China’s Soil Pollution: The $1,000 Trillion Problem

Business, China, Company Strategy, Economics, Environment, Europe, US

Chinasoilpollution

By John Richardson

THE ESTABLISHED approach to dealing with soil polluted by chemicals waste involves washing the soil and treating it with bacteria. These were the methods used ahead of the 2012 London Olympic Games, reports The Economist. The cost was £3,000 ($3,900) per cubic metre, reaching a total of £12.7m to decontaminate some 250 hectares.

We then need to do the maths for China. Using these same established techniques, China would have to clean up 250,000 square kilometres to tackle its soil pollution crisis at a cost which The Economist estimates at $1,000 trillion – more than the world’s entire wealth.

So, of course, China is looking for other viable means to deal with 16.1% of all soil and 19.4% of farmland that Beijing estimates is contaminated by organic and inorganic chemical pollutants and by metals such as lead, cadmium and arsenic.

As The Economist again writes, cleaning the soil with chemicals has been attempted with disappointing results. So has planting willow trees which absorb cadmium and poplars that absorb lead. But whilst this planting is taking place, the land cannot be used for agriculture, which is a major problem for China as it has 18% of the world’s population, but only 7% of the world’s arable land.

This is a great opportunity for the global chemicals industry. Innovative solutions are needed to solve China’s soil-pollution crisis. Similar innovative breakthroughs are needed if China is also going to deal with its badly polluted air and water.

Chemicals companies that already have solutions in the market-place should enter this year’s ICIS Innovation awards. Now in its 13th year, the awards have steadily become more and environmentally focused, writes my ICIS colleague, John Baker.

Catch 22

But a problem is that, as John Baker again writes, a new collaborative approach is necessary between chemicals companies, chemicals customers and academia if the global challenge of sustainability in general is going to be tackled.

Fear of losing intellectual property is a major obstacle, according to AT Kearney. This has led to too much focus on developing existing chemicals products rather than  blue-sky research, adds the consultancy. To try and solve this challenge, AT Kearney has launched a Collaborative Innovation Project, in partnership with the World Economic Forum. Let’s hope that this programme is a huge success.

For China, though, it may end up in the Catch 22 situation where it cannot afford the cost of its environmental clean-up, but if it doesn’t find the money, its “economic growth miracle” will come to an end.

The miracle isn’t a miracle at all, however, as it has can be easily explained by the laws of economics:

  • Surplus rural labour, and a rising working-age population, gave China several decades of what economist Sir Arthur Lewis characterises as a “free ride”, which is typical for any developing country: The easy economic growth of providing cheap exports for the developed world.
  • What further supported the Chinese miracle was its membership of the World Trade Organisation from 2001, and strong demand for its exports from the West because the West was in the midst of its Economic Supercycle.
  • Further boosting the competitiveness of Chinese exports was a willingness to allow lax environmental standards. The West benefited here as, it in effect, outsourced its pollution to China, in return for which it also gained very cheap imports.

Now, though. the Chinese workforce is shrinking as its population ages. It therefore has to escape the “middle income” trap described by Lewis. This involves moving up the manufacturing and services value chains in order to economically justify rapidly rising wage costs in its more-developed provinces.

Meanwhile, it can no longer expect the same kind of help from the West, because of the end of the Economic Supercycle.

China must, as a result, retain the educated, middle class people capable of creating higher-value goods and services, whilst also attracting highly-qualified overseas Chinese back home.

But the Chinese government recognises that it cannot do this unless it creates a more liveable environment. Many middle class young couples, particularly those young children, want to leave China because of poor air, water and soil quality.

Equally, there is an opportunity here that China is doing its best to seize through huge government investments in green industries – for example, in renewable power generation and electric batteries for automobiles. These are exactly the type of higher-value goods and services that China needs to escape its middle-income, and to clean-up its environment in order to retain talent.

The good news for China is that the global competitive playing field in green technologies has suddeny become less crowded as a result of the US decision to withdraw from the Paris climate agreement.

But can China escape its Catch 22?

Building This into Scenarios for Chemicals Demand Growth

My gut feel is that China will pull this off, as it has confounded the sceptics before. It also has a government that recognises the scale of the challenge, and one that has made sustainable growth the core of its new economic growth model.

But success is not a given. Economic collapse is, I think, highly unlikely. But you instead might see GDP growth over the long term much lower than consensus opinion. The economy could see gradual stagnation.

What worries me is that this risk is not always being factored-in to standard demand growth estimates for chemicals and polymers in China.

Too many analysts take a Panglossian, “everything will turn out alright in the end”, view of the future. They just take the standard, say, IMF growth rates for GDP over the next decade or so and assume chemicals growth at steady multiples over these GDP forecasts.

This approach might turn out to be right. But as I said, the innovative solutions China needs to tackle its environmental crisis probably don’t even exist yet. And when and if these solutions come along, will they be affordable?

You thus need Plans B, C, D and beyond – multiple scenarios for the development of the Chinese economy and its chemicals demand. This is where ICIS Consulting can help.

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