An Inevitable Choice

The strategic importance of a circular economy in China, but the nation's path towards a sustainable system is strewn with challenges.

by Lifan Li |
06 December 2018
12 min read
by Lifan Li |
06 December 2018
12 min read

He is Associate Researcher at the Shanghai Academy of Social Sciences and Secretary General of the Shanghai Center for Organization and Cooperation. Lifan Li was recently appointed as a member of the team of energy experts of the China Task Force of the Italian Ministry of Economic Development.

On June 22, 2005, Xi Jinping, then a leader of the Zhejiang Provincial Party Committee, stated that it is necessary to understand the strategic significance of developing a circular economy. He pointed out that the development of a circular economy is an inevitable choice for transforming the growth model, achieving sustainable development and is a key tool to meet the challenges of economic globalization and enhance international competitiveness. He proposed that China should develop renewable resource industries, strengthen resource recycling, adhere to scientific, technological and institutional innovation, improve the development level of a circular economy and promote the construction of a resource-saving and environment-friendly society.

Circular economy is the fundamental goal of a country’s sustainable development. The green cycle and low-carbon transformation of the energy industry is the key to the sustainable development of China’s economy and society. The rapid growth of the economy requires the support of cheap energy as well as the reduction of social burdens. Therefore, the transformation of energy structure must not only emphasize green but also economic benefits.

If China still needs to maintain an average annual economic growth rate of four to five percent over the next 30 years, the energy industry must be sufficient, safe, low-cost, and clean.

The impact of circular economy on China's development

As a major country in the production and processing of natural resources, China understands the serious consequences of disorderly resource extraction and excessive waste. In 2014, China produced 3.2 billion tons of industrial solid waste, of which only 2 billion tons were recycled or incinerated.

Meanwhile, China became the world’s largest waste disposal market: its imports of waste plastics and waste paper account for 70 percent and 37 percent of the global total respectively. However, the Chinese government began to abandon imports in early 2018. The Chinese government promotes the development of circular economy by setting goals, introducing fiscal measures and enacting laws. China is one of the few countries that have formulated circular economy strategies and laws, and the “Twelfth Five-Year Plan” and “Thirteenth Five-Year Plan” have placed the concept of circular economy in a prominent position.

In addition, China is vigorously promoting the construction of the “Belt and Road.” How circular economy fits with China’s current international priority development strategy that includes the”Belt and Road Initiative” is an important issue. The long-term success of the “Belt and Road” initiative depends on whether China can share its vision and financing projects with its partners. One way to promote such cooperation may be to focus more on the development of a circular economy, a focus that will attract cooperative attitudes from economies like the E.U., ones that view the circular economy as a major priority.

Obstacles to the Dragon's energy transition

1 | Energy shortage and unreasonable structure. In 2009, China’s total primary energy consumption exceeded three billion tons of standard coal, breaking the illusion of “doubling the energy by doubling the GDP in 2020 compared with 2000” at the beginning of this century; China’s 2017 annual import volume of coal was 41.957 million tons, an increase of 10.1 percent compared with 2016. In 2010, China’s primary energy consumption reached 3.25 billion tons of standard coal, as it surpassed the U.S. to become the world’s leading consumer.  Despite this, China’s per capita energy consumption is still lower than the world average.

China is in the acceleration period of industrialization, and the contradiction between energy supply and demand is increasingly sharp. According to the current coal-led energy structure, China will face an energy gap of at least one billion tons of standard coal in 2020.

2 | China’s energy market reform has not yet been completed, and the market mechanism has not yet been established. Taking the electricity market as an example, China has not yet established an independent dispatching mechanism; the market concentration in the provinces is high, and the barriers between provinces are strict and serious. In the oil sector, the upstream crude oil import channels have not been fully liberalized, the government’s price control has long been ineffective, the retail market is highly oligopolistic, and State-Owned Enterprises (SOE) have sufficient space to exercise market power. In the field of natural gas, the competitive system is not in place, the problems caused by the dual price system are prominent, and the double-headed monopoly of urban gas is a serious problem.

3 | Environmental pollution has been caused by energy problems. China’s coal-based energy production and consumption structure has seriously damaged the ecological environment. According to relevant research reports, China’s air pollution is a soot-type pollution, 85 percent of SO2, NOx, and CO2 emissions, and 70 percent of soot are derived from coal. China’s 63.5 percent air environment is moderately or seriously polluted. The proportion of acid rain in southern cities accounts for 61.8 percent, and the national acid rain area accounts for a third of the country’s land area. According to the calculation of the State Environmental Protection Administration, the upper limit of China’s environmental capacity is as follows: SO2 is 16.2 million tons, and nitrogen oxides are 18.8 million tons. If no effective measures are taken, by 2020, China’s SO2 and nitrogen oxide emissions will reach 40 million tons and 35 million tons respectively, greatly exceeding China’s environmental capacity.

4 | China’s energy policy system is not coordinated, and there is a lack of consistency in environmental protection policies. The anti-monopoly mechanism is still weak, the regulatory methods such as incentive supervision, share supervision, and supervision has not yet been established and the government departments have little ability to monitor and identify market forces.

At the level of natural monopoly regulation, power grid supervision has made progress, but the supervision tools are single, investment supervision is absent and the monopoly supervision of urban gas companies’ pipe network is seriously underdeveloped. In terms of industrial policies, the government is still using compulsory means to distort the market, affecting the role of market pricing mechanisms and reducing the scale of market transactions. In terms of social policy, the issue of universal service financing will gradually emerge after the grid reform. The benefits of cross-subsidization are regressive, the efficiency loss is serious, and energy subsidies are obtained by high-income groups.

In the field of environmental and climate policy, China has adopted a market-distorting approach: the setting of environmental tax deviates from the principle of optimal taxation. The carbon market mechanism has not been fully established, and the price of pilot carbon trading is too low. More seriously, various energy policies are separated from each other, lacking synergies and there are situations in which policy effects offset each other.

5 | Energy technology innovation investment is not high and the ability in this area is not strong. It is generally believed that technological innovation depends primarily on the input of R&D.

In terms of indicators related to scientific and technological activities, the energy industry lags behind the national average. Energy company R&D funds accounted for only 0.25 percent of the main business income. Almost the lowest of all industries, it is far below the national average (0.71 percent). This shows that China’s energy industry’s technological innovation capability is not strong, and innovation investment is not high.

How does the energy industry transformation serve the green cycle and low carbon development?

1 | First, improve the efficiency of primary energy, and control pollution at the source. According to the forecast of energy demand and energy supply, coal will continue to be the main force in China’s energy structure now and in the future (until 2050 or even later), and the absolute annual consumption of coal will continue to increase in the next two or three decades. The proportion in total energy should be gradually reduced. In 2010, China produced a total of 3.24 billion tons of raw coal, accounting for 68 percent of China’s total primary energy consumption. Low-quality coal with high ash content, high sulfur content and high water content accounts for 40 percent of China’s total coal resources, resulting in low overall coal use efficiency. The raw coal washing and selection process can control coal pollution at the source and reduce the desulfurization of power generation enterprises. And with the burden of dust removal, it is also possible to separate a large amount of coal gangue, which greatly reduces transportation costs.

2 | Second, improve the recycling and utilization of energy waste. According to statistical calculations, if the recovery rate and utilization efficiency of coal mines are increased by 10 percent, the amount of power generated by the extra coal resources will be able to exceed the power of dozens of Three Gorges and hundreds of times more than the currently operating nuclear power plants.

Permitting the use of “green” coal is one of the important strategies for China’s energy structure green cycle and low carbon transformation.

3 | Third, improve the processing and conversion of biomass energy, for example, coal gangue power generation and urban waste power generation.

From the perspective of engineering planning, China is committed to the development of advanced biomass thermal power, which is called alcohol and electricity co-production, or alcohol electrification.

Biogas enters the circular economy system. Biogas is green and renewable gas that has been purified. According to the National Thirteen Five-Year Plan for Rural Biogas Development, China’s national biogas production potential reached 122.7 billion cubic meters (bcm), while the production capacity in 2015 was 15.8 bcm, with a utilization rate of only 12.9 percent. In the future, the new investment in bio-natural gas will reach 120 billion RMB by 2020.


Circular economy is the only way to break through the bottleneck of the development of our country’s energy industry. It should be said that the ability of a country to control and use energy and resources in today’s society also represents, to a certain extent, the space in which the country develops in the economy and society.

You may have noticed when the “Kyoto Protocol” “Bali Agreement” and “Paris COP21” came out that the world’s largest energy consumer is actually the largest carbon emitter, and the U.S. has no intention to implement these agreements. After Donald Trump took office, the U.S. abandoned its attitude toward climate change. In contrast, the E.U. and China have taken over the banner of energy and climate and explicitly proposed energy and climate policies. China’s energy resource endowment is similar to that of the E.U., and its energy policy experience is worth learning. As a result, the energy market price will be raised, and the market space will be created for the development of renewable energy. Then, the market will choose the renewable energy varieties that meet the needs of China’s energy market. The competitive renewable energy industry relies on solid market development.

Therefore, under the strategy of circular economy, China will accelerate the transformation of economic development mode, promote energy system mechanism innovation and energy technology innovation, accelerate the transformation of energy production and utilization methods, improve energy conversion and utilization efficiency, control energy consumption and build modern energy. The industrial system guarantees the sustainable development of the economy and society.