NICHOLAS STERN ON CHINA'S FIVE YEAR PLAN AND EMISSION REDUCTION AMBITION

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28 april 2011

The prize, perils and price of China’s plan

By Nicholas Stern PublishedFinancial Times, April 28 2011

China’s 12th five-year plan for 2011 to 2015, finalised last month, will have a dramatic impact on the global economy and ambitions for managing the risks of climate change. In our preoccupation with shorter-run debt and finance issues, we risk overlooking medium- to long-term changes of profound significance.

China is moving into uncharted territory, risking instability if growth slows too much and damage for the world if it cannot reduce carbon emissions faster. But the change is essential and the gamble carefully measured. The plan identifies three key objectives. Each involves a radical shift. China now sees growth as driven by: a rising share of consumption; moving to a low-carbon economy; and innovation. This contrasts with the past pattern of growth led by investment and high-energy and low-cost manufacturing.

The first objective is motivated by the prognosis that external sources of growth may be weaker than in the past. The second objective is based on a recognition that both the quality of life and the potential for growth are in danger as a result of pollution, including the immense risks to China and the world over this century of climate change. And the third objective is prompted by the fact that in a number of industries China is not far from the current technological frontier and that China’s engineers, technologists and entrepreneurs are becoming ever stronger in quality and quantity.

China’s rapid growth has been driven by high savings and investment rates. One way of expressing the challenge of increasing the share of consumption while maintaining growth is for China to seek to increase the productivity of capital as it reduces the investment rate. China does, however, recognise that the rate of growth may have to be a little lower than in the past.

China already has a target to reduce emissions per unit of gross domestic product by 40-45 per cent between 2005 and 2020, with a target of 17 per cent during the 12th plan. Assuming a further 17 per cent reduction in emissions intensity in the 13th plan, this is equivalent to a decrease in emissions intensity of about 31 per cent between 2010 and 2020. If the growth rate for the next 10 years is in the region of 7 per cent, output would approximately double between 2010 and 2020. The combination of this growth in output and the reduction of emissions intensity would take China’s annual emissions – in 2010 of approximately 9bn tonnes of carbon-dioxide equivalent – to about 12bn tonnes in 2020. A comparable absolute increase in the following decade would take China’s emissions to about 15bn tonnes by 2030.

While this would be a major reduction, it would make it difficult for the world to achieve the target of avoiding warming of more than 2°C, as agreed at the UN summit in Cancún last December.

China has a much smaller history of emissions than the rich countries and produces for the consumption of others; but the arithmetic of the world’s carbon budgets, albeit grossly inequitable, is a fact of life. So it is vital for the safety of the world, and China, for China to find a way of increasing its ambitions for reducing emissions, with a view to peaking at 12bn or 13bn tonnes in the early 2020s, and returning to about 9bn tonnes by 2030.

China also plans to increase research and development spending from about 1.5 per cent of GDP to 2-2.5 per cent by 2015. Corresponding increases in investment in education and new skills are crucial. These investments will set the stage for a pattern of low-carbon growth. It will, and must, be a new industrial revolution, not just for China, but the world.

Accordingly, the 12th five-year plan highlights the importance of the “magic seven” industries: energy saving and environmental protection, next-generation information technology, biotechnology, high-end manufacturing, new energy, new materials, and clean-energy vehicles. The plan’s objective is to raise their share from 3 per cent to 15 per cent of the economy by 2020.

These sectors can play a strong role in reducing the capital required to produce extra output, as well as the intensities of energy and emissions. They are sectors in which the rich world thinks it has comparative advantage. It must wake up and recognise the mutual advantages of collaboration, and understand where it must compete.

The power of China’s example will be vast in influencing the world’s transition to a low-carbon economy. This can lead to a cleaner and more prosperous low-carbon future for us all. It is the growth story. Now is the time to work with China.

The writer is I.G. Patel Professor of Economics and Government and chair of the Grantham Research Institute on Climate Change and the Environment at the LSE


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