Ever since Beijing was named in 2001 to host the 2008 Summer Games, Chinese officials have been promising a "blue-sky" Olympics. Now, a week before the Games begin, pollution is threatening to rival sports as the biggest story out of Beijing. If the skies don't clear, watch for the haze over Bird's Nest Stadium to be a signature image of the Games.
This is partly because some 20,000 journalists are descending on the Chinese capital and the first thing that hits them -- literally -- when they get off the plane is the pollution. Twenty of the globe's 30 most polluted cities are in the Middle Kingdom, according to the World Bank. Another list puts the Chinese tally at 16 of the top 20. Some 70% of the country's lakes and rivers are contaminated, according to Chinese environmental officials. Hundreds of millions of rural Chinese lack clean drinking water.
In the leadup to the Olympics, China reportedly has spent $10 billion to improve air quality in Beijing. Most recently, local mandarins have been living out every radical environmentalist's greenest dream: shutting down factories by fiat, halting new construction, banning cars. Workers are required to go on partial-pay or forced to take vacation. This is not the way market economies work and it's a reminder that, for all its reforms, China is still run by Communists who haven't shaken the habits of a planned economy.
On one level, China's pollution problem is a symbol of its success, a reflection of the country's rapid economic growth since Deng Xiaoping first turned toward free-market policies 30 years ago. China is now the world's fourth-largest economy with an average per-capita income of more than $2,300. During that period some 400 million people -- more than the population of the U.S. -- have been lifted out of poverty.
A growing economy requires energy, and coal provides more than three-quarters of China's needs. Coal is cheap but its use in factories that lack clean technology is responsible for much of the country's air pollution. Higher living standards play a role too. Homes routinely have electricity now, and more than one lightbulb. Personal cars were nonexistent 30 years ago; today they are rapidly replacing bicycles on China's streets.
Beijing's leaders know they have a problem, and President Hu Jintao and Premier Wen Jiabao have pledged a cleanup. They're facing pressure from a growing middle class that is protesting both pollution and the official corruption that sometimes goes with it. After thousands of protestors took to the streets last year in the southern seaport city of Xiamen, the government scrapped plans for a chemical plant. In May, residents in Chengdu, capital of Sichuan Province, demonstrated against a petrochemical plant under construction by the state-owned oil company PetroChina. For the first time ever, environmental and energy-saving targets have been incorporated into the nation's five-year economic plans.
But Beijing is having a hard time persuading local party bosses to value environmental stewardship over economic growth. Deng's reforms pushed decision-making to local levels, where officials have little or no incentive to heed antipollution regulations. Polluting companies "provide jobs and create tax revenues as well as personal payoffs," wrote scholar Zhang Zhongxiang in an article last year in the Far Eastern Economic Review. Shutting them down could create local unrest, he notes, as companies go out of business and people are thrown out of work.
Which brings us to the main problem: China's political system. For all their faults, democracies are better able to balance growth and environmental protection. History shows that as incomes rise and basic necessities are taken care of, modern societies put a higher priority on pollution control. Western democracies -- with their ability to work out compromises among competing interests -- have for the most part been able to accommodate green priorities without sacrificing growth.
On the other hand, authoritarian governments that rely largely on economic growth for their legitimacy aren't as adaptable, or as accountable for economic externalities like pollution. Think of the mess discovered in Eastern Europe after the fall of the Berlin Wall, starting with Chernobyl or the Aral Sea. Many of the non-Chinese places on the world's "most polluted" lists are located in Ukraine, Russia, Kazakhstan and other countries in the former Soviet Union.
The Summer Games are meant to recognize China's hard-won new status as a global economic power. Count us among those who are hoping for a blue-sky Olympics that will keep the focus on China's progress. Count us, too, among those who look forward to the day when Chinese politics is democratic enough to clear the air over the country's showcase cities.
Friday, August 1, 2008
Olympic Pollution Games
European Tankers for the American Air Force?
"Gloomy?"
Louis Gallois cocks an eyebrow, verifying that he's correctly heard an aide's assessment of his office at last month's Farnborough Air Show. Big aerospace firms like Mr. Gallois's EADS (European Aeronautic Defence & Space Co.) can have surprisingly plush headquarters at these events. Yet the aide suggests, in so many words, that the windowless patch dedicated to the 64-year-old Frenchman isn't fit for the chief executive of a company whose annual revenues exceed $50 billion.
Mr. Gallois waves off the suggestion and heads for a nearby conference room. He seems to have no time for pomposity: A spokesman says that, despite being one of France's most successful executives, Mr. Gallois still drives himself to work in a Peugeot. He also has no time to waste: He puts our interview on pause at one point to shake on a $7.2 billion deal, and afterward heads to a meeting with the governor of Alabama, where EADS hopes to build the U.S. Air Force's new midair refueling tankers.
Whatever one's opinion of Mr. Gallois's office in Farnborough, "gloomy" was the right word for this edition of the biennial air show. There are a variety of reasons for the collective pall, one of which is the trans-Atlantic spat over the $40 billion tanker deal. In June, U.S. government auditors overturned a contract for EADS and Los Angeles-based Northrop Grumman to build the flying gas stations. The auditors cited procedural flaws, upholding a protest by the other bidder, Chicago-based Boeing Co., which had a 2004 contract to lease tankers to the Air Force canceled because of an ethics scandal.
"Patriotism!" cried some members of the U.S. Congress, cheering the overturned contract. "Protectionism!" charged some Europeans. Mr. Gallois's blunt assessment of the political drama: "You could go from protest to another protest to another protest. During this time, the Air Force has no airplane."
Equally blunt is his statement that the Northrop-EADS plane -- a modified version of the A330 jet made by EADS's commercial arm, Airbus -- is better than Boeing's refitted 767. "I have a big respect for Boeing as an aircraft manufacturer," he says. "But we have not lost one competition against the 767. We are winning all competitions. I don't see any reason why the U.S. Air Force could not have the best product."
Mr. Gallois's eyes dance -- no, swagger -- as he raises the "paper airplane" argument, which holds that Boeing has never built the tanker that it has offered the Pentagon. "Our airplane is existing, it's flying; we have not seen the boom system of Boeing [which connects the tanker with the aircraft being refueled]. Our boom system is working every day, tested with all airplanes."
As the tanker battle continues toward an expected conclusion by year's end, Northrop is running advertisements in the U.S. that pick up on this argument. One tag line is, "It won on that most American of values: merit." The ads don't mention Northrop's European partner.
On this count, Mr. Gallois argues that EADS's "purely European" identity is no more. "We are not European, we are not," he insists, leaning forward so that his chin draws near the tabletop. "We are becoming global. As they [Boeing] are global. Because their [tanker] has parts made in Japan, in China, in Korea, in Italy . . . Their airplane is global, our airplane is global, and we are living in that world. . . . And I think Boeing could understand that."
He laughs at the obviousness of this remark, given that Boeing indicated at Farnborough that it wants to raise the international portion of its defense business to 20% within the next five years from 13% today. "They play global on other airplanes," Mr. Gallois says. "If they want to play global, they have to play global on all fields."
As EADS becomes more global, defense is a crucial sector for the company. And with European defense budgets remaining mostly stagnant, that means the company must do more business in the U.S. Because of that, Mr. Gallois says, EADS and Airbus's plans for an assembly line in Mobile, Ala., don't hinge on their getting the tanker contract.
"It's a strategic move for us to become American citizens," he says. "And we are bringing a lot of jobs to the United States." Here he pauses and then, grinning, adds, "Perhaps it is that which is worrying Boeing. We are bringing too many jobs to the U.S.!"
Having too many jobs is not the problem that most worries aerospace industry observers these days. Airbus announced $40 billion in new orders at Farnborough, and Boeing also had a successful show. Yet folks here seemed to sense that the same skittish credit markets and high fuel prices that have turned other sectors bearish would soon descend upon their industry -- particularly its commercial-aircraft side.
Mr. Gallois betrays no alarm. "The market is alive, but not in the way it was alive last year," he observes. "Last year, everyone was requesting airplanes. Now you have different airlines with different situations. . . .
"You have airlines with very big difficulties -- I could say mainly in the U.S., but not only in the U.S. And you have airlines which want to expand their fleets because they have some money for that -- it's the Middle East," Mr. Gallois says. "You have leasing companies buying airplanes at the beginning of a downturn because . . . when airlines are in difficulty, they lease airplanes instead of buying them. And you have airlines which want to replace old airplanes which are not energy-efficient." With the 247 firm orders Airbus revealed at Farnborough, and the 487 it had collected in 2008 before the show, he says "it means we're at our target [of 700 orders] for the year."
Mr. Gallois acknowledges that EADS depends too heavily on Airbus, its commercial arm. "We want to balance better at EADS," he says. "We are 60% to 65% [of EADS's revenue] with the commercial aircraft; we want to reduce to 50%. And it's a challenge, because Airbus is growing very fast." He estimates that a better defense-to-commercial ratio could double EADS's revenue by 2020, transforming the company from one of the world's mere industrial giants -- it's No. 127 on Fortune's 2008 Global 500 list -- to a true titan, inside the magazine's top 40.
But will air travel remain attractive to consumers? Mr. Gallois says traffic remains good now compared with the slowdowns after 9/11 and the SARS virus outbreak. But airfares may become unaffordable for many travelers if oil prices remain high, which Mr. Gallois thinks they will. "I don't see the oil price below $100 for a long time," he says.
He says the aviation industry has no choice but to become more energy-efficient, and that roughly 80% of Airbus's research and technology effort is focused on energy savings. But Mr. Gallois warns against heavy-handed regulation, in particular a European Union plan to add airlines to its CO2 emissions trading scheme, requiring carbon "permits" for any flight that lands in or departs from EU territory. "I think it's not the right time to impose new burdens for airlines in addition to the oil price in Europe," he says.
Mr. Gallois offers one solution that EADS shareholders surely wouldn't object to: "Perhaps [governments] could take measures pushing airlines to replace old airplanes. You know . . . now in France we pay more if your car is [using] more energy. Perhaps we could have that for airplanes in the future."
Before joining EADS in 2006, Mr. Gallois led three businesses controlled by the French state: the engine maker Snecma; the rail company SNCF; and Aérospatiale, one of the firms that combined to form EADS. But when it comes to how government and companies interact, he believes France is not unique. "To be very frank I have now experience of four countries at least -- including the United States now," he says. "I could say there is no big difference between the different countries."
He describes the intricacies of being in a "sovereignty industry," meaning that defense contractors work with systems and information that are crucial to national security. "We have to deal with governments, even if we have to explain to them that we are a listed company and we have to work in the most efficient way."
He does allow that governments might portray their interactions with industry differently. "In France, sometimes [politicians] want to be strong" in talking about business, he says, pumping his fist. "To say, 'We are a strong influence on the companies.' And they have no more influence than the British government, the German government, the Spanish government."
Moreover, according to Mr. Gallois, "sometimes it's easier in France than in other countries" for an executive like himself to navigate the political system. And more generally, he says, it's getting easier for executives to persuade politicians to stay out of the way: "People are more understanding of the constraint of a company which has to be as efficient as possible, as profitable as possible, only to protect its future."
Which brings us to one last interaction of the state and industry, and one last potential reason for the airline sector's gloom: the U.S.-EU battle over commercial aircraft subsidies at the World Trade Organization.
In 2005, Washington asked the WTO to find that European governments violated global trade rules in making soft loans to Airbus for new product lines. Brussels immediately countersued over the Pentagon's "cost-plus" contracts, which it says give Boeing extra money for R&D that often leads to innovations applicable to civil aircraft, and the sales tax breaks that various American states have given Boeing. Mr. Gallois says EADS is open to a negotiated settlement but that no talks are being held at the moment.
As for the fear some observers raise, that other countries will continue to subsidize their aerospace industries -- and that a subsidies battle between the U.S. and EU will only weaken their two big manufacturers -- Mr. Gallois indicates that the duopoly for large civil aircraft isn't in immediate danger of ending.
"We have to be prepared for that," he acknowledges. "One day we will have competitors in long range" just as Airbus and Boeing now have for smaller, shorter-range airplanes. But, he says, "It will not be tomorrow morning."
He speaks matter-of-factly and shrugs his shoulders, then excuses himself briefly for a glass of Champagne and that $7.2 billion handshake. The gloom will have to come from someone else.
Mr. Wingfield is an editorial-page writer for The Wall Street Journal Europe.
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Pelosi's Energy Stonewall
Pelosi's Energy Stonewall
August 1, 2008; Page A12
Hell -- otherwise known as Congress -- has officially frozen over. For the first time since the 1950s, Members will skip town today for the August recess without either chamber having passed a single appropriations bill. Then again, Democrats appear ready to sacrifice their whole agenda, even spending, rather than allow new domestic energy production.
[Nancy Pelosi]
Or even a mere debate about energy. The Democratic leadership is stonewalling any measure that might possibly relax the Congressional ban on offshore drilling. Nancy Pelosi and Harry Reid know that they would lose if a vote ever came to the floor, and they're desperate to suppress an insurrection among those Democrats who are pragmatic about one of the top economic issues. Behind this whatever-it-takes obstructionism is an ideological commitment to high energy prices. The rulers of the Democratic Party want prices to keep rising.
A good gauge of the radicalism of their energy blockade is the lowest common denominator of this energy fight: The effort to blame "speculators" for $4 gas was promoted by both Barack Obama and John McCain, as well as nearly everybody else in Washington. Sure enough, the House voted 276-151 on Wednesday for a bill that would have driven oil futures trading overseas.
But the legislation actually failed to become law -- by design. It needed a two-thirds majority because Speaker Pelosi suspended the rules to prevent Republicans from offering amendments, drilling among them. Ms. Pelosi had decreed that she would not permit a roll-call vote under any circumstances, even if it stopped her own goal of wrecking the U.S. futures market.
[Harry Reid]
Meanwhile, the Senate is locked down over its own antispeculation bill. Majority Leader Reid briefly agreed to allow four amendments on GOP policy alternatives, but he withdrew the offer after he was subjected to the fury of the environmental lobby and Ms. Pelosi. To prevent a vote on offshore drilling this week, Senate Democrats also let fail a bill providing home heating assistance for the poor. Same thing for tax subsidies for wind and solar energy.
Other liberal inspirations, including suing OPEC and a windfall profits tax on the oil industry, also ended up in the Congressional dumpster. And of course Democrats long ago shut down the normal budget process in both the Senate and the House to avoid any vote.
Normally, the spending hiatus would be a useful byproduct of Congressional bickering. But in this case the shutdown is malign neglect. Surging energy prices act like a huge tax increase on the economy, since energy demand is relatively fixed over the short term. The price spike is imposing genuine hardships on middle-income and working-class voters across the country.
The Democratic leadership isn't oblivious to this man-at-the-pump reality. But Al Gore's vision of the apocalyptic tides of climate change perfectly expresses their mentality: Ms. Pelosi and Mr. Reid see soaring prices as a public good -- the mechanism that will force energy enlightenment on the U.S. If anything, they think the price of gas is too low. As recently as June, the Senate debated a multitrillion-dollar carbon tax-and-regulation scheme that was designed to boost energy costs. A new version will be a priority in the next Administration.
If nothing else, this summer's oil drilling stonewall is giving voters an insight into this ideology, which recoils at any oil, natural gas or coal production -- oh, and nuclear besides. That puts 93% of all U.S. energy off limits for expansion. Back in the real world, and barring a cold fusion or other miracle, the U.S. will remain dependent on fossil fuels for decades. A fresh round of domestic oil-and-gas exploration would ease the long-term pressures that supply and demand are exerting on prices, plus bolster energy security.
And those not bound by anticarbon theology are coming around. Broad margins of the American public -- now even a slim majority of Californians -- favor increasing domestic production. Many Congressional Democrats are working below the radar to craft a compromise that couples drilling with conservation and programs to prop up renewable alternatives.
But the leadership won't bend even a bit, and so Ms. Pelosi and Mr. Reid have spent the summer using every parliamentary deception to evade debating the issue that the American public cares most about. Short of cutting off the air conditioning on Capitol Hill, Democrats won't get the message until voters make them -- perhaps in November.
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