A version of this post appeared on Forbes.com.
President Xi Jinping's visit to the United States comes at a moment of high tension in Sino-U.S. relations. But amid uncertainty around China's economy and acrimony on cybersecurity, at least one issue holds promise for positive collaboration: climate change. Last year’s landmark climate agreement between the two countries, including China’s pledge to peak emissions and ramp up non-fossil energy, and the bold steps taken domestically to curb emissions indicate China’s seriousness. Realizing President Xi’s commitment on climate depends on perseverance with broader economic, financial and institutional reforms. Look specifically at how China deals with its current economic slowdown, its crisis-level air and water pollution and its overseas investments.
Tackling Economic Slowdown Could Put China on Low-Carbon Path
If Beijing responds to the current “hard landing” by accelerating economic and financial reforms, China will easily meet or even exceed its climate objectives.
China’s leadership clearly recognizes that a new model of growth is needed, one driven by consumption, services, and advanced manufacturing. And it has made some important progress in rebalancing its economy in that direction, as reflected in recent declines – and possible peaking – in China’s coal use, declines in heavy industrial output and the rising share of services in China’s GDP. While the economic slowdown has contributed to declines in consumption of energy, China has also taken numerous steps to limit energy consumption in energy-intensive industries and expand non-fossil energy. China’s perseverance in carrying out these plans will be important for the shift to low-carbon energy.
A clear sign of the government’s intent to rebalance its economy is the way green finance has climbed the agenda. Green financial reform addresses two pressing policy priorities: the need to rebalance the economy and unleash new sources of economic dynamism as the economy slows, and the need to restore an environment that has degraded to the point of crisis. As such, green financial reform is as much about saving the environment as it is about salvaging the economy.
On the other hand the government will struggle to bend the emissions curve if it defaults to measures that prop up the current inefficient and over-leveraged system that channels cheap credit towards highly polluting sectors – such as construction, manufacturing and infrastructure -- that are already plagued by overcapacity. Ultimately, progress needs to be seen in deep reform that moves the Chinese economy away from high-carbon drivers of growth, by tackling distortions in the economic system at their root, through true-cost pricing of energy and water, financial reform and a substantial shrinking of the state-owned sector.
Sophisticated, Inclusive Approach to Pollution vs Business As Usual
Will China embrace more sophisticated “whole-of-society” approaches to pollution control in the face of widespread public concern, or will it default to familiar but less-effective top-down enforcement?
Recent institutional reforms and advances in information and communication technology (including the rise of social media) create exciting opportunities to tackle pollution through a broad, participatory approach that engages citizens and businesses, and ensures progress is sustained over time. Amendments to the Environmental Protection Law (EPL) could make it among the strongest environmental laws around and pave the way for improved environmental governance. And judicial improvements offer the possibility of a stronger role for the courts in handling local environmental grievances.
At the same time the public disclosure of data on air quality and pollution sources in dozens of Chinese cities enables greater transparency and accountability, driving heightened civic awareness and engagement on environmental issues beyond air pollution. In Zhejiang Province, for example, reports on pollution sources are published daily, so residents can monitor pollution from 563 state-owned enterprises in real time.
But this is an isolated case, and it remains to be seen whether Zhejiang’s enlightened approach will catch on elsewhere. For sustained progress, China’s environmental policy needs to evolve beyond brute application of the principle that the “polluter pays” to foster greater responsibility and participation by citizens and the private sector.
China’s Overseas Investments Need to Match Its Domestic Climate Stance
Because heat-trapping emissions don’t stop at borders, China’s commendable climate efforts at home should be matched in its investments abroad.
This year, China sent almost as much capital overseas as it attracted in foreign direct investment. China’s overseas investments are expected to continue increasing as overcapacity at home and $3.3 trillion in reserves in search of better returns drive an outbound push in foreign direct investment. At the same time, the government aims to make China a hub of international finance by establishing the BRICS bank and the Asian Infrastructure Investment Bank (AIIB). These developments point to the high stakes of China greening its international financial flows.
Initial signs – including the release of consultation document on environmental and social safeguards by the AIIB – suggest China may play by the rules and could even set a higher bar for the rest of the world. Deliberations are at early stage and all is yet to play for: this will be an important area for further engagement with the US and others. And it remains to be seen if this progressive stance will be generalized across all China’s vast OFDI flows, and if Chinese banks will go beyond a ‘do-no-harm’ approach to shifting their portfolios from brown to green. China’s hosting of the G20 next year, and its decision to put green finance on the agenda, may offer some encouraging signals in that regard.
Keep Watching China
China has come a long way since its initial international pledge on climate change before the 2009 Copenhagen climate conference. Its November 2014 joint announcement with the United States has increased worldwide momentum toward a climate agreement in Paris. What President Xi says in Washington on these three key indicators could further build confidence on China’s climate commitments and the possibilities for global action. Because of the sheer size of its economy and its environmental challenges, any shift in Beijing creates ripples around the world. If we want to know which way China will move, we need to pay attention not only to what President Xi says on Friday or in Paris, but at how the economy, environmental policy and overseas investments are moving.