nothing would be changed in terms of energy efficiency.
         Luckily, the central government has realized the problems. On 22 Nov 2010, the National Development and Reform Commission (NDRC, the most powerful government organization in China, representing central government) hold a conference press, stating that the diesel electricity generation will not be excluded in carbon auditing. And they will correct the mistakes made by the local government officials. The NDRC also announced that the emission reduction Executive Order is not the main reason that caused the diesel famine. Supply and demand imbalance is the biggest reason. Some state owned companies are punished for price speculation, which to me is merely a face-saving measure.
         I agree with Stone that no policy is perfect and perverse incentive is inevitable. However, as what she said, “We always need to think whether perverse incentives will be caused in any rule making process.” The method she suggested to mitigate perverse incentive is to stand in the target’s shoes and ask,” how does this rule harm me, and how can I possibly get around it?” In this case of diesel famine, the central government policy makers should stand in the shoes of local government officials, when they made the Executive Order; while local officials should stand in the shoes of factory owners, when they made the decision to cut off power.

(My first post is not about water... But this is really an interesting topic to blog on...:)