This piece is part of a series of assessment submissions from Warwick Economics’ Introduction to Environmental Economics module for first-year students.
As the capital of the People’s Republic of China, Beijing is renowned for its rich history and culture, strong culture of innovation, and now unfortunately air pollution. Persistent and extensive smog caused by fine particulate matter (PM2.5) continues to disrupt the quality of life for Beijing’s people, seriously affecting public health, economic progress and social stability. Although Beijing’s current environmental policy has had some success, its PM2.5 levels are still high and remain a threat. This policy brief recommends the introduction of market-based instruments to Beijing’s economic policy, more specifically:
- A carbon price mechanism
implemented in two phases:
- a carbon tax;
- an emissions trading system.
- Using the revenue generated from the above to finance renewable energy subsidies and feed-in-tariffs.
1. PM2.5 and its impacts
China is the world’s principal consumer of primary energy, accounting for 62% of global coal consumption in 2016 (BP, 2017). Air pollution, in particular fine particulate matter (PM2.5), has become a severe environmental issue in China’s more economically developed regions, including Beijing (Hu et al, 2014; Niu et al, 2016).
PM2.5 refers to atmospheric particulate matter that is up to 2.5μm in diameter. It is predominantly generated as a by-product of coal combustion in power plants and industry, as well as automobile emissions (WHO, 2006). Being so minute, PM2.5 particles can penetrate deep into the lungs and enter the circulatory system (Ling and Van Eeden, 2009), and studies continue to indicate that PM2.5 exposure increases the risk of lung cancer (Raaschou-Nielsen et al, 2013), cardiovascular morbidity and mortality (Langrish et al, 2012). The health effects of PM2.5 also have an economic impact. As people contract pollution-related illnesses, the supply of human capital is diminished, which in turn negatively impacts labour productivity and economic growth. Beijing experienced a severe haze in January 2013 as a result of high PM2.5 concentrations. The haze covered 1.3 million km2, affected 800 million people (Huang et al, 2014) and had a total economic loss of 0.1% of GDP, amounting to USD254 million (Gao et al, 2015).
As the costs of PM2.5 emissions into the atmosphere (the ‘global commons’) are not borne by the polluters, they are externalised to society in general, representing a market failure.
This policy brief addresses the necessity for Beijing Municipality to implement more effective financial mechanisms in order to enhance control of PM2.5 emissions and mitigate the resultant implications on the health of its people and economy.
The root of Bejing’s air pollution problem lies in the 1978 “Reform and Open Policy”, when China adopted an increased market orientated approach to its economic policy. This led to rapid and unprecedented economic growth that released vast quantities of air pollution in the process. In 2014 Beijing’s Environmental Protection Bureau identified local emissions as the main contributors of PM2.5, accounting for between 64-72% of Beijing’s PM2.5 emissions, particularly from:
- motor vehicles (31.1%);
- coal combustion (22.4%); and
- industrial production (18.1%).
(Wang et al, 2015)
Beijing’s economic growth has been paralleled, naturally, by an amplification in the wealth of its citizens. Between 1978-2008 Beijing’s GDP per capita increased more than fifty-fold, from 1,257 yuan to 66,098 yuan (CEIC Data, 2008). Motor vehicles became an increasingly affordable commodity among the burgeoning middle class (Betts, 2002, Wuet al, 2010), with 1,200 vehicles being added to Beijing’s roads each day (Stone, 2008).
The rise in wealth of Beijing citizens increased the demand for goods, services and energy, which in turn led to increased industrial production and coal combustion (Yang et al, 2019). The negative impact on Beijing’s air quality was exacerbated by the inefficient, obsolete and polluting technologies used by the coal fired factories on the outskirts of Beijing (Liu and Diamond, 2005).
Population growth, in the form of natural increase and urbanisation, has been another significant contributor to the increase in PM2.5 emissions. Beijing’s population has grown by an average of 2.84% per year since 1990, which coincided with a 390% increase in PM2.5 emissions between 1990-2010. Rural-urban migration has also been accompanied by urban sprawl, and longer commuting distances have resulted in increased use of motorised transport, and hence increased PM2.5 emissions (Yang et al, 2019).
Beijing is still grappling with the task of balancing the trade-off between economic growth and air pollution. Regulations to control air pollution are already in place at the national and regional level, however as they are all based on command-and-control their effectiveness is not optimised.
2.1 National Ambient Air Quality Standards (NAAQS), 2012
Initially implemented in 1996, the NAAQS set limits for air pollutant concentrations, however PM2.5 limits were only introduced in 2012 – before then PM2.5 levels were not being monitored or controlled at all. The 2012 amendment introduced limits for daily and yearly concentrations of PM2.5 at 35μg/m3 and 15μg/m3 respectively for Grade I regions (areas in need of protection such as natural parks), and 75μg/m3 and 35μg/m3 respectively for Grade II regions (including industrial and residential areas) (Wang et al, 2015; Sun et. al, 2015).
Although the establishment of PM2.5 limits is undoubtedly an important step towards improving Beijing’s air quality, there are also shortcomings. Firstly, and perhaps most importantly, the NAAQS do not provide incentives to further reduce PM2.5 emissions once the relevant standards have been met. This hinders the potential success that the regulation can have in reducing PM2.5 emissions (Austin, 1999). Secondly, as the limits are imposed at regional level, the standards impose no obligations on the polluters themselves to reduce their emissions. It is therefore the responsibility of the local government to address the issue at its core and encourage polluters to reconsider their production processes or technologies to bring about the necessary reductions.
2.2 Air Pollution Prevention and Control Action Plan (the ‘China Action Plan’), 2013
The China Action Plan serves as a framework to improve national air quality. It acknowledges the uneven distribution of PM2.5 emissions across China and sets higher targets for the most polluting regions. In particular, it called for a 25% reduction in PM2.5 concentrations in the Beijing-Tianjin-Hebei region by 2017, and specifically for the annual concentration in Beijing to be capped at 60μg/m3. The China Action Plan proposes various measures to achieve these targets, including:
- reforming industrial structure and encouraging industrial development;
- altering the energy composition to increase the proportion of renewable energy;
- improving the law and regulation system.
Similar to the NAAQS, the China Action Plan provides no incentives to reduce PM2.5 emissions below the relevant targets. There is also a lack of sufficient enforcement in Beijing – the limited authority of the local government has made it difficult to impose policy measures on large state-owned polluters which are often exempted from control (CCICED, 2014), and high polluting firms that operate only at night tend to avoid government inspections (Wang et al, 2015).
2.3 Beijing 2013-2017 Clean Air Action Plan (the ‘Beijing Action Plan’)
In response to its PM2.5 reduction targets, Beijing Municipal Government issued its own action plan detailing its strategies to achieve these reductions, including:
- Reducing coal consumption – decreasing the amount of coal burned by 13 million tons between 2012-2017, capped at 10 million tons.
- Controlling automobile pollution and promoting automobile restructuring – capping the number of vehicles on the road at 6 million by 2017 and promoting public transport.
- Energy restructuring – increasing the use of renewable energy (particularly geothermal and solar energy) and transferring the source of power generation from coal to gas.
(Beijing Municipality, 2013)
In addition to the lack of incentives to reduce PM2.5 emissions beyond the requirements (consistent with the other regulations referred to above), the Beijing Action Plan lacked specific detail on the tangible measures required to meet the PM2.5 reduction goals to allow those affected by the policy to be properly informed on their responsibilities.
Despite their shortcomings, the China and Beijing Action Plans have largely been successful in Beijing with PM2.5 concentrations falling by 34% between 2013-2017, from 88μg/m3 to 58μg/m3. However, while PM2.5 concentrations are within the 60μg/m3 cap in the China Action Plan, they still exceed the NAAQS Grade II limit of 35μg/m3 annually.
It is also relevant to note that the limits imposed by the NAAQS and the China Action Plan are significantly higher than the World Health Organisation (WHO) recommended a PM2.5 limit of 10μg/m3 (WHO, 2018), and are also much higher than annual PM2.5 concentrations observed in major cities such as London, Paris and Rome (15-22μg/m3) (AMEC, 2014).
Therefore, while the command-and-control approach has yielded positive results in terms of reducing PM2.5 concentrations in Beijing, there is still a long way to go for Beijing to catch up with other major cities, let alone to fall in line with the WHO limit. Complimenting the command-and-control approach with the introduction of market based economic instruments could to allow Beijing to achieve the required quantum leap necessary in this regard.
3. Policy Recommendations
This policy brief recommends the introduction of economic instruments in Beijing’s environmental policy: a carbon price mechanism coupled with increased renewable energy subsidies, in order to tackle PM2.5 concentrations at their core, i.e. at the level of the polluters themselves.
A carbon price mechanism incentivises polluters to reduce their emissions and can be implemented through two different instruments – carbon taxes and emissions trading systems.
A carbon tax is a Pigouvian tax based on the ‘polluter pays principle’, and functions as a straightforward product charge on all three types of fossil fuels (coal, oil and natural gas) relative to their carbon content. By increasing the cost of fossil fuels to polluters, the government motivates profit maximising enterprises to introduce more energy-efficient production processes and/or increase their use of clean energy such as solar, wind and hydro. The tax should be based on the external cost of PM2.5 emissions for each type of fuel and should be phased in gradually to allow polluters to adjust. A disadvantage of a carbon tax is that it increases the price of electricity and other fuel-based energy sources to individuals and families, which could prove to be a significant burden on lower income groups. Appropriate fiscal arrangements will therefore have to be introduced to address this particular side-effect.
In an emissions trading system, the government sets a cap on the maximum level of PM2.5 emissions for polluters and auctions emissions allowances that cumulatively total the cap. Polluters that do not have enough allowances to account for their emissions must either make reductions or purchase allowances from enterprises with unused allowances. This system therefore favours polluters that are more able to reduce their emissions.
Since an emissions trading system requires an appropriate infrastructure to be established to measure and verify emissions from each polluter, this policy brief recommends the introduction of a carbon tax as the first step to provide an ongoing incentive for polluters to reduce their emissions, with an emissions trading system to be considered in the longer term.
China is currently at the forefront of renewable energy development, particularly wind and solar power. The success of China’s promotion of renewable energy sources since 2012 has however resulted in a rapid increase in subsidies, which has led to a large subsidy deficit and the curtailment of subsidies and feed-in tariffs for renewable energy (WEF, 2018). In order to ensure continued investment in renewable energy development, this policy brief proposes that the revenue generated from the carbon tax (and eventually from emissions trading scheme) should be used to bolster the funding available for renewable energy subsidies and feed-in tariffs in Beijing.
Beijing’s current environmental policy is mainly based on command-and-control mechanisms, and despite their success PM2.5 levels remain dangerously high. This policy brief recommends:
- the adoption of economic instruments in the form of a carbon price mechanism (a carbon tax followed by an emissions trading system) to ensure that polluters bear the costs of their emissions.
- the use of income generated through the carbon price mechanism to increase renewable energy subsidies.
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