Can China still afford to go green?

August 8, 2013 by Steve Downie

In a speech in June 2013, President Xi Jinping pledged that China “will not sacrifice the environment for temporary economic growth”. Given public pressure to clean up the environment and achieve growth, achieving a sustainable balance between these two objectives is easier said than done.

Analysts are now predicting that China’s GDP growth will be no greater than 7.5% this year. Most agree that China’s economic growth looks more fragile than at any point in the last two decades. The leadership knows that it cannot afford to stall now. As the economy has swollen, so have the public’s expectations. China is now the world’s second biggest economy, and its citizens expect commensurate improvements in income levels and living standards.

However, an important part of the living standards equation is the environment. Residents of Beijing are used to dealing with thick smog, but this year air quality has reached new lows. In January, the PM2.5 count, a measure of the number of fine particles in the air, was literally off the charts. Anger over other environmental issues has begun to spark social unrest: in 2012, officials in Jiangsu province were forced to cancel a waste pipeline project when 1000 environmental protesters occupied a government office.

In many ways, China is a victim of its own rapid growth. In 2007, China overtook the USA to become the biggest CO2 emitter in the world. Figures from the World Bank show that in 2008, for every dollar of GDP, China produced 0.8 kg of CO2. This made China’s economy the most carbon-intensive of the BRIC (Brazil, Russia, India, China) countries. High PM2.5 levels on major cities are directly attributable to three factors: increased car ownership, increased power consumption, and increased manufacturing output. In other words, Beijing is choking on its own economic success.

Policymakers are making environment protection a priority.

Commenting on the recent publication of damning air pollution statistics, environment minister Zhou Shengxian said that China could “no longer afford further delays in its cleanup efforts.” However, experience shows that such delays are inevitable, due to the inefficient command structure through which China implements policy.

Generally speaking, targets and parameters for reform are set centrally, and it is left to local governments to find a way to meet these targets. Financial oversight of local projects can be patchy. In total, 1.3% of GDP is invested in “environmental protection” annually, but the Chinese Academy for Environmental Planning found in 2007 that half of this amount is lost through corruption or mis-allocation of funds to unrelated projects. Certainly, the regular appearance of “model eco-towns” on local news reflects a tendency towards launching major construction projects (which can be a lucrative source of kickbacks for local officials), as opposed to modernising existing infrastructure.

That said, there are some promising examples of substantial reform at the local level: Zaozhuang, a city in the eastern province of Shandong, has recently closed 30 outdated coal mines, and is encouraging the growth of new industries to absorb the displaced workers. In an interview with Xinhua news agency, the city’s Mayor, Zhang Shuping, seemed prepared to accept slower growth for environmental gains:

“These transformation projects have damped our economic growth figures but the city is moving toward a promising future” But these local successes do not solve the national problem. Closing coal mines in one city does not solve the essential problem of how China will power its economy in the coming century. On a national level, per capita CO2 consumption has been rising steadily, reaching European levels in 2011. However, like Europe, emissions levels vary widely from one region to another.

Targets for emissions reduction rest on the shoulders of local officials, and the central government’s attempts to motivate them often produce strange results. Since 2007, officials’ promotion prospects have been tied to their performance in this area via a points system. As a result, environmental reforms resemble a game played between provinces, in which the loser is the one who is left holding all the CO2.

A paper published by the US National Academy of Sciences in May found that wealthier Eastern provinces are effectively outsourcing their CO2 production to poorer western provinces. Researchers estimated that 80% of emissions related to goods consumed in the eastern provinces were released in western provinces. In this regard, China is a microcosm of the wider world, making environmental improvements at the expense of its poorest regions. These imbalances reflect an overreliance on targets, and a lack of coordination from central government.

Forced to choose between the prospect of economic growth and environmental targets, some local officials are reluctant to take on any environmental reforms at all. A recent Bloomberg report relates how Zhang Haibin, an associate professor at Peking University, was told by a group of 60 local officials in April that they “do not dare to really monitor pollution”, as doing so might affect growth. Speaking at a forum, Zhang said that when “economic growth conflicts, environmental targets always give way.” These officials hear Xi Jinping’s tough talk on the environment, but still don’t believe that it is politically safe to clean up industry at the expense of GDP growth.

Looking ahead, there are encouraging signs that the State Council is ready to play a more direct role in the implementation of environmental reforms at the local level.

Yasheng Huang, a professor at MIT’s Sloan School of Management, is impressed by the Ministry of Finance’s proposal to introduce a nationwide carbon tax, which would “give [Chinese firms] and households an incentive to embrace renewable-energy sources”.

Maintaining a balance between GDP growth and environmental reforms will not be easy, but to have any chance of success, the central government must establish a clear and joined-up system of incentives for local officials and businesses to go green, and take on more responsibility for the oversight and coordination of local initiatives. With its cities choking, and its economy stuttering, the actions the CCP takes now will determine whether China will meet its citizens’ high expectations in this century.

Tags: environment, green,

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