What China’s Climate Pledge Means for Its Economy

by Robert U. Ayres

Jonathan Brookfield recently contributed an article to The Fletcher Forum regarding the risk to the global economy consequent to the slowdown in the Chinese growth rate, which has declined by 30 percent since 2010. The questions that arise from this decline are how exporters will respond, how commodity prices may change, and how raw material exporters (such as Australia) may be affected. As Brookfield says, “To the degree that capital spending in [building materials and basic commodities] has been undertaken with the expectation that future demand will resemble recent past trends, we may see less economic activity in some resource-rich economies, certain companies may find their balance sheets under pressure, and oversupply may lead to a noticeable decline in the prices of some commodities. In fact, this story has already begun to play out.” And so it has, especially with iron ore and copper prices at very low levels and still declining.

However, since Brookfield’s article was written, U.S. President Barack Obama and his Chinese counterpart Xi Jinping have met and announced their historic climate agreement. Before the agreement was announced, China’s leaders may have already decided to undertake drastic changes on carbon dioxide emissions, given the terrible air quality in Chinese cities and (perhaps more important) the rising level of public dissatisfaction with that situation. The Chinese leadership has pledged that carbon dioxide emissions will peak in 2030 and begin to decline thereafter (See Figure). They did not, however, specify a peak emissions level.

Given current emissions approaching 9 billion metric tons per year, in order to peak in 2030, the rate of increase will have to begin to slow down immediately. My personal estimate (based on curve-fitting) is that the peak emissions level will be approximately 12 billion metric tons per year, give or take a billion. This will be around a third higher than the current level of emissions.

Recently, electric power consumption in China increased much faster than economic growth. However, there was a sharp decrease in demand growth to 5.5 percent for 2012-2013 and an estimated 3.5 percent for 2014 according to the China Electricity Council. Coal consumption has actually declined during this time. This decline in demand reflects major structural change.

But if Chinese economic growth continues at 7 percent, power consumption will probably increase at least by 6 percent per annum (and possibly more). This translates into a multiplier for year 2030 of about 2.55 times the current consumption level. Assuming an electricity consumption growth rate of 5 percent per annum in China, the multiplier will be 2.18 times current consumption. But carbon fuels can only account for about 1.25 to 1.4 times current output if the emissions limit is to be 12 billion metric tons of carbon per annum. This means that renewable energy sources (plus nuclear power) would have to account for at least 36 percent of electricity output, and possibly as much as 50 percent of total electricity output in 2030. Even factoring in optimistic increases in hydroelectric output from the Yangtze dam, both of those figures are probably out of reach. Faster economic growth with faster electricity demand growth would make the disjunction still worse.

One potential solution would be to simultaneously deploy carbon capture and sequestration (CCS) technology on existing power plants. But this technology has the disadvantage of consuming quite a lot of electric power (up to 15 percent of total output) thus reducing generation efficiency. And given that there are very few examples of CCS systems operating successfully in the world today, it is unrealistic to assume that thousands of coal-burning power plants in China can be retrofitted with an untested technology in the next sixteen years. So, either the 2030 target is unreachable or the Chinese economic growth rate must decline even further, possibly to 4 to 5 percent per annum.

Meanwhile, there are two related questions to consider. First, the 2030 emissions target will require a substantial increase in capital intensity of electric power generation, whether for hydroelectric, CCS, wind turbines, or nuclear reactors. Moreover, a significant fraction of the new technology (e.g. turbines) and natural gas will likely have to be imported from Russia. This will soak up quite a bit of the current $4 trillion in hard currency reserves. Second, the slowing of the economic growth rate of China represents a permanent structural shift toward domestic consumption, with some of the global consequences noted by Brookfield, already being felt around the world. Slower Chinese growth is bad news for the iron ore and coal exporters such as Australia. On the other hand, it will reduce global demand and prices for petroleum, which is good news for resource importing countries. In fact, the increased capital intensity of electric power generation in China will continue to be favorable for some industrial equipment exporters, notably Germany.

About the Author


Robert U. Ayres, an American-born physicist and economist, is Emeritus Professor of Economics and Political Science at INSEAD, the international graduate business school. He is the author or coauthor of many books, including The Bubble Economy: Is Sustainable Growth Possible?

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