China’s thirst for energy is literally choking the country
Recent readings of air pollution meters in Beijing have rated the air well past dangerous—literally off the charts of what was once thought to be the maximum. In January 2013, the “airpocalypse” affected 800 million people. It was caused not only by emissions from coal-fired plants but also by millions of cars and trucks. In the first two days of the airpocalypse, over 10,000 face masks were purchased in Beijing through the online shopping site Taobao. Many expatriates do not last more than a year or two in the city. They are choosing to leave because of the pollution and its health impacts on their families.
Dealing with pollution, and the energy sources that cause it, is a complicated game of central and local jockeying around natural resources. Much like the United States, the coastal regions consume energy more productively and efficiently than the rest of the country and are the first to take on mandatory efforts to curb greenhouse gases. The inland parts of the country that are trying to catch up economically are less likely to pursue cleaner production methods. In fact, for many inland provinces, economic growth is tied to the coal and oil industries.
A less polluted growth path
In the face of all this, China has been wrestling with how to make the shift to cleaner energy sources without cutting off the economic growth that it needs to develop its interior and western regions. That tightrope walk is embodied in how the country has slowly unrolled its climate change policies. In September 2012, China announced an experimental emissions trading system for seven provinces and municipalities covering 40-60 percent of emissions in each place. Five of those jurisdictions are coastal: Shenzhen, Beijing, Tianjin, Shanghai, and Guangdong. Two are in the interior: Hubei and Chongqing.
Taken together, those places are among the most productive in China, accounting for more than one quarter of China’s GDP, even though they are home to less than one-fifth of the population. They are already among the most energy-efficient provinces in the country and the least carbon-intensive, producing only about one-sixth of the country’s CO2 emissions.
Still, precisely because they are more economically advanced, they are being asked to cut their emissions first. The export powerhouse provinces of Guangdong and the Yangtze River Delta each have been asked to do the most by making an 18 percent reduction in their energy intensity. Chongqing, Sichuan, and Shaanxi, by comparison, only need to improve by 16 percent, and the western provinces only need to improve by 10 percent.
All seven regional carbon markets are now operational. The last pilot project, the Chongqing Emissions Trading Scheme, kicked off in June 2014. The seven official emission trading schemes cover 18 percent of the country’s emissions. The launch of these pilots makes China the second largest carbon market in the world after the EU’s. Each scheme is different, with Guangdong auctioning permits, and Shenzhen allowing investors to trade, and with different pricing systems for the quotas, and Tianjin’s allowing for market stabilization measures if prices get too volatile.
Challenges Remain for China’s Shift to Clean Energy
Two big challenges remain if China is going to shift to cleaner energy. First, the more developed coastal provinces have to follow through on implementation. Chinese provinces regularly underperform their stated outputs on environmental protection. If the wealthier provinces do not reach their goals for implementation, there is little chance that poorer inland and western provinces will do any better.
The outcomes of the emissions trading schemes will be unclear for the first few years. Some companies and government offices refuse to conform to the regulations. On energy intensity, Guangdong has asked for forbearance on its 18 percent reductions target, seeking an “appropriately lowered target” for its next five years. The provincial government argued that the province already consumed a relatively low level of energy, and it would be more difficult and costly to achieve further savings.
Second, the inland provinces continue to have a very high stake in the future production and development of fossil fuels. If Guangdong received an exemption in meeting energy efficiency targets and the carbon trading schemes fail to meet expectations, that would shift the burden of reducing energy intensity westward to poorer inland and far west provinces. Local governments in central and western China argue that southern and eastern coastal areas have relatively lower energy intensity because the western provinces provide the coast with low-cost energy sources.
In other words, inland and western provinces have begun to recycle the same arguments made by China for years in international negotiations: that they should have common but differentiated responsibilities. In the short to middle term, there will be no effective regulation either of local air pollution or greenhouse gases in these places. The best prospects for China’s interior are breakthrough technologies in natural gas extraction or in capturing carbon and storing it below the surface.
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The U.S. still has some leverage over China, because China clearly wants a deal. ... U.S. financial markets also seem to have been boosted by the prospects of a U.S.-China trade deal, so I think it could have a negative effect on both financial markets and economic activity in both countries if a deal is not struck