Lawrence Berkeley National Laboratory

China faces a significant challenge in the years ahead to continue to provide essential materials and products for a rapidly-growing economy while addressing pressing environmental concerns. Energy is a fundamental element of the national economy and the conditions of its use have a direct impact on China's ability to reach its sustainable development goals. China's industrial sector, which accounts for over 70 percent of the nation's total energy consumption each year, provides materials such as steel and cement that build the nation's roads, bridges, homes, offices and other buildings. Industrial products include bicycles, cars, buses, trains, ships, office equipment, appliances, furniture, packaging, pharmaceuticals, and many other components of everyday life in an increasingly modern society. This vital production of materials and products, however, comes with considerable problems. China's industrial sector is heavily dependent on the country's abundant, yet polluting, coal resources. Industrial production locally pollutes the air with emissions of particulates, carbon monoxide, sulfur dioxide, and nitrogen oxides, uses scarce water and oil resources, emits greenhouse gases contributing to the warming global atmosphere, and often produces hazardous and polluting wastes. Fostering innovative approaches to reduce the use of polluting energy resources and to diminish pollution from industrial production that are tailored to China's emerging market-based economy is one of the most important challenges facing the nation today. The pressures of rapid industrial production growth, continued environmental degradation, and increased competition create a situation that calls for a strategically-planned evolution of China's industries into world-class production facilities that are competitive, energy-efficient and less polluting. Such a transition requires the complete commitment of industrial enterprises and the government to work together to transform the industrial facilities of China. Internationally, such a transformation of the industrial sector has been realized in a number of countries using an innovative policy mechanism called Voluntary Agreements. Voluntary Agreements are essentially a contract between the government and industry, or negotiated targets with commitments and time schedules on the part of all participating parties. These agreements typically have a long-term outlook, covering a period of five to ten years, so that strategic energy-efficiency investments can be planned and implemented. A key element of Voluntary Agreements is that they focus the attention of all actors on energy efficiency or emission reduction goals. Internationally, Voluntary Agreements have been shown to result in increased energy efficiency, with the more successful programs even doubling autonomous energy efficiency improvement rates. In addition, Voluntary Agreements have important longer-term impacts including changes of attitudes and awareness of managerial and technical staff regarding energy efficiency, addressing barriers to technology adoption and innovation, creating market transformation to establish greater potential for sustainable energy-efficiency investments, promoting positive dynamic interactions between different actors involved in technology research and development, deployment, and market development, and facilitating cooperative arrangements that provide learning mechanisms within an industry. The essential steps for reaching a Voluntary Agreement are the assessment of the energy-efficiency potential of the participants as well as target-setting through a negotiated process. Participation by industries is motivated through the use of carrots and sticks, which refers to incentives and disincentives. Supporting programs and policies (the carrots), such as enterprise audits, assessments, benchmarking, monitoring, information dissemination, and financial incentives all play an important role in assisting the participants in meeting the target goals. Some of the more successful Voluntary Agreement programs are based on some reduction of environmental regulations or taxes (the sticks) for participants. Overall, international experience shows that Voluntary Agreements are an innovative and effective means to motivate industry to improve energy efficiency and reduce related emissions, if implemented within a comprehensive and transparent framework. Voluntary Agreements were chosen by the State Economic and Trade Commission (SETC) as a new policy mechanism to test in China's industrial sector where the movement toward a market economy is demanding innovative methods for supporting and transforming essential enterprises. Analysis of the potential for energy efficiency improvement in various energy-intensive industrial sectors in China led to the choice of the iron and steel industry for a pilot project to evaluate this new concept. SETC chose Jinan Iron and Steel Company (Jigang) and Laiwu Iron and Steel Company (Laigang) to test this innovative policy mechanism. The Pilot Project has been developed collaboratively with representatives from Jigang and Laigang, SETC, and the Shandong Economic and Trade Commission (ETC). This report provides information on international experience with Voluntary Agreements and then provides methodologies and guidelines for developing and implementing a pilot Energy Conservation Voluntary Agreement with the two steel enterprises in Shandong Province.