Bending the rules : discretionary pollution control in China

POLICY RESEARCH WORKING PAPER 1761 In C-nina. evirn-nnienta Bending the Rules In regulators play by [he rules, bul often bend them n w,vav, Discretionary Pollution Control that reflectimportant in China environmental annd scial concerns Regulators giv'e little or no slack to heavu Susmita Dasgupta dischargers Old fac[ories pay Mainul Huq more. state-cxvned facturie, David Wheeler pay' higrier rates, anJ big employers get a discujnt The World Bank Policy Research Department Environment, Infrastructure, and Agriculture Division May 1997  I POLICY RESEARCH WORKING PAPER 1761 Summary findings Industry compliance with pollution regulations is far regulation, the economics of compliance, and regulatory from universal, even in North America. In developing discretion. They find: countries, compliance rates are often quite low, * Cost-sensitive plants will try to adjust emissions to particularly where budgets for regulation are low or the point where the marginal levy equals the marginal inspectors are corrupt. cost of abatement. And strictness of enforcement varies. Regulators are * In practice, local regulators have considerable reluctant to impose stiff penalties on financially strapped discretion in judging both compliance and appropriate plants that are major employers, and in many developing penalties for noncompliance. China's regulators play by countries state-owned plants are treated more leniently the rules, but often bend them. Underreporting and than their private-sector counterparts. underassessment are common in China. But variable But research on determinants of compliance and regulation is systematic, not random, and seems to reflect enforcement is rare, even in industrial societies. important environmental and social concerns. Old Dasgupta, Huq, and Wheeler use new plant-level data factories pay more, state-owned factories pay higher for China to analyze variations in both compliance and rates, and big employers get a discount. And regulators enforcement, with a focus on regulation of water give little or no slack to heavy dischargers. pollution. They look at the mechanics of official This paper - a product of the Environment, Infrastructure, and Agriculture Division, Policy Research Departrment - is part of a larger effort in the department to understand the economics of industrial pollution control in developing countries. The study was funded by the Bank's Research Support Budget under the research project "The Economics of Industrial Pollution Control in Developing Countries" (RPO 680-20). Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Evelyn de Castro, room N10-019, telephone 202-458-9121, fax 202-522-3230, Internet address edecastro@worldbank.org. May 1997. (24 pages) The Policy Research Working Paper Saies dissemmates the findings of work in progress to encourage the excange of ideas about developmnent issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the autbors and should be cited accordingly. The findings, interpretations, and conclusions expressed In this paper are entirely those of the authors. They do not necessarily represent the viewo of the World Bank, its Executive Directors, or the countries they represent. Produced by the Policy Research Dissemination Center  Bending the Rules: Discretionary Pollution Control in China by Susmita Dasgupta* Mainul Huq David Wheeler *Respectively Eenoromist. Consultant and Principal Economist in the Environment, Infrastructuretand Agriculturxe Division, Policy Research Department, World Bank. This paper has been produced in a collaborative program supported by China's National Environmental Protection Agency (NEPA), the Tianjin Environmental' Protection Bureau (TEPB) an'd the World Bank's Country Department EA2. Funding has been provided by the World Baank's Research Support Budget. We are grateful to our colleagues in NEPA and TEPB, without whose assistance this study would not have been possible. Thanks also to C.H. Zhang and Hua Wang for their help and comments.   1. Introduction Industry compliance with pollution regulations is far from universal, even in North America (Magat and Viscusi, 1990; Laplante and Rilstone, 1995; Dion, Lanoie and Laplante, 1996). In developing countries, compliance rates are often quite low (Hettige, Huq, Pargal and Wheeler, 1996). Since budget-constrained regulatory agencies cannot monitor all facilities, some non-compliance is attributable to optimizing behavior: Firms may choose to remain non-compliant if the incremental cost of moving to compliance is greater than the expected loss associated with discovery and payment of penalties. Where inspectors are scarce or the courts lenient, non-compliance may be quite common (Afsah, Laplante and Makarim, 1996). In addition, of course, corruption of inspectors may play a significant role in some countries. Strictness of enforcement can also vary substantially across plants. In the US, for example, numerous press accounts and case studies have identified political pressure as a source of variation in local enforcement of national regulations (Wheeler, 1991). Environmental regulators have proven quite reluctant to impose stiff penalties on financially- strapped plants which are major employers (Deily and Gray, 1991). In many developing countries, state-owIned factories seem to have been treated more leniently than their private- sector counterparts (CETESB, 1994; Pargal and Wheeler, 1996; Huq, Hartman and Wheeler, 1996). Although anecdotes are plentiful, systematic research on determinants of compliance and enforcement is rare even in industrial societies because the necessary information is  seldom provided by regulatory agencies.' To our knowledge, no such studies have been done for developing countries. In this paper, we use new plant-level data provided by China's National Environmental Protection Agency (NEPA) and the Tianjin Environmental Protection Bureau (TEPB) for an analysis of variations in both compliance and enforcement. These data provide a unique opportunity for regulatory analysis in a developing country, because NEPA has operated and documented a country-wide emissions charge system for over ten years. We focus on regulation of water pollution because the appropriate data are more plentiful in the factory sample available to us. The paper is organized as follows. In Section 2 we review China's system for ,enforcing industrial pollution regulations. Section 3 develops models for the analysis of compliance and enforcement, while Section 4 introduces the data. We discuss the econometric results in Section 5 and provide a summary and conclusions in Section 6. 2. China's Pollution Levy In China's regulatory system, emissions which exceed official standards are not treated as legal violations. Rather, Article 18 of China's Environmental Protection Law specifies that "in cases where the discharge of pollutants exceeds the limit set by the state, a compensation fee shall be charged according to the quantities and concentration of the pollutants released." This compensation fee, or levy, has been implemented nationally since 1982. Almost all of China's counties and cities are now operating the levy system, and approximately 300,000 factories have been charged for their emissions (NEPA, 1994). 1 In many countries, such records are protected by law. Even in the U.S., the Environmental Protection Agency has only recently announced plans to publish records of inspections, violations and emissions at the plant level. 2  The water pollution levy is not a true Pigovian charge; it is assessed on emissions which exceed established discharge standards for pollutant concentration in waste water. Chinese discharge standards vary across pollutants, industrial sectors, and "water environment function areas" which distinguish receiving waters by the quality of intended use. They also vary by age of plant, with more lenient standards for facilities established prior to 1979. With NEPA's permission, local areas can impose stricter standards and higher levy rates if they think it appropriate. Pollutant-specific levies are calculated by multiplying three elements together: a unit fee; the volume of waste water discharged; and the ratio of effluent concentration to the standard concentration.2 For plants with multiple pollutants, the maximum concentration ratio is used for levy assessment. Unit fees escalate with discharge volume.3 3. Model Specification 3.1 The Economics of Compliance Non-compliant factories simply have to pay the levy, so pollution control is largely an economic issue for Chinese managers. In the case of a single pollutant, the total levy for the jth non-compliant plant- is given by the formula:4 2 The termsr 'intiuent-i.anaviaulliuen' -^rer to the waste stream before and after end-of-pipe abatement. 3For more discussion of the levy and its impact on pollution, see Florig and Spofford (1994) and Wang and Wheeler (1996). 4 Model variable definitions are summarized in Table 1. 3  (3. 1) Lj=j 'Wj Ils where Lj = Expected total levy payment pj = Levy rate = Effluent concentration =s = Concentration standard Wj = Waste water volume Recent econometric work on factory-level abatement costs in China (Dasgupta, Huq and Wheeler, 1996) suggests the following model for the case of a single pollutant: (3.2) Aj =y l - where O<yl<l'Y2 > 0 and Aj Total abatement cost g0j = Influent concentration ,u; = Effluent concentration. Zj = A vector of plant characteristics which affect costs (sector, age, scale, ownership, etc.) At the plant level, y, is significantly less than unity (i.e., abatement is subject to scale economies). While total abatement cost rises less-than-proportionately with scale of waste water treatment, marginal abatement cost increases with percent reduction in pollutant concentration from influent to effluent. Total pollution-related cost is therefore given by: (3.3) Cj = Lj + A1j = p.j i