ZhongXiang Zhang: Environmental Policy Reform

ZhongXiang Zhang is Distinguished University Professor and Chairman of the School of Economics at Fudan University in Shanghai, China.

ZhongXiang Zhang

Since launching its open-door policy and economic reforms in late 1978, China has experienced spectacular economic growth, and hundreds of millions of Chinese people have been raised out of poverty. In this course, China has been heavily dependent on dirty-burning coal to fuel its rapidly growing economy. Moreover, until recently, China has valued economic growth above environmental protection. A combination of these factors has given rise to unprecedented environmental pollution and health risks across the country. While being confronted with rampant conventional environmental pollution problems, China became the world’s largest carbon emitter in 2007, and its emissions continue to rise rapidly in line with its industrialization and urbanization.

Clearly, China’s rampant environmental pollution problems and rising greenhouse gas emissions and the resulting climate change are undermining its long-term economic growth. China from its own perspective cannot afford – and from an international perspective is not meant – to continue on the conventional path of encouraging economic growth at the expense of the environment. Instead, concerns about a range of environmental stresses, along with worries over energy security as a result of steeply rising oil imports, have sparked China’s determination to improve energy efficiency and cut pollutants, and to increase the use of clean energy in order to help its transition to a low-carbon, green economy. This is clearly reflected by the key decisions of the Third Plenum of the 18th Central Committee of Communist Party of China to assign the market a decisive role in allocating resources and to build ecological civilization systems and mechanisms.

This outlook is not completely new. Indeed, President Hu Jintao and Prime Minister Wen Jiabao had recognized the seriousness of environmental degradation in China, and accordingly insisted that the conventional Chinese path of encouraging economic growth at the expense of the environment has to be changed. As a first but most important step to clean up the country’s development act, Messrs. Hu and Wen incorporated for the first time energy-saving and environmental goals into the national five-year economic blueprint for China. This change was a double-edged sword. It distinguished their vision of China’s development from that of their predecessors, but also created a test of their leadership. Overall, China had limited success on the environmental front during their tenure.

Given that environmental compliance costs would be higher now than before and are increasing as emissions targets become increasingly stringent on the one hand and that dodging of environmental regulations is widespread and common in China on the other hand, why might the outcomes this time be different from the previous ones?

First, the need for improved environmental quality has been raised to unprecedented importance. In March 2014, Chinese Premier Li Keqiang said to about 3000 delegates to China’s legislature that China will “declare war against pollution as we declared war against poverty” after nearly every Chinese city monitored for pollution failed to meet state standards in 2013. In line with this public acknowledgement at the highest level that China is facing an environmental crisis, China is attempting to cap coal consumption, and is making unprecedented efforts toward upgrading the economy, eliminating outdated energy producers and industrial plants, tackling the perennial problem of overcapacity, and promoting clean and green technology.

Second, dense smog and haze, which frequently hit in Beijing and other places in China, has become a major issue that affects Chinese people’s lives. A combination of mounting public complaints about smog and the growing standards of living not only makes people feel the necessity for more anti-pollution measures, but also increases public support for these policies and measures.

Third, the governments at all levels take broad approaches to tackling environmental issues. While having relied mostly on administrative means to date, China has realized that administrative measures are effective but not efficient. China is increasingly harnessing market forces to reduce its energy consumption and cut carbon and other conventional pollutants and genuinely transition to a low-carbon, green economy. Such market-based instruments include, but are not limited to, moving away from the energy pricing completely set by the central government in the centrally planned economy towards a more market-oriented pricing mechanism, reforming its current narrow coverage of resource taxation and the resource tax levied by revenues rather than by existing extracted volume, experimenting with seven pilot carbon trading schemes, and implementing a system for chargeable use of resources and a system for ecological compensation. Moreover, given many environmental issues of a cross-border nature, the neighboring regions now increasingly act collectively rather than on their own. These collective and coordinated efforts significantly increase their effectiveness in combating the pollution.

Fourth, implementation holds the key to actually achieving the desired outcomes, and there are encouraging signs that the Chinese government is strengthening existing efforts and is taking additional steps in this direction.

Based on these facts and observations, I am cautiously optimistic that China will be able to accomplish a great deal on the environmental front. It is in China’s interest to not only sustain its economic growth, but to also ensure its standing in the world community to be seen as a positive force in addressing environmental problems. If President Xi Jinping and Prime Minister Li Keqiang can make China “green,” history will record their contribution as equal to Mao Zedong’s achieving China’s independence, and Deng Xiaoping’s creation of a more prosperous country.