End of the ride

For a brief period in time, it seemed that the Chinese project to reduce carbon emissions and develop alternative sources of energy had gathered real momentum. China introduced the concept of "green GDP" by which GDP statistics would deduct the hidden cost of pollution. Chinese firms worked busily to resolve the production bottleneck of photovoltaic cells (incubating solar panel manufacturing giants like Suntech and Trina Solar in the process) and began investing heavily in wind energy.

At the same time, China was enjoying a free ride on the Kyoto Protocol. While China was not obligated to cut emissions under the protocol, it was permitted to sell carbon emissions reductions (CERs) to countries that were obligated to cap, such as Japan and members of the European Union. China is the world’s largest emitter of greenhouse gases. The country produces a dun-colored cloud which reaches, on windy days, the US west coast. And yet China profited both by polluting and by cleaning up. Carbon trading companies flocked to China to facilitate the sale of Chinese CERs (produced mostly from hydro power and capturing methane gas from coal mines for reuse in energy production) to foreign markets.

However, China’s privileged position appears at risk. First, Beijing made a few decisions that soured its image – such as it was – as a fair dealer in environmental policy. First, the government bowed to its provincial governments and canceled its green GDP program. Second, it put forth a proposal that consuming countries, not producing countries, should bear the burden of pollution-producing exports. In theory, this should make little difference, as the higher cost would be distributed along the supply chain or to the consumer, but practically speaking this proposal is nearly impossible to implement, which was likely the point. Third, China objected strenuously to a proposal by the Obama administration that in the case the US adopts a Kyoto-style cap-and-trade system, it would levy tariffs on carbon-emitting imports from countries that do not cap-and-trade.

This last point is key. At present, many carbon traders in China are waiting to see if the US signs on to Kyoto or adopts some alternative but similar carbon reductions scheme. They believe, correctly, that if the US enters the carbon-trading market, it will single-handedly push up CER prices. However, one of the original reasons the Bush administration rejected the Kyoto protocol was the free ride given to China and India. The Obama administration may be more interested in reducing emissions, but it is not particularly warmer on China – if anything, the American political mood is more, not less, protectionist than it was under Bush. And China has given US environmentalists little fodder with which to argue that China’s commitment to cleaning up its own act is genuine. There will be little support in the US for any cap-and-trade scheme that maintains the Chinese exception.

Europe is pushing back as well. At present, the low prices of CERs is a market problem; it is cheaper for European polluters to buy credits (currently selling around US$14 per ton) from China than to clean up their own factories. Recognizing this, the EU has stepped in to curb access to the program, reducing the supply of CERs available to Europe’s polluters and driving up the price. This may benefit the environment, but like the proposed US tariff, it would come at China’s expense.

In a way, China has been a victim of its own marketing success. Beijing has successfully changed Western perceptions. Even in movies like Mission Impossible III, Beijing ensured that footage was limited to Shanghai skyscrapers and Suzhou’s potemkin village. Now, it seems that many Westerners have forgotten that China’s average GDP per capita ranks below Angola and El Salvador. In its argument to reduce access to Chinese CERs, the EU refers to China as an "advanced developing country", undeserving of special treatment. Presumably the EU would not place Angola in the same category. But after spending some US$40 billion on the Olympics and trumpeting (if a bit prematurely) the success of its stimulus package, how can Beijing convince the West it can’t afford to reduce carbon emissions?