China's Energy and Environmental Problems and Policies by Gregory ...

China’s Energy and Environmental Problems and Policies

by

Gregory C. Chow, Princeton University

CEPS Working Paper No. 152
August 2007






JEL classification: O13, P28, Q5
Key words: China, energy, environment, pollution, sustainable development

Abstract: This paper describes China’s energy and environmental degradation problems in terms
of air pollution, water pollution, CO2 emission and shortage of energy. It discusses the laws,
agencies established and policies introduced to solve the energy-environment problems as well as
the practical difficulties in the implementation of government environmental policies. Finally it
presents three major issues to be resolved. Contact: fax 609-258-7315; gchow@princeton.edu.

Acknowledgements: The author would like to acknowledge financial support from the Gregory C.
Chow Econometric Research Program and the Center for Economic Policy Studies of Princeton
University in the preparation of this paper and the congenial atmosphere of the Department of
Economics and Finance of the City University of Hong Kong in which the paper was completed.

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1. Introduction

The economic activities of production and consumption require the use of energy, and the
use of energy affects the environment in the forms of water pollution, air pollution and
emission of CO2 that causes global warming. Furthermore the use of energy from
exhaustible resources can create energy shortage in the future. The solutions to the
problems of energy and environmental degradation include (1) reducing the use of energy
in production and consumption, (2) increasing the use of energy-saving and
environmentally friendly methods in production and consumption and (3) promoting
technological innovations that will reduce the use of energy per unit of output (reduce
energy intensity or increase energy efficiency) or reduce pollution per unit of output to
achieve (1) and (2) in the future. To achieve (1) and (2) given the state of technology we
can regulate the use of energy by law or by economic incentives to limit the emission of
pollutants.

The last is an example in solving the problem of “externalities” in economics - the
undesirable external effects of production or consumption, the cost of which is not born
by the producer or consumer responsible. An economic solution to the problem of
externalities is to charge the cost to the producer or consumer who is responsible.

In section 2, we describe the energy-environment problems during China’s recent
economic development. In section 3, we discuss the laws, government agencies
established and the policies introduced by the Chinese government to protect the
environment and reduce energy consumption. Section 4 deals with difficulties in
implementing China’s environmental policies. Section 5 discusses three most important
issues related to the attempts to solve the energy-environment problem. Section 6
concludes.

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2. Environmental Problems in China
As pointed out in the Introduction, there are four aspects of the energy-environment
problem, namely (1) air pollution, (2) water pollution, (3) the emission of CO2 in the
atmosphere that causes global warming, mainly from the burning of coal, and (4)
shortage of future energy supply that relies on exhaustible resources. Environmental
pollution from coal combustion is damaging human health, air and water quality,
agriculture and ultimately the economy. China is facing all four problems.
2.1 Air Pollution
The air and water in China, especially in the urban areas, are among the most polluted in
the world. According to a report of the World Health Organization (WHO) in 1998, of
the ten most polluted cities in the world, seven can be found in China. Sulfur dioxide and
soot caused by coal combustion are two major air pollutants, resulting in the formation of
acid rain, which now falls on about 30% of China’s total land area. Industrial boilers and
furnaces consume almost half of China’s coal and are the largest sources of urban air
pollution. The burning of coal for cooking and heating in many cities accounts for the rest.
Mercury released into the air by coal-fired power plants is captured by raindrops, and
transferred to the soil and groundwater. Groundwater is polluted by runoff from factories,
smelters and mining operations, and then used by farmers downstream to irrigate their
crops. Heavy use of fertilizers has contributed to contamination also. Fertilizers in China
often contain high levels of metals, especially cadmium, which is harmful.
As the country becomes industrialized, pollution from both industrial and consumer
sources will increase because of higher levels of output and consumption, the latter
including the increase in the use of automobiles, unless pollution per unit of output or
consumption can be reduced.
2.2 Water Pollution
China’s water is polluted also by the disposal of waste. Water beds of several important
cities including Beijing and Shanghai are low, causing shortage of supply of well water.

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Supply of waters from rivers including the Yellow River and the Yangtze River are
running short because of diversion to agriculture production and electricity generation
along the sources. Deforestation has caused the flow of bud along the rivers and affects
water supply and quality. People’s Daily, June 12, 2007 reports that Lake Taihu was
covered with a foul-smelling algae and freshwater was shut off for more than 2 million
people in Wuxi due to the blue-algae infestation of the lake. Sewage treatment plants had
to be established for chemical factories to meet a new water emission standard by the end
of June 2008. Chemical factories that fail to meet the new water emission standard risk
suspension. They will be shut down permanently if they still fail to meet the standard by
the end of next June. The new Chinese water emission standard for the Taihu valley will
raise the bar for sulfur dioxide emissions.

2.3 Energy Consumption

According to “China country analysis brief” published by the US Department of Energy
(2001) China accounted for 9.8% of world energy consumption. By 2025, projections
indicate that China will be responsible for approximately 14.2% of world energy
consumption. Of the 40 quadrillion Btu of total primary energy consumed in China in
2001, 63% was coal, 26% was oil, 7% hydroelectricity, and 3% natural gas. While
residential consumption has increased its share of China’s energy demand over the last
decade, the largest absolute gains in consumption were from the industrial sector. In 2001,
China’s energy intensity as measured by thousand Btu per 1990 dollars of output was as
high as 36 thousand, as compared with 21 thousand for Indonesia, 13 thousand for South
Korea, 4 thousand for Japan and 11 thousand for the United States, because of differences
in output mix among these countries and in energy intensities in producing the same
products.

While China ranks second in the world behind the United States in total energy
consumption and carbon emissions, its per capita energy consumption and carbon
emissions are much lower than the world average. In 2001, the United States had a per

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capita energy consumption of 341.8 million Btu, greater than 5.2 times the world’s per
capita energy consumption and slightly over 11 times China’s per capita consumption.
Per capita carbon emissions are similar to energy consumption patterns, with the United
States emitting 5.5 metric tons of carbon per person, the world on average 1.1 metric tons,
and China 0.6 metric tons of carbon per person. With a growing economy and increasing
living standards, however, per capita energy use and carbon emissions are expected to
rise. Although per capita energy use is relatively low, China’s total consumption of
energy and the resultant carbon emissions are substantial, due to the country’s large
population and heavy use of coal.
Concerning the possible shortage of future energy source, China imported 162.81 million
tons of oil in 2006 as the world’s second largest energy user. Its dependence on imported
oil reached 47 percent, having increased by 4.1 percentage points from 2005. China’s
rapid increase in oil consumption will contribute to future shortage of this exhaustible
resource.

2.4 CO2 Emission
CO2 emissions result in climate changes which are affecting the world’s physical and
biological systems. As of 2001 China accounted for 13 percent, Western European 16
percent and the US 24 percent of the world’s energy related carbon emission. By 2007
China has taken over the US for the first time as the world’s top producer of greenhouse
gases. China is a non-Annex I country under the United Nations Framework Convention
on Climate Change. This means that it has not agreed to binding emissions reductions in
the Kyoto Protocol, which it ratified in August 2002. China’s policies aim at cutting
energy costs and reducing local pollution, rather than reducing carbon emissions for the
benefit of the world.
People’s Daily Online June 4, 2007 reports the following facts:
“According to the Initial National Communication on Climate Change of the People’s
Republic of China, the country’s total greenhouse gas (GHG) emissions in 1994 are
4,060 million tons of carbon dioxide equivalent… Its total GHG emissions in 2004 is

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about 6,100 carbon dioxide equivalent, of which 5,050 million tons is carbon dioxide,
720 million is carbon dioxide equivalent of methane and 330 million is carbon dioxide
equivalent of nitrous oxide. From 1994 to 2004, the average annual growth rate of GHG
emissions is around 4 percent, and the share of carbon dioxide in total GHG emissions
increased from 76 percent to 83 percent.
“China’s cumulative emissions of carbon dioxide from fossil fuel combustion accounted
for only 9.33 percent of the world total during the period of 1959-2002, and the
cumulative carbon dioxide emissions per capita are 61.7 tons over the same period,
ranking the 92nd in the world.
“Statistics from the International Energy Agency (IEA) indicate that per capita carbon
dioxide emissions from fossil fuel combustion were 3.65 tons in 2004 in China,
equivalent to only 87 percent of the world average and 33 percent of the level of the
Organization for Economic Co-operation and development (OECD) countries.
“Along with steady social and economic development, the emission intensity defined as
the carbon dioxide emission per unit of GDP declined generally. According to the IEA,
China’s emission intensity fell to 2.76 kg carbon dioxide per U.S. dollar (at 1999 prices)
in 2004, as compared to 5.47 kg carbon dioxide per U.S. dollar in 1990, a 49.5 percent
decrease. For the same period, emission intensity of the world average dropped only 12.6
percent and of the OECD countries dropped 16.1 percent.”

Since China is a developing country, it is not surprising that its per capita CO2 emission
was only 87 percent of the world average and 33 percent of the level of the OECD
countries. The concern is the rate of increase in China’s per capita CO2 emission.

There is a consensus in the scientific community that the level of total CO2 in the
atmosphere should not exceed a level equal to twice the level existing before the
Industrial Revolution (see Pacala and Socolow, 2004). Exceeding that level would cause
violently unstable weather, melting glaciers and prolonged draughts. If the rate of
increase in emission in the future continues as it did in the last thirty years, this critical
level will be reached in fifty years time. Therefore CO2 emission is a critical and urgent

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problem. To obtain a global agreement on this issue is difficult, as shown by a week-long
meeting of the Intergovernmental Panel on Climate Change in Bangkok, reported in an
article in San Francisco Chronicle May 7, 2007.
For China to be willing to reduce its use of coal-fired power plants that cause CO2
emission alternative energy source must be priced not higher than the price of power
generated by coal. This will be possible if there shall be sufficient technological
innovations in the production of clean energy at such low prices. Market incentives for
such innovations have a good chance of success, according to Friedman (2007, p.50).
Without the benefit of new technology, the world community can reduce the rate of
carbon emission by (1) using alternative energy to coal such as gas, nuclear, ethanol and
solar, (2) reducing the consumption of electricity at homes, offices and factories, and (3)
controlling the amount of CO2 emission by reducing the burning of forests and capturing
the amount of carbon from coal burning.

3. Laws, Agencies and Policies for Protecting the Environment

3.1 Laws and Agencies for environmental protection

The Chinese central government has been aware of the environmental problems and has
made serious attempts to protect and improve China’s environment. In 1979, China
passed the Environmental Protection Law for Trial Implementation. The 1982
Constitution included important environmental protection provisions. Article 26 of the
Constitution requires that “the state protects and improves the environment in which
people live and the ecological environment. It prevents and controls pollution and other
public hazards.” There are also provisions on the state’s duty to conserve natural
resources and wildlife. Based on these provisions a number of special laws have been
enacted. These include the Water Pollution Prevention and Control Law of 1984, the Air
Pollution Prevention and Control Law of 1987, the Water and Soil Conservation Law of
1991, the Solid Waste Law of 1995, the Energy Conservation Law of 1997 and several
important international agreements including the Kyoto and Montreal Protocols.

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Beginning in the late 1980s, Premier Li Peng, a nuclear engineer by training, issued
statements underscoring the government’s commitment to giving attention to
environmental protection in its formulation and implementation of economic
development policy. China’s national legislature, through its promotion of “Cleaner
Production” and other attempts to reduce air pollution, has significantly revised the Law
on the Prevention and Control of Air Pollution in 2002.
New laws establishing comprehensive regulations have begun to curb the environmental
damage. On the national level, policies are formulated by the State Environmental
Protection Administration (SEPA) and approved by the State Council. The role of SEPA,
which was established in 1998, is to disseminate national environmental policy and
regulations, collect data and provide technological advice on both national and
international environmental issues. . In June 2002, China enacted the Cleaner Production
Promotion Law, which established demonstration programs for pollution regulation in ten
major Chinese cities, and designated several river valleys as priority areas.
3.2 Policies for energy saving
On Friday, May 8 2007, Premier Wen Jiabao made a speech stating that the current
macro-control policy must focus on energy conservation and emission reduction in order
to develop the economy while protecting the environment. The Chinese government has
set a target of reducing energy consumption for every 10,000 yuan (1,298 U.S. dollars) of
GDP by 20 percent by 2010 [or 4 percent per year], while pollutant discharge should drop
by 10 percent.
“To curb excessive growth of the sectors that consume too much energy and cause
serious pollution, China must tighten land use and credit supply and set stricter market
access and environmental standards for new projects amid efforts to rein in the rapid
expansion of energy-gorging industries including power, steel, oil refinery, chemicals,
construction materials, and metals.
“Restrictions should be imposed on exports in these sectors as soon as possible…We will
continue to curb the energy-guzzlers by further adjusting exports rebates, levying more

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exports tariff, and reducing exports quotas… China will cancel preferential policies on
the industries like lower tax, electricity and land costs.
“Outmoded production methods must be eliminated at a faster pace and how this policy is
implemented by local governments and enterprises will be open to the public and subject
to social supervision… The ten nationwide energy saving programs, such as developing
oil alternatives, upgrading coal-fired boilers and saving energy indoors, will save China
240 million tons of coal equivalent during the 2006-10 period, including 50 million tons
this year…”
Note that Premier Wen’s policy statements for environmental protection include (1)
restricting the quantities of outputs, especially those that are environmentally polluting
and high-energy consuming, by tightening land use and credit supply, (2) setting
environmental standards for production, especially in new projects, and (3) improving
method of production to make it environmentally friendly. Category (1) includes the
restriction of export production that affects the environment by means of “adjusting
exports rebates, levying more exports tariff, and reducing exports quotas.”
3.3. Policies for environment protection by regulation and economic incentives.
To reduce the amount of sulfur dioxide emitted from the burning of coal in the factories,
the Chinese government has imposed heavy penalties to such emissions and encouraged
the building of equipment to capture sulfur dioxide. However the use of such equipment
is costly even after it is built and many factories do not use it except when they are being
inspected. More recently the government is trying to introduce the use of monitoring
device to measure the amount of sulfur dioxide emission coming out of each plant, but
such a monitoring system has not yet been put into practice effectively.
China is also using economic incentives to solve the problem of externalities resulting
from the use of energy. To reduce the use of coal and encourage a switch to cleaner
burning fuels, the government has introduced a tax on high-sulfur coals. A system of
emissions trading for sulfur dioxide, similar to that used in the United States, is being
tested in some cites with pilot projects, and may eventually be applied nationwide.

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The Chinese government will advance reforms in the pricing of natural gas, water and
other resources, raise the tax levied on pollutant discharge, establish a “polluter pays”
system and severely punish those who violate the environmental protection laws. To
insure that fees charged on pollutants are higher than abatement costs and to strengthen
existing laws, the government is considering the imposition of large fines on pollutant
emissions. Future Chinese environmental initiatives also may include formulating a tax
structure beneficial to environmental protection, and granting preferential loans and
subsidies to enterprises that construct and operate pollution treatment facilities. The
government will also provide incentives to companies that use more energy efficient
production facilities and techniques.
Besides economic incentives, efforts are made to introduce technologies that will treat
wastewater, prevent air pollution and improve environmental monitoring systems.
Because of the above mentioned government policies state and non-state enterprises have
tried to find cleaner technology to generate power than from coal. Governments of cities
like Shanghai have tried to adopt urban planning strategies that are friendly to the
environment. Space within a city is reserved for planting trees in order to improve air
quality. Travelers to Beijing, Shanghai and Guangzhou in years 1998 to 2000 could
witness that these cities became cleaner and the air quality was improved during this
period.
3.4 Policies on CO2 emission
Policies for reducing the emission of CO2 per se are still under negotiation among
nations. China appears to be more concerned with the problems of air and water pollution
since the CO2 emission problem is less urgent for China. A recent expression of China’s
policy of limited involvement in the prevention of global warming is a statement of
President Hu Jintao on Thursday June 7, 2007, during the G8 meetings in Germany that
calls for upholding the principle of “common but differentiated responsibilities” for
developing countries in tackling climate change. “We should work together to make sure
the international community upholds the goals and framework established in the United
Nations Framework Convention on Climate Change and its Kyoto Protocol [in 1997] and

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