Finding Agreement on Climate in a Crisis
by Trevor Houser, Peterson Institute for International Economics
Op-ed distributed through Project Syndicate
December 23, 2008
© Project Syndicate
Poznan, Poland—The current economic crisis casts a pall over climate-change talks held this month in Poland. While negotiators hoped for concrete progress toward an international climate agreement, the world's two largest polluters were distracted—the United States with preventing a collapse of the financial system in the midst of a presidential transition, China with a slowdown in domestic investment and weakening foreign demand for its manufactured goods. With American home values and retirement savings falling and Chinese unemployment numbers rising, observers worry that neither America nor China will have much appetite to cut emissions.
The paradox here is that the crisis presents a unique opportunity for the United States and China to strike a deal that would lay the groundwork for a global climate agreement. Indeed, one of the main goals of the most recent biannual meeting of the US/China Strategic Economic Dialogue (held the week before the climate talks began) was to begin work under the "Ten Year Energy and Environment Cooperation Framework" created earlier this year.
This bilateral initiative comes on the heels of a decade in which America abstained from international efforts to address climate change, concerned that if it acts but China doesn't, the world will fail to meet its emission-reduction targets and US industry will be disadvantaged. China has countered that its historic and per capita emissions remain well below US levels, and that to cap aggregate national emissions at the same level as the United States would imply a personal carbon budget in San Francisco five times greater than in Shanghai.
The Strategic Economic Dialogue sidestepped this disagreement on burden sharing and focused instead on what the two countries have in common. Both depend on imported oil for transport and on domestic coal for power generation. Both have strong state-level governments and balkanized regulatory and energy-supply systems. But the structure of the two countries' economies, and what drives their energy needs—and thus greenhouse gas emissions—are very different. It is this difference that offers the best chance for addressing climate change head on.
Economically, the United States and China are mirror images, opposite sides of a massive global imbalance. Americans spend too much and save too little, leaving a $700 billion trade deficit financed by other countries. Much of this credit comes from China, where firms and citizens save too much and consume too little, leaving a surplus of both goods and capital that flows abroad.
This macroeconomic imbalance is reflected in the two countries' carbon footprints. In the United States, more than 70 percent of CO2 emissions come from consumer-related activities, whether gas-guzzling SUVs or power-hungry McMansions. In China, more than 70 percent of emissions come from industry. Steel production alone consumes 18 percent of the country's energy resources, nearly twice as much as all Chinese households. The chemical industry consumes more energy than all private transportation, and aluminum production rivals the commercial sector in terms of electricity demand.
In terms of brokering a climate deal, this imbalance is good news. It suggests a framework for reducing emissions that respects the development needs of China's households, addresses US firms' competitiveness concerns, and adheres to the principle of "common but differentiated responsibilities" embedded in international negotiations.
In recognition of its outsized historic and per capita emissions, the United States should agree to economy-wide emissions reductions in line with domestic climate legislation currently being considered. China should be excused from consumer-related obligations for the time being, but assume commitments on industrial production based on the recognition that effectively reducing emissions in these sectors requires coordinated international action.
China's leaders are already eager to rein in energy- and pollution-intensive industry for reasons of national security, air and water quality, and simple economic efficiency. Production of steel, cement, chemicals, paper, and aluminum alone account for nearly half of China's energy needs and generate nearly half of the air pollution that claims over 300,000 lives and costs the economy close to $100 billion each year.
Yet these five industries combined employ only 14 million people out of a total labor force of 770 million and fewer people than they did a decade ago. For a country in an employment crisis, investing in energy-intensive industry is a losing strategy. Using climate policy to discipline these industries would help rebalance the economy while taking a bite out of China's emissions. If China imposes a carbon price for its energy-intensive manufacturing industries, the United States won't need to do so at its border, lowering risks to the international trading system on which both countries rely.
The current crisis is already unwinding some of the imbalances that drive both countries' energy and environment challenges. US oil demand has fallen 8 percent as consumers tighten their belts, and electricity demand in China is down by 10 percent as energy-intensive industries cut production. A smart response to the crisis can perpetuate these trends. Future US consumption will be greener, and the cost of climate policy reduced, if the US recovery package includes money to weatherize homes, upgrade the electricity grid, and help the auto industry improve fuel efficiency.
If China consolidates its energy-intensive manufacturing, thereby freeing up investment capital for lighter manufacturing and services, then it will emerge from the crisis with a growth model that pollutes less and employs more. If the United States and China can find agreement on these issues in the midst of crisis, they will pave the way for success when climate negotiators meet again next year in Copenhagen.