China Catches Its Breath

Takeaway: China’s new environmental policies might actually fix one of the world’s worst air pollution problems.

How Do You Say “Parts Per Million” In Chinese? – China’s New Environmental Policies

This week Hedgeye Risk Management hosted a conference call with Dr. Melanie Hart, head of the China Energy and Climate Policy program at the Center for American Progress.  Dr. Hart is a recognized expert on Chinese technology and regulatory matters and a Mandarin speaker who resides part time in China.

China is prominent on the world economic radar for a large number of reasons.  1.4 billion reasons, to be exact.  A lot of people who consume lots of everything.  When China’s economy strengthens, much of the rest of the world benefits.  A major policy shift affecting Chinese manufacturing and transportation would have a global impact.  Dr. Hart says we are witnessing that shift right now as new regulations issued in 2012 will dramatically change Chinese industry as they are implemented on a schedule set to run through 2015.

The Problem

China’s official environmental policy used to consist of trying to convince the world that things were going well.  The global public relations blitz surrounding the 2008 summer Olympics in Beijing highlighted “Blue Sky Days,” a metric the government continued to track through most of 2011 as they kept telling their citizens “the air is getting better, the air is getting better.” 

But the air wasn’t getting better, the air wasn’t getting better.  In the face of the official “Blue Sky” count, ordinary Chinese were blogging photographs of distinctly Nasty Sky Days.  While official figures counted most of the year as being “Blue Sky Days,” bloggers tracked fewer than 100 acceptable days a year.

The US embassy in Beijing installed an air quality monitor in 2009 to test for “PM 2.5 particulates” within the embassy compound.  PM 2.5 measures “Particulate Matter,” which can be made up of a nearly infinite range of substances, chemicals and gases – in a heavily industrialized region, most of them are either bad for you, very bad for you, or really seriously extremely bad for you.  Says the EPA:

Particle pollution includes “inhalable coarse particles,” with diameters larger than 2.5 micrometers, and “fine particles,” with diameters that are 2.5 micrometers and smaller.  How small is 2.5 micrometers?  Think about a single hair from your head.  The average human hair is about 70 micrometers in diameter – making it 30 times larger than the largest fine particle.


China Catches Its Breath - humanhair

Take a look at the graphic and decide how much of this you want your family breathing in every day.  All right, then.  Neither do the Chinese.


Beijing residents figured out how to access the Twitter feed on the air quality monitor at the US embassy.  Ordinary citizens started re-blogging embassy Twitter messages to places where others could read them.  By 2011 a crisis erupted: here was proof that the authorities’ “Blue Sky” statistics were false.  The embassy readings indicated “extremely hazardous” levels of PM 2.5 particles and other pollutants.

So the Chinese government did something few Western observers would have anticipated: they acknowledged that air quality was dangerous and committed to new policies to aggressively clean up the environment.

Dr. Hart says this was a simple political reality driven by the average middle-class Chinese urban resident – a group comprising over 300 million people – a sizeable constituency even in a country where “One Citizen, One Vote” is considered a quaint notion.  Most of them are not English speakers and get their information primarily from the state-run media.  But they are well aware of the environmental situation and are sophisticated about monitoring air pollution levels.  They are plugged into blog networks and other sources of news about the environment.  They all know exactly what “PM 2.5” means and use the term routinely in their conversation.

The Party Takes The Clean Air Pledge

Once they acknowledged that there was a problem, Dr. Hart says the Party swung into action, to tremendous effect.

Starting in early 2012, Beijing started publishing accurate air quality readings, urging citizens to monitor the government’s progress.  In early 2012 the Ministry of Environmental Protection rolled out new air quality standards and a set of directives covering residential areas.  Under a formal 5-Year Plan, emission targets are set for 2015, and again for 2020.

The 2012 national standards for coal plants set emissions control standards comparable to, or better than those in the US and the EU.  New plants must be 100% in compliance, while existing plants have only until the end of the initial five-year stage, in 2015.  This may strike us as odd here in America where the worst polluters can get a court order allowing them to continue to run their plants, or simply violate federal rules and pay a fine much smaller than the profits they earn from their improper behavior.  Something to be said for central planning?

This unprecedented plan is focused on residential centers.  Dr. Hart says the Party recognizes they can’t clamp down on all emissions nationwide without disrupting economic growth, so they developed a 12-year plan covering 13 broad regions and 117 cities, with urban pollution reduction targets of up to 10%.  Each city must develop its own plan for emissions reduction and in the next phase, cities and regions will be linked to ensure air quality improvement along broad geographical corridors. 

Beijing itself has all but completely eliminated coal consumption, replacing it with natural gas.  Five remaining coal plants are all marked for closure and Beijing will soon be the world’s largest all-gas powered city.  The city has also imposed rigid vehicle restrictions, making it exceedingly difficult to get a new vehicle permit, and permitting drivers to go out only every second day, using odd / even license plate numbers. 

The central government is absolutely serious about this, says Dr. Hart, but they want the cooperation of the citizenry.  The government acknowledges this is a problem that took many years to develop, and which will therefore take time to clean up.  At last November’s Party congress, outgoing general secretary Hu Jinao coined the expression “ecological civilization,” an expression that has taken root as a key political concept.  Dr. Hart says this is a highly significant development, signaling a deep commitment at the highest levels of government, one that is being brought forward under the current general secretary Xi Jinping.   

Steps this year include a reassignment of high Party officials to key regulatory posts where they will have the authority to implement change.  The national electricity regulator has been moved under the authority of the national reform commission, for example, and there are rumors that the once-powerful monopoly will be broken up into more manageable units. 

What Will Change Look Like?

Apart from citizens enjoying an increasing number of Blue Sky Days, Dr. Hart says big changes will start to become apparent in 2014 as the 2015 deadline for full implementation approaches.  New regulations have been issued at the rate of one every month since February of 2012, and numerous industrial facilities have already been relocated or shut down.  A big push to complete the retooling should carry through 2014.

The message from the central government to the cadres is clear: “You can not mess this up.”  Implementation will be tracked at the local level, and meeting environmental targets will be the key to promotion through the party ranks.  In Chinese political culture, promotion within the Party hierarchy is the ultimate bottom line.

In terms of its economic impact, this has already led to consolidation in heavy industry.  Cities have made conscious policy changes to force small operators out of business, since larger facilities have greater economies of scale and are better equipped to adopt increased environmental controls.

Some industry has moved to Myanmar, a country with which China has a long commercial relationship, giving rise to concerns that Chine is merely shifting their pollution to Someone Else’s Back Yard.  Among the policy initiatives at the central government level are new rules that will require stiff pollution controls to be in place in all Chinese-owned facilities, even outside the national borders.

The government is installing monitoring equipment across the country that report air quality levels directly to Beijing.  Air quality is hard to certify and easy to fake.  And as the local cadres see their path to either advancement or ignominy dependent on improving local air quality, there is high incentive to lie.  Cameras on central government monitors have already caught local officials tampering with the devices, and the government is pursuing companies that keep shifting production just out of range of the monitoring posts. 

A significant international development is seen in complaints lodged by the Japanese, who say Chinese pollution is blowing across the open water and flowing into Japan.  The Chinese government, answering only to the political pressure from its own citizens, has basically told the Japanese, “if you buy us new technology, we’ll be happy to use it.”  This will bear watching over the next year or so as there may be increasing political pressure from China’s neighbors as the five-year plan advances and major polluters find themselves scrambling to meet a looming 2015 deadline.

Finally, a major wild card will be China’s domestic natural gas industry.  China has been watching the US shale gas business with great interest – observers estimate that China has substantially larger shale gas reserves than the US.  There are high hopes for a natural gas boom as the nation moves away from coal power – but there are a number of potential problems.

China’s shale gas deposits are much more difficult to access than those in the US, and their chemical makeup is harsher.  The highly corrosive output damages drilling equipment and will make refining more costly.  China also lacks an extensive pipeline infrastructure and has significantly less water resources for the fracking process.

Yet, with all these challenges, China’s leadership is dedicated to building a successful natural gas business and has put key experts in positions of authority to do everything possible to make this succeed.

Conclusion

Dr. Hart says the government will “absolutely not back away” from their air quality goals. 

First, the Party does not accept defeat.  The existence of a written five-year plan is a major commitment – indeed, an unshakeable one.  Having set the mechanism in place for ordinary citizens to monitor air quality, there will be no return to “Blue Sky Days.”

Secondly, Chinese are used to a High-Low society where the wealthy buy things the average citizen can’t afford.  European designer clothes and shoes.  Million-dollar luxury apartments.  Imported food and wine.  Bottled mineral water.  But clean air…?  There are some things money can’t buy.

It may prove difficult to attain all targets exactly on the projected schedule, and Dr. Hart says the next significant update should come from this autumn’s Party plenum.  She will be watching closely for any significant policy updates which could signal the level of success they are having in overcoming barriers along the path.