This year’s National People’s Congress in Beijing will be remembered for the unusual frankness with which China’s leaders addressed the country’s slowing economy. Citing the gale force headwinds caused by the trade war with the United States, premier Li Keqiang announced lowered GDP targets for 2019 of 6 to 6.5 percent, the lowest rate in decades. Even this rate might be too ambitious a target, as the government quickly followed up with a sweeping plan to axe the value added tax rate for manufacturing in a last ditch bid to jump-start the sluggish economy. But in its frenzied attempt to keep the economic motor running and keep growth above the magical 6 percent target, the government risks forgetting about another priority area: The environment.

Indeed, the government has been approaching every economic downturn with the same old-fashioned recipe: Print money and pump it into the economy. China’s banks provided in January the greatest number of new loans on record, to the tune of 3.23 trillion yuan (US$477 billion) – or 5 percent of the country’s GDP. After tax cuts exceeding one trillion yuan in 2018, some are speculating that China is preparing to unleash a stimulus package worthy of the 2008 global economic crisis, which amounted to 13 percent of GDP.

Yet after four decades of rapid growth, this fiscal package might save the Chinese economy but doom the country’s ecosystem. Dr. Zhou Jinfeng, a leading advocate for China’s sustainable development and the Secretary-General of China Biodiversity and Green Development claims: “There are direct impacts from the stimulus, but environmental protections are also gaining serious attention.”


Credit: Reuters / TPG

Chinese Premier Li Keqiang delivers the work report at the opening session of the National People's Congress (NPC) at the Great Hall of the People in Beijing, China, Mar. 5, 2019.

The stimulus – especially the tax cuts for highly polluting manufacturers – is set to derail earlier hopes that China’s carbon emissions would peak before 2023. Coal use increased once again in 2018, while greenhouse gas emissions, particularly of highly potent methane, followed in lockstep due to the country’s coal mining sector.

This is no longer a mere academic argument. Policymakers are increasingly worried about the issue of permanent smog covering Beijing and other major cities, to the extent that improving air quality is a one of Xi Jinping’s trademark policies. The “Three-Year Action Plan” of July 2018 sought to reduce polluting fine particle matter (PM2.5) for key regions to meet the WHO limit of 10µg/m³ by 2020. It mandates that PM2.5 levels fall by 18 percent on a 2015 baseline in cities of prefectural or higher level, and where “standards have not already been met.”

Previously, the government succeeded in reducing these levels by shutting coal plants for heat generation. Yet under the new vision, not only will the cuts have to go deeper if these ambitious goals are to be achieved, but extra efforts have to be made to get China’s long-promised carbon market up and running. How does Beijing expect to cut CO2 emissions if it’s giving a boost to the same manufacturing industries responsible for much of the pollution?

China’s national emissions trading scheme (ETS) was officially launched in December 2017, at first only covering power generation. Given that the power sector generates 65 percent of its electricity from coal and emits 3.5 gigatons of CO2 yearly, it was rightfully hailed as a step in the right direction. One year on, economic realities forced Beijing to backpedal and the program is currently stalling. The cautious approach to cap-and-trade reflects the government’s objective to reduce the rate at which emissions grow rather than achieve absolute reductions and strangle domestic industries.

Furthermore, the fact that the scheme has thus far not been expanded beyond the power sector is a clear shortfall, one that is exacerbated by problems relating to transparency and enforcement in already participating companies. The lack of “detailed and operable market rules” and of “a corresponding support and management system” are other factors holding back the carbon market’s development beyond the initial phase. The launch of actual trading has been slow, and the market is now so far behind schedule that it is not expected to be fully functional until at least 2025. An environment ministry official in late 2018 had to publicly admit severe shortfalls in the legal and technological infrastructure required to make the scheme effective.

Restoring the balance

Back in 2008, Ligang Song and Wing Thye Woo sounded the alarm: “The uncomfortable reality remains for China that unless ecological balance is restored within the medium term, environmental limitations could choke off further economic growth.” Faced with a slowing economy, this year’s Congress could have been a golden opportunity to put an end once and for all to the sluggish pace that climate conscious reforms are implemented. Instead of providing yet more breathing room to China’s industrial heartland, Li Keqiang could have announced instead that Beijing can no longer pursue a growth strategy that works only at the expense of the environment.


Credit: Reuters / TPG

Security personnel patrol outside the Great Hall of the People during the second plenary session of the National People's Congress (NPC) in Beijing, China March 8, 2019.

With that in mind, Li could have recognized that the cap and trade scheme needs to be urgently extended to the country’s manufacturing industries, specifically aluminium, steel and cement as originally envisioned. China’s aluminium industry is one of the country’s foremost coal consumers and sources of pollution, exacerbated for years by overcapacity production. While the government sought to curtail production somewhat during the smoggy winter months, this year the reform drive came to a grinding halt. The result was a predictable rise in both aluminium output and coal consumption.

And now as Beijing’s stimulus package is being rolled out, such highly polluting industries will receive even more economic incentives to continue their unprofitable operations – and drown cities like Beijing, Shenzhen, as well as Linfen (Shanxi province) and Shijiazhuang (Hebei) in notoriously polluted Northern China, in dense clouds of smog.

Although Xi warned the delegates at the Congress to “not ever think about launching environmentally damaging projects for growth, or any attempt to breach the red line of ecological protection”, the evident panic in Beijing caused by the economic slump shows the country’s vulnerability. The stimulus will buy some time for Beijing, but it’s clear China can no longer expect to grow at above 5 percent in the long-run. China’s production-based growth model has reached its limits, and the CCP now needs to find ways to incentivize a move away from coal and excess production in energy-intensive industries.

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Editor: Nick Aspinwall (@Nick1Aspinwall)

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