Rapid growth has led to environmental destruction as well as social and regional imbalances. A cleaner environment, without the risks of recurring climate change-related disasters, is rising up the priority list. China is potentially vulnerable to climate change-induced water shortages and a host of other climate-related threats.

As one of the world’s largest emitters and a likely trendsetter for many developing countries, China’s greenhouse gas trajectory is crucial for future global climate change. The challenge is to keep the economy growing, but in a manner that involves ever less emissions. Coupled with other environmental and social concerns, this is often termed ‘green growth’.

Green is not usually the colour that comes to mind when one observes the urbanisation and industrialisation underway in China. Yet improvements are being made. The emissions intensity of China’s economy has been declining, except during a period in the early 2000s. Emissions intensity, measured as kilograms of carbon dioxide from fossil fuel use per RMB of GDP, decreased by 15 per cent from 2005 to 2011, according to the International Energy Agency.

China’s national emissions target, pledged to the international community, is a 40 to 45 per cent reduction in emissions intensity from 2005 to 2020. This is likely to require substantial policy action. China already has programs in place to speed up improvements in energy efficiency and to deploy large amounts of renewable and nuclear power alongside the expansion of high-efficiency coal-fired power plants. The next wave of policy efforts is set to be market-based and include the use of emissions trading.

The motivation for China’s policy effort is not only to limit climate change but also to transform its development model to one that is more innovation-driven. This would improve China’s competitiveness and domestic energy security in the long run and potentially allow it to attain a leadership position in advanced energy technologies.

In most advanced economies, absolute emissions levels have fallen in recent years due to slow economic growth coupled with continued improvements in emissions levels and the development of new energy sources. In the United States there is dramatic change. Measured against 2005 (the base year for America’s international climate change commitment), carbon dioxide emissions during January–April 2012 were down 19 per cent and 14 per cent for the power sector and the economy as a whole, respectively. America’s target of a 17 per cent reduction by 2020 is in reach.

Because China is still in the process of industrialising and urbanising its absolute emissions levels continue to rise, up by approximately 57 per cent in 2011 over the 2005 level. When and at what level might absolute emissions turn around? China’s emissions intensity target may give the answer. If both GDP and emissions continue growing quickly for a few years and GDP growth slows down in the second half of the decade, then China’s emissions growth may need to level out before 2020 if the target is to be met.

For China’s emissions growth to peter out within a decade may seem an extraordinary proposition given the huge amount of urbanisation still to come. By then, China will have significantly higher average per capita emissions than Europe and Japan. But despite its reliance on coal and the prominence of heavy industries, China should be able to stay below the much higher per capita levels of the United States, Canada or Australia.

Limiting the environmental footprint of China’s economy requires a transformation from the traditional fossil fuel-based growth model to a green growth model, decoupling growth from carbon emissions and resources-dependence. It is no longer feasible for China to follow the same high emissions process the already industrialised economies of the West used to industrialise their economies. It must develop a new growth model.

Greening the economy does not mean less economic growth. Such a process can be a new source of growth and improve the quality of growth. Greening the economy means applying society’s ingenuity and effort toward activities that place little stress on the natural environment — for example, better information technology rather than larger offices and more long-distance travel; better public transport rather than more roads; smaller homes of high quality rather than ever larger ones that are poorly built.

Governments can help make growth greener by creating the right framework for change and investing in the necessary infrastructure. In other cases they need to get out of the way and allow markets to effect change. The decline in US carbon emissions stems in part from market-driven shifts, such as the expansion of shale gas and reduced energy use in response to higher oil prices.

In China, state-owned enterprises in the energy sector and in heavy industry, both critical for greening growth, exercise a large amount of control. Monopoly state ownership of heavy industries tends to act as a brake on innovation and structural change.

Yet a commitment to market-based emissions control has emerged. Emissions trading pilot schemes are in preparation in Guangdong and Hubei provinces, as well as in Beijing, Shanghai, Tianjin, Chongqing and Shenzhen. These will cover over a fifth of China’s population and a significant share of its emissions.

A national emissions trading scheme is likely to start in the second half of the decade. This will be the largest market-based scheme for emissions control. It could become the core of an effective long-term climate policy framework for China.

It will be a long and winding road. China’s plans for emissions trading epitomise the struggle between the old and new ways of organising the economy. While the leadership is pushing ahead with plans to introduce market-based emissions control, the electricity sector, which has the largest potential to cut emissions, remains in a straightjacket of regulation. Power supply prices are not fully market-based and stand in the way of an efficient response by end users. Planners rather than markets determine which power stations supply the grid at any point in time. For emissions trading to work properly, both these factors need reform.

Comprehensive energy pricing reform is widely considered a much taller task than introducing national emissions trading. The principal concern centres on social stability. Many observers fear market-based power prices could put a large number of people at a disadvantage.

China’s effort to curb emissions is significant for global climate change. But for China to achieve both economic growth and climate change mitigation it needs to transform its development model, decoupling economic growth from emissions and making ‘greening’ a source of growth. To achieve this transformation, the government needs to put in place well-designed policies. The market system needs to be further consolidated through structural reforms, and well-designed environmental market mechanisms need to be introduced, such as a broad-based national emissions trading scheme. Climate policy could become a catalyst for broader reform.

Frank Jotzo is Director at the Centre for Climate Economics and Policy, Crawford School of Public Policy, the Australian National University.

Yongsheng Zhang is Senior Research Fellow at the Development Research Centre, State Council, China.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Energy, Resources and Food’.