Even as my plane was landing in Jinan, the capital of China's heavily industrialized Shandong province, I could see cranes. By the time I got to the city center I'd counted 76 more construction cranes along the way. There were probably more, but in the city proper the smog was so thick I couldn't see any farther than the sidewalk. When I visited, just a few weeks before last summer's Olympic extravaganza kicked off, Shandong had just been named to the Chinese EPA's "green blacklist" for its terrible air quality. In the taxi, it struck me that these invisible cranes are the real symbol of China's paradoxical growth--an explosion of wealth and productivity partly obscured by its own pollution. If gross domestic product continues to grow by just 7 percent a year, 85 percent of China will be new by 2030. That's a tremendous, nearly unimaginable quantity of steel and cement--and also energy and pollution.

Americans are smug about China's smog. But do we really deserve such self-satisfaction? After all, one-fifth of the energy China uses is directly exported to us in the form of goods. We get the deck chairs, the ceramic plumbing fixtures, and the vinyl fake Hermès handbags; China gets the smog. What's more, China has to go out shopping for all that extra oil and energy. U.S. pundits often say China is competing with the United States for energy supplies, but it's more accurate to call our relationship a competitive collaboration, an undefined relationship with much at stake for the economies, environments, and lifestyles of citizens of both countries.

We may not be able to ignore the smog, but we need to look past it to the cranes, where the armature of China's future is taking shape. I was in Shandong to visit an ambitious, China-sized experiment in reducing energy use--and yes, smog--that has grown out of a 20-year relationship between the Chinese government and the Lawrence Berkeley National Laboratory. The project has the ungainly name of the Top-1000 Energy-Consuming Enterprises Program, but it has a simple rationale: China's 1,000 largest companies devour a third of the country's total energy budget. Burning fuel costs money, creates smog-forming air pollutants, and releases greenhouse gases into the air. Get companies to voluntarily use energy more efficiently and you get a four-fer: lower energy consumption, more profitable companies, less pollution, and fewer carbon emissions.

The results, so far, are impressive. The program started in 2006, and if current trends continue, by 2010 it could keep 450 million tons of carbon dioxide out of the atmosphere. Even though China's emissions continue to rise, 450 million tons is a lot. Since 1997, the entire European Union has been laboring mightily to reach its 2012 Kyoto target of reducing its 1990 baseline emissions by 300 million tons.

Top-1000 also offers a peek beyond the stereotypes to see how China works today. The program has taken shape in an atmosphere of relative openness, with international collaboration, and in a mash-up of market and command economy that is full of tension, contradictions, and surprisingly, passion.

I observed all of this in action at a banquet to celebrate the second anniversary of the program. At a hotel in Shandong's seaside city Yantai, the tables were laden with quivering purple sea cucumber, abalone, braised pork, and more. The diners demonstrated that policies are no longer made by men in windowless gray rooms to the west of the Forbidden City: There were college professors, energy experts, local and national officials, a self-identified propaganda specialist, three scientists from LBNL, efficiency experts affiliated with the Communist party leadership, cement plant operators, industry trade groups, and Chinese representatives from the Bay Area-based Energy Foundation. All of them played important roles in shaping the Top-1000 Program.

Everyone was smashed--or at least pretending to be--and besotted with energy efficiency, a concept which gets so little respect in the United States that it's often lumped in a sentence with Jimmy Carter telling people to wear a sweater or Dick Cheney dismissing it as an empty gesture, "a sign of personal virtue." The evening reached a Mad Hatter-style crescendo with a toast from the head of Shandong's Economic Development Commission, a slim, gregarious man in sports clothes. He raised his glass: "My heart is filled with so much passion for energy efficiency that I need to drink more just to lower my blood pressure!"

Actually, China has had an on-again, off-again love affair with energy efficiency over the course of three decades. When Deng Xiaoping sat down to engineer a quadrupling of China's GDP in 1978, his advisors said that no country in history had developed without increasing energy use faster than GDP. He'd need four to six times the energy China was then using, they told him--a daunting concept for a poor treasury and shrimpy infrastructure. Some advisors counseled constraining growth, but a group of academics proposed eliminating wasted energy and encouraging efficiency to hold the line on energy growth.

Anything a command economy could do, China did, including declaring a National Energy Efficiency Week each year. If a company exceeded its allowance, its supply was sometimes simply cut off. A company that was good at becoming more efficient might be paradoxically singled out for greater improvements, a phenomenon called "whipping the fast ox." Quotas, standards, regulations, incentives, contests, money for investments, and a countrywide network of training centers with 7,000 employees--they tried everything. And by 1988, they'd made history, by severing the relationship between development and energy. Energy demand had grown at half the speed of GDP.

That continued until 2002, when all hell broke loose. As the economy grew dramatically and the old energy quotas and efficiency programs were discarded, China's energy needs exploded, as did greenhouse gas emissions. China's leadership took notice and announced that 2005's Five Year Plan required every dollar of GDP be made with 20 percent less energy.

But this time around, China had become a curious hybrid of market, command, and coercion. The government couldn't pull the plug or even whip the fast ox. Instead, it turned into a Hello Kitty-esque omniscient cheerleader, trying to influence energy use through incentives, endless news reports, and even a comic book.

This new regime is off to a rocky start and insiders privately told me that the Five Year goal is running behind. But the Top-1000, based on voluntary agreements between government and industry, is turning in impressive results. In 2006, the program alone accounted for two-thirds of China's efficiency improvements and by 2007, when the country was making improvements, the Top-1000 still represented half the total. Almost overnight, the program has become a model that has been replicated far beyond the initial 1,000 companies.

The banquet in Yantai ground on, and more dishes arrived: clam and corn soup, boiled dumplings, steamed dumplings, a nostalgic kind of corn bread, noodle soup-a flood of food, alcohol, and toasts. The lantern-jawed man from the National Development and Reform Commission, the policy arm of the Communist Party, stood up and made a toast to solving global warming. Eventually, an older woman, less than 5 feet tall, and dressed in the old bureaucrat's style of a plain floral shirt and trousers, made her way to the table occupied by colleagues Christina Galitsky, Zhou Nan, and Lynn Price, a research scientist from LBNL's Environmental Energy Technologies Division who has been working in China since 1999. "A toast," the woman said raising her glass to Price, "from the Chinese Cement Industry."

Down-to-earth and quick to laugh, Price raised her glass with a broad grin even before Zhou finished translating the toast. As the woman, Zeng Xuemin, the Standing Vice President of the Chinese Cement Association continued her rounds at other tables, Price chortled. "The Chinese cement industry--that's big!"

China makes half the world's cement, emitting 540 million tons of CO2 last year. This huge opportunity to reduce China's emissions has kept Price and her colleagues commuting to China (and attending a lot of banquets) for nearly ten years. "The problems are enormous but the potential is enormous too," Price explained later. But Zeng's improbable toast speaks to another reason to work in China. "In the United States there's often pushback [from industry that does not invite efficiency standards or limits on greenhouse gas emissions] but in China the doors are wide open. It feels like we can make an impact here because we're welcome."

Earlier that day, I had watched the LBNL crew introduce a computerized tool called BEST to cement engineers from Shandong, where 15 percent of China's cement-more than the entire U.S. production--is made. The tool (designed at Berkeley) allows engineers to compare the energy use of processes in their plants to the most advanced international manufacturers. And because more than a quarter of the equipment in Chinese cement plants is estimated to be outdated, the tool also offers suggestions for upgrades.

Industrial energy efficiency is a hidden art, concealed in kilns, pipes, motors, blowers, and buried deep in balance sheets, but it has enormous potential. In 1999, when Chinese officials asked LBNL to collaborate on a long-term project to improve the country's industrial efficiency, Price jumped at the opportunity. "In industry, you can improve energy efficiency by 10 or 20 percent in a few years," she said, noting that in China industry accounts for 70 percent of total energy use. "Wouldn't that be easier than talking everyone into changing their light bulbs?"

The program started modestly, with the Chinese partners asking LBNL to help analyze industries and provinces to see which were ripe for improvement. "It was the Chinese partners' job to figure out what to do, and it was our job to show them what's done around the world," Price said, explaining that the model of collaboration between the lab and Chinese partners over the years has focused on the lab's "adding value," without favoring policies.

In 2003, the Chinese partners decided to do a pilot program to reduce energy intensity in two Shandong steel plants. LBNL offered technical expertise, and policy perspective as well. The team ended up emulating a Dutch program that found that voluntary agreements between factories and government lead to quicker, and cheaper, increases in energy efficiency. By 2005, it appeared that the voluntary agreements had improved energy intensity at the two Shandong steel mills by 9 percent.

Beijing was pleased, and started casting about for ways to scale up. In late 2005, Peking University professor Wang Xuejun, got a call asking him to look at his databases and see what would happen if the voluntary agreements were applied to more companies. He sat down with Zhang Ruiying, a briskly efficient government engineer. They combed the database to see whether the country's top 1,000 energy users--including steel, chemicals, electrical generators, coal mines, and cement--could cut the equivalent of 100 million tons of coal by 2010. The answer was yes.

In April of 2006, the program was announced as a national priority, and by August, Lynn Price heard from an official that 998 companies had already signed those voluntary agreements.

I caught up with Zeng Xuemin, the diminutive representative from the China Cement Association who'd offered a toast to Price. She spoke with determined optimism about the cement industry leaving behind its old dirty image to use only recycled materials and second-hand waste heat from power plants. Having participated in one economic miracle, she seemed driven to form another, this one with green characteristics.

But can China really pave its way to prosperity with recycled resources and energy efficiency? Despite years of work, China still needs about twice as much energy to create a dollar of GDP as the global average. For comparison, energy intensity in the United States is one third of China's. Japan requires less than a sixth of the energy China requires per dollar of GDP. China has much to gain by embracing efficiency, which not only reduces costs and emissions, but also makes the country more competitive.

To get a better idea of how industry viewed the Top-1000 Program, in July of 2008 I visited one of the steel mills that participated in the pilot project. The Shandong Iron and Steel Group is a two-hour ride from the capital through mountains and steeply terraced green fields. The plant looms over a small chaotic city, where a local bank advertises in English: Accompanied by sincere win-win tomorrow.

At Shandong, one of China's most advanced steel plants, energy efficiency has been a win-win proposition: reducing pollution while increasing profits. Shandong's lead efficiency engineer is a tall woman named Liang Kaili, who was wearing the company's blue uniform shirt with her long hair pulled back in an efficient pony tail, along with trousers containing sparkly lace insets and high heels. She said she was wary of the voluntary agreements when she first heard of them but was impressed when she traveled to see the Dutch steel mill with Price. When Shandong signed its agreement in 2003, LBNL provided international experts.

Government pressure, in the form of tying efficiency to advancement, was key to making managers receptive to Liang's suggestions. "I didn't have to convince them," said Liang. However, once the new equipment began reducing energy costs, government pressure became an afterthought. "Productivity increased while energy use was reduced and pollutants were reduced," Liang explained. "The investment was very profitable."

The extraordinary flow of resources into the plant is obvious on a quick tour. Shandong looks like an industrial amusement park in contrast to America's century-old steel plants that after decades of shrinking workforces, are sprawling mazes of rusty pipe, old brick buildings, and potholed access roads. Shangdong, compressed into 15 neat kilometers, with piles of rubble contained behind decorative walls, could have been landscaped by Disney. Faux rock gardens decorate retaining walls; four colors of hedges stand next to a salute of flags around the blast furnace; trees and pink flowers form a screen in front of the state-of-the-art combined cycle gas turbine. Landscaping, of course, doesn't reduce pollution, but it does speak to the huge amount of money flowing into China's infrastructure industries right now.

Unfortunately, the fact that energy efficiency upgrades are often profitable while providing environmental benefits doesn't guarantee that they'll get made. The United States is a stunning case in point. LBNL's own analysis has shown that American industry could profitably recycle its own waste byproducts, including heat, gases, and pressure, to reduce the national carbon footprint by 20 percent. What's more alarming is that these missed opportunities to capture efficiency add up to a stunning $50 billion in lost potential profits to American companies, according to figures from the McKinsey Global Institute.

And that's where government pressure comes in. Shandong Province is now in the sixth phase of implementing a province-wide energy efficiency plan targeting 1,000 companies in Shandong as well as 100 large schools and hospitals.

China's ability to commit administrative resources to scale projects rapidly is, in a sense, a natural resource. "The project has been copied and it's had a multiplier effect," said Jiang Lin of the Energy Foundation's China office based in San Francisco. "There's a huge opportunity for the United States and China to work together on the knotty problems of energy and carbon. If the United States can help as a solution provider, China has enormous human capital. Look at automobile fuel economy standards. They were developed in the United States and met with resistance, but China adopted them with great enthusiasm."

Although there is no explicit penalty for failing to hit the target, and no explicit reward for passing it, last year the companies in the Top-1000 Program reportedly exceeded their targets by 190 percent. This is, on the face of it, great: China emitted more than half of the world's new greenhouse gas emissions between 2002 and 2006, and without huge changes in direction, energy use is projected to double by 2020. But anyone hearing of the Top-1000's achievements is likely to look up at China's glowering sky, cough, and wonder if they're true. Are they so much data smog?

This is a subject of intense interest to architects of the Top-1000 Program, and in the days following the banquet, they gathered in the conference room of the Yantai hotel to listen to hours of rapid-fire presentations. Some presenters engaged in predictable "happy talk," claiming that their provinces reduced energy intensity by 25 percent in a single year. Despite the absurdity of this claim, no one laughed. Others, however, delivered scathing, detailed criticisms. "The reports are too long but with useless stuff and the analysis of data is incomplete. The companies are passive rather than active as if doing homework assigned by teachers," said one, according to the translator. No one laughed at that either.

The conference's showstopper came during a comment period when a rotund bureaucrat in thick glasses with a comb-over hairstyle and a swagger stood to speak. "We've been doing this for two years, but it's a typical situation: We have to shoot first before you set the target." The crowd of assembled bureaucrats roared with laughter. Because the government can enact policies quickly, they often do--hoping to fix problems (and targets) afterwards.

Behind the madness, there is a sort of method. While the United States is inclined to postpone action until a plan is in place, China seems to prefer to start acting and sort out the details later. More than that, ambiguity may serve the government's interests in a way that could only be possible at this time in China's history. Jiang Yun, an engineer who described her job as "propaganda" for the China Energy Conservation Association, told me she initially fretted that the government was "reluctant to be the hammer," and it set targets for Top-1000 companies too low. In the end, though, companies exceeded targets because they were, in her words, eager to please the government-partly to avoid future regulation or punishment.

Off to the side, sotto voce, a national industrial energy expert offered a grimmer assessment. "Some companies have no ability to meet the requirements or do the audits to reach the goal so they try to supply some documents to keep a good relationship with their local government." He blamed the government-led culture of Great Leapism, named after the disastrous 1958 experiment in steel production that resulted in environmental degradation and famine. "Now the government is using the phrase 'Great Leap Development'." The usually cheerful man seemed profoundly depressed, "We can't really do anything with a Great Leap."

As the afternoon wore on, the giant crystal chandelier in the hotel's conference room started to remind me of a sparkly, upside-down roulette wheel. And the Top-1000 Program, with its risky data, precarious achievements, and its blow-on-the-dice Great-Leapism seemed nothing less than an epic bet on whether China can continue to grow or whether it will be forced to slow down, risking social and political turmoil. Another official voices fears to me in an empty room near the presentations. "China is the world's factory. We can't reach our growth targets because of limits in the environment and energy supply. We need to change our ideas, our economic structure, and the mix of industries."

Is the Top-1000 really a model for the kind of change China needs? Possibly. And honestly, if China doesn't find a way to make green profits then we're all in trouble. But there's reason to believe that China will pull off a Modest Leap, which would be extraordinary in itself. For one thing, it has the potential to change the path of the developing world towards one that is less resource intensive. A recent McKinsey report found that if developing countries invest in current energy efficient technology, they can profitably reduce their consumption by 22 percent of projected needs by 2020, but it will require a push from governments.

And while I'd gone to China to see what was happening in Shandong, I ended up thinking a lot about the Top-1000's implications for the United States. Decades of policies favoring cheap energy have allowed U.S. industry to compete with only incremental gains in energy efficiency. If China's Top-1000 succeeds on the scale that China is hoping for, U.S. industry will have to change its strategy to compete. Traditional American barriers between government and industry, regulators and the regulated may need to be torn down, to create something more cooperative and flexible. Something oddly, more like China.

As it turned out, while I was in China, California's Public Utilities Commission announced an industrial energy efficiency program based on voluntary agreements between industry and the regulator. When Lynn Price got the news she ran off to find Jiang Yun, the propagandist, to see if she might consider doing a fellowship at LBNL, teaching Californians how China gets the word out.

As Jiang nodded her head enthusiastically, it struck me that optimism is a powerful natural resource.