Is China turning green?

On a clear day in Beijing you can see a new environmental attitude, says Fortune's Daniel Esty.

By Daniel Esty, Fortune

(Fortune Magazine) -- Sometime this year China will surpass the U.S. as the world's largest emitter of greenhouse gases. This "accomplishment" reflects the pace and scale of industrialization in a country that is already home to eight of the world's ten most polluted cities. It may also mark a turning point in China's approach to climate change.

For years China's top leaders have downplayed the environment, paying lip service to the need for sustainable development but arguing that alleviating poverty was a higher priority. They even claimed environmental conditions were improving, no matter that the air outside their offices in Beijing was getting palpably dirtier.

But those attitudes have begun to change. At the National People's Congress in March, Premier Wen Jiabao spoke frankly about missed environmental targets and told the party faithful that pollution control had to be a much higher priority. He promised to shut down dirty industrial plants and require new projects to meet tougher environmental standards.

Although the government has avoided any commitment to CO2 emissions limits, it has set a target of cutting energy use per unit of GDP by 20 percent by 2010 - an ambitious goal for a country that gets 70 percent of its power from burning coal. It has adopted fuel-economy standards that will push average car mileage to nearly 40 miles a gallon over the next five years, much higher than in the U.S. And it has promised to reduce water pollution by 10 percent by 2020 and increase industrial solid-waste recycling by 60 percent.

Those aren't just empty promises. The State Environmental Protection Agency, which recently acknowledged that air- and water-quality levels are worsening, blocked 163 projects worth about $99 billion last year.

Why this new seriousness about environmental protection? On the simplest level, China's pollution problems have become so vivid they can no longer be ignored. Just as the U.S. awakened to its environmental crisis in the 1960s, when Cleveland's Cuyahoga River caught fire and Pittsburgh's air began to choke its citizens, China now faces highly visible environmental harms.

Particulate levels in Beijing, Guangzhou and other Chinese cities often shoot up to seven times above the World Health Organization's air-quality standard and to twice China's own less stringent limits. The tens of thousands of factories in the Pearl River Delta have so contaminated the water that a dead zone stretches several miles from the river's mouth out to sea. And millions of people in Harbin had to go without water for a week in late 2005 when a chemical spill contaminated the Songhua River.

But China's leaders have also come to realize that pollution can undermine social stability. Other than corruption, no issue draws more public ire. Last year 600,000 complaints were filed with the state environmental agency, which tallied tens of thousands of pollution-related protests.

China's business leaders, whose growth-at-all-cost policies have been responsible for much of the problem, have also played a role in bringing about change. Some are awakening to the threat environmental damage poses to their businesses; others are realizing there's money to be made selling the environmental goods and services China increasingly needs.

Startup companies are being launched every day to develop pollution-control technologies, improve energy efficiency, and create alternate sources of power. The $220 million in clean-tech venture capital China received last year puts it ahead of Europe as a venue for new environmental companies.

Another reason China has gotten religion about the environment is that it wants to present a good face to the world next year when it hosts the Olympic Games in Beijing. Despite concerted efforts to develop a pollution-control strategy for the games, including plans to shut down industry in the Beijing area for the two weeks the athletes are in town, it has become clear that China is struggling to meet the air-quality levels the government promised and will have to take more drastic action. Liu Qi, president of the Beijing Organizing Committee, has said that organizers are still "a distance" from meeting their goal of a green Olympics.

China's attitude about the environment bodes well for the Chinese - and for the rest of us. Many of the actions taken to reduce local air pollution will also reduce greenhouse-gas emissions. But to ensure that China's economic growth doesn't undercut efforts to mitigate climate change, much more needs to be done.

The European Union's carbon-allowance trading system offers one model that might be used to draw China into doing more to control greenhouse gases. Under the EU scheme, companies that cannot find cost-effective ways to meet reduction targets at home can buy carbon credits abroad - in effect, paying for emissions cuts elsewhere in the world.

China has been a big beneficiary: To date, 60 percent of all such deals have been in China. This translates into an infusion of billions of dollars for new boilers, power-generation equipment and other upgrades to China's industrial infrastructure, at no cost to the Chinese.

As the world moves toward a global structure of greenhouse-gas limits, emissions trading could reach $100 billion a year. At that scale, China could receive $60 billion a year in climate-change aid. Its own carbon-offset market, announced earlier this year, might increase this flow of funds.

To be fully effective, the European market will have to be tightened, with all offset projects verified and certified. A "beyond Kyoto" treaty might also require countries to adopt an emissions-control target in order to be eligible to host offset projects. That would provide a significant incentive to get the Chinese leadership to sign on to a worldwide climate-change treaty.

While China's interest in pollution control holds promise, the depth of the commitments being made has not been fully tested. And the current environmental emphasis could be reversed if an economic downturn occurs or a different leadership team takes power. But China's new green policy suggests there is a sustainable development path for the world's powerhouse economy - and a truly global response to climate change.

Daniel Esty, Hillhouse Professor of Environmental Law and Policy at Yale University, is co-author of Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage.  Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.