This article originally appeared in the ValueCap Research newsletter, China Capitalist.
China has made significant advancements in its fight against pollution and climate change, but some old habits die hard. It remains to be seen if past practices ultimately give way to real reform.
It’s no secret: China’s environment is in trouble. Beijing’s red alert for smog last month made international news—the government kept cars off the road, halted or slowed factory production, and advised schools to close. Only 73 of 338 Chinese cities met national standards for clean air in 2015. While smog gets most of the headlines, water and soil contamination might well be more of a threat. Government statistics indicate 80% of China’s groundwater is unfit for human consumption and 19% of its arable land is contaminated by heavy metals—enough crop-land to feed the entire population of Australia. While there are promising signs of change, obstacles to cleaner development remain.
The central government has taken these issues more seriously in recent years, in part because they pose a real threat to political stability. No one knows exactly how many protests are in reaction to pollution; so-called “mass incidents” often go unreported. Chen Jiping, a former leading member of the party’s Committee of Political and Legislative Affairs, told reporters in 2013 that 30,000 to 50,000 mass incidents take place in China every year, and was quoted in Bloomberg as saying, “the major reason for mass incidents is the environment.” Last year, tens of thousands of protestors took to the streets in Hubei to oppose the building of a chemical factory they feared would contaminate their water supply. Food safety is also a major concern for Chinese consumers; scandals involving contaminated products are reported regularly. The Ministry of Environmental Protection estimates 12 million tons of grain are tainted in China every year, costing more than 20 billion RMB. In 2014, the China National Environmental Monitoring Center reported that of nearly 5,000 soil samples from vegetable plots across China, roughly a quarter were polluted.
Environmental Protection Law
In the past, attempts to get tough on pollution have been undermined by local leaders who had little incentive for enforcement. In January 2015, a law went into effect attempting to close loopholes in enforcement. The law mandated daily fines, replacing one-off penalties. It also allowed environmental lawsuits by NGOs on behalf of the public interest. Restructured local Environmental Protection Bureaus were made directly answerable to provincial authorities rather than to local governments who traditionally were happy to look the other way on environmental transgressions if companies brought in investment.
But perhaps the most significant provision of the law was an evaluation system to focus on environmental quality and not just GDP. The blind pursuit of GDP is one of the main reasons China faces an environmental crisis. Recently, many localities have gone a step further by dropping GDP altogether as a performance metric. The Financial Times reported 70 small cities and counties have done this, as well as some larger cities like Shanghai—focusing instead on issues like the environment and income inequality.
In the two years since the law was passed, there have been signs that oversight has been taken more seriously. When the central government sent inspectors to eight different provinces last year, over 3,000 local officials received disciplinary action—an unprecedented number—and 310 were detained. But changing a culture of local autonomy and emphasis on GDP will take time. This is especially true for less developed regions, where GDP remains the primary goal. These small towns and counties often have Environmental Protection Bureaus without properly trained staff. They are charged with enforcement yet lack necessary environmental knowledge.
The new law’s civil litigation component has had mixed results. In the year after the law went into effect, 36 public interest environmental cases were accepted by courts in 13 provinces. Two of these cases were won by the NGOs who brought them, setting a positive precedent. However, courts are still reluctant to take cases on behalf of the public interest, and have rejected many more cases than they’ve taken. Many NGOs are underfunded, so just a few well-established organizations are responsible for the majority of court cases. It seems unlikely that a handful of NGOs bringing lawsuits can truly police environmental law for the country.
Climate Change and Clean Energy
Climate change is one arena the government very publicly vowed to tackle. In 2014, China signed a joint statement committed to carbon emissions peaking by 2030. By 2030 it also pledged that 20% of its energy would come from renewable sources.
To do this, China must reduce reliance on coal, its main energy source, with 64% of its total energy coming from coal in 2015. Fortunately, many believe that coal use has already peaked. China used 2.9% less coal in 2014 and 3.7% in 2015, with 2016 likely to follow this trend. The reduction is largely due to the economic slowdown and decreased demand from industry. At the same time, China is building alternative energy capacity at lightning speed. Greenpeace says China added the wind power equivalent of 10,000 large wind turbines in 2015—more than one new turbine for every hour of the year.
Despite this, China can’t seem to stop building coal plants. Greenpeace reported that in 2015, 210 new coal plants had received permits—double Germany’s coal capacity—despite a steady decline in coal plants’ average operating hours since 2013. With the slowing economy and decreased demand for coal-powered energy, many of these new plants will likely sit idle. The government ultimately pulled the brakes on some of the 2015-approved plants, but new ones around the country continue to get approvals. Coal plants are still an easy way for local governments to stimulate economic growth.
The emphasis on coal means energy from renewable sources sometimes ends up being wasted, a phenomenon known as curtailment. According to the Paulson Institute, China has some of the highest rates of curtailment in the world. 15% of wind energy and 12% of solar energy went unused in 2015. Local governments, afraid of unemployment, allow just enough power onto the grid from all local coal plants to keep them open. While contracts often guarantee coal-fired plants a minimum number of operating hours, renewable projects usually don’t get such guarantees.
Increased pressure on coal might come from a new cap-and-trade program, due to come into effect this year. Pilot cap-and-trade projects have already begun in seven cities across the country. As is often the case in China, transparency (or lack of it) will be an important factor in determining the effectiveness of the program. In past pilot programs, third party verification companies checked data, with some positive outcomes, though transparency remained an issue. Jennifer Turner, director of the Wilson Center’s China Environment Forum, told The Diplomat there was a “lack of transparency on emissions and pricing in some of the pilots.” However, she remained optimistic about expanding the programs nationwide. Another potential issue is China’s regulated energy prices, which prevent plants from raising prices to offset carbon costs. This limits demand-side incentives.
Investment and Opportunities
China is well ahead of the rest of the world in renewable energy investment. In 2015 China spent $103 billion in clean energy, more than both the US and Europe combined. In 2016, however, that shrunk to $87.8 billion, likely due to the economic slowdown. In the environmental technologies industry more broadly, much still needs to be done. A report last year by Bloomberg Philanthropies, the Paulson Institute, and multiple Chinese finance associations estimated that reducing urban air pollution and carbon emissions (through energy efficient buildings, mass transit systems, electric car infrastructure, and clean energy) could require as much as 6.6 trillion RMB over the next five years—a large undertaking. Investors have been stepping up, however; last year, Bank of America and Merrill Lynch reported companies and financial institutions in China were on track to issue 301 billion RMB of green bonds in 2016. The report said this “could be vital to fulfilling the 2-4 trillion yuan of annual environmental investments needed for the country.” Even so, questions linger about what constitutes “green bonds” in China. With little regulation, items like “clean coal” are commonly included in the definition.
All this investment seems to have had a positive effect on the environmental technologies market, which the US International Trade Administration valued at $60.7 billion last year. The report, however, also mentions barriers to foreign industries such as a lack of intellectual property enforcement. Additionally, local and state-owned companies receive preference in obtaining government contracts, and work hard to push out competitors.
On the other hand, inexpensive labor and the decreasing cost of many environmental technologies still provide real opportunities, and partnering with a Chinese company can help avoid many of the pitfalls involved with being an outsider in the Chinese market. According to the International Trade Administration report, technologies in demand include pollution monitoring equipment, industrial air pollution reduction equipment, auto emissions control, technology for waste management such as composting equipment and sorting machines, hazardous waste disposal and treatment equipment, water treatment and monitoring technologies, soil remediation and monitoring equipment, and consulting and advisory expertise, particularly in the area of Environmental Impact Assessments.
Consumer products that help people mitigate the effects of pollution are also in demand. Microsoft and IBM both signed contracts to work with the Chinese government on air quality monitoring systems. Microsoft promotes an app that predicts pollution levels 48 hours in advance. Air purifiers and face masks also do well, especially as the air quality deteriorates. Taobao reported that searches for face masks went up by 141.5%, and for air purifiers went up by 50.9%, during Beijing’s 2015 pollution red alert. Air purifiers can be a luxury item in China, with many consumers willing to pay top dollar for foreign brands they consider more trustworthy. Siemens, Philips, and Daikin are the top sellers. Ctrip has also cashed in. Their “smog escape route” promotions do quite well, they told China Daily, and searches on their site increase with the smog.
The Chinese government has invested a great deal, and has made significant institutional changes to tackle its environmental challenges. But obstacles remain. To move forward, China needs to let go of its obsession with GDP, bridge the gap between central authority and local leadership, and reduce its reliance on building out-of-date infrastructure to stimulate growth. Time will tell if China is able to make these changes. If it does, it could bring a new era of green development—one that will benefit both the economy and the environment.