China’s Environmental Moment of Truth

Pollution is invariably one of the first impressions visitors form of China. From bicycles to cars in 25 years, urban China rarely sees much in the way of blue sky anymore. Rapid and large-scale industrialization only compounds the problem.

The problem is twofold, in my view: It is not just an issue of moving from dirty to clean technologies, but also a matter of shifting the macro structure of the Chinese economy from a pollution-intensive to an environmentally friendly mix.

This latter point is a key and often overlooked aspect of China's environmental challenge. It is also a crucial element of the rebalancing challenge that shapes China's macro debate. The issue, in a nutshell, is that the Chinese economy is heavily skewed toward exports and fixed investment, which now collectively make up over 80% of China's GDP.

This concentration represents the most lopsided mix of a major economy in modern history. It is not sustainable in that it threatens the twin possibilities of a deflationary overhang of excess capacity and a protectionist backlash to open-ended exports. And it is not sustainable from an environmental point of view because the industrial/production-dominated growth model has a natural bias toward excessive carbon emissions.

On a per capita basis, China's pollution problem hardly jumps off the page. Its ratio of carbon emissions per person is less than half the global average — and less than one-tenth that of the world's biggest polluter, the United States. China's enormous population, of course, distorts those comparisons.

On an absolute basis, it's a different story altogether. China's total carbon emissions are more than double those of Japan and Russia, fractionally behind the European Union’s, and a little more than half those of the United States.

The essence of the Chinese environmental degradation problem is both its scale and growth. From 1992 to 2002, CO2 emissions in China have expanded at a 3.7% average annual rate, more than two and a half times the global average of 1.4%. At that rate, according to a recent report issued by the International Energy Agency, China will surpass the United States as the global leader in carbon emissions by 2009.

In terms of sulfur dioxide, China's current rate of discharge is already double its so-called environmental capacity —responsible for an acid rain that now covers about one-third of China's total land mass. According to SO2-based measures of air pollution, seven of the ten most polluted cities in the world are in China.

With respect to emissions of organic water pollutants, China leads the world by more than three times the second-largest polluter, the United States. Moreover, fully 90% of China's urban rivers are polluted, and 90% of its grassland has been degraded.

The paucity of data on the carbon intensity of the various sectors of the Chinese economy makes it difficult to quantify the environmental implications of its unique GDP mix. The carbon intensity of the United Kingdom’s experience illustrates what China is up against.

Not surprisingly, according to The Stern Review, services are at the low end of the U.K. spectrum, averaging around 0.3 on the carbon intensity scale. For manufacturing industries, the range is wide — motor vehicles (0.5) and sporting goods/toys (0.8) are at the low end, while the paper (2.4) and steel (2.7) industries are at the high end.

A comparable dispersion is evident in the energy share of U.K. business costs, with non-transportation services at the low end of the spectrum and manufacturing at the high end.

OK, China is not exactly England. But I strongly suspect that the relative dispersion of the carbon- and energy-intensity of the major sectors of the Chinese economy is comparable to that of the U.K.

Under that presumption, consider the following: The latest data put China's industrial sector at around 52% of its GDP, well in excess of the 32% share of the average developed economy and considerably higher than the 37% average of the low- and middle-income countries of the developing world.

That implies the manufacturing-intensive Chinese economy is highly skewed toward a pollution- and energy-intensive model of economic activity.

In the case of China, there is an added complication — it is the heaviest consumer of coal of all the major economies in the world today. According to China's Development Research Center, coal-driven power accounted for fully 79% of total electricity generated in 2003, eight percentage points higher than in 1990 and essentially double the 40% share of coal-powered electricity for the world as a whole.

The adverse environmental implications of coal power are well known. According to the Stern Review, the CO2 emissions of coal per unit of energy generation are twice as much as those associated with natural gas and about 50% more than those generated by oil-burning technologies.

Inasmuch as U.K. coal consumption — fueling 34% of the country's total energy generation — is less than half the share in China, there is good reason to believe that the pollution implications for the Chinese economy per unit of GDP would be a good deal worse than those implied by the British results cited above.

The bottom line for China is a GDP that is far more predisposed toward environmental degradation than any other major economy in the world today. For an economy that is growing at 10% per year, that spells an endgame of environmental crisis — sooner rather than later — if it stays its present course.

And for the planet, even though China currently lags behind the big polluters of the developed world, it only compounds the perils of global climate change. The principles of global remediation, as put forth in international agreements such as the Kyoto Protocol, have always recognized a progressivity of burden sharing — that rich developed economies should fund a greater share of the mitigation than poor developing economies.

Yet, the Chinese environment is now nearing a critical tipping point that demands urgent action on its own merits rather than special dispensation because of its status as a low-income developing country.

China has a rare and important opportunity to kill two birds with one stone. A successful rebalancing of the Chinese economy — moving away from excess reliance on investment and exports and embracing more of a pro-consumption growth model — would be a huge plus in dealing with two key issues: On the one hand, it would enable China to avoid the capacity excesses and protectionist risks that might arise from a continued expansion of a severely unbalanced real economy. But it would also tilt the mix of Chinese output away from pollution- and energy-intensive growth.

Don't get me wrong: This should not be seen as a substitute for major environmental policy initiatives — the development and implementation of new technologies and incentives that would lead to a cleaner GDP. But rebalancing could well be an important down-payment. By shifting the mix of economic growth away from emissions-intensive activities, China would not only avoid serious imbalances — but it would also buy some important time on the environmental front.

The latest statements from official Beijing are quite encouraging in addressing this conjoined problem. Premier Wen Jiabao's "Work Report" to the recently concluded National People's Congress strongly endorsed a strategy of macro rebalancing, energy conservation, and environmental remediation.

But the time for talk is over. Just as China has had the will and determination to deliver on the reform front over the past 28 years, I am hopeful that it will rise to the occasion and finally deliver on the rebalancing front. In the end, there is no other choice. Time is growing short — for China and for the planet.