Low Carbon China - Innovation Beyond Efficiency

LOW-‐CARBON CHINA: INNOVATION BEYOND EFFICIENCY 1

English Translation

Low-‐Carbon China: Innovation beyond Efficiency ©2014 Anne Arquit Niederberger

1. Introduction I was asked to address the subject of industrial energy efficiency innovation and technology cooperation. However, this paper stresses the need to go beyond energy efficiency and focus on radical innovation to bring about systemic change – specifically business model innovation – if we are serious about green growth. Limiting the warming caused by anthropogenic greenhouse gas emissions with a probability of >50% to less than 2°C (compared with the period 1861–1880) will require cumulative CO2 emissions from all anthropogenic sources to stay below 820 GtC (3010 billion tons of CO2). Roughly two-‐thirds of this carbon budget (445 to 585 GtC) had already been emitted by 2011 (IPCC, 2013) and – at the rate of emissions recorded for 2012 (9.7 GtC/y) – the entire budget will have been used up within roughly 30 years. This simple calculation ignores several trends that could shorten this timeframe, including continued growth in emissions. Driving global emissions to zero on a 30-‐year timescale is a daunting task in itself, but it is not the only challenge we face. UN Secretary General Ban Ki-‐moon has said that “we all aspire to reach better living conditions. Yet, this will not be possible by following the current growth model. . . “ He went on to say that “we need a practical 21st Century development model that connects the dots between the key issues of our time”. And he gave some examples of those pressing issues (Figure 1). What he referred to as “connecting the dots” is about associating, and associating is at the heart of innovation. Because these societal challenges – from reducing poverty and inequality to limiting climate change and its impacts and ensuring human security in the broadest sense – are linked through common drivers and flows, there is an opportunity and a necessity to innovate the technologies, products, services, and institutions that can pave the way for improving the human condition in a balanced, comprehensive and sustainable fashion. Air conditioning might appear to be a reasonable

Figure 1. Key Issues of our Time


adaptation to a warmer world, for example, but conventional technologies can exacerbate the problem by requiring more electricity to be generated by combusting fossil fuels and are in any case out of reach for a significant share of the global population without access to power. Error! Reference source not found. aptly illustrates this complexity with another example: China has managed to reduce its energy and carbon intensity significantly over the past two decades. But total CO2 emissions nonetheless rose by 350% over the same period, as a result of successful poverty alleviation efforts and population growth. This means that – although “lower carbon” is clearly happening today – a truly “low-‐carbon” and sustainable economy will require (disruptive) innovation and solutions that do not yet exist. In the 12th Five-‐Year Plan for Economic and Social Development (2011 – 2015), China’s leadership explicitly highlighted the imperative to transform the economic and political system to deliver “higher quality” and “inclusive” economic growth that is balanced and sustainable. And the plan spells out key strategies and targets to achieve the transition. Of particular relevance to this paper is the emphasis given to innovation, including a specific target to generate 3.3 patents per 10,000 people and a commitment to invest in seven priority industries that are poised to make a contribution to green growth, while moving up the economic value chain: energy savings and environmental protection; new energy; clean energy vehicles; biotechnology; new materials; new IT; and high-‐end manufacturing. China also has a recent history of establishing its own and hosting global corporate R&D centers. But will China manage to realize a sustainable green growth model? The answer will be of existential interest to us all.

2. Innovation Case Studies The need for radical new business models is illustrated with three specific examples (Error! Reference source not found.). The first is fertilizer production, which is responsible for 1.2% of global CO2 emissions. It is an energy and carbon-‐intensive process, with hydrocarbons serving as both feedstock and energy source. And chemical fertilizer is a major and uncertain cost factor for farmers, due to global market price volatility, as well as a major contributor to land and water degradation.

Figure 2. Percentage Change in Critical Indicators 1990 -‐ 2011


The second example is the provision of lighting services, which accounts for an even greater share of global CO2 emissions, namely 6%. Current business models offer bulbs as consumable and largely throw-‐away products. Consumers purchase lamps/luminaires from retailers and pay electric bills to keep the lights on. Power producers have a tough time keeping up with demand. Efficient lighting options that could cut household electricity consumption (especially LED) have a higher purchase price, discouraging their widespread adoption. The end-‐of-‐life treatment of scrap tires is the third case study. Tires have a similar calorific value to high-‐quality coal. Energy-‐intensive industries (e.g., cement) increasingly incinerate tires as a supplemental fuel to lower fuel costs and reduce CO2 emissions. In all three cases, business model innovation can deliver better results for people and the planet than an incremental approach that strives only to make existing processes more efficient and less carbon intensive. Fertilizer Production China is the largest consumer and producer of nitrogen (used to make nitrogenous fertilizers), accounting for roughly 40% of global production capacity. Emissions from the production and use of synthetic nitrogen fertilizer in China have been estimated at 400–840 MtCO2e in 2005, accounting for a staggering 8 to 16 % of China’s total energy-‐related CO2 emissions (Kahrl et al., 2010), with fertilizer production responsible for 250 MtCO2e of the total (180 MtCO2e due to embodied energy use and 70 MtCO2e from fertilizer synthesis). The fertilizer manufacturing status quo in China relies on anthracite coal as the predominant feedstock and emits roughly 9 tCO2 per ton of N fertilizer, including fertilizer synthesis and embodied energy use associated with the coal feedstock, but not mining or transportation emissions (Kahrl et al, 2010). But its global warming impact is not the only concern; synthetic fertilizer use can lead to poor economic and other ecological outcomes. Fertilizer costs have become one of the largest and most variable expenses of producing a crop, and directly affect profits. The average urea price in China, for example, was 15% lower at the end of June 2013 than the same time the previous year (Error! Reference source not found.).

Figure 3. Industrial Sector Case Studies


Figure 4. Status quo, Incremental and Transformational Approaches in Fertilizer Production

Source: Specific emissions derived from IFA (2009)

Although China is among the most expensive producers of nitrogen fertilizer, national policies to facilitate development of the chemical fertilizer industry, direct income subsidies to farmers and heavy taxes to limit exports have distorted markets and encouraged farmers with the means to purchase fertilizer to over-‐use it. This contributes to acid rain, water pollution and the increasing frequency of red tides. Such policies also discourage entrepreneurs from seeking better, more holistic approaches to transition to sustainable agricultural models that better maintain ecosystem health and farmer welfare. Instead, the incremental approach calls for large chemical companies to implement energy efficiency and fuel switching measures. Under such a scenario, emissions could be cut by roughly 25%, but there is not much room to go further, due to the continued use of fossil fuels as a feedstock, which accounts for over 70% of the total emissions from nitrogen fertilizer production in China. Modern plants are rapidly approaching the theoretical minimum energy consumption, making it difficult to get below 3.8 tCO2/tNH3 with coal as the feedstock (IFA, 2009). Only a transformational approach – inspired by the imperative of and opportunities to address multiple challenges simultaneously – can eliminate emissions altogether (Figure 4). SynGest is a US-‐based start-‐up company that has adopted a completely new business model, driven by thinking about the best way to use corn, while benefitting farmers. The process can use any source of untreated biomass, and its calorific value is irrelevant for

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Figure 5. Average Urea Price (China)

Source: China National Chemical Information Center


fertilizer production. This offers farmers the prospect of reducing or eliminating expenses for chemical fertilizers, as well as a new income stream (selling agricultural waste as a renewable raw material for organic fertilizer production), while eliminating the pollution caused by open burning of agricultural waste and even improving soil quality (the process produces a small amount of the soil conditioner biochar). The SynGest process yields an impressive slate of end products, including:

• Anhydrous ammonia fertilizer (0.1 ton per year for each acre of corn, plus a transportable fuel that is the perfect carrier of hydrogen);

• Food grade corn oil and high protein food for human consumption;

• Riboflavin rich dry stillage (animal feed);

• Butanol (drop-‐in fuel for internal combustion and diesel engines);

• Biochar. The SynGest technology can also address issues that have arisen in conjunction with growing and distilling corn-‐based ethanol, which uses immense amounts of water (contributing to river and aquifer depletion), energy (some scientists argue that more energy goes into making a gallon of ethanol than is contained in that gallon) and fertilizer production and use, adding to harmful runoff. As pointed out by Zhao Youshan, Director, Commercial Petroleum Flow Committee, China General Chamber of Commerce: “Livestock breeders in China are facing feed shortages as ethanol fuel makers – prompted by government subsidies of roughly 1,900 yuan ($279) per tonne of ethanol they produce – have rushed to buy corn.” SynGest’s syngas technology can make optimal use the whole ear of corn to produce the “3 Fs” (food, fertilizer and fuel) simultaneously. This eliminates the food vs. fuel dilemma and produces net carbon negative ammonia fertilizer. Lighting Services The second example of business model innovation is lighting (Figure 6). Until the advent of compact fluorescent lamp (CFL) technology, the status quo had been incandescent, throw-‐away technology with a luminous efficacy of roughly 15 lumen/W. CFLs are four times more efficient than incandescent lamps, and quality bulbs can operate as long as 15,000 hours, but the introduction of the technology did not lead to any major upheaval in the lighting market. In fact, consumer reaction to early CFL technology was often negative, due to the poor quality and performance of products, as well as concerns about the mercury. The resulting market spoilage effect, combined with the current much lower price of CFLs, makes it hard for solid-‐state lighting technology – with its longer lifetime and higher retail price – to penetrate the market.


Figure 6. Status quo, Incremental and Transformational Approaches to Lighting Services

Source luminous efficacy: http://www.designingwithleds.com/ledfluorescentincandescent-‐efficacy-‐table/ CFLs brought an incremental improvement in efficiency, but not a fundamental market transformation. Since 2008, a growing number of countries have begun to adopt regulations to phase-‐out inefficient incandescent techology, including China, where a ban on the import and sale of all incandescent lamps above 100W came into force on 1 October 2012 (further restrictions on smaller lamp sizes will come into force later). These policies are driving a profound transition in the lighting market, with rapid advances in solid-‐state lighting technology (Climate Group, 2012; McKinsey, 2012; World Bank, in press). The fact that LEDs are long-‐lived and contollable, makes them well suited as an integral component of electrified building systems, rather than as a throw-‐away consumer good. We have already seen this trend in the off-‐grid segment, as solar home system providers offer super-‐efficient LED lights as part of the package. For energy service companies (ESCOs), LED lighting has already become a standard component when working with government and commercial customers, including LED streetlighting, indoor lighting and controls. Grid electricity suppliers have sometimes resorted to large-‐scale programs to distribute CFLs as a short-‐term fix to severe supply shortages, but LED technology presents an opportuntity for them to be more proactive (World Bank, in press). Africa’s largest utility, Eskom, began distributing LED downlights free of charge under its Switch and Save Residential Mass Rollout and has received authorization to invest ZAR 834 million in residential LED programs in the 2013/14 – 2017/18 period. Even without funding earmarked for demand-‐side management programs, utilities in developing countries could expand their business model by directly installing LEDs with new electricity connections and making it easy for their customers to replace inefficient lighting. It could be particularly attractive for utilities in Africa to consider. According to a 2013 analysis by the International Monetary Fund, effective power tariffs are set 30% below the historical average cost of supplying electricity in sub-‐Saharan Africa on average

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(excluding South Africa). In addition, technical line losses average 25% and the average collection rate was only 85%, with as many as 60% of poor households not paying their electricity bills (IMF, 2013). Under such conditions, and given the sub-‐Saharan Afican average electricity tariff of USS 0.17/kWh, every kWh of power used represents a fiscal loss. Let us take the example of a community of 100,000 minimum access households living in an urban slum in Africa (Table 1), each of which would use 65 kWh/y of electricity to power a single 40W incandescent lamp and share a 60W TV with three other households for three hours per day. Assuming that 60% of these low-‐income households had illegal electricity connections and did not pay for their electricity, the utility would lose just over US$1 million each year on the electricity supplied (or US$11 per household), as a result of 30% underpricing, 60% non-‐paying customers and 25% line losses Table 1. Impact of an “LED-‐Fueled” Efficiency Power Plant

Source: The author, to be included in World Bank (in press) If the utility instead outfitted these grid-‐connected households with a single high-‐quality LED that delivered the same 450 lumens using only 7.5 Watts at a cost of US$10 per bulb (“LED Current Technology” scenario), the financial gains to both the utility and the paying customers would be significant. The utility benefits, because losses associated with meeting electricity demand are avoided as demand is reduced, and because of the assumption that the share of households that can afford to pay their electric bills increases from 40% to 70%.

In addition, the electricity consumption of these 100,000 households would decrease by 55%, immediately freeing up enough energy (3.6 GWh/y) to double the number of customers served or the amount of energy that a household could afford to purchase, with the same installed capacity. Better results could be achieved under an “LED 2015


Technology” scenario, based on expected technology advances in the next few years (i.e., LEDs that cost US$5/bulb and use 3.5 W/450 lumen).

A forthcoming World Bank report makes the case that utility companies in Sub-‐Saharan Africa could become profitable, if they adapted their business models to include constructing efficiency power plants (EPPs) by outfitting households with LEDs (World Bank, in press). This would have other green economy benefits, as well:

• Households would see dramatic cuts in their electricity bills;

• Utilities could use bulk procurement to ensure LED quality and drive down prices;

• Peak demand and grid losses would be reduced;

• Utilities could serve more households and businesses with the same installed capacity.

Best Use of Scrap Tires The final example is scrap tires. The tire industry uses 70% of all natural rubber produced worldwide, and consumption is expected to double within the next 30 years (ETRMA, 2012). Applications that recycle or recover rubber are therefore critical to preserve this valuable resource – and can result in significant greenhouse gas emissions reductions. Barring specific legislation, tires are generally treated as waste at end-‐of-‐life and either discarded or sent to landfill (Figure 7). Countries with waste and resource management legislation have achieved an incremental improvement, by encouraging the use of scrap tires for civil engineering purposes (e.g., shredding tires for use as a drainage layer in landfills) or as an alternative fuel to be co-‐combusted in cement production. However, there is a better way: material recycling. The material recycling route reduces potential greenhouse gas emissions by roughly 1 t CO2e per ton of scrap tires recycled relative to the cement kiln co-‐incineration route and by 1.8 t CO2e, compared with civil engineering applications (Arquit Niederberger, Shiroff and Raahauge, 2012). Genan Business & Development A/S has developed a mechanical grinding processes that generates only 1% waste from scrap tires, with recovered materials consisting of 67% rubber powder and granulate, 18% steel and 14% textile. Recycling avoids several processes, in particular, production of virgin polymers, which saves about 50 GJ per ton of tires, and the iron fraction eliminates the need for 400 kg of iron ore (Arquit Niederberger, Shiroff and Raahauge, 2012).


Figure 7. Tire End-‐of-‐Life Pathways: Co-‐Incineration vs. Material Recycling

Advanced tire recycling facilities have been built in Europe and the USA, but many countries still encourage co-‐incineration in cement plants, which makes it virtually impossible for a recycling facility to operate profitably. In China, resource scarcity and environmental considerations led the Ministry of Industry and Information Technology to issue “Guidance on comprehensive use of old tires” at the end of 2010, which laid out principles, specific objectives (e.g., increasing recycled rubber production to 3 Mt annually and rubber powder output to 100 Mt) and policies. With the rapid development of the national economy and the gradual improvement of living standards, China has become a large consumer of rubber (accounting for >30% of global consumption), and there is a large and growing gap between the domestic rubber supply and demand in China (>70% of natural rubber and >40% of composite rubber was imported in 2011). Since 2001, tire production in China has grown over 15% annually, reaching 470 million in 2012. Were the 240 million end-‐of-‐life tires that were generated in China in 2009 recycled, rather than used for energy recovery or civil engineering applications, 1.9 – 4.3 MtCO2e emissions could be avoided (Arquit Niederberger, Shiroff and Raahauge, 2012). And there are other alternatives, as well. In Europe, Michelin Fleet Solutions leases tires and offers tire upgrades, maintenance and replacement to optimize the performance of trucking fleets and to lower their total cost of ownership. With this business model, Michelin can collect tires when they wear out and can extend their technical utility by retreading or regrooving them for resale. The company estimates that retreads, for example, require half of the raw materials new tires do (Nguyen, Stuchtey & Zils, 2014). On the R&D front, Pirelli is

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collaborating with Genan to develop a de-‐vulcanisation process that permits post-‐consumer tires to be used as a milled material in new tires, closing the virgin rubber material loop.

3. Culture of (Disruptive) Innovation The current linear economic model is fundamentally unsustainable, regardless of how efficient it becomes, and a radical shift to a circular economy model is urgently needed. The three case studies presented above show that business model innovation is needed to achieve low-‐carbon economies – and they suggest that changes in enterprise business models can transform entire industries and catalyze broader systems change. Conceptually, China’s leadership is quite advanced in its circular economy thinking. Closed-‐loop material use along with industrial symbiosis – co-‐locating or connecting industries so that a waste or co-‐product from one becomes an input to another – have become common considerations in planning economic development zones. Yet government intent is not enough. A culture of innovation is the basis for a low-‐carbon economy. This demands that we individually and collectively:

• Aspire to transformational, not incremental change;

• Adopt new behaviors and think differently. Business model innovation to achieve long-‐term sustainability has often come from startups, as in the SynGest example. It is much more challenging to transform a working business model, due to vested interests. However, it is the incumbent fossil thermal electricity generators and chemical and petrochemical industry that need to decarbonize on a massive scale. Government attempts to correct the failure of markets to properly price resource depletion and greenhouse gas emissions have therefore universally been too timid. They may have encouraged operational efficiency, but they have failed to encourage fundamental changes in business models. Researchers have found that – in the absence of substantial innovation – the financial performance of firms declines as their environmental, social and governance (ESG) performance improves (Eccles & Serafeim, 2013). Companies can only create profitable opportunities to transition to circular economy models, if they invent new products processes, and business models. In addition to removing barriers to change (e.g., incentive systems and investor pressure that emphasize short-‐term performance), therefore, it will be critical to nurture the behaviors and skills that set innovative entrepreneurs & managers apart from execution-‐oriented, results-‐driven managers (Table 2).


Table 2. Innovator's DNA

Questioning Asking questions that challenge common wisdom Observing Scrutinizing customer, supplier, and competitor behaviors to identify new ways of

doing things Networking Meeting people with different ideas, backgrounds, and perspectives Experimenting Constructing interactive experiences that provoke unorthodox responses to see what

insights emerge Associating Connecting the unconnected across questions, problems, or ideas from unrelated fields Source: Christensen, Dyer & Gregersen (2011)

These skills and behaviors have been referred to as the “innovator’s DNA” (Christensen, Dyer & Gregersen, 2011), and they can be encouraged. Engineers have an established capability to deliver incremental innovation; radical innovations, however, require new knowledge and skills. CAPEC is well positioned to advocate for changes in the way in which engineers are educated and trained, as well as to foster a culture of innovation among Chinese plant engineers. As called for in the UK context (Royal Academy of Engineering, 2012), CAPEC can consider including the responsibility of engineers to address radical innovation and drive the innovation economy in its professional competency and training functions. It can serve a liaison function between institutions of higher education and employers to encourage greater focus on radical innovation through engineering. Transformational innovations are essential, if China is to achieve the 12th Five-‐Year Plan vision of an “ecological civilization”, which Hu Jintao has suggested can be realized by pursuing development “…in a scientific way that puts people first and is comprehensive, balanced and sustainable”. Yet individual corporate actions on their own won’t suffice to create a circular economy at scale, given the systemic nature of the barriers (Nguyen, Stuchtey & Zils, 2014). Government policymakers must focus society’s attention on transformational change; this will inspire enterprises and individuals to innovate the stepping stones of an enduring, high-‐quality development path. There is a real danger that a well intentioned rush to achieve incremental improvements could actually hinder the transformational approaches needed to support circular economy models and green growth (Arquit Niederberger, Shiroff & Raahauge, 2012).

Author: Anne Arquit Niederberger, Ph.D. Affiliation: Principal, Policy Solutions Contact: www.policy-‐solutions.com This paper is the English translation of a paper to be published in Mandarin in the journal Plant Engineering Consultants, based on a presentation at CAPEC’s 2013 International Forum on Low-‐Carbon Industry and Green Economy, held in Beijing on 20 November 2013.


4. References

Arquit Niederberger, A, Shiroff, S, and Raahauge, L, 2012: Implications of Carbon Markets for Implementing Circular Economy Models. White Paper, ICAE 2012 (Suzhou).

Christensen, C.M., Dyer, J., and Gregersen, H., 2011: The Innovator's DNA: Mastering the Five Skills of Disruptive Innovators. Harvard Business Review Press.

Climate Group, 2012: Lighting the Clean Revolution: The Rise of LEDs and What it Means for Cities. London: The Climate Group, 61 pp.

Eccles, R., and Serafeim, G., 2013: The Performance Frontier: Innovating for a Sustainable Strategy, Harvard Business Review 91 (5), 50–60.

ETRMA, 2012: End-‐of-‐Life Tires – A Valuable Resource with Growing Potential (2011 Edition). Brussels: European Tyre and Rubber Manufacturers’ Association.

IFA, 2009: Energy efficiency and CO2 emissions in ammonia production, Feeding the Earth (Issue Brief). International Fertilizer Industry Association, Paris.

IMF, 2013: Energy Subsidy Reform in Sub-‐Saharan Africa: Experiences and Lessons, pre-‐publication draft. Washington, D.C.: International Monetary Fund.

IPCC, 2013: Summary for Policymakers. In: Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Stocker, T.F., D. Qin, G.-‐K. Plattner, M. Tignor, S.K. Allen, J. Boschung, A. Nauels, Y. Xia, V. Bex and P.M. Midgley (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.

Kahrl, F, Li, YJ, Su, YF, Tennigkeit, T., Wilkes, A., and Xu, JC, 2010: Greenhouse Gas Emissions From Nitrogen Fertilizer Use In China. Environmental Science & Policy, 13(8), 688-‐694.

McKinsey, 2012: Lighting the way: Perspectives on the Global Lighting Market., 2nd Edition. McKinsey & Company, 57 pp.

Nguyen, H., Stuchtey, M., and Zils, M., 2014: Remaking the industrial economy, McKinsey Quarterly, February 2014.

Royal Academy of Engineering, 2012: Educating Engineers to Drive the Innovation Economy. London: The Royal Academy of Engineering, 28 pp.

World Bank, in press: Market Transformation for Energy Efficient Lighting: Focus on Africa. Washington, D.C.: The World Bank.

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