RVHS H1 ECON

This document consists of 9 printed pages. [Turn over ECONOMICS 8819/01 Paper 1 12 September 2011 3 hours Additional Materials: Answer Paper READ THESE INSTRUCTIONS FIRST Write your index number and name on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Section A Answer all questions. Section B Answer one question. At the end of the examination, hand in your work for Section A and B separately. The number of marks is given in brackets [ ] at the end of each question or part question. RIVER VALLEY HIGH SCHOOL YEAR 6 Preliminary Year Examination in preparation for General Certificate of Education Advanced Level Higher 1

2 © RVHS 2011 8819 Section A Answer all questions. Question 1 Energy Consumption in China Extract 1: China’s Coal Consumption International coal prices hit $124 per ton this week, the highest levels in five months, as strong demand from reconstruction projects in Japan and reduced supply from flood-ravaged Australia made coal supply tight. Perhaps no country is more affected by surging coal prices than China. Coal powers the Chinese economy, accounting for 71% of China’s energy in 2008. The country is the world’s largest consumer, gobbling up nearly half of the world’s coal consumption in 2009. The Electricity Council estimates that the country’s coal demand will reach 1.92 billion tons in 2011, up nearly 10% from 2010. Many people attribute the above to the rising demand for electricity in China. The rapid urbanisation and rising middle class has led to an exponential number of new refrigerators, air conditioners and other appliances in homes. The Chinese government has made it clear that it wants to wean the country’s power grid from coal. That’s proven to be a difficult task. China’s 12 th Five Year Plan calls for bigger improvements in energy efficiency and the development of additional sources including natural gas. Massive projects such as the Three Gorges Dam have sought to increase capacity of alternatives, but hydroelectric, nuclear and other renewables combined make up only 10% of total power. Source: U.S. Gobal Investors, 10 May 2011 Extract 2: What’s really driving China’s energy demand? Between 1978 and 2000, China grew at 9% while energy demand grew at 4%. After 2001, economic growth accelerated slightly, but energy demand growth surged to 13% a year. Many China watchers assume that the recent evolution of China’s energy profile reflects growth in consumption and transport, for instance, air conditioning and personal cars. This is not correct. Consumption-led energy demand will be the major driver in the future but the main source of today’s growth is energy-intensive heavy industry. The industrial sector accounts for over 70% of final energy consumption in China today, while the tertiary (service) sector remains flat at 30%. The service sector share in China is not only much lower than developed countries but also lower than other developing countries such as India. China is now making for herself, rather than importing from abroad, more of the energy- intensive basic products (such as steel and aluminium) used to construct the roads and buildings in China. It is also interesting to note that much of the energy that China consumes is used to make products sold to the rest of the world, thus replacing energy demand in other countries. Source: Rosen & Houser, “China Energy: A guide for the perplexed”, May 2007

3 © RVHS 2011 8819 Extract 3: Preparing for sustainable energy use in China Recognizing the importance of reducing her reliance on coal and shifting to other energy sources, the China government has a range of measures to help provide a boost to the renewable energy industries. Specifically, the Medium-to-Long-Term Development Plan for Renewable Energy has set aside RMB3 trillion in funds to stimulate the development and increased utilization of renewable energy to 15% by 2020. This is supported by the introduction of the Renewable Energy Law as well as preferential financial policies, specialised funds subsidising the development of renewable energy sources, zero interest loans, as well as the reduction of taxes for certain renewable energy development activities. Source: Centre for Strategic Economic Studies, May 2010 Extract 4: China Plans Carbon Trading Pilot Scheme Faced with severe pollution, a predicted surge in urbanisation and a struggle to ensure adequate energy supplies to fuel its rapid growth, China outlined plans to reduce carbon emissions in its latest five-year economic plan. According to state media, China will introduce a pilot scheme for carbon emissions trading and gradually develop a national market as it seeks to reduce emissions and save energy. Environmental analysts have said China is keen to get a functioning carbon trading market up and running soon, especially with the expiry of the Kyoto Protocol looming in 2012. Under it, China and other developing nations are not legally bound to reduce emissions of the gases blamed for global warming and climate change. Although several cities such as Beijing, Shanghai and Tianjin have started voluntary carbon trading two years ago, the infrastructure in China is virtually nonexistent. To date, China still lacks essential legislation and third party verifications to support domestic carbon trading. Thus, Chinese leaders and industry players should first warm up with voluntary carbon trading, with the first step being to improve the infrastructure. Source: The New York Times, 10 January 2011 Source: EIA International Energy Statistics 2008 Figure 1: China’s Energy Consumption by Type (2008)

4 © RVHS 2011 8819 Figure 2: China’s Coal Consumption Source: EIA Source: BP 2005 Figure 3: Energy Price Trends Oil Coal Gas

5 © RVHS 2011 8819 Questions (a) With reference to Figure 2, describe the trend of China’s coal consumption from 1980 to 2009. [2] (b) Using relevant case material, account for the trend in China’s coal consumption. [4] (c) Using the data provided, explain why China is unlikely to reduce her coal usage substantially despite rising coal prices. [4] (d) Using demand and supply analysis, explain how the measures undertaken by the Chinese government to wean the country’s power grid from coal will affect China’s renewable energy market and coal market. [4] (e) (i) Discuss how energy consumption may lead to market failure and whether China’s investment in renewable energy is a solution to tackling this market failure. [8] (ii) As a consultant economist to the government, assess whether carbon trading is a more superior solution in mitigating the above market failure. [8] [Total: 30]

6 © RVHS 2011 8819 Question 2 Impact on Trade during Recession Figure 4: Export Market of Brazil Asia (-China, Mid. East); 11,2% China; 2,7% USA; 14,9% Mid. East; 5,9% Eastern Europe; 3,2% Africa (-Mid. East); 4,7% Aladi (-Mercosur); 3,6% Mercosur; 8,6% Others; 4,1% E.U - 27; 41,1% Asia (-China, Mid. East); 12,4%China; 11,0% USA; 8,7% Mid. East; 7,1% Eastern Europe; 6,9% Africa (-Mid. East); 6,7% Aladi (-Mercosur); 6,0% Mercosur; 2,8% Others; 5,3% E.U - 27; 33,1% 1998 2008 Source: CIA World Factbook Extract 5: The Brazilian Economy Characterized by large and well-developed agricultural, mining, manufacturing, and service sectors, Brazil's economy outw