26 February 2016

Climate change is bringing capitalism to China


It’s a sorry state of affairs when American politicians have less faith in the power of the market to tackle a problem than the Chinese Communist Party. But incredibly, that is where we find ourselves.

Next year China will unveil the largest carbon market in the world, bringing in a cap and trade system for carbon emissions, part of a range of measures the Chinese government is rolling out to tackle atmospheric pollution.  China is not alone in taking a pro-market approach to dealing with climate change. According to the World Bank 40 countries and 27 municipalities have set a price for carbon. The number of carbon pricing schemes has doubled since 2012.

However despite this boom, US politicians have so far failed to embrace the benefits of a carbon price that would boost innovation and allow market forces to lower emissions.  But this is not without trying. Last year senators Sheldon Whitehouse and Brian Schatz proposed a revenue neutral carbon tax. The plan would reduce American CO2 emissions by 45 per cent by 2025 and generate two trillion dollars over ten years which would be used to reduce the corporate income tax rate. Harvard Professor, Greg Mankiw, the conservative economist who advised George W Bush and Mitt Romney, has backed the plan: “Among economists, the issue is largely a no-brainer,” he wrote in the New York Times.  As Senator Whitehouse explained to the American Enterprise Institute last year: “You levy a price on a thing you don’t want—carbon pollution—and you use the revenue to help with things you do want.”  But it has yet to be given a hearing by the Republican controlled Senate.

Such sensible proposals have come from both sides of the aisle. Former climate skeptic Jerry Taylor, who spent 23 years at the Cato Institute before setting up the libertarian Niskanen Centre, has outlined the conservative case for a carbon tax.  Likewise Republican Bob Inglis proposed a carbon tax in 2009 that would have used all the revenue to cut payroll taxes.  But such is the ideological opposition to action on climate change by parts of his own party, he was ousted by a Tea Party candidate in 2010. Now heading up RepublicEn, a pro-enterprise group of ‘energy optimists and climate realists’, he told the New Yorker: “The science is clear and the economics are even clearer, that a price on carbon dioxide would drive innovation faster than anything else we could envision.”

Some of the current Presidential candidates claim action on carbon pollution is pointless without the likes of China also on board. But they seem unaware that China, despite having far higher levels of poverty, is actually way ahead of them.  Not only did China sign up to the multilateral UN Paris Climate Agreement in December, it is already the world’s renewable energy superpower.

As Giacomo Lev Mannheimer has written in CapX, China has been on a capitalist journey for the last 30 years.  The push into low carbon technology has seen Chinese companies thrive and the upcoming Chinese carbon market may yet fuel further innovation and investment.

Already eight of the world’s biggest solar companies are Chinese, as is the largest wind power group. China installed more solar in the first quarter of last year than currently exists in France and added a record 30 gigawatts of wind power in 2015 – more than the rest of the world combined.  In the last five years it has installed 284 gigawatts of hydro power.

Although Apple, Google, Ford and Volkswagen are investing heavily to capture the electric car market, Bill Russo of Gao Feng Advisory in Shanghai expects Chinese firms to “leapfrog” the rest of the world in the electrification drive. By 2020, new cars in China will have to meet tougher emission standards than even Europe, one reason China’s Geely Automobile aims to generate 90 per cent of its sales from electric vehicles by then.  Goldman Sachs says by 2025, the global market for hybrid and electric vehicles could multiply tenfold, in part why they predict global emissions to peak around 2020.  All of this is happening amid a drop in Chinese coal consumption – it has fallen for the past two years.  As China moves up the technology ladder, away from more primitive industries, the renewable tech sector is likely to grow further.

It’s no wonder Isabel Hilton from China Dialogue told the Telegraph’s International Business Editor, Ambrose Evans-Pritchard, that “the Chinese think they can dominate low-carbon technologies.”  As Evans-Pritchard concluded, it doesn’t matter if we accept the science on global warming: “The Chinese Academy and the Politburo do accept it. So does President Xi Jinping, who spent his Cultural Revolution carting coal in the mining region of Shaanxi. This political fact is tectonic for the global fossil industry and the economics of energy.”

Is there still time for the West to catch up? That will depend on politicians sending the right signals to the market. There are signs of hope. Not only do the American public support accelerating the development and use of clean energy, it is heavily backed by Republican voters (72% to 16%) and among conservative Republicans (68% to 19%).  Last week a bipartisan group of 17 Governors agreed to work together to develop renewables, electric cars and energy efficiency.  And Republican millionaire Jay Faison has just launched a new Super PAC backing GOP congressional candidates advocating clean energy.

Last month a report by the law schools of Columbia, New York and California, argued that there was provision under the Clean Air Act for the Environment Protection Agency to use market mechanisms to reduce emissions that endangered other countries if such countries provided reciprocal protections to the United States.

In the UK, dithering policy U-turns from Government that change with the tabloid headwinds are undermining the potential of Britain’s low carbon industry. This week Ernst & Young dropped the UK into its ‘must try harder’ category in its Renewable Energy Country Attractiveness Index along with Poland and Greece.

Whether in China or the West, embracing the clean energy technology of the future not only improves the local and global environment, it provides a boon to business and delivers energy security. Home grown renewables allow us to rely less on the two largest fossil fuel exporters; the charming twin sisters of Putin’s Russia and the Salafists of Saudi Arabia.

Tackling climate change is not at odds with market principles, it can be a catalyst to spread them around the world, for the benefit of us all.

Joe Ware is a writer at Christian Aid.