Over the winter, Beijing and China’s other major cities from Shanghai to Chengdu, suffered historically unprecedented pollution levels. Yes, two decades of hyper growth transformed China from an economy of scarcity to over-supply. But Chinese citizens are asking, what is the cost of too much unbalanced growth? In cities like Beijing and Shanghai they have the most luxurious cars and villas in the world, but cannot leave them because the air outside is toxic.
This leaves China’s new leadership with a dilemma: the trade-off between high growth rates and environmental protection. It is now urgent and critical for the Chinese government to put forth a comprehensive energy and environment policy that strikes a right balance between maintaining robust economic growth and mitigating the negative environmental impact that has become increasingly acute and can threaten stability as environmental deterioration becomes an increasing cause of social dislocations and health costs to the nation.
Today, China has become the largest emitter of greenhouse gasses, followed by America and India. The bottom line is, our planet is no longer sustainable the way it is being run. Trading carbon is not the answer. Reducing the carbon footprint is the answer. But who will lead?
This past week at the World Economic Forum in Davos, China’s President Xi Jinping offered solutions. China will lead the world with massive investments into renewable energy, setting China as the global leader in this field, as the administration of President Donald Trump denies even the science behind climate change. On the question of environment, China is now leading the global game change. How did this come about?
In the 1990s China used infrastructure investment supported by stimulus to build transport networks across the nation to raise efficiency of transport necessary to bring the production of manufacturing to market. This vast undertaking created jobs, allowing for transfer of employment from state-planned to market economy. In the decade of 2000, these policies were continued on the presumption that high growth fueled through infrastructure fixed asset investment would assure social stability.
But much of the investment over the past decade has been in redundant infrastructure, motivated by blind GDP policies that care only about quantity and not quality of growth. Actually, it has ruined China’s environment, agricultural sector, and water sources, with potential to spark more social instability. It has led to inflation and bubble pockets across the economy making China’s labor comparative advantage less cost competitive. This could lead to capital outward flows in the coming decade that may impact China’s foreign exchange reserves and economic security.
To avoid being dragged into global recession, China does now require a new round of stimulus, but the nature of the infrastructure investment must change. Instead of more networks of roads and repetitive buildings, that continue to waste resources and drive up prices, the new stimulus should be invested into conversion of the existing energy grid from fossil fuels to renewable energy.
This will be a massive infrastructure undertaking that will create generations of jobs from the highest PHD in engineering and science to the unskilled migrant worker. The energy network – or Great Grid will be a bigger infrastructure undertaking than any in the history of China. Rather than investing in more cement to pour roads, it will be in converting all electricity and power networks to solar. To some extent this will require decentralizing grids to the community.
In Chinese the word “crisis” is composed of the two characters “danger” and “opportunity.” The environmental crisis presents China’s new leadership with both. If the right policy decisions are taken in the years ahead, China could evolve a new model of green growth based on its own principles of “Ecological Civilization.” In 2015 China’s leadership adopted a policy document entitled “Opinions on Ecological Civilization.” It establishes three core principles that the leadership will adopt in transforming China’s economy into a green one.
This three-pillar approach sets forth in sequence the essential policy framework components: technology and industry transformation, fiscal and financial support, and social and economic management, needed to promote Green Growth in China. This three-pillar proposed framework could be a way to seek opportunity from crisis to confront danger follows:
First, China will need to undertake massive state investments into the conversion of China’s grid from fossil fuel based to renewable, funded by new green bond issues, keeping most of the debt domestic. Such comprehensive grid conversion will create new waves of jobs from the most senior engineers to the blue-collar workers in every province and region. New stimulus package of fixed-asset infrastructure investment into a Great Green Grid will: i) lead China’s transition from fossil fuels to renewable energy, ii) drive growth, and iii) create jobs.
Second, industrial economic policies must encourage a new growth cycle in developing and manufacturing products that are energy efficient for consumers and also required for the production of renewable energy (solar panels and wind systems, everything needed for the new Great Green Grid). This will need to be encouraged through fiscal levers such as tax incentives and rebates. In 2012 China was already giving rebates encouraging consumers to purchase energy saving television sets, and it has done the same for electric cars. Envision a repeat act of China’s export surge in the 1990s with incentives (rebates and tax reductions) used to encourage China’s energy efficiency electronic product exports to the rest of the world.
Third, the banking system and financial sector will need to take a leading role by providing favorable lending through “green credit” for low carbon developments in the property sector and for companies investing in renewable or energy efficiency products. China’s capital market regulatory authorities could favor the listing of energy efficient or renewable energy driven companies as new standards of stakeholder value are also being introduced into the debate.
China’s banking sector are now brainstorming low carbon city financing mechanisms for a host of interconnected urban services — both public and privately managed — from green energy transport buildings, waste treatment, to a plethora of related products needed to make a green city work. Imagine entire buildings where the glass windows are actually solar panels. As futuristic it might sound, this is something China could accomplish.
The vision of a pilot program is underway. China’s Ministry of Construction and urbanization has selected several test cities such as Suzhou, Hangzhou and even Baoding to become trial green cities during the coming five-year plan. The China Banking Regulatory Commission wants to come up with guidelines for financing. By 2012, China’s banking sector fully sensed that a massive green financing opportunity was waiting to be grabbed. Chinese banks were not just interested in carbon trading – the west’s answer to climate change, but rather how to finance low carbon buildings. Yes, actually reducing the carbon footprint. This may also prove to be a new form of soft power. It could become the greatest legacy of this new generation of Chinese leaders.
By Laurence Brahm, Founding Director, Himalayan Consensus Institute