Feb 17, 2023·edited Feb 17, 2023Liked by Noah Smith
"it invests $8 for every $1 of GDP growth, which is an absolutely terrible return on capital"
I feel like there is an entire post about how development economists think about growth and investment that's lurking behind this. Like, are you talking about an $8 investment producing just a one-off $1 increase in the next year's GDP? That obviously would be terrible and would repesent massive mal-investment. Investments at a loss.
But if what this means is that you invest $8, and effectively get a perpetuity at 12.5%... How in G*d's name would that be classified as "an absolutely terrible return on capital"? If I could buy that investment I'd be thrilled!
In any case, I feel like I am just not understanding how you're using the numbers here.
It's a good question! It's the second one, but it's not such a great deal as it may seem. First of all, John is right in his other comment where he explains that as a purely *financial* return, it's not great. And he didn't even mention inflation!
But instead of a financial return, let's think of it in terms of how much GDP growth you can get. The U.S. invests about 18% of our GDP (https://fred.stlouisfed.org/series/A006RE1Q156NBEA), and we grow at maybe around 4% in nominal terms. So that means that by the measure above, we invest $4.50 for every $1 of growth, compared to China's $8. If China invested 18% of GDP, and got the same return on capital that it does now, its growth would only be 2.33% in nominal terms -- barely enough to keep up with the rate of inflation! So, basically zero growth in real terms. Spending almost a fifth of your income each year just to tread water in terms of real living standards is...a bad deal, right?
Now, China invests a LOT more than we do -- maybe 43% of GDP. So with an $8 to $1 ratio, that lets them grow at maybe 5.37% in nominal terms. Subtract 2% inflation, and that's a real GDP growth of 3.37%. Which is barely more than a developed country. And with a per capita GDP of only about $20,000 in PPP terms -- less than a third as much as the U.S. -- China *should* be able to grow much faster than that. The fact that they're no longer growing much faster than we are, despite still being only a middle-income country, means that their investment is pretty inefficient.
OK, so. That $8 to $1 figure is an average. It's not a marginal number. If China cut its investment to only 30% of GDP, presumably the crappy wasteful investments would be the first to go. In that case, their average return on capital would rise. That means that their marginal return on investment is *worse* than that $8 to $1 figure would suggest. The marginal dollar of investment in China probably increases growth by very little -- in fact, it's probably wasted on crappy real estate projects.
Everybody should invest so that the NPV of the marginal project is zero. My _guess_ is that applying that rule China would invest less and the US more, especially if our immigration system were recruiting the world's talent.
Clearly we are not communicating well. I intended to claim that investing according to the NPV rule was the proper conceptual framework for public investment.
^^^ Like, this is why I'm saying, I think actually picking apart the relationship between the holistic view (how much society invests for how much social return -- with I guess the social return being measured by how much personal consumption is improved?) and the view from the perspective of the investor buying the capital, would be really interesting. In order to do development, either you need positive-return investments that a command economy can make successfully, or you need a system that incentivizes private investors to identify stuff that's positive return at both the personal and social level. A big picture view of how we measure this stuff would be an evergreen post!
So the back of the envelope math is that we're investing 18% of our $23T GDP = around $4T, and we're getting 4% nominal growth = $0.9T, then that's "spending $4.50 per dollar of growth". OK, I guess that tracks.
I'm still trying to understand what this means in terms of the rates of return on the actual investments... GDP is just kind of a weird measure. I mean, I'm sure you know the standard examples of why it's weird... You run a factory that dumps pollution in a lake, and then pay an environmental remediation firm $100M to clean up the lake, and that adds a bunch of money to GDP. If you instead change your process to be cleaner at no additional cost, then sell output for the same amount of money and pocketing $100M in profits, that makes GDP _lower_ (at least until somebody, either the company or a stockholder receiving distributions, actually _spends_ the $100M). And of course if you move stuff like childcare and cooking between the informal / personal sector, and the formal paid sector, you can have the same work getting done, but different GDP numbers.
Add on that it's tricky to flip perspective between the level of the individual firm, and the society... I know there's probably some kind of problem with a fallacy of composition here -- paradox of thrift, paradox of toil -- but I'm still trying to figure out if there's a way to express this sensibly in terms of investment and return. Like, it seems like there _should_ be, especially when you have an economy like China's where ultimately most businesses answer to a central authority.
If you're investing $8 in capital in the hopes of making additional stuff (or services) next year, and that additional production will be sold for $1. It's long-term but non-permanent, so maybe you expect to get 20 years of returns. And then there's a recurring labor cost of... what? I guess if you're saying labor is counting as 70% of input cost, and the _annualized_ capital cost is $8/20 = $0.40, then the cost to operate the capital would be around $0.4 * 0.7 / 0.3 = $0.93? So you only actually get $0.07 extra in surplus? That still seems wrong... That would work out to:
=RATE( 20 annual periods, +0.07 annual PMT, -8 up-front payment, 0 future value at tend of term)
which comes back with around -13%... So definitely something is still fishy here...
I guess maybe the point really is that China is making a ton of negative-return investments, and if they cut back the % of GDP that they invest, they'd squeeze out those investments and get to the point where the marginal project is neutral in NPV terms (although NPV is also weird given how it varies if the perceived risk-free rate moves, altering everyone's discount rates; I've always preferred to instead just look at an IRR from projected cashflows, and then ask whether that IRR is appropriate given the expected variance of the cashflows).
So, I think it's useful to recall that what society is actually trying to maximize here is not GDP -- it's consumption. The right long-term investment rate is one that maximizes long-term consumption. This is called the "golden rule" level of savings/investment.
Exactly what that "golden rule" level is will depend on some assumptions about the future of the economy. But the basic principle is that it's not worth raising your investment level in order to raise your long-term GDP if too much of that future GDP will just have to be plowed back into investment. You end up with a country that can produce a ton, but which has to use a large fraction of that production just to keep producing that amount. That's not a great situation for the people of the country (or for the military, I suppose).
Yep. In fact there are several studies that suggest Japan has gotten into this excessive-investment equilibrium. Of course, much of that investment in Japan is their practice of tearing down housing every 30 years to build more housing, which *has* kept rents down, so there are subtle tradeoffs there. In China's case, it's often just building a whole shit-ton of unprofitable steel plants and the like. And of course, "investment properties" no one wants to live in.
Considering I have lived in multiple more-than-a-century-old properties (with all the attendant plumbing and electrical "adventures") and bought a home built in 1940 (and have spent more than the downpayment by now, to make it not-a-death-trap)... The idea of tearing down the vast majority of housing and rebuilding it every 30-50 years, so everyone could live in something vaguely close to modern standards, sounds like a huge improvement over our status quo. "Luxury" housing for all! (In the sense that "luxury" in the US real estate market is purely an advertising term, describing anything built in the past ten years.)
If you assume that labour accounts for 70 per cent of average output, the 12.5 per cent drops to 4. Then note that GDP is gross (doesn't take account of the depreciation on that extra capital,) and you are down to around 2 per cent, which is pretty lame for a country that is still inside the technologicla frontier
As to China cutting coal consumption: Not-Gonna-Happen. The CCP isn't the slighted bit interested in the Western World's green objectives. It just isn't. It will posture, twist and politic like crazy (after all, they need us to keep buying their stuff). But as to objective changes, you can forget it. Mark my words. Let's revisit the data in 5 and 10 years, and I'm confident that China's consumptions of fossil fuels (including coal) will keep going up.
Probably doesn't matter. With respect to Climate Change, there is a huge free rider problem. China will be hit hard regardless of what it does or doesn't do
> China will be hit hard regardless of what it does or doesn't do
I think part of the implication of this post is that China might be a big enough coal producer now, or in the near future, such that its policies might indeed have global impacts. That doesn't mean they'll care, but it could influence them on the margin.
I don’t claim to be any kind of China expert, but when I visited there back in 2008 one thing that was very clear (unlike the air) was that the students and academics I spoke to thought the level of air pollution was a serious problem, and spontaneously brought it up. That wasn’t true of other topics.
I can’t imagine the Chinese leadership enjoys air pollution either - and for all their power, the senior leadership breathes the same air as any other Beijinger.
The same would be true of China’s regional leadership - and the pollution in Xi’an was even worse than it was in Beijing.
So while there are obvious forces pushing in the other direction, there are a lot of people with real power incentivised to cut back on coal usage even ignoring climate (which is a live issue in Beijing given the paucity of water).
Yeah...it’s not just china my guy. It’s Africa, most of Asia and Latin and South America. Those people are largely poverty stricken and many of their economies are industrializing trying to remedy some of that. It never ceases to amaze me how people like you sit over here and expect all those poor people to just stay poor and not benefit from fossil fuels the same way the west has. Get real...
As the post explains, coal is a bad investment for Africa and South America, the same as it is for China and the US. Where coal projects are going ahead, you will always find corruption at work https://johnquiggin.com/2019/03/03/coal-cronyism-and-corruption
I quite accept that climate is changing. For one thing, it has always changed and always will change. Second, we have some very bright people on order of, oh, Al Gore and John Kerry telling us about catastrophe, etc., etc. You know, the guy who invented the internet and those terribly important people who own all those non-energy efficient houses and who travel on private jets to those critical meetings at Davos and to the terribly necessary climate conferences that just can't be held via Zoom; those guys. Oh, I know they claim to buy "climate offsets" but couldn't they cut back on their personal emissions and still buy those offsets? And, just out of curiosity, how does Gretta get from place to place?
So, yes, I accept that climate is changing. Temperature going up. Time Magazine has been telling us so and they started telling us that, oh, about five years after they stopped hectoring us about the climate cooling.
Yes, Noah, I do accept that temperature is - perhaps - increasing. I absolutely understand that China is not really interested in lowering it's carbon footprint given all the new coal plants being built and planned for the future. So, I ask your forgiveness - and that of your readers when I say that if you want me to really, really care about cutting back on my personal carbon footprint, stop the hypocrisy of our worsers - really, Al Gore, John Kerry, et al are absolutely not my betters - and, above all, make a change in carbon usage economic for me and mine, without putting people in my part of Canada on the unemployment line.
Here in Canada we have a federal government that is preaching a "just transition" and they seem to want to get oil and gas industry workers to lose their well paying jobs and they offer jobs as truck drivers, janitors, etc. Really! Those are truly the examples of green industry jobs that the government publications are offering. And you wonder why many of us are not enamored of this "wonderful" transition.
You will recall that the "inventor of the internet" and that Nobel Prize recipient, a certain Mr. Gore in (I think it was) 2007 stated that within "5 or 6 years" the Arctic ice cap would be totally melted. I just two days ago saw a statistic that said in the most recent year for which there was information (2021, I believe) the Arctic Ice cap was larger than when he gave us his sage advice.
Finally, as above, I accept that the climate is changing, perhaps even warming but, truly, truly, I am not convinced that any such change will be catastrophic so, again, if you want to get me to change my carbon behavior, ensure that it will be economic and will not cause mass unemployment.
China would love to get off coal. Look at the air pollution. I've been there a few times. It's terrible. https://waqi.info/
I don't see how. Solar panels and wind are intermittent power sources. What is the backup? Batteries? Batteries won't be a solution for decades if ever. Nat gas? From where? Pipelines from Russia. It will take years to get this figured out.
USA is on debt death spiral so the IRA and subsidies for green energy are only adding to the inevitable. If USA balanced the books, the world would go into a depression and the CO2 would drop substantially. Is everyone happy now?
Having baseload power source isn't about burning coal, it is about having coal power stations ready to use. If you have a reliable sustainable energy market, only in some limited scenarios you have to use the coal itself. On nights without wind after the batteries lost their power. Baseload power is usually based on natural gas stations which can start and stop within minutes, but coal is also useful for that, although less efficient.
The only thing that can completely replace coal is another form of reliable energy. Solar and wind can’t because they are intermittant and there is no storage solution that can store more than a few hours of electricity.
At best they can limit the increase in coal by replacing some coal generation.
It has been demonstrated in every single country that has installed solar and wind.
That means only gas, hydro or nuclear can eliminate coal.
I find it remarkable that such an intelligent commentator does not grasp this basic fact. I suspect the problem is not appreciating the physical limits of battery storage. The notion that because prices are coming down batteries will able to do this is wrong, orders of magnitude wrong.
It has simply become an article of faith to some that renewables are now cheaper than fossil fuels. They always cite LCOE as evidence. Noah’s link at “ building new solar plants is actually cheaper” is a prime example. But, while LCOE considers the cost of production, it is a flawed indicator of the value of the electricity produced; dispatchable and non-dispatchable technologies have very different overall system costs.
The IEA’s World Energy Outlook 2018 (WEO2018) introduces a value-adjusted LCOE (VALCOE) that also considers “energy, flexibility and capacity.” Using India as an example, “the LCOE of new solar PV is projected to drop below that of coal-fired power plants by 2025. But the story is different using VALCOE. As the share of solar PV surpasses 10% in 2030, the value of daytime production drops and the value of flexibility increases. After 2030, even with further cost reductions, solar PV becomes less competitive.”
Solar often looks very cheap superficially because current market designs rarely monetize all the services comprising a 24x7 functioning grid.
Thanks. That seems like a better measure. Other costs include:
(1) the fact that dispatchable generators have to be run less efficiently,
(2) the cost of expanding the grid to accommodate such a low density source.
(3) the cost of balancing the grid with such variably input
(4) The cost of safely disposing of/recycling solar PV panels.
As penetration increases the marginal cost of new solar/wind increases exponentially.
Eventually, to eliminate carbon emissions, storage becomes essential and the costs of this are currently prohibitive. So high that solar would be unaffordable even if Solar PV panels cost nothing.
The best measure of cost is to look at the cost of electricity relative the levels of intermittent renewables. This ALWAYS increases.
This is flat out wrong. South Australia has no coal or nuclear, and no significant hydro, and limited interconnection to the rest of the Australian grid. Average is 65 per cent solar+wind, projected to reach 100 per cent soon. Plenty of storage, thanks initially to Elon Musk
I am 100% correct. I have been following the situation in South Australia. If you look at their electricity they depend heavily on gas and HUGE levels of electricity imports (peaking at 30-40%) from Victoria, which is mainly generated from coal and gas. This is critical at night when there is no solar. The contribution of storage is negligible. They will never be able to ween themselves of gas and/or dirty energy imports unless they install nuclear power. Wait and see....
They switched from coal to gas, which was mostly imported as they banned fracking. They have had to ramp up coal to replace the gas imports lost from Russia. Germany now gets 40% of its electricity from coal generation, and it is the dirtiest form of coal. Despite the incredible level of spending on solar and wind their greenhouse gas emissions are amongst the highest in Europe.
Look at the actual data. Not the spin. Germany had the second highest carbon intensity in Europe (679 gCO₂eq/kWh) in the past month. And it has spent by far the most on solar and wind. If it had spent this money on nuclear its carbon intensity would have been under 50 gCO₂eq/kWh. Poland has learnt this lesson and is replacing coal with nuclear, just like France did. Some people actually care about reality. https://app.electricitymaps.com/zone/DE
I think a simpler explanation is that solar doesn't work at night or on cloudy days and China wants to have power at those times. Levelised cost numbers don't take this into account. We don't really need a more complex theory.
Noah, I have previously commented on this column - which, you will recall that I praised. I expect that you will also recall, I cast doubt on the idea that the "excess" warming would be catastrophic.
Okay, I certainly expect you - and many others - to disagree with me. That is, of course, the nature of an open forum such as you offer herein.
I have certainly heard that this "excess" warming would be catastrophic and, as noted, I offered an (uneducated) opinion to the contrary. One thing for which I don't recall having seen any information concerns the level of carbon dioxide that human kind should aim for.
What I mean is that we are told (endlessly, of course) that carbon dioxide is bad, evil, must be stopped, etc., etc. All of those assertions are made but they do not take into account that human beings, just by the act of breathing exhale carbon dioxide continuously. I presume that there is no intent to stop humans (but perhaps other animals?) from exhaling? So, what IS a "good" level of carbon dioxide?
As a further query, I have heard that the level of carbon dioxide has been increasing - which I do not dispute as apparently it is absolutely measurable and no one is arguing to the contrary. I have further heard (again, endlessly) that it is this increased carbon dioxide that is the reason for the warming of the planet. As I understand matters, the link between the carbon dioxide increases and warming is still a theory but is widely accepted. [On the other hand, I do recall that big pharma told us that the Covid shots would prevent transmission of Covid 19 so I am uncertain about the "wide acceptance" given that clearly the shots do not prevent transmission.]
So, again, what is the "correct" or "best" level of CO2? As above, I quite accept that carbon dioxide levels are increasing, but I would also note that agricultural yields have increased over the last number of decades. I have seen (and talked to technical people) who attribute these increased yields to increased levels of carbon dioxide - they call CO2 "plant food." And, perhaps it is. Remember, I am not a technical guy.
To repeat, what is the "correct" or "best" level of CO2? I ask because many, many folk - you included, Sir - want to limit carbon dioxide as if it were a pollutant. Given that we humans produce CO2 and given that it appears to be beneficial for plant life, and given that CO2 is a product that is widely used in our society, it seems to me that to simply label it a pollutant is misguided at best and dangerous at worst. So, if we do need CO2, how much do we need?
I do apologize for seeming to be a contrary cuss but I am serious that this is an item that I have not seen addressed and it does seem to me that it should be.
There’s two separate questions here. What is the appropriate long run level of annual CO2 emissions, and what is the appropriate long run level of CO2 concentration? I think for the former, the long run level has to be the same as the level of CO2 absorption so that for the latter question, there can be a stable answer.
"China’s leaders may swagger and bellow on the world stage, but they’re very sensitive to mass unrest, as was demonstrated the recent rapid capitulation over Zero Covid after only a few short protests. If there’s one thing they probably don’t want, it’s millions of angry unemployed coal miners in the regions surrounding the capital city."
Six million coal miners is a significant number and those workers are likely among the least educated. It is likely just above subsistence living for them. And it does appear the China has a history of coal miner strikes directly impacting the political landscape.
Until China (and the rest if us) can reliably produce and store renewable energy at scale, the cost and convenience of coal, particularly for heating, is hard to beat.
Great article. Best thing we can do is apply pressure in our states that are still burning coal. We lack credibility with China as long as our side of the street isn’t clean.
China has a rainy or monsoon season lasting 6 months of the year. So has large parts of Africa. So solar doesn't work for these places far less than at night when the sun don't shine.
As far as geopolitical bargains go, the best one would be to drop the silly rhetoric about the South China Sea, and leave it countries in the region to sort out (while sending plenty of anti-ship missiles to Taiwan). But the US Navy has the same kind of political power as the Chinese coal lobby.
USN insistence on FONOPS creates massive problems for the US in lots of places. And, again because of improvements in anti-ship missiles, it's pointless. Ships sailing close to China would be sunk instantly if hostilities broke out. Look at how Russia's mighty Black Sea Fleet turned out to be a paper shark in the Ukraine war.
Not expressed as baldly as that. But the whole point of diplomacy is to make deals that no one wants to admit to publicly.
Actually, North Korea is higher on my existential threats list than Chinese coal. Chinese action to rein them in would be a more natural offset for FONOPS. Maybe too late for that, but worth a shot.
"China is focused on becoming the world’s green energy superpower."
More accurately, China is focused on becoming the world's energy (of all kinds) superpower.
Why? Because China is focused on being the world's superpower, period.
"it invests $8 for every $1 of GDP growth, which is an absolutely terrible return on capital"
I feel like there is an entire post about how development economists think about growth and investment that's lurking behind this. Like, are you talking about an $8 investment producing just a one-off $1 increase in the next year's GDP? That obviously would be terrible and would repesent massive mal-investment. Investments at a loss.
But if what this means is that you invest $8, and effectively get a perpetuity at 12.5%... How in G*d's name would that be classified as "an absolutely terrible return on capital"? If I could buy that investment I'd be thrilled!
In any case, I feel like I am just not understanding how you're using the numbers here.
It's a good question! It's the second one, but it's not such a great deal as it may seem. First of all, John is right in his other comment where he explains that as a purely *financial* return, it's not great. And he didn't even mention inflation!
But instead of a financial return, let's think of it in terms of how much GDP growth you can get. The U.S. invests about 18% of our GDP (https://fred.stlouisfed.org/series/A006RE1Q156NBEA), and we grow at maybe around 4% in nominal terms. So that means that by the measure above, we invest $4.50 for every $1 of growth, compared to China's $8. If China invested 18% of GDP, and got the same return on capital that it does now, its growth would only be 2.33% in nominal terms -- barely enough to keep up with the rate of inflation! So, basically zero growth in real terms. Spending almost a fifth of your income each year just to tread water in terms of real living standards is...a bad deal, right?
Now, China invests a LOT more than we do -- maybe 43% of GDP. So with an $8 to $1 ratio, that lets them grow at maybe 5.37% in nominal terms. Subtract 2% inflation, and that's a real GDP growth of 3.37%. Which is barely more than a developed country. And with a per capita GDP of only about $20,000 in PPP terms -- less than a third as much as the U.S. -- China *should* be able to grow much faster than that. The fact that they're no longer growing much faster than we are, despite still being only a middle-income country, means that their investment is pretty inefficient.
OK, so. That $8 to $1 figure is an average. It's not a marginal number. If China cut its investment to only 30% of GDP, presumably the crappy wasteful investments would be the first to go. In that case, their average return on capital would rise. That means that their marginal return on investment is *worse* than that $8 to $1 figure would suggest. The marginal dollar of investment in China probably increases growth by very little -- in fact, it's probably wasted on crappy real estate projects.
Everybody should invest so that the NPV of the marginal project is zero. My _guess_ is that applying that rule China would invest less and the US more, especially if our immigration system were recruiting the world's talent.
Well, not really, because you also need to consume. A very poor country might have NPV>0 for investing 100% of GDP, but then you die...
That's not the way the discount rate works. :)
Someone else could operate the capital after the builders die 😉
Clearly we are not communicating well. I intended to claim that investing according to the NPV rule was the proper conceptual framework for public investment.
Oh, I wish I understood all this! I did get the overview perspective which I appreciated.
^^^ Like, this is why I'm saying, I think actually picking apart the relationship between the holistic view (how much society invests for how much social return -- with I guess the social return being measured by how much personal consumption is improved?) and the view from the perspective of the investor buying the capital, would be really interesting. In order to do development, either you need positive-return investments that a command economy can make successfully, or you need a system that incentivizes private investors to identify stuff that's positive return at both the personal and social level. A big picture view of how we measure this stuff would be an evergreen post!
So the back of the envelope math is that we're investing 18% of our $23T GDP = around $4T, and we're getting 4% nominal growth = $0.9T, then that's "spending $4.50 per dollar of growth". OK, I guess that tracks.
I'm still trying to understand what this means in terms of the rates of return on the actual investments... GDP is just kind of a weird measure. I mean, I'm sure you know the standard examples of why it's weird... You run a factory that dumps pollution in a lake, and then pay an environmental remediation firm $100M to clean up the lake, and that adds a bunch of money to GDP. If you instead change your process to be cleaner at no additional cost, then sell output for the same amount of money and pocketing $100M in profits, that makes GDP _lower_ (at least until somebody, either the company or a stockholder receiving distributions, actually _spends_ the $100M). And of course if you move stuff like childcare and cooking between the informal / personal sector, and the formal paid sector, you can have the same work getting done, but different GDP numbers.
Add on that it's tricky to flip perspective between the level of the individual firm, and the society... I know there's probably some kind of problem with a fallacy of composition here -- paradox of thrift, paradox of toil -- but I'm still trying to figure out if there's a way to express this sensibly in terms of investment and return. Like, it seems like there _should_ be, especially when you have an economy like China's where ultimately most businesses answer to a central authority.
If you're investing $8 in capital in the hopes of making additional stuff (or services) next year, and that additional production will be sold for $1. It's long-term but non-permanent, so maybe you expect to get 20 years of returns. And then there's a recurring labor cost of... what? I guess if you're saying labor is counting as 70% of input cost, and the _annualized_ capital cost is $8/20 = $0.40, then the cost to operate the capital would be around $0.4 * 0.7 / 0.3 = $0.93? So you only actually get $0.07 extra in surplus? That still seems wrong... That would work out to:
=RATE( 20 annual periods, +0.07 annual PMT, -8 up-front payment, 0 future value at tend of term)
which comes back with around -13%... So definitely something is still fishy here...
I guess maybe the point really is that China is making a ton of negative-return investments, and if they cut back the % of GDP that they invest, they'd squeeze out those investments and get to the point where the marginal project is neutral in NPV terms (although NPV is also weird given how it varies if the perceived risk-free rate moves, altering everyone's discount rates; I've always preferred to instead just look at an IRR from projected cashflows, and then ask whether that IRR is appropriate given the expected variance of the cashflows).
So, I think it's useful to recall that what society is actually trying to maximize here is not GDP -- it's consumption. The right long-term investment rate is one that maximizes long-term consumption. This is called the "golden rule" level of savings/investment.
https://en.wikipedia.org/wiki/Golden_Rule_savings_rate
Exactly what that "golden rule" level is will depend on some assumptions about the future of the economy. But the basic principle is that it's not worth raising your investment level in order to raise your long-term GDP if too much of that future GDP will just have to be plowed back into investment. You end up with a country that can produce a ton, but which has to use a large fraction of that production just to keep producing that amount. That's not a great situation for the people of the country (or for the military, I suppose).
"You end up with a country that can produce a ton, but which has to use a large fraction of that production just to keep producing that amount."
It actually sounds like China has maybe dug itself into exactly that hole?
Yep. In fact there are several studies that suggest Japan has gotten into this excessive-investment equilibrium. Of course, much of that investment in Japan is their practice of tearing down housing every 30 years to build more housing, which *has* kept rents down, so there are subtle tradeoffs there. In China's case, it's often just building a whole shit-ton of unprofitable steel plants and the like. And of course, "investment properties" no one wants to live in.
Considering I have lived in multiple more-than-a-century-old properties (with all the attendant plumbing and electrical "adventures") and bought a home built in 1940 (and have spent more than the downpayment by now, to make it not-a-death-trap)... The idea of tearing down the vast majority of housing and rebuilding it every 30-50 years, so everyone could live in something vaguely close to modern standards, sounds like a huge improvement over our status quo. "Luxury" housing for all! (In the sense that "luxury" in the US real estate market is purely an advertising term, describing anything built in the past ten years.)
If you assume that labour accounts for 70 per cent of average output, the 12.5 per cent drops to 4. Then note that GDP is gross (doesn't take account of the depreciation on that extra capital,) and you are down to around 2 per cent, which is pretty lame for a country that is still inside the technologicla frontier
Xi went after oil in 2014 because that was Zhou Yongkang’s power base. He didn’t care about the environmental impact.
Right.
As to China cutting coal consumption: Not-Gonna-Happen. The CCP isn't the slighted bit interested in the Western World's green objectives. It just isn't. It will posture, twist and politic like crazy (after all, they need us to keep buying their stuff). But as to objective changes, you can forget it. Mark my words. Let's revisit the data in 5 and 10 years, and I'm confident that China's consumptions of fossil fuels (including coal) will keep going up.
I mean, climate change is gonna hit them hard.
Probably doesn't matter. With respect to Climate Change, there is a huge free rider problem. China will be hit hard regardless of what it does or doesn't do
> China will be hit hard regardless of what it does or doesn't do
I think part of the implication of this post is that China might be a big enough coal producer now, or in the near future, such that its policies might indeed have global impacts. That doesn't mean they'll care, but it could influence them on the margin.
I don’t claim to be any kind of China expert, but when I visited there back in 2008 one thing that was very clear (unlike the air) was that the students and academics I spoke to thought the level of air pollution was a serious problem, and spontaneously brought it up. That wasn’t true of other topics.
I can’t imagine the Chinese leadership enjoys air pollution either - and for all their power, the senior leadership breathes the same air as any other Beijinger.
The same would be true of China’s regional leadership - and the pollution in Xi’an was even worse than it was in Beijing.
So while there are obvious forces pushing in the other direction, there are a lot of people with real power incentivised to cut back on coal usage even ignoring climate (which is a live issue in Beijing given the paucity of water).
China is probably too big to free ride even is the rest of the world let it. But a border adjustment tax create and incentive NOT to free ride.
Yeah...it’s not just china my guy. It’s Africa, most of Asia and Latin and South America. Those people are largely poverty stricken and many of their economies are industrializing trying to remedy some of that. It never ceases to amaze me how people like you sit over here and expect all those poor people to just stay poor and not benefit from fossil fuels the same way the west has. Get real...
China is no longer poor, and they use much much more coal than those other countries, as you can see from the graphs in this post.
India is next but I am cautiously optimistic that they will go straight to solar instead of fossil fuel -> solar like Europe and the US are going.
You have given me optimism for solars ability to replace fossil fuels. I have a friend who is busy trying to bootstrap solar power into rural Malawi.
https://www.solar4africa.org/
As the post explains, coal is a bad investment for Africa and South America, the same as it is for China and the US. Where coal projects are going ahead, you will always find corruption at work https://johnquiggin.com/2019/03/03/coal-cronyism-and-corruption
Yep. Coal is a jobs program now, not a good investment.
All "jobs" programs are bad investments by definition. A cost benefit analysis that considers costs as as benefit will lead to bad results.
No country, poor or right should use more or less fossil fuels that is the result of applying a tax on net emissions of CO2.
poor or _rich_
Do you suggest we just give up? Seems like it.
I think some of the problem may be that China’s massive solar industry isn’t particularly efficient at generating power. https://twitter.com/akshatrathi/status/1620745384447594498?s=46&t=n06SHGQx3ciNj4nDXJbuag
Interesting.
Very interesting column, Noah.
Now, having said that ....
I quite accept that climate is changing. For one thing, it has always changed and always will change. Second, we have some very bright people on order of, oh, Al Gore and John Kerry telling us about catastrophe, etc., etc. You know, the guy who invented the internet and those terribly important people who own all those non-energy efficient houses and who travel on private jets to those critical meetings at Davos and to the terribly necessary climate conferences that just can't be held via Zoom; those guys. Oh, I know they claim to buy "climate offsets" but couldn't they cut back on their personal emissions and still buy those offsets? And, just out of curiosity, how does Gretta get from place to place?
So, yes, I accept that climate is changing. Temperature going up. Time Magazine has been telling us so and they started telling us that, oh, about five years after they stopped hectoring us about the climate cooling.
Yes, Noah, I do accept that temperature is - perhaps - increasing. I absolutely understand that China is not really interested in lowering it's carbon footprint given all the new coal plants being built and planned for the future. So, I ask your forgiveness - and that of your readers when I say that if you want me to really, really care about cutting back on my personal carbon footprint, stop the hypocrisy of our worsers - really, Al Gore, John Kerry, et al are absolutely not my betters - and, above all, make a change in carbon usage economic for me and mine, without putting people in my part of Canada on the unemployment line.
Here in Canada we have a federal government that is preaching a "just transition" and they seem to want to get oil and gas industry workers to lose their well paying jobs and they offer jobs as truck drivers, janitors, etc. Really! Those are truly the examples of green industry jobs that the government publications are offering. And you wonder why many of us are not enamored of this "wonderful" transition.
You will recall that the "inventor of the internet" and that Nobel Prize recipient, a certain Mr. Gore in (I think it was) 2007 stated that within "5 or 6 years" the Arctic ice cap would be totally melted. I just two days ago saw a statistic that said in the most recent year for which there was information (2021, I believe) the Arctic Ice cap was larger than when he gave us his sage advice.
Finally, as above, I accept that the climate is changing, perhaps even warming but, truly, truly, I am not convinced that any such change will be catastrophic so, again, if you want to get me to change my carbon behavior, ensure that it will be economic and will not cause mass unemployment.
China would love to get off coal. Look at the air pollution. I've been there a few times. It's terrible. https://waqi.info/
I don't see how. Solar panels and wind are intermittent power sources. What is the backup? Batteries? Batteries won't be a solution for decades if ever. Nat gas? From where? Pipelines from Russia. It will take years to get this figured out.
USA is on debt death spiral so the IRA and subsidies for green energy are only adding to the inevitable. If USA balanced the books, the world would go into a depression and the CO2 would drop substantially. Is everyone happy now?
China could provide baseload with much less coal than now. And they build plenty of nuclear too.
Having baseload power source isn't about burning coal, it is about having coal power stations ready to use. If you have a reliable sustainable energy market, only in some limited scenarios you have to use the coal itself. On nights without wind after the batteries lost their power. Baseload power is usually based on natural gas stations which can start and stop within minutes, but coal is also useful for that, although less efficient.
The only thing that can completely replace coal is another form of reliable energy. Solar and wind can’t because they are intermittant and there is no storage solution that can store more than a few hours of electricity.
At best they can limit the increase in coal by replacing some coal generation.
It has been demonstrated in every single country that has installed solar and wind.
That means only gas, hydro or nuclear can eliminate coal.
I find it remarkable that such an intelligent commentator does not grasp this basic fact. I suspect the problem is not appreciating the physical limits of battery storage. The notion that because prices are coming down batteries will able to do this is wrong, orders of magnitude wrong.
Just do the maths!!
It has simply become an article of faith to some that renewables are now cheaper than fossil fuels. They always cite LCOE as evidence. Noah’s link at “ building new solar plants is actually cheaper” is a prime example. But, while LCOE considers the cost of production, it is a flawed indicator of the value of the electricity produced; dispatchable and non-dispatchable technologies have very different overall system costs.
The IEA’s World Energy Outlook 2018 (WEO2018) introduces a value-adjusted LCOE (VALCOE) that also considers “energy, flexibility and capacity.” Using India as an example, “the LCOE of new solar PV is projected to drop below that of coal-fired power plants by 2025. But the story is different using VALCOE. As the share of solar PV surpasses 10% in 2030, the value of daytime production drops and the value of flexibility increases. After 2030, even with further cost reductions, solar PV becomes less competitive.”
Solar often looks very cheap superficially because current market designs rarely monetize all the services comprising a 24x7 functioning grid.
Thanks. That seems like a better measure. Other costs include:
(1) the fact that dispatchable generators have to be run less efficiently,
(2) the cost of expanding the grid to accommodate such a low density source.
(3) the cost of balancing the grid with such variably input
(4) The cost of safely disposing of/recycling solar PV panels.
As penetration increases the marginal cost of new solar/wind increases exponentially.
Eventually, to eliminate carbon emissions, storage becomes essential and the costs of this are currently prohibitive. So high that solar would be unaffordable even if Solar PV panels cost nothing.
The best measure of cost is to look at the cost of electricity relative the levels of intermittent renewables. This ALWAYS increases.
This is flat out wrong. South Australia has no coal or nuclear, and no significant hydro, and limited interconnection to the rest of the Australian grid. Average is 65 per cent solar+wind, projected to reach 100 per cent soon. Plenty of storage, thanks initially to Elon Musk
https://www.climatechangenews.com/2022/09/16/south-australia-set-to-become-first-big-grid-to-run-on-100-renewables/
I am 100% correct. I have been following the situation in South Australia. If you look at their electricity they depend heavily on gas and HUGE levels of electricity imports (peaking at 30-40%) from Victoria, which is mainly generated from coal and gas. This is critical at night when there is no solar. The contribution of storage is negligible. They will never be able to ween themselves of gas and/or dirty energy imports unless they install nuclear power. Wait and see....
The data can be found here https://www.electricitymaps.com
And Europe is rapidly going off coal, despite having built essentially zero new nuclear + hydro in decades.
They switched from coal to gas, which was mostly imported as they banned fracking. They have had to ramp up coal to replace the gas imports lost from Russia. Germany now gets 40% of its electricity from coal generation, and it is the dirtiest form of coal. Despite the incredible level of spending on solar and wind their greenhouse gas emissions are amongst the highest in Europe.
Out of date. https://ember-climate.org/press-releases/wind-and-solar-overtake-fossil-gas-to-produce-record-fifth-of-eu-electricity/#:~:text=As%20a%20result%2C%20Ember%20estimates%20that%20fossil%20generation,transition%20emerges%20from%20this%20crisis%20stronger%20than%20ever.
Look at the actual data. Not the spin. Germany had the second highest carbon intensity in Europe (679 gCO₂eq/kWh) in the past month. And it has spent by far the most on solar and wind. If it had spent this money on nuclear its carbon intensity would have been under 50 gCO₂eq/kWh. Poland has learnt this lesson and is replacing coal with nuclear, just like France did. Some people actually care about reality. https://app.electricitymaps.com/zone/DE
I think a simpler explanation is that solar doesn't work at night or on cloudy days and China wants to have power at those times. Levelised cost numbers don't take this into account. We don't really need a more complex theory.
Noah, I have previously commented on this column - which, you will recall that I praised. I expect that you will also recall, I cast doubt on the idea that the "excess" warming would be catastrophic.
Okay, I certainly expect you - and many others - to disagree with me. That is, of course, the nature of an open forum such as you offer herein.
I have certainly heard that this "excess" warming would be catastrophic and, as noted, I offered an (uneducated) opinion to the contrary. One thing for which I don't recall having seen any information concerns the level of carbon dioxide that human kind should aim for.
What I mean is that we are told (endlessly, of course) that carbon dioxide is bad, evil, must be stopped, etc., etc. All of those assertions are made but they do not take into account that human beings, just by the act of breathing exhale carbon dioxide continuously. I presume that there is no intent to stop humans (but perhaps other animals?) from exhaling? So, what IS a "good" level of carbon dioxide?
As a further query, I have heard that the level of carbon dioxide has been increasing - which I do not dispute as apparently it is absolutely measurable and no one is arguing to the contrary. I have further heard (again, endlessly) that it is this increased carbon dioxide that is the reason for the warming of the planet. As I understand matters, the link between the carbon dioxide increases and warming is still a theory but is widely accepted. [On the other hand, I do recall that big pharma told us that the Covid shots would prevent transmission of Covid 19 so I am uncertain about the "wide acceptance" given that clearly the shots do not prevent transmission.]
So, again, what is the "correct" or "best" level of CO2? As above, I quite accept that carbon dioxide levels are increasing, but I would also note that agricultural yields have increased over the last number of decades. I have seen (and talked to technical people) who attribute these increased yields to increased levels of carbon dioxide - they call CO2 "plant food." And, perhaps it is. Remember, I am not a technical guy.
To repeat, what is the "correct" or "best" level of CO2? I ask because many, many folk - you included, Sir - want to limit carbon dioxide as if it were a pollutant. Given that we humans produce CO2 and given that it appears to be beneficial for plant life, and given that CO2 is a product that is widely used in our society, it seems to me that to simply label it a pollutant is misguided at best and dangerous at worst. So, if we do need CO2, how much do we need?
I do apologize for seeming to be a contrary cuss but I am serious that this is an item that I have not seen addressed and it does seem to me that it should be.
There’s two separate questions here. What is the appropriate long run level of annual CO2 emissions, and what is the appropriate long run level of CO2 concentration? I think for the former, the long run level has to be the same as the level of CO2 absorption so that for the latter question, there can be a stable answer.
And that is what “net zero” means.
"China’s leaders may swagger and bellow on the world stage, but they’re very sensitive to mass unrest, as was demonstrated the recent rapid capitulation over Zero Covid after only a few short protests. If there’s one thing they probably don’t want, it’s millions of angry unemployed coal miners in the regions surrounding the capital city."
Six million coal miners is a significant number and those workers are likely among the least educated. It is likely just above subsistence living for them. And it does appear the China has a history of coal miner strikes directly impacting the political landscape.
See http://www.cpreview.org/blog/2021/10/can-china-have-it-all-in-a-coal-transition-how-the-ccp-will-struggle-to-balance-climate-reform-with-labor-concerns
Until China (and the rest if us) can reliably produce and store renewable energy at scale, the cost and convenience of coal, particularly for heating, is hard to beat.
See https://www.reuters.com/markets/commodities/chinas-daily-coal-output-hits-record-high-november-meet-heating-demand-2022-12-15/
Great article. Best thing we can do is apply pressure in our states that are still burning coal. We lack credibility with China as long as our side of the street isn’t clean.
China has a rainy or monsoon season lasting 6 months of the year. So has large parts of Africa. So solar doesn't work for these places far less than at night when the sun don't shine.
As far as geopolitical bargains go, the best one would be to drop the silly rhetoric about the South China Sea, and leave it countries in the region to sort out (while sending plenty of anti-ship missiles to Taiwan). But the US Navy has the same kind of political power as the Chinese coal lobby.
USN insistence on FONOPS creates massive problems for the US in lots of places. And, again because of improvements in anti-ship missiles, it's pointless. Ships sailing close to China would be sunk instantly if hostilities broke out. Look at how Russia's mighty Black Sea Fleet turned out to be a paper shark in the Ukraine war.
I doubt they'd be interested in a FONOPS-for-coal swap...
Not expressed as baldly as that. But the whole point of diplomacy is to make deals that no one wants to admit to publicly.
Actually, North Korea is higher on my existential threats list than Chinese coal. Chinese action to rein them in would be a more natural offset for FONOPS. Maybe too late for that, but worth a shot.
man, this makes me sad. i wonder if coal will suddenly decline like how solar has exploded. i sure hope so.