Kate Mackenzie Will China’s environmental problems affect its growth?

Most players in energy outside the country are fascinated and intrigued by China. Everyone wants more clarity on its international oil and gas plans, its coal consumption, and, more than anything else, what its long-term strategic plans are with regards to climate and energy security. Because China, of course, does plan ahead. It is clear from the country’s numerous efforts to secure long-term supplies of fossil fuels that it takes energy security very seriously – and this ties in well with expanding its own renewables capacity and regulations, such as supporting low-emissions cars.

But is all this enough to counter its fast-growing fossil fuel consumption?

We know that China wants the social stability that economic growth has so far brought. But how much does China care about climate change, once energy security is addressed?

Right now, several of the country’s south-western provinces are in the grip of a severe drought, thought to be the worst in a century. Cloud-seeding, a popular (if not completely credible) technique in China, has been attempted in the area, and more wells are being drilled. Xinhua quotes experts attributing the drought to climate change.

However Willem Buiter, former FT columnist and blogger and now chief economist at Citibank, says environmental pollution will ultimately become a problem for economic growth — but local pollution, not climate change (emphasis ours):

The traditional Chinese growth model of export-driven, capital-intensive, energy-intensive and commodity-hungry production and depressed levels of private and public consumption is unlikely to be environmentally sustainable. The first constraints to bind are unlikely to be the global environmental externalities from Chinese growth, such as global warming and other forms of climate change. Instead local, regional and national environmental constraints are likely to limit China’s future growth if the country persists with its traditional strategy (see e.g. Economy (2007) and Zissis and Bajoria (2008)). Fresh water pollution and under-pricing of water are producing growing shortages of this vital commodity. Air pollution is creating public health and social problems in most urban and industrial areas. Soil pollution, degradation and erosion, including desertification, are a growing economic, social and political problem.

However just because it’s a problem, doesn’t mean leadership will take appropriate action:

The Chinese leadership are aware of these problems (see e.g. MEP (2009)), but fear that any material overhaul of the existing growth model would threaten employment growth and cause social instability. The opposite seems to be the case: China’s traditional approach to economic growth has likely been a defective source of employment growth.

Buiter goes on to argue, quoting Aziz and Dunaway (2007), that China’s focus on capital-intensive (and therefore, resource-intensive) growth has actually led to a slower rate of employment growth than would usually be seen. The reason is that capital has fallen in comparison to wages, despite China’s plentiful supply of labour. The result is that it makes more sense to develop resource-intensive sectors and methods, rather than using service- or knowledge-based approaches. But this means China gets less growth in employment for every point of GDP growth than in most countries.

Buiter also refers to a paper by Carin Zissis and Jayshree Bajoria, which can be found on the Council on Foreign Relations’ website. The two also reference Elizabeth C. Economy, a Council on Foreign Relations fellow whose 2004 book ‘The Rivers Run Black’ looked at the extent of China’s environmental problems.

Economy believes it is wrong to dismiss the problems as a normal phase of economic development, saying the “scale and scope of pollution far outpaces what occurred in the United States and Europe” during their industrial revolutions.

Zissis and Bajoria argue that, importantly, opposition to environmental pollution is a factor:

The government received six hundred thousand environment-related complaints in 2006, a figure that has risen roughly 30 percent each year since 2002. Aside from economic concerns over the cost of environmental degradation, the government recognizes that environment-related social unrest threatens central authority.

One of the most interesting comments on Mark Lynas’ controversial claim that China wrecked the Copenhagen talks was a question – ‘how high above above sea level, on average, is Shanghai? i heard it was just under 4m.”

Another replied - ‘The Chinese leaders may take the loss of Shanghai as a price worth paying.

But will they, really?

Related links:

Willem Buiter’s Global Economic Outlook paper (FT Alphaville – Longroom members only)