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Resources: China's record in addressing climate and air pollution includes a mix of successes and failures—but the big picture doesn't seem to give a sense that tremendous progress is being made. What is China's status on these issues?
Mun Ho: The headlines highlight the negative parts of the story and, at times, they present a misleading picture. Everybody knows about the very rapid rate of economic growth in China, which has hovered just below 10 percent for a long period of time. Those who read the newspapers know that the air pollution problem is very serious, and it is often attributed to the inability or unwillingness of the government to deal with this issue. But while indeed the air pollution problem is severe, the government has done quite a lot to improve air quality.
The biggest example is the effort to reduce sulfur dioxide (SO2) emissions during the recent 11th Five-Year Plan covering 2006–2010. During this period, China aimed to reduce SO2 emissions by 20 percent and was quite successful by mandating flue gas desulfurization plans in electric power plants. That reduced emissions—and did so at a remarkably low cost.
Unfortunately, we since have seen Chinese pollution continue to increase because of rising electric power generation and industrial activity, such as cement production. So China has made great efforts to reduce emissions, but the level of industrial output keeps rising. The government is fighting an uphill battle.
China's record on climate change is similar. There is no policy to reduce emissions of CO2 directly, but China has ambitious energy efficiency targets. Officials stated at the United Nations Framework Convention on Climate Change meeting in Copenhagen in 2009 that China plans to reduce the energy per unit of GDP by 40 percent over the next 20 years. The country is in line to achieve such a target but, again, with the economy growing in excess of 7 percent, China will continue to have rapidly rising carbon emissions. It overtook the United States many years ago and will continue to be the world's largest emitter for many years to come.
Resources: You recently wrote in the New York Times with Chris Nielsen that China's faltering progress may be partially attributable to a reliance on a command-and-control regulatory model. Will you elaborate on that point?
Ho: The Chinese government, like almost every government, uses what we call command-and-control policies to control pollution—for example, by issuing regulations requiring flue gas desulfurization equipment.
These affect particular industries where these rules are mandated. This approach is suited to address the traditional pollutants, such as SO2, which is emitted in large part by the manufacturing and utilities sectors. But when it comes to CO2, which is emitted by almost everyone, a command-and-control policy by its very nature is too narrowly limited to particular industries or particular fields.
We are suggesting that the government think very seriously about applying a market mechanism—putting a price on carbon. In this case, everyone in the economy faces a higher price of carbon, incorporating that into their decisions, for example, about fuel choice and capital equipment.
Resources: Has there been experience with pricing environmental "bads" in China?
Ho: The Chinese have been learning from what they observe in the West—in particular, the US experiment with SO2 trading. China has started its own pilot programs to explore how SO2 trading might work.
China is also implementing a few trial programs for carbon trading, in Shenzhen, Shanghai, Beijing, and, most recently, in Guangdong Province. This is a typical way that the Chinese government tries these new programs: on a small-scale basis to see if it works and to draw lessons. Unfortunately, the current pilot programs cover only a very few firms in very few sectors. We advocate thinking about a more general policy that would affect many more fossil fuel users.
That said, very few countries in the world have a broad-based carbon tax or a common price on carbon. Some experiments are beginning in the United States—the Regional Greenhouse Gas Initiative in the Northeast and the California cap-and-trade system. In the European case, there is an EU-wide emissions trading scheme for electric utilities. So implementing an economy-wide carbon price is something new, and China will be learning, along with the rest of the world.
One of the most important questions in China and elsewhere is how to implement a price that would encourage conservation by raising the cost of electricity and transportation while also helping the people who would be worst affected by these higher prices of daily essentials. This distributional question requires more study of how different households in China might be affected—for instance, households in the North versus the South, older households versus younger ones, or those that own cars versus those that do not. My colleagues and I are working to improve our modeling analysis to inform this question. We would also like to study household and enterprise energy consumption to get a better idea of how households and businesses might respond to a higher energy price.
Resources: We've discussed two stories here: one about air quality and the other about climate. You've stated that solutions exist to tackle both simultaneously. How can China make progress on local pollution problems by addressing climate change?
Ho: I believe a price on carbon would induce energy and fossil fuel conservation, in particular, reducing the use of coal. The very important side benefit is the reduction of the local air pollutants—SO2 and nitrogen oxides (NOX).
The traditional tools to reduce (NOX) exist—by using low-NOX burners or selective catalytic reduction equipment—but that still leaves us with a lot of emissions. We need all hands on deck to deal with these severe problems. By putting a price on carbon, the hope is that millions of actors will look for ways to reduce the use of energy.
Resources: It seems that China is in a particularly difficult position because these pollution and climate change issues are quite pressing but, at the same time, the imperative for growth is strong—even dominant. How is the country navigating the trade-off between growth and environmental quality?
Ho: You are absolutely right to say that for a long time now, given the large-scale, low-income situation in China, growth has been the key priority. This is changing, now that China is developing more of a middle class. The emphasis now is on the quality of life. The quality of the environment, accordingly, is much higher on the agenda, but it is a difficult problem. We don't know how to generate electricity in China without using a lot of coal, and we certainly don't know how to drive our cars without burning a lot of gasoline today—at least not in a feasible, cost-effective manner.
So it requires a very deliberate act of public choice for the government to implement a complex and often expensive set of environmental policies. I believe China is doing this. The present plan involves spending a great amount of money on environmental protection.
China is a complex country, and because it is the most populated in the world, everybody's attention is focused on it. In many ways, the country is ahead of other developing countries and even the United States. As I said, China has carbon-trading pilot programs in a few cities now, representing the second-largest carbon market after the European Union.
The sheer magnitude of the problem, however, requires everybody's creative thinking. Clever ideas are needed to deal with this very complicated problem of providing energy to lift a large number of people out of poverty and at the same time protect the local environment and reduce climate change.
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