Great pall of China

The Bulletin, Page: 60
Tuesday, 13 June 2006

GLOBAL warming is the classic boiling frog issue. It's done very slowly. Too quickly, and the frog jumps out. The global-warming frog has been a long time aboiling.

A continuing debate among experts as to whether the temperature is even rising has kept the issue docile. (I have always accepted Mark Twain's version of "an expert" as being just somebody from out of town.) But it's now settled that boiling is actually occurring. Even the US Climate Change Science Program, the George W. Bush administration's co-ordinating agency for global-warming research, conceded last month that it had found "clear evidence of human influences on the climate system".

That falls rather short of British Prime Minister Tony Blair's recent description of climate change as "a challenge so far-reaching in its impact and irreversible in its destructive power that it alters radically human existence". Our own prime minister, John Howard, has eschewed the apocalyptic approach. With his trademark pragmatism and political guile, he has declared that it's time Australia had a full scale national debate on nuclear power.

The knee-jerk reaction of the Canberra commentariat has been to define the Howard initiative as an exercise in wedge politics aimed at exploiting Labor Party differences over this policy space. There might be more than a grain of truth in this. But the global-warming issue has reached a point where it can no longer be ignored. Of course, some people have been saying that for years.

But in the democracies of the developed world, such warnings have had little currency among elected officials. The long-term nature of the threat meant that consideration, let alone actual action, could be postponed because its solution involved unpopular measures. This complacency has now been displaced by an emerging sense of urgency. A major contributing factor to this mood shift has been the fast-gathering economic implications of China's rapid industrialisation.

It's not just that Howard has suddenly focused on our absence of a nuclear policy in an Australia that has significant uranium reserves. We will have to deal with China, a country that proposes to build 30 nuclear reactors during the next two decades to supplement its present nine reactors. That's part of it. Doubtless Washington would be much more comfortable with such a trading prospect if uranium was enriched in Australia, not China but that could require considerable marketing on the domestic political front.

However, China's voracious appetite for energy represents a larger, more vexed and pressing issue than potential Australian uranium sales. Its industrialisation drive has been a major global disinflationary force in recent years. As Morgan Stanley's Andy Xie points out, manufacturing production has relocated to China on a massive scale in the past five years, due to the country's cheap labour and lax enforcement of environmental standards. Xie believes that the lack of enforcement of environmental rules may have been more important than labour costs in attracting production relocation.

Whether that's been the case or not, the reality has been that the world has dumped a large quantum of its industrial pollution in China in the past five years. According to China's Environmental Protection Agency, pollution is 12 times the world average per unit of GDP. The emission of sulphur dioxide is 22.5 million tonnes compared with a maximum carrying capacity of 12 million tonnes for the country.

The World Health Organisation estimates that (500 million people are exposed to SO2 levels above their emission standards. When mixed with nitrogen oxides and chemically transformed, SO2 causes acid rain -which devastates crops and forests. WHO estimates that 30% of China is seriously affected by acid rain. Two-fifths of the country's major river bases are polluted.

Ninety per cent of the rivers running through cities are severely polluted. Some 300 million rural residents have no access to purified water. Two-thirds of the population suffers from poor air quality. China is estimated to emit 13% of global carbon emission from fossil fuels -second only to the US, This share is projected to rise to 18% by 2025. The health costs, mostly paid in terms of life quality and age expectancy, implicit in these environmental statistics are huge and growing.

Not surprisingly, there are disturbing implications in terms of social and political stability, especially from peasants dispossessed of land to make way for factories. The Beijing government is conscious of this and has moved pollution control up its political agenda. But just as China's large and growing contribution to greenhouse warming is a global, not simply a Chinese problem, so too are the economic consequences. China's policy of export-led growth through rapid industrialisation on the back of low-cost labour and minimal pollution costs has been a major factor in delivering low inflation to developed economies, especially the US.

China now acknowledges the need to normalise pollution costs. As Xie puts it: "Part of the unsustainable disinflation from 2002 through 2005 has to be regurgitated." That could be very difficult for a US economy that is struggling with high oil costs and a heavily indebted household sector to handle. Recent volatility in financial markets partly reflects concerns about how the Federal Reserve will react should inflation pick up.

With the strong correlation we see across global financial markets, any shock on Wall Street will cascade through the global system. Under such circumstances, especially given the unknown dimensions of the global market in leveraged derivatives, we could see the financial market tail wagging the non-financial economy dog. The uneasy relationship between global warming and global financial-economic health is not going to be a phase. The linkage will be ongoing.

The imminent dilemma involves China and the US, but the populous developing economies of India, Brazil and Russia are also engaged in industrial catch-up. That has obvious implications in terms of energy production and greenhouse emissions. The China situation further underlines the flawed nature of the Kyoto treaty. Kyoto's failure is usually ascribed to the refusal of the US and Australia to ratify the agreement.

Even had they done so, Kyoto would not have solved the pollution problem driven by the breakneck industrialisation of China. Importantly, Kyoto has not been a waste of time. It has launched a carbon-trading market that, despite early teething problems, holds out the real prospect of reducing greenhouse gas emissions in the developed countries where it is operating. Kyoto also demonstrated the practical futility of imposing a top-down command model on environmental policy.

There is no way the US Senate will ever accept a UN direction on domestic economic policy. Even Australia, with no history of intransigence, would not go along with Kyoto. The major flaw in the Kyoto approach, however, is that it had no answer to the developing economies' demands that they had a moral right to catch up with the developed world. One way to address this issue is to point to China's experience in discounting the social and political costs of pollution.

Warwick McKibbin from the Australian National University believes that individual countries could address their economic aspirations with locally based carbon-trading markets. It's a model he has been developing and refining for nearly a decade. The concept has been successfully pioneered in the US where acid-rain pollution has been dramatically reduced. While there is no costless way to stop and then reduce global warming, the impact of a long-term, gradual approach is far from draconian.

But the delays involved in conceding that global warming was actually a problem have increased the costs. The devil has not been so much in the detail as in the politics. And, to be honest, that's still the case.