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Using the market to cut pollution

By Sun Xiaohua (China Daily)
Updated: 2008-08-22 08:50

As China carries out a sustainable development strategy that ties the economy with the environment, the country is putting more emphasis on market instruments and incentives to foster environmental protection and curb emissions.

Over the years, China has developed a relatively comprehensive environmental protection apparatus that largely employs conventional command-and-control policies.

However, the regulatory effort has been fraught with difficulties, particularly the lack of financial resources and independence of the regulatory agencies. Having encountered considerable difficulties with administrative regulation, China has been keen to experiment with other types of regulatory policies.

A shift in policymaking is highlighted in the 11th Five-Year Program (2006-2010) of Environmental Protection, which stresses "complete economic incentive policies in environmental protection" to help China reach its goal of improving environmental quality. China plans to cut its main air and water pollutants by 10 percent from 2006 to 2010.

Eco-economic incentive policies refer to those that create financial incentives for pollution reduction, but do not dictate decisions such as reduction targets or the technology to use.

In other words, eco-economic incentive policies encourage behavioral changes through market signals rather than through administrative directives on pollution levels or reduction methods. Such policies encourage firms to undertake pollution control efforts that are both in their self-interest and which, on aggregate, meet policy goals.

According to the five-year plan, China will introduce a series of eco-economic incentive policies, including pricing natural resources, levying environmental tax, piloting an emission trading system in certain places, giving preferences to renewable energy development and desulfurization in thermal power plants, limiting polluting manufacturers' ability to raise money from banks and the market, and setting up ecological compensation mechanism in places vital for the ecosystem.

In Taihu Lake basin, which witnessed a poisonous algae outbreak because of heavy industrial emissions last year, the cap-and-trade business of water pollutants has started this year. Listed firms have to submit data about environmental protection. Polluted manufacturers are finding it hard to get loans from banks for dirty projects. They are also urged to buy the so-called green insurance to safeguard against any pollution-related accident.

Just a month ago, the country released its first nationwide ecological function zoning map, offering the basis of ecological compensation.

"Frankly, I don't expect the market instruments to produce a dramatic impact in the short term because any new policy will meet opposition from the local industry and governments," said Pan Yue, vice-minister of environmental protection.

"New policies are just the beginning of a shift in environmental management from administrative orders to market-based instrument. And the ministry will try to set up a long-term, effective system."

Administrative orders are often not cost-efficient. This is because holding all firms to the same pollution reduction target through government regulation can be very costly and hence counterproductive, said Pan.

For example, although technology standards, by stipulating the actual equipment or methods that must be adopted by firms to comply with regulations, are attractive from an administrative perspective, they tend to be the most capital-intensive - a serious drawback in a developing country.

Also, as the costs of reducing pollution vary greatly among firms, the appropriate technology for one firm may not be so for another. So one of the advantages that market instruments offer over administrative orders is cost efficiency.

Economic instruments allow pollution control to be realized at the lowest overall cost to society as firms that can reduce pollution most cheaply have an incentive to increase such a reduction, Pan said.