How winnable is China’s new ‘war on pollution’? Q&A with Karl Hallding

Citing the urgent need to address particulate air pollution, Li set targets to reduce outdated steel and cement production capacity and close small coal-fired furnaces by the end of 2014. SEI Senior Research Fellow Karl Hallding discusses the significance of Li’s speech and the prospects for success.

Q: How optimistic should we be about Li’s announcement?
KH: There’s no question that this is a significant step. It was the new leader’s first address to the People’s Congress, and he made this “war on pollution” a key point in his speech. The previous Chinese leadership under president Hu Jintao acknowledged the need to address environmental problems, but it’s never been articulated this strongly or prominently before. And it is particularly important that he drew a direct link between pollution and the prevailing economic structure. Li has made the war on pollution a signature policy, and he knows he could be evaluated on it later on.

Q: The focus of Li’s speech was on pollution, of the air, water resources and land. These are local problems – and sources of anger – for Chinese citizens. Will this translate into serious curbs on China’s greenhouse gas emissions?
KH: There’s always a risk that a focus on cleaning-up the urban areas in China’s eastern provinces will lead to emissions being transferred to other parts of China – for example, gasifying coal in Inner Mongolia and then piping the derivatives to Beijing would clean up the air in Beijing but it would increase China’s total greenhouse gas emissions. But by and large what Li is talking about, strongly linking cleaning up pollution with economic restructuring away from heavy manufacturing, will have positive side-effects on greenhouse emissions. And many Chinese researchers are talking about China’s “peak emissions” year moving closer to 2020 than to 2030, which is when people used to think it would happen.

Q: China’s leaders have been talking about environmental problems for years. How have the problems been allowed to get so bad?
KH:China’s environmental problems correlate directly with economic growth over the past couple of decades. China’s last two generations of leaders have faced a choice: get rich or stay poor, with a somewhat better environment. Development is dirty, particularly at the stage China has been going through. It needed massive investment in infrastructure, and that requires heavy manufacturing and commodities that are associated with a lot of energy use. Most OECD countries went through similar periods of severe pollution when they passed through the same development stage. But China is facing an unprecedented dilemma because of the magnitude of the development process: its huge population and the huge volume of China’s economy determine the level of pollution and the pressures on environment and resources.

Q: In the speech Li also said that the “war on pollution” would not affect the target of 7.5% annual economic growth. Can China really get to grips with its environmental problems and still have such high growth?
KH: No, I don’t believe a 7.5% growth target is compatible with fixing the pollution problem. As leader he has to say that, but there is another message coming from top leaders about quality, not quantity, in economic growth. China’s recent growth has been based on capital and labour, not productivity gains. I think China’s leaders would very much like to see more moderate growth if it were based on genuine productivity gains in sectors where China could leverage its comparative advantages of labour-intensive yet high value-added production.

Q: What would it take to fix China’s pollution problems?
KH: On the supply side, China is already doing as much as any country could realistically do. The policy packages rolled out since the mid-2000s have made China the biggest market for clean and green tech in the world, and made it possible for Chinese producers to become leaders in most clean-and-green tech components. There is a “green” revolution going on there. An interesting “sign in the sky” is that according to SEI calculations the share of thermal power, most of which comes from coal, in new power generation capacity that came on line in China in 2013 fell to around half for the first time thanks to the growth in alternative energy sources – hydro, wind, solar and nuclear. Yet, while there has been double-digit growth in green- and clean-tech sectors over the past half-decade, it started from a very low level, so it still amounts to only limited additions in total capacity.

And given the huge momentum of China’s total energy demand growth, the fact that “brown” sectors are still growing by roughly 5%, means that fossil, mainly coal-based, energy sources have added much more absolute capacity than has been added in the green sectors. It appears as if China might be at a crossroads, on a more traditional coal-based trajectory but wanting to take a much more low-carbon development pathway. It will be telling whether the reduction in the share of coal-based power seen in 2013 continues in the next couple of years.

The biggest potential game changer is on the demand side: restructuring the economy. Reducing the share of heavy manufacturing in China’s industrial output and phasing in alternative source of employment and income would mean early retirement for a lot of capital, but it would offer the best chance of rapidly reducing pollution. Closing down steel mills in Hebei province have the potential to considerably improve air quality very quickly.

Q: How much can central government really do to bring about the changes needed?
KH: Of course central government has a lot of power, but not as much as we often think, and China is not as governed by grand plans and long-term thinking as we sometimes imagine. So although Li’s speech framed this in grand terms as a war, in reality it will probably be a lot about firefighting – that’s what occupies most of central government’s time. To get an idea of what might to happen in the next few years, you could look at the very ambitious plans to reduce coal consumption and improve air quality in the greater Beijing, Shanghai and Guangzhou areas. If those succeed, I think China has a much better chance of muddling through this in a positive way.

Q: What is at stake if the “war on pollution” fails?
KH: Well, then China fails. China risks ending up in a very dirty middle-income trap. It will make it an increasingly unpleasant place to be. It could cause major social unrest and negative effects on domestic security and stability. There could be a lot of migration from China – anyone with money or knowledge will leave and they will be warmly welcomed elsewhere.