China Strives To Make the Polluter Pay Are China's market-based incentives for improved environmental compliance working? H . K E I T H F L O R I G , W A L T E R O. S P O F F O R D ,
JR.,
X I A O Y I N G M A , Z H O N G MA
F
ollowing the birth of the People's Republic of China in 1949, an emphasis on the development of state-owned heavy industry in urban areas left a legacy of large point sources of air and water pollution. Economic reforms introduced in 1978 have sparked rapid growth in industrial output accompanied by increasing pollution discharges into urban airsheds and water courses. Residential waste has intensified the industrial pollution problem. Consumption increases caused by growth in household incomes are propelling concomitant growth in per capita solid waste generation. As millions of unemployed farmers migrate to urban areas, pollution problems are exacerbated by untreated sewage and the burning of coal for domestic heating and cooking. A rapidly expanding transportation sector threatens to become a significant source of air pollution in China's larger cities. Since the enactment of its first trial environmental legislation in 1979, China has moved aggressively to develop ambient and emission-effluent standards, establish an infrastructure for a m b i e n t environmental monitoring, and experiment with new programs for pollution reduction. Although these programs depend in part on central planning and moral suasion, the Chinese are harnessing economic incentives as environmental protection instruments (i). As China moves toward a full market economy, these incentives become more attractive. Economic instruments that are in use or being tested include pollution levies, discharge permits, environmental achievement rewards for officials and managers, price reform, security deposits, environmental taxes and tariffs, environmental labels, and fines (2). Although China has made notable progress in environmental protection, her pollution problems remain serious. China depends on coal for about 75% of primary energy needs, including residential heating and cooking and industrial process heating. This use contributes heavily to air pollution in urban ar2 6 8 A • VOL. 29, NO. 6, 1995 / ENVIRONMENTAL SCIENCE & TECHNOLOGY
eas, particularly in winter. Air pollutant levels in most large cities exceed World Health Organization guidelines. High levels of airborne particulates are thought to be largely responsible for a death rate from chronic obstructive pulmonary disease five times that of Western industrialized countries. In many urban areas, surface waters are polluted by sewage and industrial wastewater. In 1993 only 55% of all industrial wastewater discharges met discharge standards (3).
Evolving environmental regulations After three decades of central planning and isolation from the Western world, China in the late 1970s moved quickly to address the environmental legacy of the past and stave off the environmental effects of rapid economic growth sparked by economic reforms. China's first modern environmental legislation was passed for trial implementation in 1979. The 1979 Environmental Protection Law (EPL) described goals and principles of environmental protection and authorized a system of environmental regulation, monitoring, and enforcement. The law emphasized pollution prevention by prohibiting the siting of facilities with noxious emissions in residential areas; exhorting enterprises to control pollution or face closure, relocation, merger, or mandatory p r o c e s s or p r o d u c t c h a n g e s ; r e q u i r i n g environmental impact assessments for new or upgraded industrial facilities; requiring new or expanded facilities to include pollution prevention and control in design, construction, and operation (dubbed the "Three Simultaneous Steps" policy); requiring new facilities to meet discharge standards; and promoting development of an indigenous environmental technology industry. The law also embraced the "polluter pays" principle by collecting fees from enterprises that discharge pollutants in amounts exceeding state standards. China's State Council issued rules clarifying the discharge fee system in 1982. In 1989 a new EPL was passed that superseded the 1979 trial law. It reaffirmed existing policies on sit0013-936X/95/0929-268A$09.00/0 © 1995 American Chemical Society
Pollution decline observed Although urban pollution levels in China are high by developed-world standards, there are signs that environ mental deterioration is slowing. Air quality monitoring data suggest a 50% reduction in urban particulate con centrations from early 1980s levels and stable urban S02 concentrations over the past decade (9). Industrial wastewater and waste gas treatment is more common, especially among large state-owned urban enterprises (see figure). In recent years, reported industrial effluents and emissions show a marked decline in pollution amounts per unit of real economic output. Several factors explain these trends. Central heating systems and gas units are replacing coal stoves for home heating and cooking. The economy is shifting away from heavy industry, and all industries are becoming more effi cient, resulting in less coal burning and waste generation. Many old, dirty factories have closed, left population cen ters, or retooled. Some new environmental policies are helping to reduce pollution from new urban factories.
cle emissions, and environmental monitoring (5). The standards are stringent enough to require signifi cant pollution reductions without being unrealistic given China's economic base (6). In general, Chi nese discharge standards are somewhat weaker than those of Western industrialized countries (7). China's environmental policies are being devel oped and tested in a rapidly changing economic sys tem. Since the beginning of economic reform in 1978, China has liberalized or freed prices on many com modities. Many state-owned enterprises may sell a portion of their products in markets outside the stan dard quota system and exercise autonomy in choos ing suppliers and customers. Taxes and accounting rules for state-owned enterprises now encourage more cost reduction. Collective and private enter prises, operating in largely free markets, are grow ing in number and now comprise more than half the economy. Despite these changes, substantial rem nants of the planned economy remain, particularly in heavy industry, energy, and transportation.
Pollution levy system Article 18 of China's 1979 EPL specifies that "in cases where the discharge of pollutants exceeds the limit set by the state, a fee shall be charged according to the quantities and concentration of the pollutants released." Although local environmental protec tion bureaus (EPBs) began collecting fees in 1979, for mal procedures interpreting the 1979 law were not issued until 1982. These measures required that a pol lution levy be paid by any enterprise that dis charged pollutants above relevant standards. A state fee schedule came with the regulation, but provin cial and local governments could charge higher rates with approval from the central government. For in dustrial wastewater discharges, the fee for any given pollutant was based on the multiple by which the pollutant concentration exceeded the standard. For air emissions, fees were based on multiples by which standards were exceeded, but air emissions stan dards included a mix of concentration-based and
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ing restrictions, environmental impact assess ments, the Three Simultaneous Steps, and dis charge fees. The 1989 law also addressed some shortcomings of the 1979 law and paved the way for new policies on pollution control. A system was es tablished to reward factory managers and govern ment officials for meeting environmental goals and to punish those failing to meet the goals within a specified time. Greater attention was devoted to gain ing economies of scale by the centralized treat ment of industrial wastes. Incentives to recycle wastes were instituted, and a system was developed to quan titatively rank urban environmental quality and ser vices, thus harnessing the power of publicity to en courage environmental improvements. To implement the 1979 EPL, environmental pro tection units at the state, provincial, city, and county levels were formed. The 1989 EPL required individ ual enterprises to set up environmental units to col lect and report effluent and emissions data. Chi na's environmental bureaucracy grew rapidly through the 1980s and currently employs more than 200,000 people nationwide, including about 60,000 in in dustrial environmental protection offices and 80,000 in provincial, city, and county environmental pro tection bureaus. In 1984 China's State Council formed the Environmental Protection Commission to over see China's institutional environmental protection structure. Composed of all relevant ministry and agency heads, it sets broad policy directives and re solves interagency disputes. In 1988 the Environ mental Protection Commission elevated the Envi ronment Office in the Ministry of Urban and Rural Construction and Environmental Protection to full agency status, forming the National Environmental Protection Agency (ΝΕΡΑ) to take responsibility for environmental policy (4). China's first environmental quality standards were developed in the early 1970s. During the 1980s more comprehensive standards were developed for am bient air and water quality, and new standards were introduced for industrial pollutant emissions, vehi-
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VOL. 29, NO. 6, 1995 / ENVIRONMENTAL SCIENCE & TECHNOLOGY • 2 6 9 A
China's fees and fines produce revenue for local regulators Nationwide, collection of pollution discharge fees and fines has increased in the past decade, especially in later years. The revenues generated help pay for local enforcement efforts (9,10). 3000
and subsidize pollution control projects for enter prises that have paid into the system. Local EPBs may use 20% of the fees and 100% of the fines to fund their operations. Up to 80% of the fees are allocated for pollution control loans to enterprises that have paid into the pollution levy system. Thus, as established in 1982, the pollution levy sys tem was intended to provide both "stick" and "car rot" pollution control incentives. However, the sys tem turned out to be more of an EPB funding source than an incentive for reducing industrial emis sions.
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89 91 92 Year As defined by 1982 and subsequent levy procedures; "four small pieces Amounts are in current (not constant) yuan.
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mass-based limits. "Overstandard" fees were as sessed only on the pollutant most in violation in a waste stream. As established in 1982, the discharge fee system provided incentive to reduce discharges only to lev els specified in standards. No incentive existed to fur ther reduce discharges, even if the marginal cost of control was small. To provide incentive for further pollutant discharge reductions, a volume-based in dustrial wastewater discharge fee was introduced in 1993 (8). This fee is charged on the total quantity of wastewater discharged (.05 yuan per ton; 8.5 yuan = $1). However, a factory is not required to pay both an overstandard pollution fee and a wastewater dis charge fee. The overstandard fee supersedes the wastewater discharge fee if the effluent standards are violated. In 1993 collections of this "within stan dard" fee amounted to about 10% of the collec tions of the overstandard fee (9). The 1982 and subsequent procedures defining the pollution levy system specify four additional cate gories of penalty. Following a three-year grace pe riod, effluent fees increase 5% per year for enter prises that fail to meet effluent and emission standards. Double fees are assessed both for facili ties built after passage of the 1979 EPL that exceed standards and for old facilities that fail to operate their treatment equipment. A fine of 0.1% per day is spec ified for delays of more than 20 days in paying dis charge fees. Penalties for false effluent and emis sion reports or for interfering with EPB inspections are mandated. These four penalties are referred to as the "four small pieces" component of the pollu tion levy system. Fees and fines collected support EPB operations 2 7 0 A • VOL. 29, NO. 6, 1995 / ENVIRONMENTAL SCIENCE & TECHNOLOGY
A number of observers have noted that the pollu tion control incentive provided by the levy system is low because fees are small relative to pollution con trol costs. Fees are not indexed for inflation, and, for state-owned enterprises, they can be included un der costs and later compensated through price in creases or tax deductions (6, 7, 10, 11). Thus, many enterprises choose to pay the fees rather than in cur pollution control costs, which often require sig nificant capital investment. Because the fees and fines can be lower than operating and maintenance costs, enterprises that install pollution control equip ment have little incentive to operate it {10). Nationwide, collections of pollution fees have grown steadily over the past decade (see Figure 1) but recently have fallen behind inflation in most prov inces. Most of the growth resulted from increases in the number of enterprises assessed rather than fee rate increases (9,10). In 1993 about 2.7 billion yuan were collected in discharge fees and penalties from 254,000 enterprises. This represents an average an nual fee per paying enterprise of only 10,500 yuan ($1200-$1700 depending on exchange rates). The av erage annual gross output value for a state-owned industrial enterprise is about 15 million yuan. For firms that pay discharge fees, the fees typically make up less than 0.1% of the firm's total output value. By comparison, U.S. industry environmental compli ance costs are estimated to be a little more than 1% of total manufacturing costs. Since the pollution levy system was established in 1979, about 60% of the total amount collected has gone to pollution abatement grants and loans for ex isting (old) enterprises (8). Nationwide, grants and loans from pollution discharge fees contribute about 8% of China's total capital investment in pollution control and about 20% of China's pollution reduc tion investment in existing factories {12). Thus, al though the discharge fee system provides a signifi cant fraction of China's pollution control spending, the amounts are small compared to the 12 billion yuan per year ΝΕΡΑ estimates is needed to meet in dustrial effluent and emissions standards by the year 2000. Industrial wastewater effluent standards cur rently are specified in terms of allowable concentra tions rather than mass flow rates. In the past, some enterprises could meet discharge standards and avoid fees by diluting their waste stream with fresh water. Therefore some local governments imposed fines for diluting waste streams (5). Although the discharge fee system provides sig-
nificant operating revenues for local EPBs, it pro vides little incentive for enterprises to invest in pol lution prevention or control. Because the policy is applied uniformly, it does not account for regional differences or the assimilative capacity of local en vironments. To address these two concerns, a dis charge permit system was introduced to control pol lution from large enterprises. Water pollution permitting was implemented on a trial basis in 17 cities in 1987 and now is operating in 391 cities (9, 13). Trial air pollution permitting was begun in 16 cit ies in 1991 and has expanded to 57 cities (9). The dis charge licenses specify both the maximum pollut ant concentrations and a factory's maximym annual wastewater discharge volume. Criteria for setting lim its vary from city to city. Some call for apportioning total allowable loads within a region to achieve am bient environmental quality standards; others are based on the emissions status quo or on the capa bilities of available and affordable technology {10,13). Fines are levied for failure to meet permit condi tions. To effectively negotiate a permit, EPB personnel need technical knowledge of industrial processes, but few of them have had the opportunity to gain such information. Therefore, the EPBs are susceptible to industry-biased claims. In many regions, the pollution levy and dis charge permit systems operate simultaneously. En terprises thus can face conflicting or discontinuous incentives from a concentration-based fine applied to behavior out of compliance with discharge stan dards and a mass-based fine for exceeding permit limits. Conflicting incentives also have arisen be tween the levy and the tax systems. In earlier years, some enterprises shielded profits from taxes by pay ing into the levy system and then recovering 80% of their payments under a rebate program.
Local resistance In the early 1980s some enterprises resisted fee col lection by local environmental protection units {14). The collectors often were turned away when mey ap pealed to higher local officials. Because of the threat to the economic welfare of vital local enterprises, lo cal officials often preferred to waive the fees, partic ularly for unprofitable enterprises. This problem still exists in many rural areas but has improved sub stantially in urban areas. Enforcement of the pollution levy system is weak for China's 8 million township and village indus trial enterprises (TVTEs), which are significant sources of rural pollution. Because most TVIEs are small, lo cal EPB revenues from fee collection are less than those from larger state-owned enterprises. There fore, because they have limited personnel, EPBs con centrate on the largest polluters first. The TVIE sec tor is growing rapidly and contributes about half of China's industrial output. Figure 2 shows how fee and fine collection per unit industrial output varies across China. Low collec tions per unit output can reflect either high compli ance rates, such as in Beijing, or weak enforce ment, such as in Liaoning where many large and bankrupt heavy industries are excused regularly from making payments.
This wastewater discharge from a paper mill in northeast ern China is a source of income for local farmers who re cover fiber from the discharge stream.
In December 1994 ΝΕΡΑ began a two-year study of the pollution levy system. The objective is to cor rect deficiencies and propose changes to improve ef fectiveness and efficiency consistent with a market economy and with ongoing economic and institu tional reform. NEPA's Department of Supervision and Management is conducting the study with a World Bank technical assistance loan. The technical por tion of the study is being conducted by the Chi nese Research Academy of Environmental Sci ences in Beijing with the assistance of foreign consultants. Intended to be both comprehensive and spe cific, the study will address four main areas: design ing mass-flow levy formulas for pollutants with fee schedules based on the marginal costs of pollution control; designing a pollution levy fund to include institutional arrangements, technical assessment of loans, and priorities for the use of the fund; design ing an information management system for calcu lating fees and maintaining billing and receipt records; and practical issues of implementation. The latter includes emissions and effluent monitoring, calculating fees, fee collection, and fund manage ment. The goal of the study is to develop a pollu tion levy system for China that reduces emissions and effluents, achieves environmental goals with the least cost, and imposes minimal administrative burdens on local EPBs and regulated enterprises.
Other incentives The 1989 EPL specifies that government at all lev els should be responsible for environmental qual ity in their jurisdiction. In 1990 this was formalized as a contract system in which officials from mayors to enterprise managers agree to work toward envi ronmental goals. Depending on the organization, goals can include objectives for environmental qual ity, pollution control, facility construction, and en vironmental administration. Although there is no penalty for failing to meet contract goals, rewards for doing so can include grants, bonuses, or special sta tus that offers tax breaks and control of foreign ex change. In the autonomous regions Inner Mongolia and Guangxi Zhuang and in Fujian Province, a compen sation fee is being imposed on sales of products made VOL. 29, NO. 6, 1995/ENVIRONMENTAL SCIENCE & TECHNOLOGY • 2 7 1 A
Average fees paid into pollution levy system by province, 1993 Though averages are shown by province here, pollution levies are collected at the local level. Low average fees and fines paid into the pollution levy system per unit economic output can indicate either nominal enforcement or a high degree of compliance (S). Amounts are in current (not constantl yuan.
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Sichuan
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Guizhou Fees paid yuan
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outside the province by highly polluting industries {15). The levy, approved by the State Council, is ap plied to commercial coal, steel, crude oil, and elec tricity. Revenues will be used for the region's pollu tion prevention and control and recycling projects. Recognizing that the growing demand for envi ronmental products would otherwise be filled by for eign firms, China is encouraging the growth of an in digenous environmental products industry. Now more than 4000 enterprises in China make pollution con trol, monitoring, and recycling products (9). These enterprises have fixed assets of about 3 billion yuan and an output of roughly 6 billion yuan per year. The Chinese government encouraged the growth of such firms in several ways. In Ningbo, a port city in Zhejiang Province, China established its first environ mental products market. Elsewhere, special indus trial parks for environmental protection industries are being established to take advantage of syner gies and economies of scale. The inefficiencies of materials use associated with China's centrally planned economy prompted the government to advocate "comprehensive utiliza tion of materials" in the 1970s. Incentives such as tax breaks on recycled materials sales, subsidies for re cycled materials sold at a loss, reduced prices for re cycled materials, and low-interest loans for recy 2 7 2 A • VOL. 29, NO. 6, 1995 / ENVIRONMENTAL SCIENCE & TECHNOLOGY
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cling projects were introduced (11). This is one of several programs managed by a new ΝΕΡΑ division concerned with clean production.
Monitoring and enforcement problems China's environmental policy is comprehensive, com plex, rapidly developing, and contains a mix of com mand and control, moral suasion, and economic in centive. The development of environmental laws, regulations, and infrastructure has greatly im proved, but monitoring and enforcement still are ma jor problems. Compliance has been best for large new facilities because abatement equipment was incor porated in the early design stages. But many medi um- and small-scale enterprises, particularly rural ones, feel little or no pressure to comply, and larger enterprises operating at a loss can maneuver for ex emptions. With economic reforms diminishing the central government's control, a strong bias favoring economic development over environmental protec tion, and no support from an independent environ mental movement, environmental protection in China faces an uphill battle {11, 16). Until the Chi nese legal system is strengthened, it may be neces sary to employ short-term means such as taxes on inputs that do not rely heavily on monitoring and en forcement.
A number of macroeconomic incentives drive en vironmental protection in China. Price reform for raw materials and profit retention for state enterprises induced manufacturers to be more efficient, result ing in less waste per unit of output. Price reform still has a long way to go, however. For instance, water still is priced below its scarcity value in most areas. The most important accomplishment of the dis charge fee system has been to provide operating rev enue for local EPBs, whose collection activities con tributed significanuy to enhanced public and official awareness of environmental problems (11,14). But this arrangement can distort incentives within the collec tion bureaus, which might focus on the largest indus trial facilities where payoffs are greatest or tolerate con tinuous violations to maintain an income stream. However, linking fee collection to EPB revenue does provide incentive for die agency to do its job. As in most industrialized countries, command and control is the principal instrument of Chinese en vironmental policy. The 1979 and 1989 EPLs both re quire all enterprises to meet discharge standards es tablished by ΝΕΡΑ. But this "legal" requirement is enforced weakly through low-level fines targeted at the largest and most egregious polluters. The dis charge permit system will attempt to address this problem by collecting enough in permit fees to fi nance enforcement. But this probably will not ex tend to the smallest rural enterprises. Although local EPBs are receptive to citizens' en vironmental complaints, the Chinese government is reluctant to allow formation of independent activ ist environmental groups. If allowed to flourish, such organizations could ease the government's enforce ment burden by bringing additional pressure to bear on noxious facilities. The Environment and Resources Protection Com mittee of China's National People's Congress expects to approve 14 new or revised environmental laws in the next few years (2 7). These should address gaps in existing legislation such as controlling disposal of solid and hazardous waste, bring China into compliance with its international commitments, and improve existing pollution control measures.
References
Acknowledgments
(1) Ross, L. Environmental Policy in China; Indiana Univer sity Press: Bloomington, IN, 1988. (2) Zhang, Κ. Μ. "Apply Economic Measures to Strengthen Environmental Protection Work, Promote Sustained, Sta ble, and Coordinated Development of the National Econ omy"; Zhongguo Huanjing Bao [China Environment News], July 23, 1991; English translation in JPRS-TEN92-005, U.S. Joint Publications Research Service, March 3, 1992. (3) "Zhongguo Tongji Nianjian [China Statistical Year book]"; State Statistical Bureau, distributed by China Sta tistical Information and Consultancy Service Center: Bei jing [various years]. (4) "Introduction to the Environmental Protection Organi zations in China"; National Environmental Protection Agency: Beijing, 1992. (5) "Huanjing Baohu Zhengce Fagui Biaozhun Shiyong Shouce [Handbook of Environmental Protection Laws, Regula tions, and Standards]"; Beijing Municipal Environmen tal Protection Bureau; Jilin People's Publishing House: Changchun, 1987. (6) "China Environmental Strategy Paper"; World Bank: Wash ington, DC, 1992. (7) Krupnick, A. Incentive Policies for Industrial Pollution Con trol in China; presented at the annual meeting of the American Economics Association: New Orleans, LA; Jan uary 2-5, 1992. (8) Ma, X. Y. Effectiveness of Environmental Policies for the Con trol of Industrial Water Pollution in China; working pa per, Civil Engineering Department, Stanford University; March 1994. (9) "Zhongguo Huanjing Nianjian [China Environment Year book] "; National Environmental Protection Agency; China Environment Yearbook Publishing House: Beijing [vari ous years]. (10) Sinkule, B. Implementation of Industrial Water Pollu tion Control Policies in the Pearl River Delta Region of China; Ph.D. dissertation, Department of Civil Engineer ing, Stanford University, August 1993. (11) Vermeer, Ε. Β. China Information 1990, 5(1), 1-32. (12) Qu, G. R Basic AnalysL· and Assessment of China's Envi ronmental Protection Investments and Policies; pub lished in three parts in Huanjing Baohu [Environmen tal Protection], Nos. 3-5, March 25, April 25, and May 25, 1991. EngUsh translation in JPRS-TEN-91-014, July 9,1991, and JPRS-TEN-91-016, August 22, 1991, U.S. Joint Pub lications Research Service. (13) Rozelle.S. et al. Natural Resources Modeling 1993, 7,35378. (14) Jahiel, A. R. The Deng Reforms and Local Environmen tal Protection: Implementation of the Discharge Fee Sys tem, 1979-1991; presented at the 46th Annual Meeting of the Association for Asian Studies: Boston, MA; March 1994. (15) Xia, Κ. Β. "Fines: Forcing Polluters to Listen"; China En vironment News (English éd.), January 1993, 42, 6. (16) Ross, L. Policy Studies Journal 1992, 20(4), 628-42. (17) Ross, L. China Business Review 1994, 21, 30-33.
This paper was supported in part by a grant from the United Nations Environment Programme through the Organization for Economic Cooperation and Development. Views ex pressed do not necessarily reflect those of UNEP, OECD, or any of their member countries. The authors thank Xia Kunbao and participants at the OECD/UNEP Paris Workshop on the Application of Economic Instruments for Environmen tal Management, May 1994, for helpful comments.
H. Keith Florigand Walter O. Spofford, Jr., are environmental policy analysts at Resources for the Future, Washington, DC. Xiaoying Ma is a Ph.D. candidate in civil engineering at Stanford University, Stanford, CA. Zhong Ma is an environmental economist at Renmin University of China, Beijing.
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