Top economist Liu Shijin on valuing ecological services

The economist who first suggested the Chinese economy had arrived at a ‘new normal’ is working on systems to aid green development
<p>Lui Shijin speaks at the World Economic Forum&#39;s Annual Meeting of the New Champions, July 2019. (Image: World Economic Forum)</p>

Lui Shijin speaks at the World Economic Forum's Annual Meeting of the New Champions, July 2019. (Image: World Economic Forum)

“If you move beyond the existing understanding and view green development as a superior approach that can compete with the traditional model of industrialisation, then its significance for economic growth is hugely changed.” This is the view of Chinese economist Liu Shijin, who spoke to China Dialogue at a recent seminar on the 14th Five Year Plan – China’s top policy blueprint – and long-term growth.

Liu is a long-standing employee of the State Council’s Development Research Centre, a policy research body. As the centre’s deputy chair and a leading economist, Liu helped draft reform documents for the Third Plenary Session of the 18th Central Committee. He was also one of the first to suggest that China’s economy had reached a “new normal” – a slower rate of growth following over 20 years in the double digits. He argued that rather than fight it, this should be accepted as part of economic policy.

More recently, Liu has argued that China’s demand for property, infrastructure, steel and coal has already peaked, and macroeconomic stimulus policies will not only struggle to change underlying growth rates, but also risk sparking economic decline. He is currently working on the economics of green development during the 14th Five Year Plan.

China Dialogue: The topic of this high-level seminar was “green development”. What mechanisms need to be in place for this to take place?

Liu Shijin: Alongside maintaining relatively strong growth, China needs to consider how to emphasise sustainability and inclusivity during the upcoming social and economic transition.

How do we balance these things? Working this out involves a fundamental issue: accounting. We can only realise green development if we can do the sums properly. If we can’t do that, any balance will remain theoretical.

We have well-established ways of accounting for material and human capital. But there’s currently no good solution for calculating the value of ecological services.

I’m leading a research team that’s trying to make some progress on this. We’ve come up with an “ecological unit accounting” method, the basic idea of which is to borrow solar energy units – an idea developed internationally over the past few years – to make an initial assessment of the value of ecological services, turning ecological issues into economic issues.

If you work out the negative externalities of pollution and the positive externalities of environmental protection, you find that in many scenarios green development makes sense: it’s a cheaper, more profitable and more competitive mode of development. Proper accounting makes the benefits of green development clearer.

There’s been lots of research internationally into green gross domestic product (GDP) and green key performance indicators. Where are China’s research strengths?

Internationally, there’s been a lot of work on green GDP accounting, but there are several significant issues outstanding. The most important of these is the alignment of measurement units.

We chose solar energy units as our measurement unit. The sun is the ultimate provider of the energy driving ecosystem services, mediated by a range of complex systems such as plant photosynthesis.

Also, earlier research often progressed no further than academic papers, with figures worked out manually. No tools for practical use were developed. Our research is on developing such practical tools for calculating costs and benefits during green development.

In a recent assessment we published, we used our [ecological unit accounting] method to calculate the total value of ecosystem services, their value by area, and changes to these for 31 provinces and 340 cities in China between 2000 and 2015. These data are useful for things like evaluating the performance of officials and their work.

We’ve also made innovations in the presentation of data. China is a world leader in internet, big data and AI technologies, and our methodology automatically draws environmental data – such as levels of atmospheric pollution – from environmental-monitoring systems every hour and then calculates “ecological units” representing the value of ecosystem services. Those updated calculations are presented visually via software we’ve developed.

This is all to build a complete green economic system. And in the past you’ve pointed out that resource and environmental constraints will limit China’s economic growth, referring in particular to the need for carbon emissions caps. Do you think we’ll see tougher carbon targets during the 14th Five Year Plan?

Responding to climate change is a national strategy. Commitments, especially the carbon emissions peak, have been made, and long-term carbon emissions targets set. Based on the current situation, China will be able to meet its commitment of reaching peak carbon prior to 2030.

But at the same time, China needs to promote economic growth. Comparing costs and benefits is a key part of that balancing process, and this comes down to accounting.

For energy firms, carbon intensity targets are very important, requiring that they increase carbon efficiency.

Also, energy suppliers will make adjustments in response to economic and social developments, as well as changing policy targets and changing constraints on energy development. It’s not necessarily the case that they will lose out. If they change the make-up of their sources of energy, they could profit from the development of new energy.

How do you view the relationship between the energy transition and energy security?

Currently, nobody is talking about using more coal, or reducing reliance on oil and gas imports, for the sake of energy security. Even if the 14th Five Year Plan period does see changes in the international environment and obstacles to globalisation that increase our energy security concerns, overall our intention to use both domestic and international sources of energy will not change.

Furthermore, the energy transition does not conflict with energy security. It may actually help. For example, one current energy security concern is the scale of our oil imports. Much of this oil is used for transportation. If more vehicles can be powered by electricity or hydrogen, which can be supplied by renewable sources such as solar and wind, we will be able to reduce our reliance on imports of oil. So, in a lot of cases, the energy transition and energy security are mutually reinforcing, rather than opposed.