The economic impact of China’s “New Normal” environmental policy

Over the past decades, China’s economy has been growing rapidly. The continuous years of double digit GDP growth has made China one of the world’s biggest economies. However, with economic development at such high speed, the limitation of previous developments started to emerge, such as high CO2 emissions, pollution problems, a heavy industry dependent economy, a coal based energy system, etc. Chinese leaders in the past years have started to refer to the “New Normal”. With this they mean that China is moving to a new model with a better quality of economic growth, by combining structural improvements and policy instruments towards energy use, environment and economic development. If followed up, the “New Normal” is a grand shift in policy that has not only Chinese but also global implications that should be investigated further. Therefore, this research traces the origins of the “New Normal” trend, looks at what the main characteristics and targets of the “New Normal” approach are, calculates the potential impact with a focus on China, and aims to indicate likely implications in practice. We employ one of the best models available to date to look at this kind of question: the E3MG model, whereby E3 stands for ‘energy-environment-economy’. The E3MG simulation suggests that the “New Normal” policy will indeed achieve ambitious GHG emission and environmental goals: GHG emissions would decline by 18.6 percent and energy consumption by 10.1 percent. The energy and environmental results have implications for the economy, however. GDP in 2030 will be 2.8 percent lower than without the “New Normal”. Decoupling of growth from emissions through more R&D would therefore be an important flanking measure the Chinese government could push for next to the “New Normal”. Consumption is expected to be 6.8 percent lower (due to higher prices by 6.8 percent). Exports will decline slightly (0.4 percent) while imports remain at the same level. Interestingly, investments are expected to decline only by 0.3 percent and employment by only 0.1 percent. If investments and employment only drop marginally, it implies that both shift away from heavy industries (that are taxed under the “New Normal”) but do not leave China. Rather they shift towards other sectors – like services sectors or other manufacturing sectors. The same goes for employment. This implies that the “New Normal” policy has a structural adjustment consequence away from polluting towards cleaner sectors as engines for economic growth. Also it implies that it does not lead to a big drop in aggregate demand. That means that the “New Normal” is indeed potentially a true sustainable growth strategy.