China’s challenge to Europe

The ambitious green goals in China’s new five-year plan are a test for EU leadership, writes Shin Wei Ng.

China’s 12th Five-Year Plan (FYP) will be approved at the end of this week after the annual sessions of the National People’s Congress and Chinese People’s Political Consultative Conference – bodies that meet once a year to discuss and determine national-level policies. Central to the FYP are the government’s aims to accelerate social development, expand domestic demand and develop new strategic industries.

Over the next five years, the Chinese economy is expected to grow by 50% to US$7.5 trillion (49.3 trillion yuan); its working population, however, is also expected to peak around 2015 to 2017. To address the impending challenges and maintain steady economic growth, the Chinese government will shift from a focus on the quantity of growth to the quality of development.

Five-year plans are more than mere political intent – delivery of their targets is a crucial source of political legitimacy for the Chinese leadership. Despite some difficulties, strong top-down measures have meant that the Chinese government has managed to achieve most of the environmental targets set under the 11th FYP. As China starts to deliver on its potential, the 12th FYP will further intensify China’s “green transition”, which is particularly critical in helping China to implement its 40% to 45% carbon-intensity reduction target by 2020.

The 12th FYP is also meant to cover a critical shift in China’s development model: the economy will move towards higher value-added sectors and create Chinese companies that are global players. In particular, the green and low-carbon sectors have been identified as the core part of a new industrial strategy and an important pillar for growth. Despite China’s environmental aspirations, continuous rapid economic growth may threaten its ambition – local governments striving for high GDP growth over the next five years will cast a long shadow on China’s future carbon and energy-intensity targets.

There are both quantitative and qualitative differences between the new FYP and its predecessor. A significant change is the role of the market – the Chinese government will create new markets and encourage the use of market mechanisms, potentially including emissions-trading or a carbon tax, to achieve its environmental goals.

This is a necessity rather than a choice: as China has exhausted almost all of its low-hanging fruit under the 11th FYP, it now has to rely on comprehensive economic restructuring and innovation to achieve its environmental ambitions. The 12th FYP also extends China’s environmental ambition from solving local pollution problems to increasing its share in the global clean technology and energy markets.

China’s new industrial strategy will prioritise the development of seven industries: alternative energy, biotechnology, new-generation information technology, high-end equipment manufacturing, advanced materials, alternative-fuel cars and energy saving and environmental protection. The total value-added output of the new industries is expected to account for 8% of China’s GDP in 2015 and 15% by 2020.

By placing substantial amounts of public investment in these sectors and providing the right policy framework over the next five to 10 years, the Chinese government aims to increase dramatically the capacity and competitiveness of Chinese businesses in the green sector. For example, under the draft “New Energy Industry Development Plan 2011-2020”, the Chinese government plans to invest 5 trillion yuan (US$761 billion) in the new-energy sector by 2020. Investment in environmental protection is expected to top 3 trillion yuan by 2015, and the government also plans to invest 100 billion yuan in the alternative-energy vehicles industry over the next 10 years.

China will also experiment with new governance approaches in its “low-carbon pilots”, schemes recently announced in eight cities and five provinces, affecting more than 300 million people.

In addition to encouraging the emergence of new “green” industries, the Chinese government will also introduce hard environmental targets under the 12th FYP. This will include a 16% to 17% carbon- and energy-intensity target, sectoral performance standards (energy consumption and pollution control) for heavy industry, and 11.4% share of non-fossil fuel energy in primary-energy consumption. The government also plans to invest 5.3 trillion yuan (US$807 billion) in the power sector and 500 billion yuan (US$76 billion) on ultra high voltage (UHV) transmission lines under the 12th FYP. Two to three trillion yuan (US$304 billion to US$457 billion) is expected to be pumped into renewable energy and investments in smart grids are expected to top 4 trillion yuan over the next 10 years.

The 12th FYP presents both risks and opportunities for Europe and European businesses. Europe’s current leadership in low-carbon technologies means that it will benefit from the growth in China’s clean energy and green markets. For example, European companies are already very active in meeting high Chinese demand for modern grid infrastructure. Also, Europe will certainly benefit from China’s proactive contribution to curbing greenhouse-gas emissions globally, although currently the emissions-reduction pledges put on the table by both regions are not sufficient to keep warming below two degrees Celsius above pre-industrial temperatures – the goal recognised in the Copenhagen Accord.

On the other hand, the rise of global Chinese companies in these sectors means that Europe will face stronger competition for market share and may eventually lose its competitive edge if it does nothing. This new dynamic will help define the EU-China relationship moving forward.

Europe cannot stop or avoid China’s rise, but it can prepare itself for the challenges it brings. The financial crisis has knocked the EU’s confidence, and its internal discussions currently seem to be moving away from the strong strategic focus established through the process around climate and energy packages from 2007 to 2008. As China increases its synergy in combating climate change and developing a green economy under its 12th FYP, there is increasing fragmentation between the growth, energy and climate agendas at both policy and political level in Europe.

To stimulate economic growth and maintain its competitiveness, Europe needs to maximise the benefits and minimise the risks of China’s green transition. Firstly, Europe needs to ensure strong domestic demand for low-carbon goods and services by raising EU emissions-reduction targets to 30% by 2020. Failure to do so may dampen new investment and innovation. Secondly, Europe needs to invest strategically in key infrastructure assets such as super and smart grids and support its clean-technology sector by building markets in key areas. In particular, as the future battleground shifts from production to innovation, Europe needs to maintain its competitive edge by investing in ambitious initiatives such as the Strategic Energy Technology (SET) plan.

Finally Europe should take advantage of China’s new industrial policy and environmental ambitions by working with the Chinese to create an even bigger global market for clean technologies. This will require Europe to set up a strategic partnership with China within a robust and reciprocal framework, which emphasises low carbon. Areas for cooperation could include joint development of standards, development of an intellectual-property rights (IPR) framework, co-development of technology, investment and services access and government procurement.

Given the focus on the low-carbon race and the large amount of public money going into supporting low-carbon technologies and markets in both Europe and China, a failure to build a strong or strategic partnership and work together towards the common good will increase the propensity for protectionist measures. This would be highly detrimental to the interests of both regions and to environmental integrity.

Shin Wei Ng is a researcher at E3G.

Pending the approval of the 12th FYP, E3G analysis is based on draft decisions and extensive analysis of media reports. Though some details may change the main elements of the package reported here are unlikely to change.

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