On Wednesday, China did the unthinkable by putting environmental concerns ahead of growth. For a country lauded (and feared) as the world’s new superpower, this initiative calls into question some of the energy assumptions we investors hold dearest. To put things in perspective, let’s take a look at one chart, five companies, and a prediction so crazy it just might come true.
Changing colors and cars
Green is the new red in China. Recently elected Chinese Premier Li Keqiang announced on Sunday that China would ramp up efforts to curb pollution, and by Wednesday its government had passed new stringent fuel standards.
The revised regulation mandates an average 34 mpg for passenger cars by 2015, and 47 mpg by 2020. The most recently available data on China’s 2009 fuel efficiency clocked in at approximately 30 mpg. For a peck of perspective, the United States issued new fuel standards last August that call for 35.5 mpg for cars and trucks by 2016 and 54.5 mpg by 2025.
There are obvious automotive winners and losers. Tata Motors Limited (ADR) (NYSE:TTM)‘ stock dropped 4% on Thursday on fears of falling Jaguar Land Rover sales. Morgan Stanley estimates that the automaker will need to improve average fuel efficiency by 10% to keep its luxury cars on China’s lots.
On the other end of automobiles, Ford Motor Company (NYSE:F) seems well-poised to continue its 31-mpg Ford Motor Company (NYSE:F) Focus takeover. The Chinese bought more Focuses in 2012 than any other vehicle, and the Blue Oval sold 33,632 in January 2013 alone.
The beginning of coal’s end
But there’s a deeper story to Li Keqiang’s green garnish. The country’s air and water pollution records are abhorrent, and these new fuel standards might be the first of many regulations that choose environmental benefit over economic growth. Don’t believe me? Just ask a Nobel-winning Harvard economist.
Dr. Simon Kuznets developed a simple but shockingly accurate chart to map out any country’s environmental and economic development. It’s known (big surprise) as the Kuznets curve:
Dr. Kuznets predicted that when a country first begins to boost its manufacturing economy, environmental concerns are put on the back burner and degradation runs rampant (think Dickensian London). But at some point, environmental benefits begin to outweigh economic growth, and the country works to strike a balance between the two ideals (think logging regulation in the U.S). To put Kuznets’ theory into practice, here’s where China might’ve moved this week: