Will climate change constrain China's development? Part 2: Green growth pathways

There are two key ways in which climate change will affect China’s development.  Firstly the impacts of climate change on China (such as increasing droughts and water shortages, increases in severe weather events and rising sea level, and the costs of air pollution) will affect China’s population and its economic development.  These effects were discussed in a previous post.  The second consideration is to how difficult it will be to shift China’s current economic model to one of low carbon development and the costs and benefits of doing so. 

China has developed very rapidly in a very resource intensive manner which has grown the economy and reduced poverty in China whilst simultaneously producing huge levels of pollution that are now having a substantial impact on the Chinese quality of life and a negative impact on continuing economic development.  China was able to borrow ideas for its development from both Soviet and western examples, and has followed a fairly familiar development path.  China has also borrowed the idea of “develop first clean up later”.  Given the dire state of the Chinese environment, and the global imperative to reduce emissions, this is unlikely to be a viable pathway for China.  But there are obstacles with Chinese characteristics in China shifting its economy to a low carbon pathway. 

China’s development has been resource intensive

Since 1978 China has built a manufacturing based economy.  China’s economic growth has been particularly energy-intensive.  In 2007 the Chinese economy was 6.2% of the world economy, but accounted for 21% of CO2 emissions, 17% consumption of energy from non renewable sources, 34% steel, 48% cement and 31% non ferrous metal consumption (Chinese Academy of sciences in Keeley and Yisheng 2011, p24).  Total energy consumption in China increased 70% between 2000 and 2005, and coal consumption increased by 75% (World Bank 2007).  The graph below from the International Energy Agency (IEA) demonstrates that China’s use of coal in the electricity supply has grown dramatically.

 Source:  IEA 2012a p16. 

All of which has meant that China’s greenhouse gas emissions have grown substantially, to the point that China has overtaken the United States as the worlds’ number one polluter as shown below. 

 

Data source Olivier 2011, p33. Graph developed by me.

The pollution associated with this growth has a directly negative impact on the Chinese population and Chinese economic growth in many ways – including reduced air quality and increased water pollution.  The human and economic impact of these were explored in my earlier post.

Estimated losses from environmental pollution vary widely -- from 3% of 2004 GDP in Studies in Green National Accounting, published in 2006 by the State Environmental Protection Administration and National Bureau of Statistics (Jin and Mingyuan in Keeley and Yisheng 2001, p161) to 8-12% of GDP by Economy (2004 p19) and 18% of GDP (Chinese Academy of Sciences in Jin and Mingyuan in Keeley and Yisheng 2011, p161).

The degradation of China’s natural environment has a negative impact on China’s ability to increase wealth.  UNU-IHDP and UNEP (2012) have produced an Inclusive Wealth Index (IWI) that calculates whether a country is positioned to grow its wealth, by factoring in human, produced and natural capital.  As the table below shows China’s GDP growth per capita has been very high, at 9.6%, but when the reduction in natural capital is taken into account its wealth growth (IWI) per capita reduces to only 2.1%.  China’s degradation of natural capital is putting at risk its ability to increase wealth.  The report recommends that China re-evaluate its development strategy and begin increasing its investment in natural capital. (UNU-IHDP and UNEP 2012, pp 43, 44, 55)

 Source:  UNU-IHDP and UNEP 2012, p44

Specifically the cost of CO2 emissions on the Chinese economy has been calculated to be extremely high by UNU-IHDP and UNEP (2012, p100), with costs of 3.58% of GNI on production and 2.81% GNI on consumption.  These costs are below only Russia and Iran and compare unfavourably with a world average of 0.93% for both production and consumption.

So there is wide agreement that China’s pollution is damaging the Chinese economy.  And a widely agreed view that China should reform its economic direction in order to shift to a low carbon pathway.

A low carbon pathway to growth?

China faces the “perfect storm” in relation to its continued economic development and climate change challenges.  China’s dire pollution levels means that it does not have the luxury of ‘developing first, cleaning up later’ – the path that many already highly developed countries took.  Additionally China’s continued development must take place in a carbon constrained world.  And many countries have shifted their heavily polluting industries to China, yet have high expectations that China will reduce emissions.  These factors, explored below, conspire to pose challenges for China’s continued development.

Countries that industrialised early tended to experience different kinds of environmental damage during different stages of economic development.  Many of them were able to ‘develop first and clean up later’.  However in China these stages and problems have been conflated as the pace of development has been so rapid.  New problems are forming when existing problems have yet to be solved, compounding each other and make solving any one problem far more difficult as it is entwined with other problems. (Yisheng in Keeley and Yisheng 2011, p13-14) 

This is exacerbated as the countries that have already reached high levels of development and living standards have done so with few, if any, carbon constraints and hence have used up a substantial portion of the available “carbon budget” (Baer et al 2009).  Hence China has the task of continuing its development in a globally carbon constrained world (as illustrated in the graph below).

Source: Athanasiou 2011

An additional element of this perfect storm is that many of the countries that are already developed have shifted their heavily polluting industries to China – hence they find it relatively easy to reduce their emissions, yet China may find it commensurately more difficult.  23-33% of China’s emissions can be allocated to net exports. (Wen 2009)

In a speech to the G8 in 2008 President Hu cited these challenges as reasons for not wanting to undertake internationally legally binding emission reduction commitments :  Firstly China is a developing country in the process of industrialization and modernization, secondly China’s per capita emissions are relatively low, and are even lower if calculated in accumulative terms, and thirdly as a result of changes in international division of labor and manufacturing relocation, China faces mounting pressure of international transferred emissions.  (NIC 2009)

There are heavy international expectations that China will reduce its emissions – both to benefit its own citizens, but mainly in order to contribute to keeping global warming within internationally agreed “safe” limits.  The graph below illustrates one set of expectations for China's emissions pathway. 

Source: Baer et al 2009, p78

Setting targets & establishing plans

Against this backdrop China has acknowledged it must take action and follow a low carbon growth path.  China integrated this effort into its 11^th Five-Year Plan, and has enhanced its efforts within the 12^th Five-Year Plan. (Lee 2012)

China has 3 key mitigation actions it has committed to: 

• reduce emissions per unit of GDP (energy intensity) by 40-45% by 2020 compared to 2005;
• increase share of non-fossil fuels in primary energy consumption to 15% by 2020;
• increase forest cover and forest stock (Chinese Government, 2012). 

These targets have been translated into China’s 12^th Five-Year Plan and down to province and county level. (Li 2012 and Lee 2012)   

China is investing in meeting these targets, and reducing its emissions against business as usual.  Liu Fenghua, deputy securetary-general of the China Council for the Promotion of International Trade, says under the 12th Five-Year Plan, battling the country's environmental pollution will involve an investment of up to 3.4 billion yuan, or about 1.4% of the country's GDP for the same period. (Lee 2012)

On track to meet targets – but emissions will still go up

China has had mixed results to date against its emissions targets.  Emission targets for the 11^th Five Year Plan were reached largely because they targeted the ‘low hanging fruit’ of relatively easy reductions (Li 2012) and also because many small but highly polluting mines and factories were closed (Seligsohn 2011) especially in the final year. 

China missed its targets in the first year of the 12^th five year plan targets (Li 2012), yet assessments by Höhne et al (2011b) and den Elzen et al (2012) consider that China is likely to surpass its emissions intensity pledge for 2020 based on China’s efforts to save energy and to introduce renewable sources.  For the period 2006 to 2010, emissions per GDP decreased by 21%.

Even with the potential overachievement against China’s emission intensity target China’s absolute emissions are likely to be about 1 GtCO2e higher than previous estimates due to faster than forecast economic growth.  As energy consumption and real emissions do not increase as fast as economic growth, paradoxically, higher economic growth will make it easier to achieve China’s energy intensity target, whilst resulting in higher absolute emissions. (Höhne et all 2011b)

This is likely to increase international pressure on China to either increase its energy intensity target or to take an absolute emissions reduction target, ie: a target that would place an upper limit on overall emissions.  China has steadfastly refused to do this, given its current level of development.

Cost of action high – but benefits higher?

There is no internationally agreed level of action from individual countries in order to keep warming within the agreed goal of 2 degrees[1].  This is the focus of the current round of negotiations (the Durban Platform which is due to culminate in a legally binding agreement in 2015).  However there is broad agreement that there is a gap in ambition between the action that countries have currently committed to and that which is necessary to keep warming below 2 degrees (UNEP 2011, IEA 2012, den Elzen et al 2012).  

The International Energy Agency (IEA) has calculated the additional investment required to shift from the current set of commitments, which they calculate as 6 degrees (6DS) of warming, to the internationally agreed goal of 2 degrees (2SD).  The elements of which are illustrated below.

Source:  IEA 2012a, p62

It can be seen that China makes up a significant portion of this investment.  The IEA (2012a, p61) notes that China’s economic growth is expected to remain strong over the next decade resulting in increased investment needs across all sectors, but particularly in the power and transport sectors to meet growing demand for electricity and higher vehicle penetration rates.

Using the graph as a guide the IEA allocates to China approximately 13% of the additional investment required to move from 6DS to 2DS.  Given that China’s GDP currently makes up approximately 10% of the world GDP, but is growing quickly, on this measure it seems a little high but not unreasonable.  But the IEA graph foreshadows a roughly equivalent level of investment in the US - which is 60% larger than the Chinese economy.  This would appear to allocate a relatively light effort to the US.  This reflects a general expectation that China will take a relatively high level of effort in the fight against dangerous climate change.

The IEA (2012a) points out that whilst this is significant additional investment needed to transition to a low-carbon future, they expect China’s economy to continue to grow, that such a transition will have net economic benefits and there will be other advantages including reduced environmental damage, significantly improved health and employment benefits and reduced geopolitical stresses.  As dependence on fossil fuels is reduced, global energy security will increase.

A different path than developed countries followed – one without cars?

Past economic development within China has increased standards of living for Chinese dramatically.  However the heavily polluting economic pathway has had disadvantages and China may have exceeded the cost benefit point of this development path.  If China is to follow a different development pathway forward, what will it look like?

Many economists insist that China must boost domestic consumption in order to balance an investment and export led economy.  But where would China find the resources to fuel domestic demand if a large portion of Chinese became heavy consumers?  It would require several Earths to support the global population if every Chinese consumed resources at, or even near, the level of the average citizen in wealthier, developed countries (Chinese Academy of Sciences, 2010 in Yisheng 2011, p13). 

The size of China means that it has a disproportionate impact on international prices, which could have a heavy impact on domestic inflation if Chinese consumers starting buying at the rate of Western consumers.  For instance, if Chinese consumers were to start buying and using cars at Western rates it is likely the global price of oil would increase at a fast rate fuelling domestic inflation (Yisheng in Keeley and Yisheng 2011, p19) and international tension.  Yet this is the current trajectory, with China’s passenger vehicle sales growing 22.6% in one year, despite Beijing being plagued by traffic gridlock (McDonnell 2012).  Imports to China have also been growing, up by 12.7% on previous year (McDonnell 2012).

For all the reasons explored above China must follow a different path than the one it has taken in development so far and different from the typical development path followed by Western and Soviet economies in the past.  But there is no existing example of what this economic future might look like.  Such a change will require a huge shift in mind space for Chinese leaders, and for the rest of the world.  This shift will require mainstream financial markets to understand and take into account a new sustainable pathway, and it will require China to overcome both the pressures to continue along a tried and true development path and also some specific Chinese challenges.

Challenges with Chinese characteristics

There are a number of specific challenges that China faces in redeploying its economy in light of the constraints posed by climate change.  Some of the key challenges are outlined below.

GDP before environment

The forces of economic development within China continue to be powerfully skewed toward GDP, hence ensuring that environmental policies remain marginalized.   

The incentive structure, particularly at a local and regional level, encourages wasteful, GDP-boosting spending at the expense of environmental sustainability and an unrelenting pressure to generate employment in order to maintain social stability (Yisheng in Keeley and Yisheng 2011, p19).  For instance local enterprises are responsible for a significant portion of pollution, yet are often a key form of local employment and income to local state organisations (Economy 2004, p91-129).

Local governments have strong incentives to turn a blind eye to corporate environmental misconduct because they depend on tax revenue from these same businesses.  And in order to gain revenue local government institutions often exploit the resources they are charged with managing. (Yisheng in Keeley and Yisheng 2011, p17)

Political achievement and subsequent career advancement is gauged on the basis of GDP growth.  Reform of job performance evaluation systems for political office-holders to include environmental standards as well as traditionally calculated economic growth rates would bring enormous benefits for Chinese economy and society.  (Jin and Mingyuan in Keeley and Yisheng 2011, p167)

Structural change needed

There is a concern that even though the Chinese Government has identified a ‘third great transformation’ to a clean economy, and there are competitive pressures on Chinese entrepreneurs to adopt clean technologies, that most of the ‘fixes’ have been technological improvements only.  Whereas the problem is so deeply entrenched that an overhaul of the structural and institutional levels of the economy is necessary to affect change of the scale required.  (Yisheng in Keeley and Yisheng 2011, p19)

Two examples illustrate the difficultly in addressing structural challenges.  Since 2006 coal prices in China have been subject to market pricing and domestic coal prices have increased by more than 50% from 2006 to 2008. However a continued policy of keeping power prices low has meant that China’s top five state owned power generating groups incurred losses of USD 1.9 billion in the first five months of 2011. (China Electric Council in IEA 2012a, p20)  This subsidy of energy prices is not only a transfer of public wealth to polluters, but also undermines the attempted structural adjustment, acting as a disincentive against increased energy efficiency.

A second example - in 2010 China became the world leader in total installed capacity of wind.  However out of the 63GW of cumulative installed onshore wind capacity, only 47GW were grid connected at the end of 2011 (IEA 2012a, p27).  This illustrates both the structural problems that China faces and the cultural challenges where a mindset of announcing large projects is valued over an approach of systemically identifying problems and fixing them (Economy 2004, p121).

On the positive side China’s 12th Five Year Plan (2011 to 2015) sends a strong message about the introduction of a national carbon trading scheme after 2020. In 2011, six provinces and cities were given a mandate to test pilot a carbon pricing system, which may go into effect as early as 2013.  This will act as a strong incentive for lower emission investment decisions and could provide the signal needed for a structural realignment. (IEA 2012a, p20) 

Rule of law (or not)

As Yisheng (in Keeley and Yisheng 2011, p17) notes there are plenty of environmental laws and regulations on paper -- 20 major pieces of legislation according to Jin and Mingyuan (in Keeley and Yisheng 2011, p162).  The problem is with enforcement.

Chinese laws are typically written in general language, with specifics left to implementation guidelines, supplementary provisions or the discretion of law enforcers.  Most legislation is too abstract, general and vague and hence is inadequate for effective rule of law.  Enforcement agencies have practically unbound discretionary power.  Many laws go unenforced, or enforcement is too lax.  Environmental and resource management agencies and their staff deliberately sabotage law enforcement by bending laws to suit their own purposes or even breaking them outright.  In other instances administrative agencies can be handicapped while trying to do their work because legal guidelines are ambiguous, abstract and unenforceable.  And soft measures for violations of the law do little to encourage compliance.   (Jin and Mingyuan in Keeley and Yisheng 2011, p163 & 164)

How accurate is the data?

A recent paper in Nature (in Fogerty & Stanway 2012) identified a 1.4-billion tonne emission gap in different versions of China’s 2010 emission statistics – a nearly 20% discrepancy.  The findings expose the challenges China faces in introduce emissions trading schemes, which need accurate measurement, reporting and verification of energy use and carbon pollution at the local and national level when China has not got a history of this kind of account keeping.  (Guan in Fogerty & Stanway 2012)

Conclusion

There is no doubt that China’s development must follow a different path forward, compared with the highly polluting path it leaves in its wake.  China faces huge challenges in shifting to this low pollution pathway – some of these challenges have Chinese characteristics and will be difficult to overcome as they require not just technological but more importantly institutional and structural change.  However, the Chinese Government has recognised the need for these changes and taken steps upon the new pathway. These changes will have not inconsequential costs, but the economic and social benefits outweigh the costs.   The question is whether China can make the changes quickly enough to continue growth on a low carbon pathway, and hence continue to increase the material living standards of its citizens whilst improving the natural capital of the country.  If the Chinese Government fails in this task it is likely to come into conflict with its own citizens, who will demand a better quality of life, and the international community who expect a high level of action on climate change from China.

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[1] At the UN climate change talks countries have agreed a goal of keeping warming below 2 degrees and agreement to reassess whether 1.5 degrees is a more appropriate goal (UNFCCC 2011).