For breathable air, China must reduce the costs of its growth

The visible effect of pollution in China is undeniable. I recently spent two weeks in Beijing, where I grew up, with my family. For the first seven days, the sun did not shine. A hazy layer of greyish-white smog hung over us. Every morning, I checked the air quality index, which uses guidelines set by the US Environmental Protection Agency (EPA), on my smartphone app and the results were alarming.

Air quality came in at around 300. According to the EPA, levels between 301 and 500 are considered "hazardous", meaning people should steer clear of all outdoor activity. Essentially, it's like breathing in the fumes from a forest fire. (For comparison, Boston's air quality is about 45.)

But, thankfully, it appears that China, the world's largest producer of atmospheric carbon dioxide - accounting for nearly a quarter of global emissions - is starting to take this issue more seriously. In spring, the Financial Times reported that China is considering an absolute cap on carbon emissions in advance of the climate talks in Paris in 2015, though officials later stressed they were nowhere near a decision. The cap would be a remarkable policy shift for the country, which for years has resisted international efforts to limit greenhouse gas emissions, claiming that they unfairly thwart the economic growth of developing countries.

In China, coal is king. Chinese gross domestic product as a share of global GDP hovers around 14 per cent. But China's coal consumption is 47 per cent of world consumption. As a source of energy, coal is cheap and widely available. It is also terrible for the environment: Coal plants are one of the top sources of carbon dioxide emissions, the primary cause of global warming. Burning coal is also a primary cause of acid rain, smog and toxic air pollution.

It's easy to say that China ought to shift towards renewable energy, such as solar, wind or hydroelectric power. The problem is that diversifying energy sources is always a relative concept. Renewable energy sources draw a lot attention in the US, but in reality they represent only a small share of consumption. The share is even smaller in China.

One case in point: while China is a major producer of solar panels, it hardly uses them at all. (Yet, manufacturing solar panels requires a great deal of raw materials and thus generates a lot of pollution. It's a folly that China makes these panels at great environmental expense and that all the environmental benefits the panels generate go to the countries it exports them to.)

The fact is that an absolute cap on carbon emissions holds the most promise for effectively easing China's reliance on coal and reducing its carbon footprint. There is no way to achieve this, however, without the country making dramatic changes to its growth strategy. It's a politically and economically complicated task, but it can be done. Here is a road map:

First, China must stop its obsession with GDP growth. For over 20 years now, the leadership has been relentlessly fixated on growth of around 8 per cent a year. It has achieved this by emphasising the development of heavy industry, rather than investing in the service sector or light industry. It is clear that blindly encouraging industry and consumption in ways that damage the earth and degrade the air is unsustainable, not to mention unhealthy and unnecessary. There is some evidence that China is gradually realising this: the government said recently that an acceptable range for growth this year is between 7 and 7.5 per cent.

Second, China must change how it promotes political officials. Traditionally, they advance on the basis of how well they drive GDP growth. It has become the de facto measure of government achievement. This needs to change. It will require China to rewrite its political playbook and judge its leaders on more complex social measurements.

Next, China needs to give more power to the private sector. This sector tends to be more energy efficient than the state sector because, generally speaking, private enterprises are concerned about costs and their future viability. Giving firms more freedom to do business the way they choose will, ultimately, have a positive effect on carbon emissions.

Fourth, it should change the cost of capital. Cheap capital has been critical to China's emergence. But there are steep costs to this approach. The absurdly low interest rates offered by China's banks are, in effect, a tax on savers and a subsidy for industry. When capital is this cheap, it leads to overinvestment. And where you overinvest, you overuse energy. Raising the cost of capital will slow investment to more sustainable levels.

Five, China must strengthen its regulatory laws. Government enforcement remains a critical part of this solution. China must regulate private companies to ensure they uphold environmental laws.

For a country the size of China, change has to come from within. Ultimately China has to make these changes primarily for its own benefit, not just for the global community. China accounts for about a fifth of the world population. So it has a lot to lose from global warming. With its fast growth, it also has a lot to contribute to warming. China's pollution is already producing adverse effects on the welfare of its people. According to a recent study, northern Chinese, who live in the heavy-coal-using regions, lose on average five years in life expectancy compared with southern Chinese due to coal pollution.

It is simply false to say that China needs to sacrifice its own interests to protect the environment. It is entirely in China's own interests to first reduce the energy intensity of its GDP growth and reduce the absolute levels of its carbon emissions.

Yasheng Huang is a professor of global economics and management and the associate dean for international programmes and action learning at MIT Sloan School of Management