There are few places in the world that suffer more from pollution than China. Climate change and the negative externalities of economic growth are daily concerns in a large area of the country. Having lived in Ningbo and Shanghai, I can attest that it is a daily topic among the expat and local population. Hopefully, we are on the cusp of significant change in the battle against climate change.

Two major news announcements were made in the last few days, one by the G7 and the other by the Chinese lead negotiator to the UN climate negotiations. In the first, G7 leaders agree to phase out fossil fuel use by end of century, while in the second Xie Zhenhua, special representative for climate change affairs at China’s National Development and Reform Commission, stated that China was planning on spending U$6.6 trillion (41 trillion yuan) to meet the greenhouse gas reduction goals it will lay out later this month in its strategy for the United Nations climate negotiations.

Why those ambitious, but still far from reality, plans matter? Because they may tackle really big issues, ones that small, local actions cannot really do anything about. Below I broadly divide sustainable policies in terms of impact and intervention.

Clipboard01

Dividing policies in terms of impact allows us to improve our perspective and analyze the scope of policies towards a more sustainable future. There are plenty of local policies that improve quality of life but do not have a larger impact. They are important, but not the goal of the present post. My own research, on Sustainable Finance, does not aim at a global impact, but is restricted to the finance industry (the Sustainability Credit Score System is supposed to help commercial banks improve their risk management processes to direct credit to more sustainable firms).

We can also divide sustainable policies in terms of how we decide to intervene in regular economic activities. I remember the answer from a colleague from NUBS China when I sent him my paper on the SCSS for his comments. Amidst his comments he casually mentioned that his PhD advisor only believed in government regulation as effective in dealing with sustainability issues. That struck me as a strong ideological statement – a belief in government authorities as efficient arbiters of market design. Coming from a developing country this kind of view is almost laughable – I certainly do not want the Brazilian government to solely decide on how to improve sustainable practices in the country. There are even stronger ideological assumptions on how to improve the world – those usually involve transforming economic activity, to the point that we have advocates for a complete overhaul of the capitalist system, as in the degrowth movement. I believe that the ideological movements are either too impractical or simply delusional, but some have important points to make.

An example of a great thinker that is strongly ideological is Andy Hoffman. In his latest book, Andy puts forward an impassioned argument for changing the way we produce and consume things. It is a fascinating read, even though I think his arguments are simply too impractical to achieve the changes he aims for.

As an economist, I do believe that market mechanisms are more efficient to deal with sustainability efforts, given the right incentives. Of course, only market mechanisms won’t be enough, as the incentives are simply not there. The sustainability imperative, a concept in which companies compete for an eco-premium, may result in significant changes if companies actually follow it (and fast!). One such example is Unilever. We need more. Many more.

The major announcements by the G7 and the Chinese representative for the UN climate negotiations fall into the global impact category, with the potential to be game changers in the fight for a sustainable future. The risk with such initiatives is that they are rhetoric in nature, with no full commitment for their implementation. The G7 announcement, in particular, is based on the idea that the richest countries in the world can actually phase out fossil fuels in the next 85 years. The time frame is too long and there is no action plan. It is a start though. The Chinese plan has not only the highest probability of being implemented but also the ability to bring substantial change.  There is a clear demand for improved living conditions in China, and indication that the government is actually devising policies to deal with those issues. How big of a commitment the Chinese government has is still unclear, but one can be hopeful. Maybe.