Update: Audio of this talk is now available, and video is embedded after the jump.
Preventing global warming requires lowering carbon production, and China produces a high level of carbon emissions. China gains a significant advantage to its economic growth from its continued use of fossil fuels, but the harms from global warming will fall disproportionately on other countries. Thus, some writers advocate giving side payments to China as part of an international agreement to reduce global warming. Their analysis treats China as a "black box"; the input is money, the output is reduced carbon emissions. But when we open the box, the situation is not so simple. The box really has two Chinas inside.
In the most recent edition of Chicago's Best Ideas on January 14, Professors Daniel Abebe and Jonathan Masur presented "The Two Chinas and the Problem of Global Warming," based on their paper "Climate Change and Internal Heterogeneity." The first China is Eastern China. Eastern China is prosperous, having experienced a blistering growth rate around 10 percent annually over the past couple decades. Most of China's major cities dot the Eastern coast, and the cities are hubs for finance and manufacturing. The second China is Western China. Western China resembles a developing country and is still mostly agrarian. Per capita GDP is half what it is in the East (9,967 yuan versus 19,813 yuan). The interplay between the two gives the Chinese Communist Party (CCP) incentives to not accept a climate-change treaty.
The CCP, in the 1980s, switched from Marxism to economic growth as its justification for one-party rule. The strategy has been a success in Eastern China, but the policies have not benefited Western China to nearly the same extent. Many of the economic policies apply only to urban environments or particular coastal areas; for example, the CCP opened up fourteen mostly coastal cities to direct foreign investment. The growing economic disparity concerns the CCP. First, inequality causes demographic instability because large numbers of people migrate from the West to coastal cities to find work. Second, the lack of economic growth in the West could cause political instability because the government loses its economically based mandate. Furthermore, although China has a fairly homogeneous Han majority, ethnic-minority enclaves are located in the West, such as Tibet and Xinjiang. Most of China's natural resources are located in the West, raising the potential costs of instability. The Western Development Program evidences the CCP's goal of alleviating the disparity by focusing attention on western China.
So China does not want to implement a climate treaty, but even if it did want to, China is probably incapable of implementing the treaty because of problems with government structure. Another strategy China is using to promote growth is widespread devolution of governmental power. First, provinces have their own ministries, ministries that have equal authority with the central government ministry; thus, the central ministry cannot issue a binding order to a provincial ministry. Imagine if California's EPA could choose to implement a contrary policy to the federal EPA. Second, provinces are responsible for collecting taxes, from which they give some to the central government according to negotiated agreements. China has one of the highest proportions of government money spent by local bodies at over 70 percent; the US, by contrast, spends 46 percent. Provinces, therefore, have the financial capacity to buck the central government's authority. Third, officials have perverse incentives. Each official in the government is measured according to how much economic growth that official creates, even environmental officials. Furthermore, their local EPAs depend on local governments for tax revenue, so environmental officials must try to enforce regulations against their bosses. Finally, corruption is a problem, especially at the provincial level, so environmental officials often collude with local officials to skirt environmental regulations.
And the problems for a climate-change treaty continue. The amount of any side payment depends on how much carbon output a nation must forego, and China's future output will be higher than many think. The problem with previous estimates is--again--treating China as a black box. Total carbon emissions are estimated this way:
Carbon emissions = Population * GDP/person * carbon/GDP
The first two terms, population and per capita GDP, are easy for economists to estimate. The third term, called "carbon intensity," is the real source of uncertainty. The relationship of carbon intensity to per capita income follows the environmental Kuznets curve, that is, carbon intensity grows with per capita income, crests at a maximum, and then decreases. The curve represents an underlying dynamic in which society increases its carbon emissions as industrialization occurs but then decreases emissions as efficiency increases and people become more environmentally conscious. Economists fit this curve to the historical pattern to create future estimates. Viewed in the aggregate, China has already hit its maximum and is on the downslope. Several authors formulated estimates based on this relationship, yielding estimates between 2.5 and 5 percent annual growth rate of carbon emissions. One article, by Auffhammer and Carson, uses province-level data to project the environmental Kuznets curve for each province. Since the Western provinces are still on the upswing of their curves, they predict that China's carbon intensity will continue to grow in the future, so carbon output will grow at 11 percent, twice as much as the next highest estimate.
Abebe and Masur admit that their forecast is pessimistic: China will not want to accept a side payment for joining a climate-change treaty, it will be unable to effectively enforce any treaty it does sign, and the amount of the side payment will be much higher than previously anticipated. The questioning started off with audience members suggesting alternative negotiation strategies, such as a technology transfer or direct deals with provinces. Abebe and Masur support technology transfer, but that strategy is not a panacea and does not completely solve the political difficulty in this country with giving large sums of money to China. Provincial deals would be stymied by the high local corruption and lack of enforcement mechanisms (any retaliatory actions must be taken against China as a whole). And countries do not like it when other countries make deals with regional subparts.
One glimmer of hope, I think, stems from China's desire to be accepted as a major player on the world stage. The industrialized world is forming a consensus on the necessity of climate-change action, so while China's carbon emissions grow, so will the international pressure on China to take some action. China has an incentive to centralize authority within the country, not merely to handle climate change but also myriad other problems, ranging from the current economic crisis to tainted milk. Increased centralization can overcome the capacity problem, and the rest of the world will have to overcome the cost problem. One can only hope.