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The possible climate impacts of rebalancing – economic policy is climate policy

Anyone who studies climate change for long concludes that development and greenhouse gas emissions are tightly coupled. This is true both here and in the developing world. The great recession has caused a large drop in greenhouse gas emission – as big as 9% in the US according to the EIA and a global drop of some 3% according to the IEA.

Now, many policy makers in the US and abroad are pushing hard on China to allow the Renminbi to appreciate substantially in value relative to the Dollar and the Euro. What would the impact of such a “rebalancing” be on Chinese and global emissions of greenhouse gases? As in all economic questions, the key question is, “and then what?”

The answer depends on what China does to cushion the blow to its export driven economy that such a currency appreciation would deliver. A central goal for Chinese state planners is maintaining levels of employment sufficient to guarantee stability. This is a big challenge in the face of a contraction due to reduced demand for exported goods.

The most likely solution to this problem might be to further lower interest rates in order to stimulate production and hence employment in various capital intensive industries. In this scenario, the Chinese economy would rebalance away from export intensive industries and towards capital intensive industry. This can’t be good for Chinese development, as it trades one macroeconomic distortion (export dependence, low domestic consumption) for another one (lots of capital stock that isn’t terribly productive). On the other hand, it would allow Chinese policy makers to satisfy Tim Geithner while also maintaining their goal of finding jobs for all of those millions of workers moving from country to city.

My thought is that It also isn’t likely to be good for either the local or the global environment. Heavy industry in China is far more energy intensive than the Chinese export industry generally, with all the concomitant resource impacts. It’s also generally more energy intensive than equivalent heavy industry in China’s main developed world trading partners. Thus rebalancing may make it harder for China to meet its domestic climate and energy objectives while also leading to a net increase in global greenhouse gas emissions.

We may well solve one (macroeconomic) problem by creating both a new economic problem and a new environmental one.

Every time I think I understand that economic policy is climate policy, I find reasons to believe I have underestimated the depth of the connection.

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