Wednesday, November 7, 2018

China's War on Pollution Is Not Over Yet

Beijing draws up battle plans but victory requires support at local level

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By Wai-Shin Chan, Head, Climate Change Centre for Excellence

China’s new laws are making pollution harder, but the war is not yet over. Coal consumption and greenhouse-gas emissions are rising again; data cannot always be trusted. Pollution is not an acceptable way for business to increase profits.

China’s war on pollution is in its fifth year. In 2013, with growing public disquiet over air pollution, the country’s new leadership sought to stem the deterioration in the environment. The aim was to make companies realise it is cheaper to comply with the law than to pollute.

Green and low-carbon themes permeated the entire five-year plan agreed in March 2016, from manufacturing and agriculture to investment and consumption. Now a new Ministry of Ecology & Environment has taken over responsibilities from six other ministries, centralising many issues that were previously everyone’s - yet nobody’s - responsibility.

Progress is being made. Since 2012, China’s energy and water consumed per unit of GDP have fallen by more than 20%, major air pollutants have declined by over 30%, and 20m old vehicles have been taken off the roads.

However, the picture is not all rosy. Even when targets are apparently met, there are questions about the accuracy of data. And coal consumption is rising again after a three-year pause. Economic growth, combined with a hot summer and cold winter, pushed up energy demand while flooding reduced hydropower supply in a country with insufficient gas infrastructure.

Greenhouse-gas emissions are thus also rising again. Achieving China’s pledge of peak emissions by around 2030 will require a concerted effort by many industries, including building lower-carbon infrastructure.

Beijing met pollution targets in 2017 only by closing factories or suspending production and banning the use of coal to heat homes during a cold winter. Smog alerts resumed throughout the country in March when ‘winter restrictions’ were lifted.

A new environmental-protection tax introduced on 1 January 2018 replaced the previous discharge fee covering air, water, solid-waste and noise pollution. Companies had regarded this minor levy as a ‘licence to pollute’. But now, “not paying taxes” should have more consequences.

Many countries relied on China to process their waste. More than 40m tonnes of imported waste was processed each year in 1,750 dedicated plants. It supplemented manufacturers’ demand for raw materials, such as copper wire retrieved from electrical motors, but checking it for hazardous contents was difficult and undesirable substances inevitably leaked into the environment.

So since January 2018, China has banned the import of 24 types of waste, including plastics, paper and textiles. This is an opportunity to bring order to China’s informal domestic waste-processing and recycling sector. Central government has told 46 cities to start sorting commercial waste by 2020, then to include households. It is targeting 350m tons of recyclable solid waste.

Besides health and environmental concerns, these policies reflect China’s transition towards a consumer-based economy where urbanization and packaging from online shopping create more unnecessary or recyclable waste.

China’s increased efforts to fight its war on pollution are encouraging. But it will take many years before businesses stop thinking that polluting is a corner to cut to increase profits; before local authorities find the right balance between economy and the environment; and before data can be independently verified.

For China to be an effective player on the world stage, it needs to keep its own house in order.

Disclosure and disclaimer

Analyst Certification

The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Wai-Shin Chan, CFA

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