Surviving success : policy reform and the future of industrial pollution in China

\N?5 1I (, POLICY RESEARCH WORKING PAPER 1856 Sur iv n Suc es Lax regulation of industrial Surviving Success pollution is causing thousands of premature deaths and Policy Reform and the Future serious health problemsin of Industrial Pollution in China China. Pollution abatement would cost little; inactioi i Susmnita Dasgupta amounts to valuing a Chinese Hua Wang workers life below US$500, a David Wheeler tragically low figure by any standard. The World Bank - Development Research Group November 1997  | POLICY RESEARCH WORKING PAPER 1856 Summary findings China's recent industrial growth, a remarkable success thousands of people will die or suffer serious respiratory story, has been clouded by hundreds of thousands of damage. premature deaths and incidents of serious respiratory Continuing current trends in tightened regulation for illness caused by exposure to industrial air pollution. water pollution will lead to sharp improvements; Seriously contaminated by industrial discharges, many of adopting an economically feasible policy of much stricter China's waterways are largely unfit for direct human use. regulation will restore the health of many waterways. This damage could be substantially reduced at modest The stakes are even higher for air pollution because cost. Industrial reform combined with stricter regulatory enforcement has weakened in many areas in environmental regulation has reduced organic water the past five years. Reversing that trend will save many pollution in many areas and has curbed the growth of air lives at extremely modest cost. China's National pollution. But much higher levels of emissions controls Environmental Protection Agency (NEPA) has (of particulates and sulfur dioxide) are warranted in recommended a tenfold increase in the air pollution levy; China's polluted cities. adopting NEPA's very conservative recommendation For the cost-benefit analysis that led to this conclusion, would produce a major turnaround in most cities. For the authors developed three scenarios projecting representative Chinese cities, a fiftyfold increase in the pollution damage under varying assumptions about levy is probably warranted economically. future policies. Their findings: To be cost-effective, heavy sources of particulate and Even if regulation is not tightened further, continued sulfur dioxide emissions should be targeted for economic reform should have a powerful effect on abatement. Reducing emissions from large private plants pollution intensity. Organic water pollution will stabilize is so cheap that only significant abatement makes sense in many areas and actually decline in some. Air pollution - at least 70 percent abatement of sulfur dioxide will continue growing in most areas but at a much slower particulates and even greater abatement of particulates in pace than industrial output. large urban industrial facilities. The cost of inaction would be high: Most of China's waterways will remain heavily polluted, and many This paper - a product of the Development Research Group - is part of a larger effort in the group to identify appropriate policies for environmental regulation 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 this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Susmita Dasgupta, room N10-035, telephone 202-473-2679, fax 202-522-3230, Internet address sdasgupta@worldbank.org. November 1997. (52 pages) The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development 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 authors 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 view of the World Bank, its Executive Directors, or the countries they represent. Produced by the Policy Research Dissemination Center  Surviving Success: Policy Reform and the Future of Industrial Pollution in China by Susmita Dasgupta* Hua Wang David Wheeler Correspondence should be addressed to: Susmita Dasgupta, N10-035, World Bank, 1818 H St., NW, Washington, DC 20433 The authors are tespectively Economist, Consultant and Principal Economist in the Environment, Infrastructure and Agriculture Division, Policy Research Department, World Bank. Our thanks to Richard Newfarmer, Todd Johnson, Gordon Hughes, Kseniya Lvovsky, Feng Liu and Muthukumara Mani for many useful comments and suggestions. This paper has been produced in a collaborative program with China's National Environmental Protection Agency and the World Bank's Country Department EA2.   1. Introduction China's industrial growth has been extremely rapid during the period of economic reform. In the 1990s, the output of China's 10 million industrial enterprises has increased by more than 15% annually. Industry is also China's largest productive sector, accounting for 47% of its gross domestic product and employing 17% of the country's total labor force. As a source of rapidly expanding income, Chinese industry has provided one of strongest forces lifting many millions of people from poverty. Unfortunately, serious environmental damage has accompanied this rapid growth. Many of China's waterways are close to biological death from excessive discharge of organic pollutants. In many urban areas, atmospheric concentrations of pollutants such as suspended particulates and sulfur dioxide routinely exceed World Health Organization safety standards by very large margins. As a result, hundreds of thousands of people are dying or becoming seriously ill from pollution-related respiratory disease each year. There can be no doubt that Chinese industry is a primary source of this problem. China's National Environmental Protection Agency (NEPA) estimates that industrial pollution accounts for over 70% of the national total, including 70% for waste water, including organic water pollution (COD, or chemical oxygen demand); 72% for sulfur dioxide (S02) emissions; 75% for flue dust (a major component of suspended particulates) and 87% for solid wastes. Many polluting industries are located in densely-populated metropolitan areas, where emissions exposure causes particularly serious damage to human health and economic activity. China's pollution control agencies are aware of these problems, and have responded with stricter enforcement of regulatory standards for water pollutants. As a result, many industrial enterprises have reduced emissions through adoption of end-of-pipe equipment, process change and materials recycling. Since 1987, provinces which have tightened enforcement have witnessed a substantial decline in the water pollution intensity, or pollution per unit of output, of factories which are under regulatory supervision.' Emissions intensity for some water pollutants has declined so rapidly that total emissions have fallen despite rapid industrial growth. Unfortunately, the same cannot be said for industrial air pollution. The evidence shows that some regulatory incentives for air pollution control have actually weakened since 1987. Industrial discharges continue at very high levels, seriously contaminating the atmosphere of many cities. Figure 1 shows the strong relationship between emissions of S02 and atmospheric concentrations in fifty-three Chinese cities during the period 1991- 1993. l It is important to note that this does not include many Township and Village Industrial Enterprises (TVIE's), which are often highly-polluting and account for a major share of China's industrial production. 2  As we will show in this paper, market reforms have been _ I another important source of Atmospheric ~~~Sulfur Dioxide. Emissions andI another important source of Atimospheric Concentration in Chinese Cities, 1991-1993 change in environmental performance. The reforms have shifted production away cn 2.5 from state-owned-enterprises C 2 and toward larger plants. With these changes have come C substantial increases in O0 productive efficiency and o decreases in the cost of abating pollution, both important 3 3.5 4 4.5 5 5.5 6 sources of declining pollution S02 Emissions (Log) intensity. These two factors may have had as great an impact on industrial pollution Figure 1: S02 Emissions and Air Pollution in Chinese Cities as changes in direct regulation. Although the general trend is positive, there remain great regional disparities in industry's environmental performance. In provinces with stricter regulation and a strong commitment to economic reform, many industrial facilities have already shown the way to a cleaner future. However, the legacy of the past remains strikingly apparent in thousands of highly-polluting plants. With industry expected to maintain rapid growth during the next 20 years, a steep decline in pollution intensity will be necessary just to keep emissions constant. The consequences of current pollution are tragically apparent in public health statistics for polluted areas. As we will show, the best available evidence suggests that approximately 4,000 people suffer premature death from pollution-related respiratory illness each year in Chongqing; 4,000 in Beijing; and 1,000 in both Shanghai and Shenyang.2 If current trends persist, we project large cumulative losses in human life through 2020. Figure 2 illustrates the grim stakes: Beijing could lose nearly 80,000 people, Chongqing 70,000 and other major cities could suffer losses in the tens of thousands. 2 These estimates are based on the dose-response relation established for atmospheric S02 in Beijing and Shenyang by Xu, et. al. (1994). This relation is combined with monitoring data on S02 concentrations to produce estimated individual probabilities of premature mortality by city. City-specific probabilities are multiplied by current population estimates to produce estimated annual deaths. 3  In light of other pressing needs, Lives Lost to Air Polluton Through 2020 LUder Present how strongly should ChinaCodon respond to this challenge? 80,000 Environmental improvements 70,000 are desirable, but pollution 60,000 abatement uses valuable 50,000 economic resources and there 40,000 may be other, less costly, 30,000 health interventions which will 20,000 save lives. Nevertheless, after 10,000 a careful assessment of the 0 _ benefits and costs, this paper m. will argue that stricter 0X regulation of air emissions in heavily-polluted areas is a very Figure 2: Projected Deaths from Air Pollution, 1997 - cost-effective option for public 2020 health improvement. We will also highlight the beneficial effect of recent economic reforms on public health, through their impact on industrial pollution intensity. Other compelling arguments for continued modernization of China's economy are bolstered by its clear environmental benefits. The rest of the paper is organized as follows. In Section 2, we introduce five provinces which will be used to illustrate the scope of China's industrial pollution problems and the options for policy reform. Section 3 draws on several recent research papers to describe the impact of China's economic reforms and environmental regulations on industrial pollution since 1987. In Sections 4 and 5, we explore the implications with several scenarios for policy reform, pollution reduction, and associated health benefits during the next two decades. Section 6 uses our results for a detailed benefit/cost analysis of stricter air pollution control; Section 7 considers more general policy implications, and Section 8 concludes the paper. 2. Industrial Pollution in China's Regions China is continental in scale, with great regional variation in social, economic and environmental conditions. To illustrate the implications for environmental policy, we highlight the experience of five diverse provinces which have serious industrial pollution problems: Liaoning, Beijing, Shanghai, Guangdong, and Sichuan (Fig. 3).3 The first four provinces are scattered from north to south in China's eastern coastal region. Beijing's industry has a diversity which reflects its status as the nation's political capital. In contrast, Liaoning is a traditional center for Chinese heavy industry; many of its factories have old, highly polluting processes which depend on coal-based energy. Shanghai's 3 In this paper, the term "province" refers to provinces, autonomous regions and municipalities which are directly affiliated with the central government. 4  industrial base is extremely |ive Induetrial Regiona diverse, but its sheer scale assures a large potential pollution problem. On the other hand, Shanghai has joined Guangdong as a center of China's economic i modernization, with attendant benefits for pollution reduction. Guangdong has its own particular interest for the analysis, because Figure 3: Featured Provinces its industrial development has featured the growth of light manufacturing which operates at smaller scale than China's average. Finally, Sichuan is located in the Red Basin, in south-central China. It is considerably poorer than the other four provinces, and its industry is highly pollution-intensive. Figure 4 displays income (consumption) per capita in 1988 and 1993: Shanghai had the highest level initially, and has bounded ahead in the period of economic reform. Guangdong and Liaoning grew more rapidly than Beijing during the five-year period, arriving at near-parity in 1993. From a much lower base, Sichuan has grown at approximately the same rate as Guangdong and Liaoning. It remains the poorest of the five provinces by a considerable margin. It mnight seem logical for China's richest provinces to be the most highly polluted, but Figure 5 strongly suggests the converse: There income Per Capita (SUS) is an inverse relationship between industrial ....... ..................pollution and economic development, most 2500- strongly in the case of air pollution. Sichuan is 2000 l