Friday, March 29, 2013

Pollution Costs in China

According to an interesting story in today's New York Times (here), environmental degradation in China cost that country 3.5% of its gross domestic product (GDP) in 2010 or $230 billion. For the sake of comparison, in a recent article in the American Economic Review (here), Muller, Mendelsohn and Nordhaus estimated gross environmental damage in the US in 2002 at $184 billion, amounting only to 1.7% of US GDP in 2002 (which was approximately $10.6 trillion). Thus, China suffers approximately twice the economic losses to GDP from environmental degradation at the US (admittedly based on a comparison of statistics eight years apart).

No doubt a big part of the difference is the relative success of the US environmental protection program, which has provided large net economic savings according to both government and independent estimates (see, e.g., here and here). Factors affecting China's ability to control pollution costs likely include the fact that budget constraints on Chinese industry are soft, which means that they have little incentive to reduce emissions, regardless of legal requirements, taxes, or fees, plus the fact that China is still somewhere on the left-hand side of the Environmental Kuznets Curve (see here), where relatively low levels of per capita income are associated with high levels of environmental stress. An important implication of soft budget constraints among Chinese polluters is that whatever funds the Party-government plans to spend to reduce environmental degradation will be mostly wasted in the absence of structural reforms that harden budget constraints and reduce the conflicts of interest the Party-government inevitably faces as environmental regulator of economic enterprises it controls and relies on for production.

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