Sustainability and Globalization--China's Low Carbon Path in an Era of High Energy Prices

Just how real is China’s renewable energy revolution?  It may be manufacturing a lot of cleantech goods, but the extent of domestic uptake leaves more to be desired.   At the same time, global supply chains face the increasing strain of sustained high oil prices.  What does the end of cheap oil, decades of which has subsidized international trade, mean for China’s new green path?

The Climate Group just released an upbeat report, China’s Clean Revolution, which lauds China for trailing only Germany in 2007 for renewable energy investments (US$12 billion vs. $14 billion), for leading the world in installed generating capacity of renewable energy at 152 GW by the end of 2007, and for being a leading manufacturer across various low carbon technologies. There is no question that China has serious ambitions in the renewable energy sector. A recent announcement that a Jiangsu-based solar company is contemplating a US$1 billion IPO (which as far as I know would be the largest cleantech IPO ever) on the New York Stock Exchange is testament to this.

But all that glistens is not gold, to use Olympic-speak. While much is being made about the $12 billion that China invested in renewables in 2007, the fact that $15.7 billion was spent “greening” the Olympics (see previous post) and that the Beijing games cost $40 billion in total lends a sobering context to this amount. The 152 GW figure mentioned above comprises mostly of hydropower, and much of it or the large-scale and ecologically and socially destructive sort. Only less than 6 GW of that is wind—amounting to 0.6% of China’s electricity production—and even then, a quarter of that remains unconnected to the grid. And solar PV? Only 80 MW (i.e. 0.08 GW) was installed at the end of 2007. Despite being the world’s leading manufacturer of solar PV panels, over 90% of that is exported.

In other words, focusing on China’s dollar amount of investment in clean energy and the volume of its clean energy manufacturing and exports misleadingly conflates the supply of clean renewable power with the adoption and uptake of such technologies, the latter of which should be the true measure of sustainability.

A Central Role in the World Economy

China’s place in the global fight against climate change is a unique one, not only as the fastest growing developing country and the impact of its activities simply because of the sheer scale of its economy in proportion to the world’s, but because of its central position in the supply chains of a vast majority of consumer products worldwide. In fact, it is reported that China will eclipse the US as the largest manufacturing base in the world next year—some four years ahead of schedule—and that some one third of China’s carbon emissions are attributed to exported goods (frankly, I thought this figure would be higher). All roads lead to China, so to speak.

Is China entirely to blame? The Worldwatch Institute notes that China’s share of global emissions has risen sharply since the turn of the decade. This more or less coincides with China’s entry into the World Trade Organization, and reflects the increasing preeminence of heavy industry in its economy as industrialized economies outsource their manufacturing—and emissions—offshore. It is reasonable to conclude that China’s rising carbon footprint is in no small part attributable to the consumer demands of its trading partners and points to the challenge of apportioning blame responsibilities on a geographic basis, as the current international climate negotiations attempt to do. Framing international climate policy in such terms is like trying to fit a square peg into a round hole because it simply sweeps over the fact that supply chains have become, after decades of low energy prices, highly transnational in nature.

But the sustained climb in oil prices over the first half of this year (recent price correction notwithstanding) may start to tilt the balance in reverse, making logistics more expensive and creating challenges for supply chain managers of every transnational business. The New York Times observes:

The cost of shipping a 40-foot container from Shanghai to the United States has risen to $8,000, compared with $3,000 early in the decade, according to a recent study of transportation costs. Big container ships, the pack mules of the 21st-century economy, have shaved their top speed by nearly 20 percent to save on fuel costs, substantially slowing shipping times.

Can we expect a fundamental rearrangement of global production chains in an environment of sustained high oil prices?

One likely outcome if transportation rates stay high, economists said, would be a strengthening of the neighborhood effect. Instead of seeking supplies wherever they can be bought most cheaply, regardless of location, and outsourcing the assembly of products all over the world, manufacturers would instead concentrate on performing those activities as close to home as possible…In a more regionalized trading world, economists say, China would probably end up buying more of the iron ore it needs from Australia and less from Brazil…

It is fair to wonder how the neighborhood effect, if it plays out, would affect China’s ambitions to be the international manufacturing hub of low carbon technologies, as such manufacturer’s seek to locate their operations closer to their markets. The era of cheap energy has subsidized decades of globalization and international trade has come to a conclusive halt.

Stuff vs. Knowledge

Although I may sound like an anti-globalizationist, I assure the reader I am not. I am just more selective in the kinds of things that I feel should be globalized. By making this statement, I am distinguishing between the international flows of stuff from those of knowledge. Generally speaking, unrestricted flow of stuff = bad, but unrestricted flow on knowledge = good. Citing Herman Daly, the father of the field of ecological economics, Brian Milani asserts in his brilliant book Designing the Green Economy (a must-read) that:

…intelligent economic policy today should entail (1) putting more restrictions on the wasteful long-distance flow of material goods and resources, and (2) decreasing restrictions if the flow of information…current trends in capitalist globalization are moving in precisely the opposite direction: toward decreasing restrictions on goods through free trade, and toward growing restrictions on the flow of information through intellectual property rights.

This drive towards dematerialization stems from the basic understanding that the transported manufactured goods contain a high amount of embedded energy, most of which at this stage originates from high carbon fossil fuels. The transfer of knowledge, on the other hand, relies on the transmission of electrons, requiring an infrastructure of transcontinental fiber-optics that is far less carbon intensive that trans-ocean shipping.

The premise of this “intelligent economic policy” is that goods and information are, to a certain extent at least, cross-substitutes. To the extent that knowledge of, say, green technologies (the know-how rather than the physical good) or best practices to lower the carbon footprint of the operations of a particular heavy industry leads to a decrease in resource inputs and resulting waste streams (and hence material flow), this premise holds water, and points to a different, softer path towards trade liberalization.