If Chinese leaders and energy policymakers have any trouble identifying an issue in urgent need of action, they should simply look to the smog that has blanketed Beijing since the beginning of 2013. The smog, rooted in China’s overwhelming reliance on coal for energy consumption and the rapid motorization of the urban population, underscores a broader challenge Beijing faces: how to  transform its approach to energy security and minimize the environmental issues it faces by changing its energy mix. 

For decades, discussions about energy security in China have been driven by nearly exclusive concerns about adequate supply, the cost of energy as an industrial input, and average household prices. 

It is true that the fast and sustained growth of the Chinese economy for the past three decades would not have been possible without adequate supply to meet consumption needs. But one result has been a reliance on cheap but not necessarily environmentally friendly coal.

And as energy demand increased, another problem also cropped up. China became more reliant on imports to fulfill its energy needs. A new priority was added to Chinese energy policy: securing supply from abroad.

In terms of total primary energy consumption, China’s foreign dependence rate is still lower than 10 percent because of its heavy use of domestic coal. But foreign sources of oil accounted for 58 percent of China’s consumption in 2012, which raised concerns about China’s energy insecurity.

Contrary to popular belief, China’s increasing reliance on foreign oil is not dangerous in and of itself. The real problem lies with the government’s stance that state-owned enterprises must control the import of oil and other energy commodities into China. The monopoly these state-owned enterprises have on the import process produces no winners.

The government has to subsidize oil importers and refiners, who then, at the government’s request, sell low-priced final products to meet consumer demand. The result is that efforts to upgrade the quality of fuels cannot be fully financed by passing on the costs to consumer.

But worsening air quality and other environmental ills make the continuation of existing energy-policy thinking socially and politically unjustifiable. As the public is calling for cleaner air to breathe, the leadership faces a new imperative for identifying priority areas in energy policy to deliver tangible progress. This will require a new conceptualization of China’s energy insecurity that prioritizes tackling the associated costs—environmental and societal—over ensuring adequate supply and low cost.

Beijing should be a standard-setter and oversee an increase in the level of cleaner energy consumption. To do so necessitates opening up the country’s energy consumption market to foreign suppliers. Both Chinese and foreign energy supplies should be able to compete to meet and surpass the Chinese government’s energy-technology standards. The power of consumption in the Chinese market is the most effective driver of energy flow into China. Deeper foreign participation in China’s energy supply market is in China’s interest to safeguard supply security.  The truth of the matter is that should geopolitical uncertainty rise to a point to negatively impact Chinese access to international energy supply, China will be at greater risk if foreign energy companies do not have a significant stake in supplying the Chinese market.

To hedge against prospects of deliberate disruption of the stable flow of energy resources and to help improve the quality of its energy supply over the long run, China should deepen its market integration and open its energy import market, power-generation sector, and end-user sales to foreign participation. China can break down barriers to market integration by encouraging direct investment. With the exception of critical energy infrastructure such as electric power lines and oil and gas pipelines, the greater degree of foreign investment in the production and sales phases of the Chinese energy economy, the higher the degree of security of supply China will enjoy. Breaking down barriers in this way can externalize a good deal of potential costs associated with geopolitical uncertainties, as international suppliers have a self-interest in resisting political and diplomatic interference to maximize their returns on their holdings.

China of course still needs to work to ensure stable access to foreign supply of energy, especially oil and natural gas. But the government should not mistakenly equate seeing Chinese oil companies acquiring stakes in overseas energy production with an enhanced level of security.

The new Chinese leadership would be wise to capitalize on public sentiment and move quickly to streamline the country’s energy policies. Government regulations should focus on the quality of fuels and services sold within China, rather than the corporate nationality of a supplier.

Toward that goal, there has to be a redefinition of the role China’s energy governance agencies ought to play: from one of managing energy imports and domestic production to one of setting standards for energy production and use. By using these standards as the sole criteria for entry into the Chinese market, all energy supply companies—whether Chinese or foreign, owned by the state or private—will be treated equally.

Key to making this change in energy governance is recognizing the power of investment capital. China’s current energy economics are drastically different from the situation in the early 1980s. Then, a shortage of investment funds prohibited China from expanding energy supply from both domestic and international sources. This fund shortage was a key reason energy became a bottleneck on the entire economy.

Today, the movement of investment capital is the most powerful driver of all forms of energy production and sales around the world. And as long as there is demand in the Chinese market, there will always be an interest in amassing capital and producing energy to satisfy it. 

The Chinese government’s energy policy has to mobilize all stakeholders to contribute toward making tangible progress in air quality and other aspects of the environment. Given the entrenched and competing interests in China’s current energy system, bringing about policy change will not be easy or smooth. But with rigorous leadership, reform will yield dividends in environmental protection and improvements in energy efficiency.

Zha Daojiong is a professor of international political economy at Peking University. 

This article was published as part of the Window into China series