How China is going to save the world

As China suffers record air pollution, it is also emerging as the world’s leading clean energy investor
BEIJING, CHINA - JANUARY 13: (CHINA OUT) A girl wears a mask calls for more attention on PM 2.5 pollution at Sanlitun Village on January 13, 2013 in Beijing, China. The recent surge in air-pollution levels in more than 30 cities around China may boost demand for environmental and air-filtering products and spur the performances of the companies in those industries. (Photo by ChinaFotoPress)***_***435407108

Last week the U.S. Embassy in Beijing upgraded its official reading of the city’s air quality on Twitter from “hazardous” to merely “very unhealthy.”

But that was scant comfort to the millions of Chinese workers who don masks for their daily commute through thick smog into “Greyjing.” Recent news that air pollution had reached its highest levels since the American government began monitoring it—roughly 44 times worse than the World Health Organization’s recommended daily levels—had ground the city’s construction industry to a halt, forced schools to cancel outdoor sports activities and even sparked several rare, critical editorials in the state-owned press. “What do we want, breathtaking growth or taking a breath amid choking air?” asked China’s state-run news agency Xinhua. It prompted two Chinese environmental activists to pay for an ad in the New York Times urging new Communist party chief Xi Jinping to pledge his commitment to the environment.

China’s ongoing struggles with pollution have been a blight on the country’s international reputation. The world’s image of China is that of an industrial behemoth fuelled by the dirtiest of energies, coal. On the surface, the reputation is well deserved. No country pumps out as much CO2 as China (not even the U.S. comes close). But behind the smog, China’s environmental woes have become an unexpected boon to the global renewable energy industry. Last week’s air quality emergency sent Chinese green energy stocks soaring on the hope that the political fallout will prompt the Communist party to offer up more public money for the country’s burgeoning environmental protection sector.

Investors are counting on it. Even as it remains the scourge of environmentalists for being the largest emitter on the planet, China is also emerging as the world’s biggest spender on green energy.

Globally, green energy investment fell 11 per cent last year, according to a recent Bloomberg New Energy Finance report. Indebted European countries slashed subsidies, India cut its spending by more than 40 per cent and the U.S. witnessed a string of solar power manufacturer bankruptcies. China’s investment in renewable energy, meanwhile, was a bright spot. It rose 20 per cent to nearly $68 billion, or a full quarter of the $269 billion global total.

From having virtually no green energy infrastructure as recently as 2008, China has built 133 gigawatts of renewable energy—mainly wind turbines—enough to power as many as 53 million homes, or every household in Canada four times over. The International Energy Agency predicted that China would overtake Europe as the world’s top renewable energy growth market. It’s a market expected to be worth more than $470 billion by 2015, according to state-owned China Merchants Securities, or almost double what it was in 2009 and equal to about eight per cent of the country’s GDP.

That investment has caught the eye of clean-tech companies in Europe and North America, who are flocking to China in hopes of selling their technologies after seeing demand stagnate or collapse in their home markets. “All the key players are going to China these days,” says Changhua Wu, Greater China director of the Climate Group, a London-based agency that promotes green energy investment. “Everyone is trying to figure out what the potential for opportunity is, partly because everyone recognizes that China could potentially be the largest market for clean tech in the world.”

As China takes the lead, everyone will benefit from the technology that is developed and exported. China is saving itself, but might also be saving the world in the process.

While the Middle Kingdom’s smog problems have earned plenty of headlines, it has also been quietly attracting a host of very unlikely supporters, including praise from the Pew Charitable Trust and the World Wildlife Foundation, which gave its “climate solver” award this year to several Chinese companies that manufacture technology to capture and recycle wasted heat, water and chemical emissions to power everything from factories to refrigerators. Greenpeace predicted the country would be on track to install 400 gigawatts of wind energy by 2030 and could become the largest solar market in the world.

The argument that China is the world’s environmental bad guy “is increasingly difficult, if not impossible, to make given China’s recent policies,” wrote the authors of an October report for the Climate Institute, an Australian think tank. The country has closed more coal-fired power plants since 2006 than the entire capacity of Australia’s electrical grid, and exported more than $35-billion worth of renewable energy technology—equal to the total value of shoes exported from China that year. This year, China is rolling out pilot projects that could eventually lead to the world’s largest carbon trading system.

“The broad scheme of things is that China believes it wants to become a resource-conserving, environmentally friendly society and that’s the way they describe it, in those exact words,” says Arthur Hanson, one of Canada’s leading experts on sustainable development. The former founding director of Dalhousie University’s School for Resource and Environmental Studies, Hanson is in Beijing this week in his role as international chief adviser to the China Council for International Co-operation on Environment and Development.

Granted, China has little choice but to invest in renewables as it seeks out more sources of energy to help power its rapidly developing economy, with GDP growth expected just shy of eight per cent this year and an urban population rising by an estimated 2.3 per cent a year. Green energy is also seen as a political tool for the Chinese government that can quell rising environmental protests and appease political dissent. “The leadership in China is really recognizing that in order to manage and govern the country better you need to find a universal underlying theme to make sure everyone is with you,” says Wu. “Green growth or sustainable development happens to be the only one.”

But beyond the obvious political and economic advantages of green energy, China is also pinning its hopes on the belief that global demand for clean technology will enable the country to transform both its domestic economy and its exports.

Until now, China’s green energy sector has largely done what the country does best: import technology developed elsewhere, reproduce it for less money and then export it back to the West. That’s changing as China pours billions into research and development and advanced education in hopes that clean tech can help shift China from being merely the low-cost factory of the world to being a global leader in developing innovative technology.

China’s current five-year plan, which runs through 2015, includes an economic development blueprint that will see more than $1.5 trillion invested in seven industries, all of them related in some way to environmental protection and renewable energy technology.

“Some of my colleagues feel we’ll be receiving an awful lot of technologies that are Chinese born and bred and brought to commercialization in Canada on the environment,” says Hanson. “It may take five to 10 years, but it won’t be a one-way flow of technology from the developed world to China. It will be in partnership or even a reverse flow.”

China is moving quickly to incorporate electric vehicle technology into what has become the world’s largest automotive market. Already, Beijing drivers have practically abandoned internal combustion motorcycles for electric ones. “There’s millions of these things buzzing by and with very little noise and limited pollution,” says Hanson. “I don’t know who is going to be the winner in the electric automobile, but I think that everyone should be looking over their shoulders at the Chinese.”

Like much of the economic development in China, the green energy industry’s growth has not come without controversy. China’s commitment to sustainable development has garnered its share of skepticism from environmentalists who argue that its investments have less to do with being an environmental role model and more to do with sustaining a green energy bubble it helped create.

The Worldwatch Institute noted that as many as half of the wind turbines in northeastern China aren’t connected to any grid, that they are “ghost” projects like the vacant cities and shopping malls that have been built to prop up China’s construction industry. In the desert outside the city of Jiuquan, for instance, as many as 20 companies are in the midst of constructing what could be the world’s largest wind farm. Yet as few as a fifth of the 3,500 massive, 60-m windmills that now dot the landscape are hooked up, according to Worldwatch. What’s more, most of the electricity they might generate is needed on the other side of the country, on the industrialized eastern coast.

While China has improved its energy efficiency, it has sometimes done so with a heavy hand, by simply shutting down small factories, or turning off power to entire communities for days.

Much of China’s solar industry was developed for export and took a huge blow after the U.S. slapped steep protectionist tariffs on Chinese-made solar panels last year, accusing the country of trying to flood the American market with heavily subsidized components for below cost. The European Union launched its own Chinese anti-dumping probe in September. (China retaliated with an investigation into European imports of polysilicon, the raw material used to make solar panels.)

Such trade disputes have had devastating effects on China’s solar industry and prompted the government to shift its focus for solar to its domestic market. In December it announced $2 billion in subsidies for the industry and says it plans to add another 10 gigawatts of solar capacity this year. Its targets for domestic solar growth have quadrupled in the past year, less out of environmental concern and more out of economic necessity.

“Companies that were formerly success stories are literally now facing life or death situations,” says the Climate Group’s Wu. “Chinese banks invested a lot of money into those companies and suddenly there’s no market anymore. That’s part of the reason why the government has lately been driving their targets higher and higher in order to create a large enough domestic market.”

Stimulating a domestic green energy market has also pushed China toward what is quickly becoming the world’s largest carbon trading market. China has emerged as the biggest user of the UN’s carbon credit program, which gives companies credits for clean energy investments they make to their businesses that they can sell on international carbon exchanges. Chinese companies represent 45 per cent of projects registered under the program and 65 per cent of its total of the emissions reductions.

This year, China is rolling out the first of seven of its own carbon exchange pilot projects across both the industrial heartland in the Pearl River Delta and China’s rural regions with plans to create a national exchange system by 2016. It’s a move the Chinese government hopes will spur much-needed private investment in green energy—which until now has subsisted largely on public money—both by encouraging more companies to invest in green energy to earn credits and by establishing a market price for carbon emissions.

China’s financial sector lacks the expertise to drive more private investment into emerging clean technology on its own, says Wu. “Banks see the sector as really high-risk,” she says. “But if you continue to rely on command-and-control to [encourage] investment, it costs too much.” The government has already signalled it will allow more consolidation among Chinese solar panel manufacturers, a sign that it won’t continue to prop up the industry forever.

If it works, China’s carbon trading market could become a model for the rest of the world and will likely be critical to reducing global pollution, if only because it will help set the Chinese price for carbon emissions. The success or failure of China’s carbon trading system is “one of the most important questions of environmental policy of our time,” wrote researchers from FORES, a Swedish sustainable development think tank.

Yet even with its ambitious investment, China’s green energy policies have hardly made a dent in the country’s overall energy consumption. China’s goal is to have 15 per cent of its energy from renewable sources by 2020. It’s already 17 per cent of Canada’s primary energy supply. Nearly 70 per cent of China’s energy still comes from coal and the country’s need for cheap energy is growing. From being a net exporter of coal as recently as 2008, China has become the world’s largest coal importer. Global demand for coal grew 4.3 per cent in 2011, according to the International Energy Agency. Virtually all of the demand came from China.

All this means pollution in China will continue to get worse before it gets better. Images of masked commuters aren’t likely to be replaced with images of windmills and solar farms anytime soon. Hanson says the expectation is that it will take China until 2030, another 17 years, to get a handle on its pollution problem. Still, those stresses will bring more opportunities for green energy companies both in China and abroad, adds Hanson. That’s perhaps not too reassuring if you live in “Greyjing” today, but for the rest of the world, a breath of fresh air.