US-China relations: Role reversal will slow climate change

  • Blog Post Date 23 January, 2013
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Arvind Subramanian

Peterson Institute of International Economics


This column proposes a new approach to climate change that involves China, and eventually other developing countries, offering inducements to the West to take steps to foster a private-sector led green technology revolution.

Barack Obama's choice of destination for his first post-election trip reflects his pivot to Asia. This potentially friction-laden strategy needs to be balanced by pursuing the opportunities for co-operation, especially in US-China relations. Climate change would be a natural starting point and China should take the lead. Consider why and how.

Why must China act?

Domestic problems will naturally occupy China's new leaders. But they ignore at their peril one of the biggest external threats to China’s long-term development - climate change. Whether it is the shrinking of the Himalayan glacier and the resulting pressure on water and agriculture, or the threat to coastal cities such as Shanghai or urban pollution from carbon - China is extremely vulnerable.

Worse, this vulnerability risks becoming an inevitability if the west decides, in Simon Kuper’s words, “to wing it, run the risk of climatic catastrophe, and hope that it is mostly faraway people in poor countries who will suffer”. The west believes it has a greater capacity to adapt to climate change. China must therefore act not just for its own sake but also to prod the reluctant west, especially the US, to act to prevent climate change.

The challenge

Start with the challenge. Science has handed humanity a carbon dioxide emissions budget of about 740 gigatonnes over the next 40 years that cannot be exceeded if temperature increases are to be limited to below 2C. This budget is simply not consistent with China and other developing countries meeting their legitimate energy needs. A technology revolution that allows more energy to be generated for the same emissions is the only way to reconcile climate change goals and the energy needs of humanity.

Working towards a green technology revolution

A crucial first step to galvanising a private sector-led technology revolution is a sustained increase in the price of CO2 emissions (or carbon price). This would make it costly to emit and to consume emissions-intensive goods and services, driving the search for cleaner alternatives. A higher price can be achieved through a carbon tax or by capping emissions and allowing private sector trading to determine their price. The west must take the lead in this respect because China and other developing countries cannot: significant emissions cuts would compromise their development goals. But in the US, Chinese reluctance to act on climate change has provided a reason for inaction. China must remove this excuse by offering the following deal to the US: first, any action by the US today to place a high price on carbon would be matched by China according to a precisely specified, and even legally binding, timetable. Thus, for every $10 increase in the price of CO2 implemented by the US now, China would increase carbon prices by, say, $5 in 15 years and it would match fully the US carbon price by 2040. This assurance would facilitate US action and also guarantee high long-term returns to private sector investment in green technologies.

Second, China would address US fears that any unilateral carbon price increase would hurt the competitiveness of its energy-intensive industries such as steel, cement and fertiliser. So, for the duration when carbon prices are greater in the US than in China, the US would be allowed to impose limited carbon tariffs on Chinese exports to help overcome domestic opposition to increases in carbon prices.

Third, China would ensure strong and effective intellectual property rights protection for green technology developed anywhere in the world.

Fourth, China would also use its considerable foreign exchange reserves to finance a global fund for green technology development and dissemination. Both these measures would be a direct contribution to fostering the green technology revolution.

The contributions will not be costless for China but they are an investment whose return will be the technology revolution that would reduce the economic costs of its own future emission cuts. And, over time, India and other emerging economies can follow, emulating the Chinese contributions but staggering them in time and calibrating their magnitude to take account of their economic situation relative to China’s.

A new approach – radical role reversal

Our proposition would replace the current approach to climate change co-operation, which relies on the west offering cash (which it does not have) to developing countries for cuts (that they are anyway unwilling to make). It is China, and eventually other developing countries, that must offer inducements.

Radical role reversal is central to our approach to climate change co-operation, reflecting the broader shift in economic dominance from America to China. In fact, China might have to offer not just carrots but also wield some sticks, such as threatening trade sanctions in the event of failure by America and other industrial countries to raise the price of carbon. The role reversal would then be complete. Yesterday’s presumed currency manipulator would target tomorrow’s climate change foot-dragger.

This article first appeared in Financial Times

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