Wednesday, April 13, 2005

Use of inputs depends on their prices 

One of my students pointed out this story on how much energy China uses to produce things, and with it comes pollution.
University of Alberta political economist Wenran Jiang calculates China spends three times the world average on energy -- and seven times what Japan spends -- to produce $1 of gross domestic product. It also is far more inefficient than nations like Brazil and Indonesia. "China needs to shift from a high energy-consumption model of development to a green model," says Hu Angang, director of Tsinghua University's China studies center.

Chinese steelmakers on average use about twice as much energy as Japanese or Korean rivals per ton of output. Only 5% of the country's office and residential towers meet China's own minimal energy-conservation standards. China's waste has big implications for global oil prices: In 2004, China imported 2.4 million barrels per day. By 2030, the U.S. Energy Dept. estimates China will have to import 8.4 million bbl.
But why is this a surprise? I use an example in principles of manhole covers. There are two main locations for production -- India and Michigan. There are also two very different methods for their production, one much more labor-intensive than the other. Where do you think the more labor-intensive one is used? India, of course, because labor costs less there.

Now, what is the cost to the Chinese steel manufacturer of the oil they use? Do they face the world price? If they are a state enterprise, the cost of energy is a cost to the state budget, not to the steel plant manager. It will not matter much if they waste energy.