Durban’s Dilemma: China’s Wealth Gap

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The transition from a developing to a developed country has always been the messiest and most debated affair in economics, so should we be surprised that it is threatening to derail the Kyoto climate change agreement?

At issue is the massive wealth being created in China and India, both Annex II countries under international climate change agreements. Let’s take China. By 2020, 700 million Chinese, or 50 percent of the population, will have attained middle class status. In dollar terms, this means that China’s new urbanites, many recent migrants from the country, will bring home 80,000RMB (11,800USD) to 120,000RMB (17,700USD) a year, according to Euromonitor. In contrast, the median income for the 80 percent of Americans who are middle class is around  $40,000 a year.

However, it is not China’s middle class that is holding up the climate change talks but Richard, the 34-year-old owner of several semiconductor plants in Zhongguancun—China’s Silicon Valley.  Ahead of the Beijing olympics, Richard accepted China’s demand that a car only be put on the road every other day with equanimity.  He bought a second BMW with an odd license plate. With both an even and odd license plate, his chauffeur was able to drive him from Beijing to Zhongguancun each day without hassle from the blue skies police. Then, there is his UK household. His wife who lives in London with their young son who attends English school runs two cars each day — a BMW and a SUV. Understandably, the developed world—namely the US, Canada, Japan and Russia—wants to know why it should pay to offset Richard’s carbon emissions.

There is another bump on the road to transition. Although privatization of state assets continues, China still owns the bulk share of oil assets and energy generation. The Chinese state is so wealthy that more than a few economists are looking for it to bale out Europe (China says its reserves are not managed “that way.”)  That wealth includes $3.2 trillion in reserves and a $374 billion sovereign wealth fund. So why is China not paying for its carbon emissions?

Let’s step into the future and imagine that as of January 2012 China is an Annex I country.  Richard’s personal income keeps rising as global demand for his low cost but high value sensors grows. He pays for his carbon offsets without complaint. The Chinese government also starts to pay for the carbon emissions and, thus, steps up its investment in carbon capture and storage technology (The world’s largest coal consumer, about 69%, or 2 trillion kilowatt hours per year, of China’s energy is generated from coal plants). Its 700 million new middle class citizens, however, do not have the purchasing power to compete in the global carbon offset market.  They grow their new businesses at a slower rate and buy fewer global goods.  If the latter scenario happens, then it goes without saying that global growth will slow.  Once again, that nasty wealth gap gets in the way of progress.

No doubt, the day is fast approaching when China will have to step up to Annex 1 status, but we cannot let our jealousy of Richard dismantle the climate change talks. The road to capitalism is always bumpy. It is too soon to make China’s farmers who are buying their first cars pay the same price as an American who has been spurting emissions into the global atmosphere since the first Edsel rolled off the assembly line.