December 23rd, 2008:

Trevor Houser, SCMP – Updated on Dec 23, 2008

The current economic crisis cast a pall over climate change talks held this month in Poland. With American home values and retirement savings falling, and Chinese unemployment figures rising, observers worry that neither America nor China – the world’s two largest polluters – will have much appetite to cut emissions.

The paradox here is that the crisis presents a unique opportunity for the US and China to strike a deal that would lay the groundwork for a global climate agreement. Indeed, one of the main goals of the most recent biannual meeting of the US-China strategic economic dialogue was to begin work under the 10-year energy and environment co-operation framework, created earlier this year.

This initiative comes after a decade in which America abstained from international efforts to address climate change, concerned that if it acted but China didn’t, the world would fail to meet its emission-reduction targets and US industry would be disadvantaged.

China has countered that its historic and per capita emissions remain well below US levels, and that to cap aggregate national emissions at the same level as the US would imply a personal carbon budget in San Francisco five times greater than in Shanghai.

Economically, the US and China are mirror images, opposite sides of a massive global imbalance. Americans spend too much and save too little, leaving a US$250 billion trade deficit financed by other countries, notably China, whose firms and citizens save too much and consume too little, leaving a surplus of goods and capital that flows abroad.

This macroeconomic imbalance is reflected in the nations’ carbon footprints. In the US, more than 70 per cent of carbon dioxide emissions come from consumer-related activities. In China, more than 70 per cent of emissions are industrial.

In terms of brokering a climate deal, this imbalance is good news. It suggests a framework for reducing emissions that respects the development needs of China’s households, addresses US firms’ competitiveness concerns, and adheres to the principle of “common but differentiated responsibilities” embedded in international negotiations.

In recognition of its outsized historic and per capita emissions, the US should agree to economy-wide emission cuts in line with domestic climate laws under consideration. China should be excused of consumer-related obligations for now, but assume pledges on industrial production.

If China consolidates its energy-intensive manufacturing, thereby freeing up investment capital for lighter manufacturing and services, then it will emerge from the crisis with a growth model that pollutes less and employs more. If the US and China can find agreement on these issues in the midst of crisis, they will pave the way for success when climate negotiators meet again next year in Copenhagen.

Trevor Houser is a visiting fellow at the Peterson Institute for International Economics in Washington. Copyright: Project Syndicate