Hello, welcome to visit Shanghai Forum
Wei Shangjin
Visiting Professor (Short Term) at Fanhai International School of Finance (FISF), Fudan University; Professor of Finance and Economics at Columbia University
Thank you President Choi, good morning everyone in Shanghai, Seoul and online. It is my pleasure to join you in this year's Shanghai Forum. I would like to share with everyone my thoughts that I call 'A Green Shoot in Global Partnership.
On the troika that pulls the global economic growth for this and next year, there are two black horses and one green. The two black horses are respectively the uneven recovery speed from the pandemic-induced recession in the major economies, and the uncertain policy directions of the new U.S. administration. There are many uncertainties surrounding these two black horses' temperament, but how fast they run and to which direction they run affect the economy in Asia and the world significantly.
The third horse is a green one, which is the renewed interest and effort in managing the challenge of global climate change, which happens to be very much connected to Professor Hart's last few remarks. This provides an opportunity for possible reset in Sino-U.S. bilateral relationship and in the relationship between China and the world.
We know the human race faces two real, big challenges that can potentially wipe us off from the surface of the earth. One is a nuclear weapon competition and the other is climate change. The nuclear weapon competition currently is not out of control, although there are various hot spots we need to watch out for. But climate change is different. Not long ago, there are signs of it going out of control. In 2015, we had this Paris Climate Accord, which was a landmark achievement. I should first note that the landmark Accord was partly successful because of U.S. leadership and China's effort. U.S., China and Europe all played a huge role. In a sense, without the major developing and developed countries' efforts, the 2015 Court will not be as significant as it has become.
Nonetheless, I note that Paris Climate Accord is still deficient in quite a few ways. I want to suggest that there are five areas in which Paris Climate Accord is perhaps, insufficient. One, the Accord has insufficient ambitions and actions. Many countries have made commitments, that is very good. But at the same time, majority of climate scientists tell us that even if every country carries out the pledges made in Paris, it simply postpones the danger point rather than helping us to avert it. In other words, we are still moving towards a potentially dangerous future state. And the hopes of the Paris Convention lie in that it is not the end point. Hopefully, after Paris Accord, there will be success of future efforts, they will upgrade the ambitions and actions. Nonetheless, it is important to point out that Paris Accord itself was insufficient in ambitions and in actions.
Two, very importantly, the Paris Accord did not come with real enforcement power. It relies very much on voluntary compliance. Some people made a virtue of necessity saying why it is wonderful to have voluntary compliance. The problem with voluntary compliance is that when it becomes less convenient, sometimes governments will prioritize other issues. For example, during the current COVID induced economic recession, virtually every country has rolled out some kind of stimulus program. In an analysis of all the stimulus programs rolled out by G20 economies, we find that majority of them are not green enough. Most countries try to help people out of jobs and so on. So climate change management becomes a lower priority. Most stimulus programs tend to ignore that goal.
Now of course, the carbon emission itself in 2020 is very likely to be lower than previous years, just because of the partial lock down in the transport industry, there are few airplane flights and cars on the streets and so on. But without attention to these green goals, when the economic recovery comes next year, we might see an increased greenhouse emission next year that will be higher than past years'. This is just an illustration to show that without real enforcement, there is always a chance that those pledges and countries can be off check.
In the third problem, I will say that the Paris Accord, or perhaps much of the global discussion, has not put sufficient weight on carbon consumption. There is a lot of discussion about carbon production and this icould be a problem. On this slide, I will show you a plot. The solid lines depict per capita carbon emission within national boundaries. For U.S., it is the top line, and Germany is the middle line and China is the lower line. The relative orders may be surprising to some but will not be to the experts in the field. I will not spend time on why the Chinese line is below that of Germany's, but it is a fact that the people in the U.S. and Europe tend to lead more carbon-intensive lifestyles than the Chinese and Indian people, and people in developing countries.
The main thing I want to point out is that one can also compute carbon intensity in our consumption, in the way we live our life, and these two are not the same thing. For U.S., Germany and most of the developed countries, the data tells us that the carbon intensity of rich countries' imports tend to be a lot higher than the carbon intensity of the exports. These countries import a lot of manufacturing products and others. This means that the per capita carbon consumption tends to be higher than per capita carbon generation within the boundary. Even for a country with balanced trade like Germany, that is still the case. This means that the typical developed country 'outsources' some of its carbon emissions to other countries through its own consumption levels and patterns. For a developed country with a trade deficit, such as the United States, per capita 'carbon consumption' far exceeds per capita 'carbon emissions.
Why is this an important point to make? Much of the discussion and the Paris Accord focused very much on reducing emission on the production side. But the sum of carbon emissions of all countries in the world must be equal to the sum of carbon consumption of all countries. Given that my consumption requires ten tons of carbon emissions per year, if I do not emit within my country, I must 'ask' other countries to emit on my behalf through trade.
As the slide shows, if we do not change our lifestyles and reduce carbon emissions in the consumption sector, a developed country's reduction of carbon emissions on the production side within its boundaries will definitely lead to an increase in carbon emissions (in other countries) through trade.
Therefore, it is very important to look at carbon intensity on the consumption side. For all future carbon neutrality pledges, what we need to do is to switch from pledging neutrality on the production side, to pledge neutrality on the consumption side globally. So, the third potential shortcoming is not giving enough attention to carbon density on the consumption side.
I labelled the fourth one as insufficient discipline. Essentially, the current governments are making promises but the burden of delivery will fall mostly on future governments. It is very hard for current governments to bound the future governments. As you can see in United States, a change of government can completely alter the promises and pledges on the climate side. We need to have something to bind current as well as future governments.
The last issue I think the Paris Accord has was not paying sufficient attention to is what I call the “next China” challenge. In terms of annual contribution, China is the largest emitter, although in terms of stock of emissions, China is not the largest. Even if when we focus on the annual contribution, much of the discussion seem to be that if China can reduce emission, the world will be 'halfway there' in terms of solving the problem. The problem with that is what economists say, ignoring the general equilibrium effect.
Right now, China has pledged to achieve neutrality by 2060. If China delivers, that is going to be a tremendous progress for the world. But if global demand for carbon intensive products does not change very much, just having China reducing emission— in fact, China is doing this partly because the Chinese economic structure has been changing very rapidly in the last 10 years and will continue to change very rapidly.
In the next 10 years to make the economy becomes less manufacturing and energy intensive—one implication for the world is that the current structure almost guarantees that some other developing countries will take up what China has been doing the last 10 years in terms of energy consumption and the manufacturing production. Soon, we could be dealing with a set of other countries having the same kind of issue that China faced in the last 10 or 20 years.
These are the five challenges I think we will need to address to make progress. What needs to be done? Perhaps we need to consider a few new tools. I want to advocate three new tools in particular.
One is broad-based green consumption tax. China together with Europe, perhaps also with the United States under President Biden, can announce and implement green consumption tax.
Two, green assistance to developing countries, providing both financial and technical assistance to help developing countries to improve climate mitigation and climate adaptation. Many development banks are doing that. I want to suggest that for the individual country, both climate adaptation and climate mitigation are very important, but for the world as a whole, these are not equivalent. A lot more effort and weight are to be put on mitigation rather than just adaptation.
Third, green industrial policy that is to encourage not just more new energy which is useful and important, but also more innovation that can drastically reduce the cost of carbon capture and carbon storage.
This provides potentially a shining, new green opportunity for US-China collaboration and collaboration with world communities. I want to share how those collaborations can potentially improve the Paris Accord.
China together with some like-minded countries can impose green consumption tax because they collectively account for 70% of global consumption and higher share of global imports. This will not just raise the cost of carbon emission of producers in those countries, but will also raise the cost of carbon emission anywhere in the world. It will alter the incentive to decrease carbon emission and make the job much easier.
The last point I want to say is China should have an incentive to participate because it also makes it easier for China to carry out its own carbon neutrality pledges. That is because a green consumption tax will also improve the relative competitiveness of the Chinese firms. Chinese firms will not need to lose competitiveness to firms from other countries with weaker environmental standards.
Thank you very much.
