China’s sustainability issues are largely linked to energy conservation and environmental protection. Accelerating innovation and more investment in human capital also are significant contributors to long-term growth.

 

As the second decade of the 21st century approaches its end, one of the obstacles standing in the way of China’s sustainable development is the looming threat of ecological crisis. The Chinese government has realized that it can no longer blindly pursue growth at the expense of the natural environment and now seeks new ways to synergize ecological ideals with development goals. To this end, the national government put forward the concept of green development, which has at its core the goal of constructing an eco-friendly, conservationist society, to promote sustainable growth.

 

Ecological constraints
Of the nearly 700 cities in China, around 400 suffer from inadequate water supply. Of those, 110 are suffering from severe water shortages. Environmental monitoring shows that about 50 percent to 80 percent of rivers, including the Songhua River, Liaohe River, Huaihe River, Haihe River and Yellow River, have been polluted and their water quality has dropped to the lowest level of national water quality standards.

Natural forests make up less than 10 percent of overall forested areas, and degradation affects 62 percent of the total grassland area.

Indicative of the enormous environmental challenges that China is facing today, these figures paint a dire portrait of ecological destruction on a mass scale. China is destroying and at the same time protecting the ecological environment.

Environmental degradation poses a serious threat to China’s economic growth. A total of nearly 958 billion yuan was invested in pollution treatment in 2014, accounting for 6.8 percent of the national fiscal revenue. The average annual cost of pollution treatment has exceeded 7 percent of national revenue since 2014, according to the China Statistical Yearbooks.

In addition to environment, China is testing the limits of its energy resources. The 2015 edition of BP Statistical Review shows Chinese energy consumption grew at its slowest rate since 1998, yet China still recorded the world’s largest increase in primary energy consumption for the 14th consecutive year.

The gap between total energy consumption and total primary energy production grew from 0.84 million tons of standard coal equivalent (TCE) in 2000 to 6.39 million TCE in 2014, a nearly eight-fold expansion in 15 years, meaning the gap doubled every two years, according to China Energy Statistics Yearbook 2015.

By 2025, projections indicate that China will overtake the United States as the world’s largest consumer of energy. At that point, China is expected to consume 19.6 percent of the world’s supply of energy, while the United States will consume 19 percent, according to a report from the US Energy Information Administration.

 

Urgent vs. rational growth
The relationship between the economy and the environment is dialectical, i.e. the environment is a source of economic growth but it is simultaneously affected by it.

In terms of its relationship to humanity, the natural environment plays two important roles. Its first is to provide air, water and other material resources. Its second is to process human waste and emissions. At the same time, economic growth is inextricably linked to energy, and energy is indispensable for all kinds of human activity . So what happens when economic growth is constrained by energy and the environmental factors?

Endogenous growth theory holds that economic growth is primarily the result of endogenous and not external forces. For example, investment in human capital, technological progress and knowledge are significant contributors to long-term economic growth.

The endogenous growth model—which factors in technological progress—incorporates environment and energy as factors of production while emphasizing environmental quality from a utilitarian standpoint.

According to consumer’s rate of time preferences and the elasticity of marginal utility, urgent growth and rational growth could be used to explain society’s two development paths.

Consumers with a high time preference mean they value current consumption over future consumption, so we can use the urgent growth model to describe their behaviors.

Rational growth could be interpreted as an individual preference for a higher elasticity of marginal utility. Marginal utility is the extra satisfaction generated from consuming one more unit of a good. If marginal utility is more elastic, consumers will obtain more utility from consuming the same goods.

Given conditions of sustained economic growth, the marginal utility of goods would be higher while the rate of technological progress in a steady-state economy would be lower. Following this trend, society will experience reduced energy consumption, coupled with declining rates of energy production and a lower deterioration rate of environmental quality.

The endogenous growth model shows that when economic growth encounters the constraints of energy and environment, whether or not humanity can break the dual constraints is depend on the chosen  path of economic growth: urgent  or rational. And the effective strategy is consistent investment in human capital.

Sustained technological progress and rapid innovation in a steady-state economy are the basic prerequisites for a society pursuing urgent growth. But when economic growth encounters energy and environmental constraints, the growth will ultimately become unsustainable.

Urgent growth will constantly result in ever-higher rates of energy production and environmental deterioration, leading humans to an environmental tipping point— perhaps even sudden and inevitable destruction.

If a society adopts a rational growth model, it reduces its economic growth rate in the long run steady state while maintaining the individual’s utility. Even in the face the dual constraints from energy and environment, balanced development can be expected by adapting this model. Given conditions of sustained economic growth, the rate of technological progress will eventually slow down, together with declining rates of energy production and environmental deterioration.

Theoretically, the most effective way to break through the constraints of energy and the environment and achieve economic growth is to increase investment in human capital, which not only improves the long-term growth rate of the economy by increasing the rate of technological progress but also curbs excess energy production and environmental deterioration.

 

Human resources, tech
Based on  data from China Statistical Yearbooks, a vector autoregression model was also used to predict the relationships among economic growth, environment and energy, using GDP, sulfur dioxide emissions and energy consumption as indicators, respectively.

It shows that the increase of energy consumption and deterioration of the environment will increase average income, which is in line with China’s previous economic growth model of fast-paced economic growth at the expense of the environment, but there is little potential for long-term growth.

Economic growth driven by the model will be difficult to sustain. Stagnation—even economic collapse— may result from energy and environmental constraints.

When taking into account the impact of energy consumption and pollution on economic trends, we found that the impact of environmental factors on economic growth is very limited. The reduction of pollutant emissions reflects decreased energy consumption, which is also correlated with lower economic growth rates.

In other words, emissions can effectively be reduced to improve environmental quality by controlling the amount of energy consumption. So the aforementioned relationship between environment, energy and growth is one of the major reasons that many developing countries refused to sign the internationally binding emission reduction agreement.

It is based on the premise that China will not exercise strict control over energy and environment. Its average GDP will stay above 6 percent each year in the next five years, while with the average annual growth rate of total energy consumption and the average growth rate of total industrial pollutant discharge will both stay below 2 percent. The average GDP growth rate will reach more than 4 percent in the next five years, according to forecasts.

Apparently  imposing environmental and energy constraints on the economy will generate three outcomes: slowdown, stagnation and collapse. Theoretically, the outcome depends on different available growth paths we choose, i.e. urgent growth or rational growth. In addition, it is also highly related to individual ideas and behaviors.

Accelerating innovation is the fundamental way to achieve sustainable economic development, and more investment in human capital is needed. Ultimately, energy conservation and environmental protection is the basis for sustainable economic growth.

 

Shi Gang is an associate professor from the School of Statistics at Beijing Normal University.