The China Syndrome: the world is waking up to climate change – can China respond?

It is received wisdom that China is on an unstoppable pathway to becoming an economic superpower. With a poor domestic and international environmental reputation, Insight Quarterly investigates how China may respond to an increasing awareness of climate change.

In our research to answer the question we investigated the link between economic development and climate change, its implications for China and made recommendations as to how these can be reconciled within an international context.  Using the three pillars of sustainable development, we analyse how climate change may impact China internally, demonstrating the need for a proactive stance on the world’s stage.

China’s attitude to local pollution is that the economic needs of growth and its associated pollution must be balanced against potential social unrest and improving the lives of 200 million poor Chinese.  This fundamentally influences strategies to respond to international pressure related to climate change.

We believe that China should be increasingly proactive in its domestic and international efforts to reduce its carbon footprint. It is already the largest developing country recipient of carbon financing through the Kyoto Protocol’s Clean Development Mechanism, however as yet no successor to the treaty exists.

By forming a central committee led at the highest levels of the Communist Party strategy can become part of the country’s five year planning cycle.  A suggested strategy is to steer and participate in the post-Kyoto protocol framework currently under discussion, and to ensure that the existing and planned rollout of dirty coal fired power stations can be adapted and upgraded to cleaner technology, together with a long term goal of using low or zero carbon power generation.
 

The economy heats up
Since Deng Xiao Ping introduced economic reforms in the 1980s the Chinese economy has grown exponentially.

Figure 1.  China’s economic rise (PRC Bureau of National Statistics, Hitotsubashi University (Japan)

This growth has caused significant environmental degradation which is felt nationally and internationally. China is the fourth largest economy in the world and it is about to become the world’s largest polluter and emitter of greenhouse gases.  The Chinese government and people are increasingly aware of climate change through international political pressure, increasing coverage by the media and health problems respectively.  Indeed, a recent survey carried out by the BBC say that the Chinese people are most willing to accept taxes on fossil fuels to help mitigate the growth of greenhouse gas emissions.

Part of the challenge of mitigating the production of greenhouse gases such as CO2 is that it is considered a non-point source pollutant i.e. it is produced by many sources, for example each internal combustion engine or boiler.  With the atmosphere, for which no one pays, being degraded as a result, a ‘tragedy of the commons’ scenario has unfolded. Individual countries therefore have little incentive to act unilaterally by reducing emissions, as others will benefit from their action.  This is part of the ‘prisoner’s dilemma’ that faces China as well as the international community.

Thus the Kyoto Protocol’s Clean Development Mechanism (CDM) was devised to incentivise both developed and developing countries through setting up a trading mechanism that encouraged investment in clean technologies by developed countries in developing countries, thereby hoping to ‘leapfrog’ more polluting technologies seen during the industrialisation of the West.

China is currently the second largest recipient of carbon financing under CDM, having issued 25% of certified emissions reductions (CERs) (23m CERs) to date, although China is expected to deliver some 78m CERs annually; around 40% of the total, going forward .  This represents considerable income to the country, as each CER ranges between €10-€20 dependent upon the purchase agreement.

This demonstrates that the Chinese economy can benefit from developing in a ‘cleaner’ fashion through international cooperation. It would be well advised to continue in this vein, as climate change poses real dangers to the country’s future development. 

Shaky pillars
We subscribe to the view that the “three pillars of sustainable development”: environmental protection, social and economic development, are mutually reinforcing in the long run. If one of the three pillars starts to crumble, the others may follow in a domino effect.  In the following section we examine China’s performance and attitude with respect to each of these pillars.

Economy

The potential economic impact of climate change on China is not well understood with commentators yet to reach a consensual view on the extent to which the nation will be affected.  However there are some broad predictions of the macroeconomic forces influencing China’s economic outlook.

• A carbon tax - a tax on energy sources which emit carbon dioxide - is the preferred tool of many economists to internalise the cost of carbon.  It would increase export prices because of China’s dependence on coal fired power generation. This would reduce demand and growth.
• Developed nations increase protectionist policies or trade tariffs in response to China’s ‘free-rider’ attitude, limiting exports which drive the engine of growth.
• Natural disasters and disease outbreaks break down China’s vulnerable developing infrastructure.
• Economic resources diverted from growth to develop more sophisticated resource management solutions because of increased variability and volatility in weather systems.
• Reduced agricultural yields diverting growth into food production or purchase.
• Negative environmental feedback because of an increase in per capita energy consumption as more extreme climatic conditions lead to increased heating costs.
• Social migration causing upheaval and lowering growth.

Environment

Between 2001 and 2006 Chinese energy consumption doubled from 920 MtOE, to 1880 MtOE.  To meet this energy demand, every week two 500MW coal-fired power plants start production - a capacity equivalent to that of the whole British grid.  China will roll out an additional 600 such power stations in the next ten years.

There is a strong correlation between the level of atmospheric CO2 and mean temperature.  The level of atmospheric CO2 has been rising dramatically with increasing levels of economic development since the Industrial Revolution in the 18th Century. As global energy demand has soared so has the use of fossil fuels. Temperatures are expected to continue to rise as well.

It is now widely accepted that climate change acts as a magnifier for existing environmental, economic and social challenges, such as flooding, migration, resource conflicts, the spread of diseases and health degradation.  However it appears that the rise in living standards within China over the past 20 years has not reached the point on an inverted Kuznet curve whereby environmental degradation is reversed through heightened focus on, and investment in, ways to build environmental capital.

China’s environmental record makes alarming reading. It has 16 of the world’s 20 most polluted cities by air quality indicators, all seven major river basins are polluted – many to a ‘serious’ level. Current estimates put the economic impact of environmental degradation at around 5.8 per cent of GDP. If factored into the economic account, this would reduce China’s growth by over half.

These indicators act as a warning for the current low valuation levels placed on environmental services.  Historically China has always had problems with water. Climate change could alter rainfall patterns, destroy the value of the three gorges dam project and  ripple-through to affect food production and potable water causing, social unrest and flooding.

Drought
Large parts of China, particularly the heavily populated northeast, are arid with large areas given over to deserts.  While the changes to rainfall patterns may positively affect certain areas, others will suffer from increased droughts similar to that of last year.

Flooding
Much of China’s vast population live on major fertile flood plains between the Yangtze and Huang He (Yellow) Rivers.  These are prone to disastrous flooding episodes, for example last year some 200 million people have been affected by storms with an economic cost in the region of £3.5 billion.  According to Chinese climate change scientists, climate change is leading to more intense storms.

The shrinking of the No 1 Glacier, on Tianshan Mountain, in Northwest China's Xingjian Uygur Autonomous Region, was recently reported by China Daily.  Environmentalists expect that the impact of the glacial melt will include floods and landslides but will also reduce the freshwater supplies at lower levels due to changes to the glacial runoff. This impacts not only China, with its Yangtze and Huang He Rivers, but also its neighbours with the Mekong, the Gangees, the Bharmaputra, the Indus, and the Irawaddy feeding from the shrinking glaciers of the Himalayas.  The consequences of such changes are unknown.

Society

Perhaps the pillar to which the Chinese government is most sensitive is the extent of social unrest and disharmony – here we mention broad trends resulting from climate change which are likely deeply impact society.

Environmental refugee-ism
A social refugee is someone fleeing poor or worsening, environmental conditions.  With its huge population even relatively small climate change influences could cause massive relocations. Since such movement is currently controlled by the government in order to maintain social stability there is a real risk of upheaval and a loss of central control.

UN researchers suggest that climate change is a major factor, exacerbating the impacts of unsustainable farming methods and population growth.  Flooding displaces many millions each year e.g. 1.22 million houses ruined in recent flooding in Hubei province.

Civil unrest
The Chinese Communist Party’s Central Committee identified in the mid 1990’s that environmental degradation and pollution represented one of the four leading causes of social unrest in the China.

Conflict with neighbours
The effects of China’s economic growth are also affecting their neighbours. Pollution is carried over the Pacific to the west coast of the US and causes acid rain in South Korea and Japan.  This is creating an unwelcome friction between the countries.

Nearly half the world's population lives in river basins which have their source in China, according to Leo Horn, an adviser to Britain's Department for International Development.  Observers are increasingly seeing water management as a current and future ‘conflict resource’ in Asia.

As an economy heavily reliant on fossil fuels to drive its economic development and with 76 million rural people living in extreme poverty (a further 120 million live in poverty), maintaining China’s sustainable economic growth will require a delicate balance between controlling greenhouse gas emissions, directing international pressure to mitigate the causes of climate change and avoiding internal social conflict caused as a result of climate change and other local Chinese pollutions.

In light of the risks to its economic development from climate change China should take an active role in developing an international response to this issue.

Avoiding meltdown
Climate change is a global challenge that cannot be overcome by unilateral action.  We believe that China faces difficult decisions to ensure that it achieves its goals of creating a harmonious society whilst maintaining economic development in the light of the new-found global awareness of the issue.

China has argued that the atmospheric stock of greenhouse gases resulting from the industrialisation of the West has resulted in current climate change.  As long as the USA postpones action, so can China – in effect a prisoner’s dilemma scenario.

If China is seen as an international free rider with respect to greenhouse gas pollution, it faces either increasing pressure from the rest of the world as the impacts of climate change become more apparent, or risks assisting a ‘tragedy of the commons’ on an unprecedented and global scale with associated internal and external tensions.

Regardless of whether the causes of climate change are of national or international origin, the impacts have the potential to create social disruption in China which could spiral out of control if food shortages, flooding or water shortages occur.

In anticipation of almost certain international and internal pressures we believe that China should adopt a holistic, anticipatory, long term strategy to tackle potential problems. The following recommendations make up a high-level change programme:

1. Creating internal cohesion

Identify opportunities & threats
China’s leaders have recognised that climate change is a fundamental threat, but they must balance it against sustained economic growth. There is a need to recognise that a low-carbon economy can provides a future compromise and opportunity. Signs of this recognition exist in new policies being enacted.

Create an empowered group
The structure of China’s governmental departments and the interdisciplinary nature of the challenge mean that a new, empowered cross-functional group is required to centrally direct activities. Members of the group need to have significant political capital, power and skill in order to drive changes through. The existing Office of National Coordination Committee on Climate Change may provide the correct platform, but it needs the correct individuals. That demands support from the highest level of authority within the Chinese Communist Party and requires balancing short-run economic development against long term greenhouse gas emissions and local environmental changes resulting from climate change.

Create a change programme
This needs to include a comprehensive, realistically achievable, low carbon energy strategy with supporting legal framework. A centrally controlled committee would then be able to implement the envisioned future energy mix as well as the necessary incentives and disincentives to force economic actors in the planned direction. Such a programme would need to be included in the five year planning process. Adopting a market-based energy price would enable the cost of carbon to be internalised thereby providing significant incentives towards cleaner energy production and greater energy conservation. Penalties for those who contravene the laws need to be rigorously enforced, correcting the current lack of prosecutions related to the existing environmental legislation

2. Identifying early opportunities to demonstrate success

Focus on energy efficiency
Initial focus on driving greater energy efficiency is needed.  According to consultants McKinsey, massive benefits exist for developing countries such as China to capture improving energy efficiency.  China, as the world’s industrial centre, suffers from an energy crisis which is exacerbated by poor energy performance.  A roll out of 600 dirty Coal-fired power stations over the next ten years whilst cheap is inefficient. Increasing the upfront capital cost is required to capture significant benefits over the lifetime of new capital equipment. For a country with massive current account and trade balance surpluses, wise investment now can help provide for a more efficient future. This means ensuring that old and current power generation technologies can be adapted or upgraded to cleaner technology such as the Zhejiang ultra-super critical coal fired power station.

Post-Kyoto framework
China’s success in the Kyoto framework needs to be built upon in its successor.  The government has implied its support for a move towards a ‘contraction & convergence’ framework in which rights to pollute are given on an international per capita basis, with the pollution rights to tradable between parties.  This would provide an equitable basis for reducing pollution. China could use its increasing political weight, on behalf of the developing world, to proactively bring this onto the world agenda.

China’s economic interests are best served by promoting free trade in global markets for its goods and services as well as tradable pollution rights and further developing access to energy resources whilst preserving flexibility in labour and internal commodity markets.

3. Creating a low-carbon future

Carbon Sequestration
Significant international development in carbon capture and storage technology is a potential solution to reducing greenhouse gas emissions.  Commercially successful techniques can reduce China’s carbon footprint provided new and old plant can be fitted with capturing technologies. However an urgent action is required to plan to allow retrofitting to occur in a cost-effective manner. This can benefit from mechanisms such as the Clean Development Mechanism (CDM) of which China is the leading recipient, to bring in carbon financing into proposals.

Nuclear
Newer, ‘safer’ technologies such as pebble bed nuclear reactors may provide another component of the low-carbon energy mix, although security issues and waste treatment are still unresolved.

4. Green products

There will be increasing demand for renewable and low-carbon energy technologies throughout the world.  China’s competitive advantage in manufacturing costs can be brought to bear on technologies such as photo-voltaics, solar thermal and wind turbines. This would lever China’s drive for higher level engineering for higher engineering standards and low cost-high quality Chinese brands.

5. Adaptation

Regional
With the majority of Asia’s large rivers sourced in the glaciated Himalayan mountains within Tibet, regional cooperation will be required to ensure that changing rainfall  patterns do not create conditions of international competition over diminished or unpredictable water supplies.  Similarly, well regulated yet free markets for goods (e.g. food) and services (e.g. engineering) can help the region adapt to different climactic conditions.

International
Continued, constructive engagement with the international community will be required to capture benefits and efficiencies as policies and mechanisms begin switching to adaptive needs.

Summary
China, due to its scale, provides the world with an uncomfortable case study in how sustainable development may or may not work. Gaining the economic resources is important in helping the country to move towards a sustainable trajectory.

Yet economic resources will not be translated into environmental improvements unless there is political will. Environmental difficulties are translating into social unrest, and are quickly moving up the political agenda. Reportedly there are discussions underway to move the EPA towards ministerial status in order to give it the clout needed to synchronise economic and environmental development.

It is important that this goal is achieved, and not just for China’s sake.

This report was undertaken as part of the 2007 Imperial EMBA study tour to China. Sustain would like to thank the report’s authors for their permission to publish this report.