The Downside of Growth: Law, Policy and China's Environmental Crisis

Alex WANG

Perspectives, Vol. 2, No. 2

China is experiencing a period of intense economic growth unlike anything the world has ever seen. The story of this growth is familiar to anyone with even a passing interest in China. Vice Premier Wu Bangguo recently summarized this story as follows: "Over the past 20 years, under the guidance of Deng Xiaoping theory, China has practiced reform and opening up, successfully opening up a road of building socialism with Chinese characteristics. China's social productive forces have developed rapidly, its overall national strength has grown notably, and its livelihood has continued to improve."

In the past 20 or so years since the start of reforms, China's economy has surged, growing at an average rate of ten percent a year. Some coastal areas have grown at nearly 20 percent a year. In that period, China's GDP, in real terms, increased nearly five times. China's push towards a market economy (albeit with "Chinese characteristics") has made China one of the five fastest growing economies in the world. In the process, some 125 million people have been lifted from "absolute poverty" since the beginning of reforms. The growing prosperity has improved quality of life in multi-faceted ways - reducing infant mortality, improving child and maternal health, and lengthening life expectancy, for example.

This is the good news about China's growth and development across the past three decades. This news is surely no surprise to anyone.

I. The Pollution Story

The problem is that China's impressive growth has come at the cost of equally spectacular environmental degradation. Since the beginning of reforms, the most commonly measured forms of environmental pollution - particulate matter concentrations, sulfur dioxide levels, greenhouse gas emissions - have all increased literally to life-threatening levels.

The statistics are staggering. For example:

· Eight of the ten most polluted cities in the world are now located in China

· In 1995, ambient concentrations of sulfur dioxide (SO2) in over half of 88 Chinese cities monitored, exceeded World Health Organization (WHO) guidelines for safety

· 85 of 87 cities exceeded WHO guidelines for total suspended particulate matter (TSPs); In many cities the concentrations were two to five times safety levels given by WHO guidelines

· The percentage of arable land affected by acid rain increased from 18 percent to 40 percent between 1985 and 1998

· China now releases 13 percent of global carbon dioxide (CO2) emissions. This is second to only the United States (23 percent). With the increase in auto usage in China and development in general, this number is increasing rapidly. China will soon attain the top position if growth trends continue.

Moreover, the aforementioned problems all fall within the realm of air pollution. This discussion does not even touch on the issues of water pollution, loss of rare and endangered species, deforestation, desertification, or soil erosion; these problems and others, though not discussed in this article, are no less serious.

Overwhelming reliance on coal, particularly in the industrial and energy sectors, is the primary cause of particulate emissions, acid rain and greenhouse gas emissions. China's coal use topped 1.3 billion tons in 1995, more than twice the figure in 1980, and China is now the second largest producer of energy behind only the United States. Moreover, about 75 percent of China's energy demand is met by coal. No other major world economy is so dependent on coal; the world average is only 27 percent. The burning of coal (which in China is generally of low quality) is responsible for 70 percent of particulate and 90 percent of sulfur dioxide emissions. Shifting to cleaner fuels will bring about a significant reduction in air pollution in China.

The industrial and energy sectors utilize some 80 percent of China's annual coal consumption, and produce much of China's air pollution. But coal used for cooking and heating in the residential sector and auto pollution account for increasingly significant amounts of pollution.

II. The Cost of Pollution

The social and economic costs of this environmental pollution are quite high. The World Bank estimates that air and water pollution cost China US$54 billion per year, or about eight percent of GDP. The World Bank further estimates that, every year, just the air pollution in excess of China's own air quality standards results in 6.8 million emergency room visits, 346,000 hospital admissions, and 178,000 premature deaths. In addition, air pollution causes some 7.4 million work-years to be lost annually. The numbers here are so uniformly large that they become a bit numbing; the numbers are too abstract in their largeness. Anyone who has ever been to China can attest to the very tangible ways in which environmental pollution reduces quality of life - the dank atmospheric haze, the way the air hurts the lungs and eyes, the way white shirts turn brown after a day outside.

Pollution has other economic costs as well. For example, sulfur dioxide emissions have created acid rain, with damaging effects on agriculture, forest ecosystems, as well as human health. The World Bank estimates that acid rain causes crop and forest losses of $5 billion a year. Of international concern is China's contribution to "global warming." At current rates of increase, global atmospheric concentrations of carbon dioxide could double by 2050. China's rising emissions of greenhouse gases is a major contributor to this global growth rate.

III. Future Energy Consumption Trends

China's continued economic growth will require ever increasing consumption of energy. The government recently reiterated its aggressive plans for national economic growth. China's plan for the next half century is, by 2010, to double its GNP in year 2000, and by 2050, as one government official put it, to make per capita GDP "reach the level of intermediately developed countries, modernize the country, and to build China into a wealthy, strong, democratic, and civilized socialist country." Achievement of its year 2010 goal requires that GNP growth be an average of 7 percent annually.

China's energy consumption still has a great deal of room for growth. Despite rapid growth in energy consumption, China's per capita energy usage remains well below much of the rest of the world. Per capita commercial energy usage is only a tenth of the United States' and less than half of the world average. The prospect of a China that consumes energy at the same rate as developed Western nations is somewhat frightening, given the levels of environmental degradation that already exist.

IV. Government Response to Environmental Problems

Chinese government is well aware of the social and economic costs of environmental pollution. The government has made a number of major policy pronouncements concerning the environment since the beginning of the reform era in 1978. In 1983, the government "declare[d] environmental protection a basic national policy." In 1994, China set forth a broad plan to achieve sustainable development in China Agenda 21. In 1996, the State Council, for the first time, issued a five-year plan on environmental protection. In June 1999, senior legislators of the NPC made a well-publicized five-city tour of major Chinese cities and publicly pronounced their alarm at the severity of the air pollution problem they witnessed.

The policy pronouncements of this period represented a shift away from a single-minded focus on economic development to an approach that balances development and environmental protection. Lester Ross, a frequent author on China affairs, has remarked that China's Agenda 21, released in 1994, represented a particularly sharp shift in "the center of gravity in the environment/development debate further in the direction of environmental protection." However, traditional opponents of environmental protection, such as the Ministry of Finance, and the production-oriented ministries, were only assuaged by Communist party leadership's assurance that environmental protection would be phased in only to the extent that China's economy could handle. In practice, this has meant that enforcement of environmental regulations has been stronger in the most economically robust industries and regions, and weaker in areas with under-performing economic growth.

In March of 1999, Xie Zhenhua, director of the State Environmental Protection Agency, made the (perhaps too) bold prediction that "China plans to stop environmental degradation… by 2010." This and the government's other numerous policy pronouncements on the environment, however, have been more than just lip service. For example, in 1998 China's National Environmental Protection Agency (NEPA) was elevated to ministry status, given expanded authority and powers, and renamed the State Environmental Protection Agency, or SEPA. Moreover, in 1998, China devoted a greater percentage of GDP (nearly 1 percent) to the environment than it had ever before, and more, according to the head of SEPA, than any other developing country in the world.

V. Results to Date

Though China's environmental problems are dire, they would be worse without China's environmental reforms. For example, China has already exhibited a strong record in managing the energy needs of its growth. Over the past two decades, China's growth in energy consumption has been only half that of its rate of economic growth. Compare this to other developing countries, such as India, South Korea, and Brazil, which have all shown energy consumption growth greater than economic growth.

China has done this by reducing its energy intensity [1] by 50 percent, or 4.5 percent per year, since 1980. Such a sustained and significant drop in energy intensity (i.e., increase in energy efficiency) is unprecedented among industrializing nations. This reduction in energy intensity was primarily caused by structural factors, or changes in the demand mix for goods and services. Since the late seventies, production in China has shifted from more polluting heavy industry to less resource-intensive light industry and service sectors. This shift was in part due to direct government policies, and in part the result of a general relaxation of central planning and reliance on market forces. Improvements in technology and slow energy demand growth in the residential sector also contributed to lower industrial energy intensity. Even so, China still uses energy far less efficiently than major industrialized nations, such as Japan and the United States.

Perhaps most importantly, China's reforms have, to a limited extent, controlled pollution. Particulate emissions have been flat since the 1980s, despite a two-fold increase in coal consumption. Sulfur dioxide emissions, however, have increased roughly in proportion to increases in coal use. Ambient particulate concentrations have fallen significantly in large cities; though in medium and small cities concentrations have increased slightly since 1990. Ambient concentrations of sulfur dioxide have remained stable or declined in many cities, despite the increase in sulfur dioxide emissions.

VI. Three Policies

Three government policies have made a particularly significant impact on energy efficiency improvements: economic reforms, energy pricing policies, and energy conservation policies.

1. Economic Reforms

The shift towards a market system has resulted in greater investment in more efficient technologies and processes, increased allocation of resources to higher value added activities, and reduced inefficiencies through market competition. Some specific reforms are: (1) reduction of so-called "soft budgeting" of state enterprises such that they will respond to environmental penalties, such as air pollution taxes; (2) opening international trade to increase Chinese industry access to leading edge environmental technology; (3) development of capital markets to improve financing for environmental infrastructure changes.

The PRC has moved from a system of national planning to one utilizing "indicative" plans, where the central government produced general guidelines, but local governments determine specific targets, to a system where much of economic activity is outside of the economic planning process. Indeed, in 1994, the percentage of GNP produced by state-owned enterprises (and controlled directly through state planning) was less than that in France, Italy, or Singapore.

2. Energy Pricing

Prior to the reform era, the PRC maintained strict pricing controls over key commodities. The often single-minded focus on increasing production created very little incentive for innovation and efficient use of resources. Government dictated price ceilings on products in certain industries, such as coal and water, which prevented those industries from investing in environmentally beneficial improvements, such as wastewater treatment or coal washing. The market reforms since 1978 have led prices in most industries to be set by the market or through the so-called "guidance pricing" (i.e., allowing market pricing within a defined price range). Significant price reform is still needed in the energy and raw materials sectors. Market reform in coal prices commenced in 1994.

Rising real prices for energy (e.g., coal, oil, electricity) appear to have increased efficiency and conservation efforts by energy consumers. In the reform era, China has used a variety of devices to bring the country towards market pricing. In general, this involved first a shift to a system that maintained government-set (read: below market) pricing for products sold to SOEs, but allowed producers to sell any surplus not sold to SOEs at market prices.

The Chinese government is currently engaged in a massive effort to make its energy sector more market-oriented. Market reforms in the energy sector create the prospect of lower electricity prices, which has been shown to lead to rising consumption. This phenomenon could potentially offset the positive environmental effects over the past decade of rising energy prices. However, the effect on overall pollution of increasing energy consumption is uncertain because increased consumption will likely be counterbalanced by greater market efficiencies and improved technology. Moreover, the Three Gorges Dam project may cause artificial propping up of electricity prices in China for the foreseeable future because government taxes will be required to pay for the financing on the dam project that is well over budget.

3. Energy Conservation

Technology-driven energy conservation programs have made significant contributions to reduction in the industrial energy intensity in China. Moreover, in the 1990's, the Chinese government increasingly pursued market-oriented approaches to energy efficiency promotion. One example is the World Bank-sponsored initiative to promote for-profit energy management companies (EMCs) in China. EMCs work with companies to design more energy efficient systems. The companies generate income by financing the upgrade projects and sharing in the efficiency savings. Another example is the Green Lights program, established in 1996 to promote production and utilization of energy efficient lighting. In late 1999, the State Economic and Trade Commission (SETC) announced a four-year World Bank funded project to compile the "top 100 energy-saving measures" and assist enterprise in securing funding to implement these ideas. Also in late 1999, a consortium of Chinese companies announced the creation of a one billion yuan environmental investment fund, which represents the largest-ever private investment in China's environmental sector.

VII. Rationale for Reform

Commentators have posited manifold reasons behind the increased focus on environmental protection. First and foremost is probably the financial aspect; it will be less expensive for China to address its environmental problems now than later. Moreover, the health consequences of pollution impose a heavy economic cost on China. Second, China is clearly making moves to become an ever-larger player on the international scene, in political, economic, and culture realms. China's major impact on global environmental conditions requires that progressive environmental policies be a part of achieving this assimilation into the global community. Also, the potential political instability that may be caused by extreme environmental problems is likely another motivating factor. Indeed, China is no doubt aware that, in Taiwan, grass-roots movements in response to severe environmental pollution helped forge the vanguard of the democracy movement.

VIII. Environmental Law in Particular

China, whether in imperial times or in the history of the PRC, has not had a tradition of using so-called "positive" law to address societal problems. At the beginning of the Deng reform era China was a nation governed by the decrees of people, not the dictates of any law. It had no law to speak of and the law it did have was often not available to the public. This has all changed a great deal since the beginning of the Deng reform era.

The primary purpose of legal reform was to support China's radical economic reform and expansion. The Chinese government was well aware that it couldn't attract foreign investment or develop a market economy without a more stable, transparent legal infrastructure. This legal reform has included the creation of a large body of environmental law. This legal regime includes at least six laws addressing pollution prevention and nine laws concerning natural resources protection, 29 sets of environmental protection regulations, more than 70 statutes, and over 900 local regulations.

The PRC government passed its first major environmental enactment, the Environmental Protection Law for Trial Implementation, in 1979. Furthermore, the 1982 PRC Constitution embodied a number of important environmental provisions. Perhaps the most important was Article 26, which mandated that "[t]he state protects and improves the environment in which people live and the ecological environment. It prevents and controls pollution and other public hazards." The 1982 Constitution also included provisions concerning the State's duty to conserve natural resources and wildlife.

From these constitutional provisions and the original draft EPL sprung a rich body of environmental law. These include: the Water Pollution Prevention and Control Law (1984), the Air Pollution Prevention and Control Law (1987), the Water and Soil Conservation Law (1991), the Solid Waste Law (1995), the Energy Conservation Law (1997), portions of the General Principles of the Civil Law and the Criminal Law, and a number of important international agreements, such as the Kyoto and Montreal Protocols.

While the volume of environmental legislative activity may seem impressive, it says nothing of the efficacy of these laws in protecting the environment. To date, China's environmental law regime has suffered from the same weaknesses as Chinese laws in general: vague statutory language, weak institutions and infrastructure, and poor enforcement. The weakness of environmental law, in particular, is not surprising considering the dampening effect environmental protection often has on economic development. Moreover, the fact that environmental benefits often only manifest themselves in the long-term reduces the political imperative to address environmental problems today.

IX. Weakness in the Laws

One obvious weakness of Chinese environmental law is the vague, aspirational quality of the statutory language. Many provisions of important Chinese environmental laws are more policy pronouncements than law. This vagueness in the law suggests that government still perceives the law as primarily a means of disseminating policy. However, even for such a broader policy function, the imprecise nature of many of the laws creates obvious problems of determining what behaviors are required or prohibited, and which entities have duties to follow or enforce the law.

X. Weaknesses in the Legal System

The efficacy of environmental law is further hampered by systemic weaknesses in the Chinese legal system. These include the absence of a strong, independent judiciary, and poor enforcement of laws and judgments.

1. A Weak Judiciary

Though the Chinese Constitution calls for an independent judiciary, in reality, Chinese courts are affected by a variety of outside influences, including the legislative and executive departments, the Communist Party, and commercial interests. Local government officials also can exercise significant control over the judiciary because judicial salaries, resources, and funding are provided by the local government. Chinese judges have traditionally lacked adequate legal education and are held in low societal regard. Chinese judges also lack the inherent power to make law or interpret the law. The power to interpret the law is generally delegated by the National Congress to the executive bodies responsible for enforcement. The courts will generally not overturn agency interpretation of laws.

Moreover, resolution of conflict through the courts is not nearly as common in China as, say, in the United States. Violations of law and civil disputes are usually handled outside of court. One expert has commented that: "Environmental protection officials claim that over 90 percent of their actions are accepted by the parties concerned, although they concede that their decisions take account of factors like the ability to pay fines or make restitution and also that political realities temper their independence. Of the remainder, the overwhelming majority are resolved through semiformal mediation involving the regulator, the polluter(s), and the victim(s)[2].

2. Poor Enforcement of Laws

The lack of enforcement of Chinese environmental laws can be attributed to a number of factors. Enforcement of environmental laws is largely in the hands of local officials, who are often poorly trained, ill-equipped, or unmotivated to enforce environmental regulations. Moreover, local officials often have an economic stake in the very companies they are supposed to be regulating. Furthermore, there is really no mechanism for private citizens and organizations to seek enforcement of environmental statutes.

Chinese environmental laws view citizen participation mainly as the right to report infractions to authorities. Chinese law has a much narrower view of legal standing than in the United States that requires those bringing suit to be directly affected by environmental pollution. Such a view of standing in the United States would have prevented environmental groups from bringing many of the seminal U.S. environmental cases, such as Tennessee Valley Authority v. Hill, the first major Endangered Species Act case, or Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., which established the standard for judicial review of agency interpretations.

It is a mistake to criticize Chinese environmental law too harshly though simply because it does not work in the same way that the U.S. law works. Indeed, U.S. environmental law has only become much more detailed largely because of changes in law in the past thirty years or so. Environmental litigation in the U.S. is now seen (as one commentator has put it) more as "an instrumentalist way of controlling administration," and less as only a means of resolving "specific parties' rights and duties in a particular setting." To the extent that this is a conception unique to the United States legal system, it is a mistake to expect Chinese environmental law to perform in the same manner.

Even with its many infirmities, Chinese environmental law does further environmental protection through a number of limited avenues. First, it sends a message to lower level governments and the Chinese citizenry that the environment is a governmental priority; this is a view of law as a political resolution of sorts. Second, environmental legislation shifts bureaucratic power to environmental government entities that have traditionally been weaker than industry and economy related government bodies. Richard Stewart, a law professor at NYU, who was part of a project to assist the NPC in redrafting China's environmental laws, commented that "[w]e were not advising the [NPC] how to write laws that are going to be litigated or interpreted by judges in litigation. Rather, we were trying to assist them in developing and implementing an environmentally progressive vision for China (emphasis added)."

XI. What Next?

China scholar Kenneth Lieberthal has commented on the pressures faced by the government to maintain growth, as well as the risk of social unrest of putting a stop to that growth through environmental protection. This tension between the environment and development has existed in every industrialized or industrializing nation; indeed, the U.S. did not begin to take its environment seriously until well after its economy had blossomed into a global powerhouse. Even today, compliance with the U.S. Clean Air and Water Acts, for example, is extremely spotty.

Nonetheless, the environment in China is in dire straits, and the longer the government waits the more costly it will be to repair the damage. Moreover, it is often the poorest that suffer the most from environmental degradation. It is well and good for China to develop its economy quickly, but the burdens of that development should not fall disproportionately on the least well-off. Furthermore, as China becomes more and more integrated into the global community, it damages its global prestige if it cannot keep its own house in order, so to speak, and address environmental issues in a progressive way. Perhaps most importantly, China may risk internal political instability more from its deteriorating environment than from any potential cooling of economic development.

It is easy to put forth pat answers and remedies to what ails China. It is hard to know whether the environment would be better served by publishing the ideas I have put forth here, or by simply saving the paper (and thus the trees) by publishing nothing at all. The truth is that there are no easy answers. The hard reality is that the Chinese government is well aware of the steps that need to be taken to cure its environmental woes. What remains is a need for the too scarce political resolve and many long years of hard, unglamorous work to put everything in place.

(The author is an associate at the New York law firm of Simpson Thatcher & Bartlett.)