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China Gets Serious on Pollution

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Pacific Money

China Gets Serious on Pollution

Beijing finally announces a set of measures aimed at dealing with China’s notorious air quality.

Time certainly flies. It is already nearly four years since the 2009 United Nations Climate Change Conference (the “Copenhagen Summit”) ended amidst mutual recriminations, blame-trading and considerable bad feeling. Much of the acrimony centered on the subject of developed country subsidies, or funding for environmental cleanups and clean-technology deployment in emerging markets and less-developed economies, these days increasingly the source of pollution.

Since then, the issue of air pollution and environmental degradation has become that much more immediate, especially for China. Worries about health consequences, economic fallout and a lack of government action have been some of the most persistent issues facing China throughout the year, especially in January when Beijing and much of Northern China suffered from a choking “Airpocalypse” that seemed to finally bring the issue to the forefront of policymakers’ minds (and lungs).

So, as Beijing again suffered from a spike in bad air quality, it was perhaps fortunate that the Chinese government finally announced on Thursday a long awaited and much-rumored set of measures aimed at improving China’s air quality.

Front and center of the plan is the issue of coal. China has a lot of it, burns a staggering quantity and has been doing so at increasing rates over recent history. Beijing has now announced that the country will aim to cut coal’s contribution to primary energy use to below 65% by 2017. The beneficiaries of this policy will be nuclear power, natural gas and a little bit of non-fossil fuel energy.

This plan comes just more than a month after the announcement that the government would support environmental protection as a “pillar industry” (through tax breaks and subsidies) and would increase spending on energy-saving and pollution-tackling technologies.  

Several industries in which coal consumption is high are also, quite conveniently for a government trying to push through a painful economic restructuring, suffering from chronic overcapacity and are in need of “consolidation” (read: closures) anyway. The steel sector, excess capacity in which actually increased even after global demand collapsed in late 2008, is expected to be one loser as the plan takes effect. Another area that could face pressure is the country’s enormous aluminum industry.

Of course, in China strong regulations are not always accompanied by strong or effective enforcement, with both corruption and growth-favoring local governments conspiring to undermine rules in many areas. Moreover, the plan fails to address another major source of air pollution in China – vehicle emissions – although the announcement does suggest that the roll out of stricter emissions standards may be brought forward. China will need to tackle both issues if it is to achieve a healthier environment in which its citizens can strive for the “Chinese Dream” recently described by President Xi Jinping.

Investors in Chinese energy, coal, steel and aluminum would be advised to consider the implications of the plan seriously.  As usual, there will be both winners and losers, as opportunities emerge alongside the pain.