Beijing Could Choke The World Or Save It

While ministers from all over the world gathered in Poland for the annual U.N. climate summit in Katowice, the most fateful decisions on climate were being taken out of sight in Beijing.

After surging for two years, China’s industrial output and carbon dioxide emissions growth are slowing down, and the leadership is confronted with a trillion-dollar question: whether to unleash another gigantic construction boom with a stimulus package even larger than the last two rounds, in 2008-12 and 2015-2017, or whether to finally embark on a transition to higher-quality, more sustainable growth.

The consequences of this choice are immense not only for China’s economy, but also for the global climate. A new round of industry and construction stimulus would condemn global emissions to grow for another several years—at a time when, according to a recent U.N. report, we only have 12 years to halve emissions or face socially catastrophic consequences.

China’s economic policy has been the key driver of global emissions for the past two decades, with repeated rounds of debt stimulus and withdrawal leading to record increases in emissions in 2008-12, and a rebound in 2017-18, with a period of falling emissions in between.

China has an extremely carbon-intensive economic model due to its high reliance on centrally driven construction. The country emits more CO₂ per capita than the EU, despite having just a quarter of the gross domestic product per capita. Maintaining this skewed economic structure requires constant injections of credit, which have seen China’s debt climb rapidly as a proportion of its total assets.

The need for the economy to transform away from its excess dependence on heavy industry is well known and well recognized, but the losers of such a transition, principally state-owned smokestack industries such as steel, cement, and non-ferrous metals, as well as the construction sector, are formidable political forces.

Shifting to a consumption-based, high-tech and service-driven economic model, already envisaged in the economic blueprints of President Xi Jinping’s administration, such as the 2013 Third Plenum communiqué, the 13th Five-Year Plan, and Xi’s speech at the 2017 Communist Party Congress holds huge potential for reducing emissions and environmental impact while delivering on the professed policy goals of high-quality growth, improving living standards, and environmental protection.

As China’s leaders in Beijing contemplate their choice, they do so in a city once again shrouded in heavy smog. Beijing’s PM2.5 – the microscopic particles that are among the most harmful forms of pollution – levels went up by 14 percent year-on-year in October-November, against a target of cutting pollution by 3 percent this winter compared with the previous one. The central government gave free rein to local governments to regulate their own heavy-industry output this winter, which unsurprisingly resulted in a jump in emissions from officials more concerned with their districts’ GDP figures than national statistics.

This comes despite China making remarkable gains in air quality from 2013 to 2017, as coal consumption fell, new strict emissions standards were introduced for power plants, and enforcement of air emissions regulations was strengthened massively.

Last year, in an unprecedented last-minute campaign to meet air quality targets, thousands of industrial plants and millions of households were shifted from coal to gas and electricity, enabling air quality to improve dramatically even as coal consumption rose. The results of last winter’s campaign were amplified by exceptionally favorable weather—strong winds from the grasslands in the north.

Now much of the low-hanging fruit—installing state-of-the-art scrubbers in power plants and large factories, eliminating small-scale coal burning, etc.—has been picked, but the massive heavy-industry clusters around Beijing are still there. As a result, the capital tops air pollution rankings among Chinese cities, and both in Beijing and elsewhere further gains in air quality will become progressively harder as long as the country’s excessive reliance on highly polluting heavy industries is not addressed.

The solutions to China’s economic transformation, debt load, and pollution issues are intimately linked—the same state-controlled sectors are responsible for the lion’s share of China’s corporate and local government debt, for most coal use and CO₂ emissions, as well as for the majority of air pollutant emissions.

That means that China doesn’t have to choose between quality of life and reducing pollution. Choosing slower economic growth will actually improve living standards. That might seem counterintuitive, but consider that about half of the entire economic output in the country is directed at capital spending, mainly on projects with questionable economic value. Effectively, Chinese households have been saving a lot and consuming little as the country got rich, and it’s now their turn to benefit.

Redirecting the resources currently spent on excessive investment to households would unequivocally raise their standards of living. Furthermore, household consumption is far less carbon-intensive than state-directed capital spending on yet more airports, highways, half-empty technology parks and megabridges.

Unfortunately, since late 2015, economic policy has been slowing down rather than enabling this transition: the economy has yet again been driven by construction and bulk industry, resulting in surging CO₂ emissions. A new round of stimulus would mean further putting off the transition.

So, if China’s leaders decide that another round of stimulus is necessary, is everything lost?

Not necessarily. First of all, stimulus could target consumption through tax cuts and income transfers, rather than unleashing another wave of construction. Furthermore, to soften the blow for traditional economic sectors, China has enormous investment needs in environmental protection and clean energy, and potential to scale up, such as by training millions of workers to install insulation and heat pumps in rural households, or to retrofit buildings that were built to shoddy energy standards in the construction boom of the past two decades. The continued deployment of renewable energy is already helping support the industrial and construction sectors, but further expanding the sector could secure much of China’s future energy needs.

A stimulus focused on energy savings and clean energy would still push emissions up in the short term, but it would store up major emissions reductions once the construction boom is over. This is in direct contrast with the effect of traditional stimulus which just perpetuates dependency on heavy industry and stores up even more emissions for the future.

However, a green stimulus would not solve the underlying problem of an economy addicted to enormous levels of capital spending and construction, so the question of how to transition to a sustainable economic model would simply be put off further. For the coal industry, one of the heavily indebted state-controlled sectors and one of the major benefactors of traditional stimulus, massively ramped up investment in clean energy would make the eventual downturn even steeper. Perhaps the best-case scenario would be a measured, green investment programme combined with a determined push to transform the economy.

For decision-makers in the rest of the world, the fact that China’s domestic economic policy decisions dwarf almost all other factors in driving global emissions presents a very challenging problem.

Interestingly, the trade conflict between China and the U.S. is raising some of the key issues behind China’s high carbon intensity—especially subsidies to state-owned heavy industry and industrial policies that favor highly polluting industries and skew the country’s economic structure.

Above all, all major emitters have to ramp up efforts—China is the biggest emitter in the world, but it’s still responsible for only 25 percent of global CO₂ emissions, so there is plenty for the rest of the world to do. But it’s also time for other countries to raise this issue with China, or an outdated and toxic economic model may end up dooming everyone.