The agenda for the COP 26 summit

There has never been a collective human endeavour more ambitious than stabilising the climate. In this special report our journalists assess what it will take to meet the historic goals agreed on in Paris six years ago

Some 1,500 years before the birth of Christ, when the chariots of Ahmose I, the first pharaoh of the 18th dynasty, had brought all of Egypt back under the rule of Thebes, the level of carbon dioxide in Earth’s atmosphere was about 277 parts per million (ppm). 

When the Gautama Buddha attained enlightenment under the Bodhi Tree a millennium later, and when Socrates drained his cup of hemlock a century after that, the level of CO2 had hardly changed at all. 

It was barely different when the Tang dynasty in China and the first Muslim caliphate arose in the 7th century ad, or when the Aztec empire fell to the conquistadors nine centuries later on the other side of the world. 

For most of history the composition of Earth’s atmosphere has been as unchanging a backdrop to the human drama as the arrangement of its continents, or the face of its Moon.

In the middle of the 19th century that changed. 

Very quickly by historical standards, and instantaneously by geological ones, the CO2 level began to rise. 

Having stayed between 275ppm and 285ppm for millennia, by the 1910s it had reached 300ppm. 

By 2020 it was 412ppm (see chart). 

In a century or so a crucial aspect of Earth’s workings had undergone a change 100 times greater than had previously been seen in a millennium.

An equally sudden shift in the background arrangement of the continents would have been a lot more noticeable. 

But it might not have been much more consequential. 

Although the way in which the atmosphere’s carbon-dioxide level affects the planet’s biology, chemistry, and physics does not in itself shuffle the tectonic plates, it changes the world in which they sit.

More carbon dioxide means more plant growth. 

In the 30 years from 1980 to 2009 satellite observations revealed that between a quarter and a half of the plant-covered surface of Earth—an area between those of Africa and of Asia and Europe combined—grew noticeably greener. 

Plants were flourishing on the CO2-enriched air, adding tens of billions of tonnes to the planet’s biomass. 

The oceans, for their part, have grown more acidic after absorbing some of the atmosphere’s sudden CO2 surplus. 

It is as though ten rivers of pure battery acid the size of the Thames have emptied themselves into the seas.

And then there is the physics. 

Carbon dioxide absorbs infrared radiation. 

It is by emitting infrared radiation that the surface of Earth cools itself down. 

More CO2 in the atmosphere makes this process harder, so it means a warmer Earth. 

The increase in CO2 since the mid-19th century has, in concert with industrial and agricultural production and the release of other greenhouse gases such as methane, nitrous oxide and industrial gases like cfcs and hcfcs, increased the planet’s average surface temperature by between 1.1°C and 1.2°C.

This has already had an adverse effect on crop yields which outstrips any of the benefits from a higher level of CO2. 

It is increasing the frequency, intensity and duration of droughts and heat waves. 

It has made large tracts of permafrost impermanent, gobbled up mountain glaciers and reduced the area of multiyear ice on the Arctic Ocean by 90%.

It is destabilising the great ice sheets of Greenland and western Antarctica and making it easier for midsized hurricanes to intensify into the most powerful of storms. 

It is also making it harder for nutrients at depth to get to the living things that depend on them close to the surface and reducing oxygen levels. 

Sea levels are rising by a centimetre every three years or so.

If this were a continental rearrangement, it would be a global tectonic spasm which moved all the continents and their hapless inhabitants away from the poles and towards the equator while, at the same time, pushing once-cool mountain heights down towards sweltering plains and once-stable coastlines beneath the waves. 

And it would be picking up speed.

There is no doubt that the change in the CO2 level was brought about by humankind—mainly through the burning of fossil fuels, but also through conversion of forests and other natural ecosystems to farmland. 

As long as those activities continue in their current form, the CO2 level will continue to rise, and the world will move further and more damagingly away from its historical state.

In 1992, when the CO2 level had reached 356ppm and evidence of anthropogenic warming was, if not overwhelming, definitely discernible, the leaders of the world agreed to do something about the potentially catastrophic course they had more or less unwittingly embarked on. 

In the un Framework Convention on Climate Change (unfccc) agreed upon at a summit in Rio de Janeiro that year, they committed themselves to the “stabilisation of greenhouse-gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system”. 

This was to be done in a “time-frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner”.

This was, by far, the most ambitious international agreement of all time. 

There is no way of stabilising the climate without stopping the increase in the levels of long-lived greenhouse gases in the atmosphere. 

Although it did not say so in so many words—many might not have signed up if it had—the unfccc had, in effect, committed its signatories to ending the fossil-fuel age.

A new era

Fossil fuels have been crucial to the development of the economy for two centuries. 

They played an intimate part in the most important transformation in the human condition since the development of agriculture, a transformation that saw a huge growth both in the world’s population and in people’s wealth. 

But their use also gave the CO2 level, previously part of the background against which the human drama played out, a potentially show-stealing, or even show-ending, role. 

It had to be brought under control. 

It had to be stabilised.

While these remarkable aspirations floated free of specific targets, the sheer magnitude of the task could be ignored, and ignored it largely was. 

In 2015 in Paris, the same group of countries tethered their aspirations to a set of specific goals, thereby revealing the brutal size of the undertaking. 

“Preventing dangerous anthropogenic change”, said the Paris agreement, meant in practice, “holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels”. 

As to the time frame, the peak in greenhouse-gas emissions should come about “as soon as possible”, there should be “rapid reductions thereafter”, and “a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases” (net-zero emissions) should be achieved by “the second half of this century”—ie, in considerably less than a human lifespan.

As the parties to the unfccc converge on Glasgow for the cop 26 summit, this special report looks at what those commitments mean. 

It is not a guide to the specifics of carbon-cutting policies and technologies, nor to the particular ways in which national commitments made in Glasgow will fall short of the ambition needed. 

It is a survey of the scale of action required, the battleground on which it will be fought and the fundamental novelty of undertaking to stabilise the climate.

The moment when the CO2 level, so flat for so long, began to rise was the inadvertent beginning of a new era in which the industrial economy and the forces of nature became conjoined. 

The moment when the now perilously steep curve rounds the corner to a new plateau, or even a steady decline, will be as consequential. 

But the agreements in Rio and Paris say that this time it will not be inadvertent. 

The curve-flattening climate stabilisation will be the result of deliberate interventions in both the economy and nature on a global scale. 

And it will be maintained, if it is maintained, by human institutions with the astonishing, and possibly hubristic, mandate of long-term atmospheric management. 

The economic threats from China’s real estate bubble

Property’s great investment boom has reached its limit — the economy needs new drivers of demand

Martin Wolf

China’s population is ageing and 60 per cent of it is already urbanised. All these signal that the property boom must end © James Ferguson

How serious a threat to the Chinese economy might the difficulties of Evergrande, the world’s most heavily indebted property company, and now Fantasia, become? 

The answer is not that China will experience a devastating financial crisis. 

It is rather that the economy’s dependence on demand from investment in real estate must end. 

That will impose a huge adjustment and create a big headache for the authorities: what can replace property investment in creating demand?

From the macroeconomic point of view, the most important fact about the Chinese economy is its extraordinary savings. 

In 2010, gross national savings reached 50 per cent of gross domestic product. 

Since then, it has fallen a little. 

But it was still 44 per cent of GDP in 2019. While household savings are extremely high, averaging 38 per cent of disposable incomes between 2010 and 2019, they account for slightly less than half of all these savings. 

The rest consist mainly of corporate retained earnings.

Investment plus net exports have to match savings when the economy is operating close potential output, if it is not to fall into a slump. 

Since the global financial crisis, net exports have been a small share of GDP: the world would not accept any more. 

Total fixed investment duly averaged about 43 per cent of GDP from 2010 to 2019. 

Surprisingly, this was 5 percentage points higher than between 2000 and 2010. 

Meanwhile, growth fell significantly. 

This combination of higher investment with lower growth indicates a big fall in the returns on investment (shown directly in a rising “incremental capital output ratio”). (See charts.)

Yet there are even bigger problems than this suggests. 

One is that the high investment is associated with huge increases in debt, especially of households and the non-financial corporate sector: the former jumped from 26 to 61 per cent of GDP between the first quarters of 2010 and 2021 and the latter from 118 to 159 per cent. 

Another is that a substantial part of this investment has been wasted. 

Xi Jinping himself has spoken of the need to shift “to pursuing genuine rather than inflated GDP growth”. 

This has to be a big part of what he meant.

This combination of high and unproductive investment with soaring debt is closely related to the size and rapid growth of the property sector. 

A 2020 paper by Kenneth Rogoff and Yuanchen Yang argues that China’s property sector contributed 29 per cent of GDP in 2016. 

Among high-income economies, only pre-2009 Spain matched this level. 

Moreover, almost 80 per cent of this impact came from investment, while about a third of China’s exceptionally high investment has been in property.

A number of powerful indicators show that this investment is driven by unsustainable prices and excessive leverage, and is also creating huge excess capacity: the price to income ratios in Beijing, Shanghai and Shenzhen are far higher than in other big cities around the world; housing wealth accounted for 78 per cent of all Chinese assets in 2017, against 35 per cent in the US; household debt ratios are comparable with those in high-income countries; vacancy rates and other measures of excess capacity are high; and rates of home ownership had reached 93 per cent in 2017. 

Furthermore, family formation is slowing, China’s population is ageing and 60 per cent of it is already urbanised. 

All these signal that the property boom must end.

Since the government controls the Chinese financial system, it can prevent a financial crisis. 

A large fall in house prices and a big negative impact on household wealth and spending are likely, but might be avoided. 

The likeliest threat is that investment in property will collapse. 

This would have a large negative effect on local government finances. 

But, above all, it would leave a huge hole in demand. 

Rogoff and Yang argue that “a 20 per cent fall in real estate activity could lead to a 5-10 per cent fall in GDP, even without amplification from a banking crisis, or accounting for the importance of real estate as collateral.”

It could be worse.

Between 2012 and 2019, investment contributed 40 per cent of China’s growth in demand. 

If investment in property fell sharply, it would leave a huge shortfall. 

Yet tolerating this painful adjustment would ultimately be desirable. 

It should improve the welfare of the population: after all, building unneeded properties is a waste of resources. 

Slowing the recent pace of property investment would also be a natural consequence of the “three red lines” for property developers imposed by the state last year: hard limits on a company’s debt-to-asset ratio, its debt-to-equity ratio and its cash-to-short-term-debt ratio.

The main policy now should be to shift spending towards consumption, and away from the most wasteful investment. 

This would require redistribution of income towards households, especially poorer households, as well as a rise in public consumption. 

Such a shift would also fit with the recent attack on the privileges of great wealth. 

It would also require big reforms, notably in taxation and the structure of public spending. 

In addition, investment should be shifted away from property toward the transition away from high carbon emissions. 

That too would require big policy changes.

Crises are also opportunities. 

The Chinese government is well aware that the great investment boom in property has gone far beyond reasonable limits. 

The economy needs different drivers of demand. 

Since the country is still relatively poor, a prolonged economic slowdown, such as Japan’s, is unnecessary, especially when one considers the room for improved quality of growth. 

But the model based on wasteful investment has reached its end. 

It must be replaced.

Joe Biden’s China trade policy lacks ambition

US retreat from shaping global system could hand Beijing a victory


US trade representative Katherine Tai said Washington would start new talks © Anna Moneymaker/Getty

After a seven-month review, the Biden administration has unveiled its trade strategy with China. 

There was little to show for the months of work; the approach is, in essence, a continuation of the stance of Donald Trump. 

This may be a reflection of US political realities. 

But it is a blow to US allies that would like to see Washington once again take a lead role in championing trade and investment deals. 

Instead, they are witnessing what appears to be a bipartisan urge to walk away. 

Over time, this threatens to hand a strategic victory to Beijing.

In her first detailed comments on China trade since taking office in March, US trade representative Katherine Tai said Washington would start new talks. 

But it intended largely to press Beijing on commitments it made in the “phase 1” trade deal agreed in January 2020, after the Trump administration had imposed tariffs on an initial $370bn of Chinese imports.

Beijing promised to boost purchases of US goods and services by $200bn throughout 2020 and 2021. 

Washington’s Peterson Institute for International Economics estimates China is on track to purchase only a little more than 60 per cent of what it promised.

Tai does seem to want to address China’s subsidies and use of state-owned companies. 

But the White House has signalled little intention of starting talks on a “phase 2” deal. 

This would move on from a preoccupation with goods such as soyabeans and steel to key questions such as intellectual property, data flows and regulatory issues. 

Officials say they do not believe Beijing is prepared to engage seriously. 

But that means the only real change for now is the reopening of a procedure to allow US companies, which have complained about paying tariffs on essential Chinese parts, to apply for exclusion from tariffs.

All this is not politically surprising. 

Scrapping the deal and lifting tariffs on China was scarcely credible as Democrats fret about the possibility of losing control of both the House and the Senate in next year’s midterm elections. 

A reluctance to take trade measures that could be portrayed as hurting American workers is understandable. 

But the White House could at least have tried to reorientate the agenda of talks rather than settling for inertia.

US officials say they intend to work more closely with allies, and have taken steps to reset trade relations with Brussels. 

The US and the EU agreed in June to end their 17-year dispute over aircraft subsidies, lifting the threat of billions of dollars in punitive tariffs. 

They also launched a Trade and Technology Council in Pittsburgh last week to co-ordinate approaches on key global issues, but this is at an early stage.

Many allies, though, see the US as marginalising itself from any desire to shape the global trading system. 

This is happening just as China last month applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which evolved out of the TPP from which Trump withdrew the US in 2017 and is now one of the world’s largest trade pacts.

Beijing’s application may be vetoed initially by one of CPTPP’s existing members. 

US partners in Asia are keen for America to join — pointing out that without an economic dimension alongside the defence and security efforts, Biden’s Indo-Pacific strategy is a two-legged stool. 

But the longer the US stands aside from the group, the more its members may conclude it is in their best interests to have Beijing inside the tent: for most of them China is a dominant trading partner. 

For a White House determined to counter China’s growing influence, that would be a sizeable geopolitical setback. 

A Made-in-China Financial Crisis?

Since the 2008 global financial crisis, the Chinese financial system has grown to become systemically important. Yet it is not clear that the international financial safety net has the resources to protect the world from the associated risks.

Paola Subacchi

LONDON – As the International Monetary Fund and the World Bank prepare for their annual meeting next week, all eyes are on Evergrande, China’s second-largest property developer, which apparently cannot repay about $300 billion it currently owes to banks, bondholders, employees, and suppliers. 

With the property giant teetering on the edge of bankruptcy, the world is being forced to contemplate a scenario it had never seriously considered: a made-in-China financial crisis.

Observers have been quick to draw parallels between the Evergrande debacle and past crises. 

Some compare it to the 2008 crash of the US investment bank Lehman Brothers, which triggered a massive banking and financial crisis. 

Others recall the near-collapse of the hedge fund Long-Term Capital Management in 1998, which was staved off only by a bailout from the US Federal Reserve to protect financial markets. 

Still others invoke the collapse of Japan’s real-estate bubble in the 1990s.

In all of these cases, the combination of excessive leverage and overvalued assets triggered instability. 

But none really offers much insight into the situation at Evergrande, owing to the peculiarities of China’s banking and financial system, which is driven by policy, not markets.

Whereas a country like the United States may provide a bailout when financial collapse seems imminent, China intervenes in capital markets regularly and tolerates few risks to financial stability. 

China’s monetary authorities are thus well-versed in managing the financial troubles of domestic firms, shielding the distressed ones from contagion, ensuring low borrowing costs, and providing selective bailouts.

In engineering such rescues, the Chinese authorities are unlikely to agonize over the question of whether a firm really is “too big to fail,” as the US authorities did in the days before the Lehman Brothers bankruptcy. 

China would much rather risk moral hazard than jeopardize financial stability.

Given this, it is probably safe to assume that China will intervene to manage Evergrande’s collapse. 

But the episode will nonetheless leave two major scars on China’s economy.

First, as foreign investors will not be sheltered, confidence will take a bit hit, especially in China’s offshore credit market, which is particularly exposed to Evergrande risks. 

Yields on China’s junk dollar bonds have jumped to approximately 15%, their highest level in about a decade.

Since its establishment in 2010, the offshore market has been central to China’s strategy for making the renminbi a liquid and freely usable international currency, because it enables the circumvention of domestic capital controls. 

But foreign investors have been extremely cautious about trading renminbi-denominated assets in this market. 

The Evergrande saga will reinforce their misgivings, at least for now, forcing China to rethink its renminbi strategy.

The second scar will be on China’s real economy. 

The real-estate sector accounts for nearly 30% of China’s GDP, compared with 19% in the US. 

And real-estate value added contributes about 6.5% to China’s GDP. 

(If indirect contributions, such as fixed-asset investment, are considered, the sector’s contribution to Chinese growth is even larger.)

The Evergrande implosion could therefore have serious consequences for jobs and growth. 

If it triggers a drop in stock and real-estate prices – housing comprises 78% of Chinese assets, compared to 35% for the US – consumer confidence, and thus consumption, may also take a hit.

The question is whether China will be able to contain the Evergrande crisis and prevent its consequences from spilling over to global financial markets. 

So far, the expectation seems to be that China will succeed in ring-fencing the problem. 

Even if Evergrande collapses, the logic goes, China’s banking and financial system is robust and resilient enough to withstand it. 

Furthermore, the policy response to any instability would most likely be effective, matching in speed and scale the Fed’s move in 2008 to backstop the US banking system. 

Several policy tools, including monetary and fiscal easing, are available.

But there is no guarantee that the policy response will not lag behind events, with political considerations potentially impeding action. 

In that case, the rest of the world would feel the effects.

Since the 2008 global financial crisis, China’s financial system has expanded to become one of the world’s largest, with financial assets amounting to nearly 470% of GDP. 

And it has become more integrated with the rest of the world through investment flows and direct lending. 

But while the Chinese financial system is now systemically important, it is not clear that the international financial safety net – provided by multilateral financial institutions, notably the IMF – has expanded adequately to accommodate this.

That safety net is currently estimated to amount to about $2.7 trillion (based on immediately available financial resources, not including pre-committed resources). 

This is less than China’s foreign-exchange reserves – currently around $3.2 trillion. 

Would this be enough to stave off disaster in the event of a made-in-China systemic crisis? 

Would the US – the IMF’s main shareholder – even agree to the Fund extending adequate assistance and resources to backstop such a crisis?

Fortunately, this scenario still seems unlikely. 

But it should not be dismissed out of hand. 

After all, how many low-probability events have come to pass over the last two decades? 

At the very least, the Evergrande crisis should shake us from our complacency regarding global financial risks. 

We need to be building resilience, not politicizing the multilateral financial architecture. 

And if a systemic financial crisis does hit China, we need to know who will step in to rescue the rest of the world – and how.

Paola Subacchi, Professor of International Economics at the University of London’s Queen Mary Global Policy Institute, is the author, most recently, of The Cost of Free Money. 

The Geopolitical Conquest of Economics

Although economics and geopolitics have never been completely separate domains, international economic relations were shaped for 70 years by their own rules. But the rise of China and its growing rivalry with the United States have brought this era to an end.

Jean Pisani-Ferry

PARIS – From the Huawei affair to the AUKUS spat and beyond, a new reality is shaking up the global economy: the takeover, usually hostile, of international economics by geopolitics. 

This process is probably only just beginning, and the challenge now is learning how to live with it.

Of course, economics and geopolitics have never been completely separate domains. 

The post-World War II liberal economic order was designed by economists, but on the basis of a master plan conceived by foreign-policy strategists. 

Postwar US policymakers knew what they wanted: what a 1950 National Security Council report called a “world environment in which the American system can survive and flourish.” 

From their perspective, the free world’s prosperity was the (ultimately successful) conduit to containing and possibly defeating Soviet communism, and the liberal order was the conduit to that prosperity.

But although the ultimate objective was geopolitical, international economic relations were shaped for 70 years by their own rules. 

On occasion, concrete decisions were skewed by geopolitics: for the United States, providing International Monetary Fund financial assistance to Mexico was never equivalent to providing it to Indonesia. 

The principles governing trade or exchange-rate policy, however, were strictly economic.

The end of the Cold War temporarily put economists on top. 

For three decades afterward, finance ministers and central bankers thought they were running the world. 

As Jake Sullivan (now the national security adviser to US President Joe Biden) and Jennifer Harris pointed out in 2020, management of globalization had been deferred to “a small community of experts.” 

Again, there was an underlying geopolitical aim: in the same way that economic openness had contributed to the Soviet Union’s collapse, it was expected to bring about China’s convergence toward the Western model. 

But for the rest, interference remained limited.

The rise of China and its growing rivalry with the US brought this era to an end. 

With the failure of convergence through economic integration, geopolitics has returned to the fore. 

Biden’s focus on the Chinese challenge and his decision not to dismantle the trade restrictions put in place by his predecessor, Donald Trump, confirm that the US has entered a new era in which foreign policy has taken over from economics.

In China, there was no need for such a takeover. 

Although the country’s leaders routinely pay lip service to multilateralism, both its historical tradition and governance philosophy emphasize political control of domestic and especially foreign economic relations. 

The transnational Belt and Road Initiative embodies this model: as Georgetown University’s Anna Gelpern and co-authors recently documented, Chinese loan contracts to finance infrastructure projects in developing countries are opaque, involve political conditionality, and explicitly rule out debt restructuring through multilateral procedures.

Even in Europe, where belief in the primacy of economics was most entrenched, things have begun to change. 

“The beating heart of the globalist project is in Brussels,” US populist agitateur Steve Bannon declared contemptuously in 2018. 

This was in fact true: the primacy of common rules over state discretion is part of Europe’s DNA. 

But the European Union, too, is now waking up to the new reality. 

Already in 2019, European Commission President Ursula von der Leyen spoke of leading a “geopolitical commission.”

The question is what this renewed geopolitical focus actually implies. 

Most foreign-policy experts envision international relations as a power game. 

Their implicit models often assume that one country’s gain is another’s loss.

Economists, on the other hand, are more interested in promoting the gains that cross-border transactions or joint action yield to all parties. 

Their benchmark concept of international economic relations envisions independent actors voluntarily entering into mutually beneficial arrangements.

In a 2019 article, Sullivan and Kurt Campbell (who now directs Asia policy at Biden’s National Security Council) outlined a plan for “competition without catastrophe” between the US and China. 

Their scheme combined across-the-board trade reciprocity with China, the formation of a club of deeply integrated market democracies (access to which would be conditional on economic alignment), and a policy sequencing in which competition with China would be the default option, with cooperation conditional on China’s good behavior. 

They also rejected any linkage between US concessions and cooperation in the management of global commons such as climate.

This would be a clear strategy, but the Biden administration has not yet indicated whether it intends to pursue it. 

US middle-class economic woes and the resulting enduring domestic reluctance to open up trade contradict geopolitical aims and make America’s intentions hard to read. 

Foreign-policy types may have prevailed over economists, but domestic politics reigns supreme, and clear-mindedness is not what is guiding action.

China, meanwhile, has flatly refused to carve out climate cooperation from the wider US-Chinese discussion, and recently wrong-footed the US by applying to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a regional trade pact that President Barack Obama designed to isolate China but that Trump chose to quit. 

Instead of being isolated, China is trying to outmaneuver the US.

Paradoxically, Europe is getting closer to defining its stance. 

It still believes in global rules, and gives priority to persuading partners to negotiate and enforce them, but it stands ready to act on its own. 

“Open strategic autonomy” – its new buzzword – seemed to be an oxymoron. 

But the EU now seems to know what it means: in the words of senior EU trade official Sabine Weyand, “work with others wherever we can, and work autonomously wherever we must.” 

In a more geopolitical world, this may well become Europe’s credo.

Jean Pisani-Ferry, a senior fellow at Brussels-based think tank Bruegel and a senior non-resident fellow at the Peterson Institute for International Economics, holds the Tommaso Padoa-Schioppa chair at the European University Institute.