Wednesday, Jan 28, 2015, 10:56 AM CST – China


Addressing the air pollution problem will not necessarily sacrifice economic growth

To a large extent, environmental pollution has resulted from what economists call market failure.

With recent studies on the impact of air pollution on health, including one that concluded that air pollution has reduced life expectancy for people in northern China by 5.5 years, public outcry over air pollution has been rekindled. The issue has become one of the major challenges facing China’s new leadership.

To fundamentally address this problem would require a systemic policy shift encompassing energy, automobiles, taxation, public subsidies and public transport. To implement these policy changes would mean major economic restructuring.

At the core of the issue is the energy pricing mechanism. To a large extent, environmental pollution has resulted from what economists call market failure. The price of energy is determined by supply and demand, but disregards the external cost of air pollution.

Currently, coal burning and emissions from traffic account for 65 percent of all China’s air pollution. To address the problem, the government should raise taxes on the coal and automobile industries, in order to suppress demand.

More specifically, tax rates on coal should rise to between five and nine times their current level, emission standards for sulfur dioxide and nitrogen oxide should double or triple, auctions should govern the issuance of private car license plates in major cities, and the annual growth rate in automobile numbers should be controlled at less than 10 percent.

Moreover, more efforts should be taken to increase energy efficiency by centralizing government-controlled central heating, doing away with high-emissions vehicles, and increasing standards in a wide range of sectors, including the oil, traffic, chemical, printing, construction, and automobile industries.

A major concern among officials and economists is the potential impact of these measures on economic growth. Can the government’s coffers afford them in the long run? Will it lead to inflation?

Research led by Ma Jun, chief economist of Deutsche Bank (Greater China), concludes that these measures can sustain a growth rate of 6.8 percent, while lowering levels of PM2.5 (particulate matter 2.5 micrometers in diameter or smaller) in major Chinese cities from the current level of 65 micrograms per cubic meter to 30 micrograms by 2030.

Although some traditional industries may experience a slowdown or even recession, the loss can be made up by growth in other industries. For example, with these measures, the coal industries will surely come under serious pressure, but the gas and wind energy industries will be boosted. China’s rapidly-growing automobile industry will be affected, which may give a boost to electric cars. The number of electric cars is estimated to reach several million by 2020 if relevant measures are put in place.

Raising taxes on coal and relevant industries can offset the decrease in corporate tax. Energy prices will inevitably increase, but the impact on inflation will be limited. Ma Jun’s team estimates that these measures will only increase inflation a marginal 0.1 percent.

Economic restructuring is more likely than the economic slowdown or recession that officials fear. This will not only decrease the level of air pollution, but will also help to make the Chinese economy more sustainable. 


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