SED SESSION IV: MANAGING THE ECONOMIC IMPACT OF ENERGY

UNCLAS SECTION 01 OF 03 BEIJING 000001

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SENSITIVE
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STATE FOR EAP/CM SECOR/YAMAMOTO
STATE PASS USTR FOR STRATFORD/WINTER/MAIN
STATE PASS EX-IM BANK FOR LAMBRIGHT/MYROW

E.O. 12958: N/A
TAGS: ECON ENRG ETRD SENV CH
SUBJECT: SED SESSION IV: MANAGING THE ECONOMIC IMPACT OF ENERGY
CHOICES, DECEMBER 12, 2007

REF: A. 07 STATE 168294

B. 07 BEIJING 7557

C. 07 BEIJING 7579

D. 07 BEIJING 7581

E. 07 BEIJING 7593

F. 07 BEIJING 7590

G. 07 BEIJING 7595

H. 07 BEIJING 7596

I. 07 BEIJING 7600

(U) THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED. PLEASE HANDLE
ACCORDINGLY. NOT FOR DISTRIBUTION OUTSIDE USG CHANNELS.

Summary
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1. (SBU) Summary: During a discussion focused on managing the
economic impact of energy choices, Treasury Secretary Henry Paulson
said both the United States and China are affected by high oil
prices and are vulnerable to potential supply disruptions. National
Development and Reform Commission Chairman Ma Kai said that China
recognizes it must better optimize its energy mix and noted the many
areas for bilateral cooperation. Department of Energy Deputy
Secretary Clay Sell said the United States and China as

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indispensable players in the world market must jointly address the
twin issues of global energy security and global climate change.
Minister of Agriculture Sun Zhongcai stated that China must pursue
its own path towards biomass development focusing on non-food
sources. Ministry of Science and Technology Vice-Minister Shang
Yong stated that it is the responsibility of developed countries to
provide advanced energy efficiency and environmental protection
technology to the developing world without preconditions. Chinese
Vice Premier Wu Yi and Secretary Paulson closed by noting the common
ground China and the United States share in pursuing energy and
environmental cooperation. End Summary.

Paulson: Open Markets Key to
Meeting Energy Challenges
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2. (SBU) Treasury Secretary Henry Paulson opened the session by
stating the importance of China and the United States working
together to meet common energy challenges. Both countries are
affected by high oil prices and are vulnerable to supply
disruptions. There is a common need to pursue development of clean
fuel and alternative energy technology. Secretary Paulson
emphasized that energy markets benefit from transparency and
openness rather than opaqueness.

NDRC: China Must
Diversify Energy Mix
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3. (SBU) National Development and Reform Commission (NDRC) Chairman
Ma Kai highlighted China's need to better optimize its energy mix
and structure. China's coal usage is 41 percent higher than the
world average. Beijing recognizes that there are environmental
consequences from the country's heavy reliance on coal. Ma
highlighted several specific areas for energy optimization including
developing clean coal technology, expanding the use of non-fossil
fuels, and broadening ongoing bilateral energy cooperation in the
areas of energy efficiency and biomass. Future cooperation should
focus on power generation, coal, oil and natural gas, renewables and
environmental protection, according to Ma. He distributed a "Guide
to China-United States Cooperation on Energy and Envionment
Proection," which outlines key areas and projects for cooperation
in five parts: ower, Coal, Oil and Gas, Renewable Energy, and
Energy Conservation and Environmental Protection.

Sell: Opportunity for
Enhanced Strategic Cooperation
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4. (SBU) Department of Energy (DOE) Deputy Secretary Clay Sell
emphasized the need for a strategic approach to future energy
challenges. China and the United States together represent 25
percent of the world's population and produce 33 percent of global
economic output. The countries also account for one-third of the
world's daily oil consumption and generate 40 percent of global
carbon emissions. Washington and Beijing in the coming years will

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have to address the threat of resource nationalism and climate
change in a carbon-constrained environment. Sell noted that there
are four broad areas of future bilateral energy cooperation: energy
efficiency, clean coal, nuclear power, and renewable energy. Sell
urged China and the United States to work together to address the
tariff and non-tariff barriers to energy and environmental goods and
services. He further charged both delegations to pursue energy
cooperation strategically to move forward with real solutions, as
opposed to relying on tactical agreements.

Jeffery, Johnson: Energy
Talks Modalities Changing
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5. (SBU) State Department Under Secretary Reuben Jeffery said that
increasingly energy security and diversification issues have a
diplomatic context. For example, topics such as oil shipping routes
and strategic petroleum reserve (SPR) accumulation must be addressed
in an international setting. Environmental Protection Agency
Administrator (EPA) Stephen Johnson stated that artificially created
bureaucratic lines have divided cross-cutting energy and
environmental discussions. The SED is a positive step in removing
this impediment in both countries. Administrator Johnson said that
environmental and energy discussions between Washington and Beijing
should be interrelated, holistic, comprehensive, and collaborative.


Sun: Food Grain Will Not
Be China's Biofuel Source
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6. (SBU) Chinese Minister of Agriculture Sun Zhongcai stated that
Beijing is pursuing biomass development with Chinese
characteristics. China has limited arable land and must strictly
control grain use in biomass production. Grain use is an important
food security concern for the country. Sun noted that China must
make full use of agricultural waste products, such as straw stalk
for biofuel production. China, on a limited basis, is developing
solar and wind power projects in rural areas to replace fossil
fuels. NDRC Chairman Ma added that the Brazilian model of using
sugar cane to produce biofuel will not work in China. Washington
and Beijing should pursue a joint energy roadmap addressing the
technical aspects of non-grain biofuels, such as straw and cassava,
while also working to verify the ethanol production cycle is
actually positive, closed Ma. (Note: The U.S.-China Biofuels
Development Cooperation Memorandum of Understanding signed December
11 creates a roadmap for cooperation in biofuels development,
production, and use.)

MOST: No Need to Reduce
Tariffs on Energy Tech
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7. (SBU) Ministry of Science and Technology (MOST) Vice-Minister
Shang Yong stated that developed countries should provide advanced
energy efficiency and environmental protection technology to the
developing world. Developed countries must think of this issue in
other than commercial terms. Sun said there is little need to
reduce tariffs on energy efficiency and environmental protection
related products. Efforts to do so are intended to promote market
access for companies in developed countries rather than aid
developing countries. Sun also claimed that developed countries
should no longer use intellectual property rights (IPR) as an excuse
to limit the transfer of technology or research and development
know-how.

Paulson: That Is a Really Bad Idea
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8. (SBU) Secretary Paulson responded to Vice-Minister Shang's
comments by stating that it is economically foolish and immoral to
maintain tariffs on these goods. It is fair for developing
countries to seek economic development similar to that the United
States has experienced. Developing countries must recognize,
however, that today's environmental protection technology was
unavailable to the United States when it was a heavy polluter, said
Secretary Paulson.

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Both Sides Agree, Session
Shows Cooperation Potential

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9. (SBU) Secretary Paulson closed by emphasizing that both the
United States and China have many common energy interests. This was
evident during the session and although there are clearly some
disagreements, the energy discussions went very well. Chinese
Vice-Premier Wu Yi agreed on the positive tenor of the session and
recalled her observation during SED I that the greatest potential
for Sino-United States economic cooperation is in the energy and
environment arena. Both sides agreed to form a working group to
begin formulation of a ten-year plan on energy and environmental
cooperation. Madame Wu said this work should be launched as soon as
possible.


10. Department of Energy has cleared this cable.

RANDT