China is rapidly converting to a Green Economy. What is changing and why?

Rapid industrialization and economic development have made China one of the world’s most influential and prosperous countries. The country’s meteoric rise in just under three decades is nothing short of amazing. However, the same factories and industrial centers that fueled Chinese economic growth also threaten its natural resources and create health problems for its citizens.

To the government’s credit, rather than deny the threat of climate change or double down on ineffective rhetoric, they made a concrete commitment to a green future and set out actionable policies to achieve this.

Today, China has made giant strides in its dedication to reducing pollution and, in my opinion, is also staking a credible claim as a global climate leader. As the Center for Strategic International Studies (CSIS) reports, while the country is currently the world’s largest emitter of greenhouse gases, it is also a powerhouse in renewable energy and is leading the race towards a sustainable future.

How did things change, and what did China do to reach this point?

Seref Dogan Erbek

China’s green track record

When China started its drive towards economic prosperity in 1978, it was fueled primarily by coal. However, with the country taking over as the world’s largest climate offender in 2006 and spurred by studies establishing pollution as a cause of one million Chinese deaths yearly, the government has made sustainability a core policy goal, and this commitment is paying off.

China currently leads the world in the production of renewable energy sources. The country is the largest producer of wind and solar energy worldwide. Likewise, it is the largest foreign and domestic renewable energy investor and is one of the foremost manufacturers of green tech globally. In 2019, the country held the most world-class patents in water, waste treatment, and recycling. Likewise, Chinese environment-related patents have ballooned by 60x since 1990, compared to just 3x in the OECD area.

With the government’s move away from coal, the World Economic Forum reports that “huge progress has been made on air quality, and there are now fewer smog days in China’s largest cities.”

How did the country get here?

As I see it, China has achieved its current sustainability status due to concrete and measurable planning towards climate goals. The country has made the drive to a green future a part of its government planning since 2001. Since then, each of the country’s five-year plans (FYPs) has included revised and steadily improving objectives for reduced pollution and greater climate action.

Further, as the Mercator Institute for China Studies reports, the country progressed under its 13th FYP (2016-2020), with virtually sixteen out of sixteen green targets met, thereby laying a foundation for more significant action in the 14th FYP.

The government has backed its climate commitments with funding too. In July 2020, the country set up an ecological environment fund that raised 88 billion Chinese yuan (CNY) as of January 2021. The fund is on track to become the second-largest national fund in the country.

Apart from this, China is using various strategies to procure its climate change objectives. This includes designating special green development zones such as Shenzen, Guilin, and Taiyuan. These cities focus on specific sustainability goals such as sewage treatment and waste utilization, desertification, and air and water pollution.

Private companies are also participating vigorously in the green drive. For instance, Alibaba helped create a Green Digital Finance Alliance, pulling other private corporations into the sustainability race, and launched an app (Ant Forest) to gamify carbon tracking. The app is already reported to have helped save 150,000 tons of CO2 as of February 2017.

There’s still work ahead

While the Chinese progress has been impressive, it’s important to clarify that the country can still do more. For instance, the Chinese share of renewable energy in overall power generation is still 12.7% (as of January 2021), compared to 14% in the EU. Also, while the country continued to implement many green targets in 2020, China added nearly 20 gigawatts of coal capacity in the first half of the year and approved another 48 gigawatts of additional power from new coal-fired plants.

However, as I see it, the Chinese progress on climate looks likely to bear positive fruits for the overall transition to clean energy. Western nations will be hard-pressed to emulate the Chinese to compete in green tech and allied advancements and show that the West is just as invested as the East in the move to arrest harmful climate change.

Rising energy costs worldwide: reasons and what to expect

I have closely followed the recent upsurge in energy costs that characterized the end of 2021. According to global reports, coal, gas, and electricity prices rose to decade-high levels in the final months of the year, and projections were that the energy shortfall would continue well into 2022.

The International Energy Association reports that gas prices are at a record, with costs as of 3rd quarter 2021 at ten times the price a year ago.

In addition, coal prices increased 5x compared to 2020 prices, and natural gas prices tripled in October 2021 to their highest levels since 2008.

Many factors have been fingered as culprits for the energy squeeze, but one that seems to be thrown in now and then is the effect of reduced investment in fossil fuels and capital transfer to fledgling green energy projects.

Right off the bat, I would like to emphasize that investment in green energy is not the cause of the energy crisis. Moreover, as both the International Monetary Fund and the IEA clarify, blaming the clean energy transition for the situation is “inaccurate and misleading.”

Instead, there are various factors involved, not least of which are the 2014 and 2020 commodity price collapses and the resurgence of energy demand after a COVID-induced hiatus. I will briefly outline some of these causes and how we can expect things to evolve.

Seref Dogan Erbek

Why are energy prices so high?

While it seems like the energy crisis hit out of nowhere, there are longstanding reasons for the situation, and they mainly stem from the collapse of oil prices in 2014.

At the start of the 2010s, strong growth in the price of commodities created an oil industry boom, with prices sitting around $100 per barrel. The boom encouraged greater investment in the sector, significantly increasing supply. Similarly, developments in energy efficiency reduced worldwide demand, thereby creating an oil glut. However, major oil-selling countries failed to respond by lowering supply, and as a result, oil prices fell by 70% from 2014 to 2016.

One implication of this collapse was that investors lost appetite for new fossil fuel investment. Second, abundant oil also created a natural gas glut, making gas cheaper and a viable alternative for coal. Due to this, gas-fired plants gained ground, and the electricity systems worldwide began to rely more on gas instead of coal.

By the time COVID came around, the pause in fossil fuel investments was already several years old, and as Bloomberg reports, supply was already falling behind demand. COVID-19 tanked energy production globally due to lockdowns, the rampaging pandemic, and health regulations. While demand rebounded faster and stronger than expected, supply quickly fell further behind due to unexpected outages, a sizable maintenance backlog, and supply chain inefficiencies. Households and power plants began to compete for limited gas supply, which helped increase prices even more.

Currently, OPEC and Russia seem unwilling to intervene and help stabilize prices with increased supply. At the same time, the EU and other countries in the Northern Hemisphere have all but depleted their reserves in response to unseasonal weather, thereby leaving them unable to ease the supply hardships within their territories.

That said, I should note that climate policy is not exactly blameless in the overall operation of forces leading to this crisis. For example, increasingly stringent emissions targets in Europe, North America, and China have contributed to policies favoring gas (which is cleaner) over coal. But in the general scheme of things, climate policy has had a negligible effect on the crisis.

What will the new year bring?

The causes behind the current energy crisis are myriad, so it’s uncertain how things will develop within 2022. While major oil producers will likely open up their stores and help provide stability at some point during the year, other factors such as maintenance difficulties and destructive weather events are less certain.

I believe one potential solution could be to increase investment in renewable energy sources to help make the global system less vulnerable to wild swings in commodity prices. With decentralized energy production and renewable sources enjoying more production capacity, the world can recover from these commodity cycles quicker and suffer less damage as a result.

Inflation hits middle-class consumption and remains an uncertainty for the economy

As the world looks to bounce back from the 2020 COVID-induced slump, inflation is playing a larger role than anticipated in global economies. A slower than expected economic recovery, a flagging labor market, and supply chain disruptions have created concerning inflationary conditions, affecting middle-class families globally.

For instance, the UN Food and Agriculture Organization reports that food prices rose for the third straight month in October 2021, climbing to their highest levels since 2011.

Likewise, in Europe, annual inflation was reported at 5% in December 2021, with energy costs driving higher figures at a rate of 26.5%. The higher cost of energy is in turn pushing up the prices of necessaries, from heating to transportation, food, and gas.

While inflation is a global concern, data shows that middle-class families are feeling the pinch of rising prices more. Here’s why I think that might also be bad for the global economy.

Seref Dogan Erbek

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Inflation has hit the middle class hard

As a general rule, inflation impacts individuals and families by reducing their spending power. However, the trend is usually tougher on lower-income families because they have less money to spend than the upper-middle class and the rich. For instance, the IMF found that people who identify themselves as poor are 10.5% more likely to name inflation as a major concern than those who identify as rich.

According to the Penn Wharton Budget Model, low and middle-income families spent 7% more in 2021 on the same products they purchased in 2020 and 2019. On average, they spent $3,500 more on the same products as they did two years earlier.

Similarly, the World Economic Forum states that one survey of 20,000 respondents from 30 countries found that at least half reported higher healthcare, clothing, housing, and entertainment costs. Seven out of ten people said that they expected the price of food, gas, public transport, and groceries to increase even further.

According to Reuters, Argentina reported the highest inflation rates, with prices rising to 54% as of October 2021. While countries such as China and Japan have reported the least inflation figures (at 1.5% and 0.1%, respectively), the general trend paints a troubling picture overall.

Food prices are more than 6% higher than in 2020, and gas prices jumped to 58% at the end of 2021, forcing these families to devote more of their budget to necessaries. In many cases, the inflationary trend is forcing middle-class families to explore cheaper alternatives to everyday staples, according to NBC. More people with incomes ranging between $50,000 to $100,000 are looking for deals in stores that traditionally serve rural and low-income shoppers.

Why this is bad for the economy

The middle class is a vital driver of business within the global economy – they sit at both ends of the table as business and consumer.

I see one reason for this as their overwhelming representation in the ownership of SMEs, which constitute the vast majority of businesses worldwide. Without a strong and financially stable middle class, more businesses will likely suffer cash flow issues and struggle to keep shelves stocked or services going.

As consumers, inflation takes more money from middle-class households in return for fewer goods. Therefore, they suffer reduced purchasing capacity and are ill-equipped to provide the demand that helps businesses arrest cash flow concerns. In effect, each phenomenon reinforces the other and produces a risk that all players will be caught in a vicious cycle.

Eventually, the economy bears the brunt of middle-class woes. Research shows that higher middle-class incomes presage better economic growth overall. Likewise, an ailing middle class is bad news for the economy, as high inflation levels leave them with less money to save, invest, or spend.

Unfortunately, it’s not certain how long this inflationary trend will continue or what might be done to arrest the trend. Seeing as the root causes are numerous, it is more likely that countries will provide whatever support they can through subsidies and stimulus payments while looking to the market to correct itself in due course.