Comparative Advantage Strategy for Rapid Pollution Mitigation in

Aug 9, 2013 - Comparative Advantage Strategy for Rapid Pollution Mitigation in China. Yuan Xu*. Department of Geography and Resource Management & Inst...
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Comparative Advantage Strategy for Rapid Pollution Mitigation in China Yuan Xu* Department of Geography and Resource Management & Institute of Environment, Energy and Sustainability, The Chinese University of Hong Kong, 2nd Floor, Wong Foo Yuan Building, Shatin, N.T., Hong Kong, China S Supporting Information *

ABSTRACT: Due to its sheer size and growth trend, no other country is facing more daunting challenges than China in reducing its pollutant emissions. A critical but inadequately addressed question is how rapidly China could feasibly achieve such mitigation. The stake is high not only about how much worse China’s environmental quality could become but also about how the world can prevent catastrophic climate change. Through examining sulfur dioxide (SO2) mitigation in coal-fired power plants and wind energy development for carbon dioxide (CO2) mitigation, this article proposes a comparative advantage strategy for overcoming high barriers to fast pollution mitigation. On the demand side, China could first make progress in the deployment of more pollution control facilities and then improve their operational performance. The resulting low technological market entry barriers could help to build enough industrial capacity to meet the huge demand with prices under control. The strategy in the current practice could be improved to establish not only a large supply industry but also a strong one to enable other countries to move more rapidly in pollution mitigation.

1. INTRODUCTION The daunting environmental challenges facing China have been widely noted, and the deterioration of its environment is happening at a rate which has rarely been seen in world history, with Eastern China having the most polluted air in terms of fine particulate matter concentration.1−3 In January 2013, air quality in Beijing went beyond “crazy bad”, thus further exemplifying the country’s very serious environmental pollution4 and heating up the term “Beijing cough”.5 Furthermore, China’s sheer size and its growth trend in greenhouse gases indicate that no international mitigation treaty could be successful without its close involvement. In 2010 China was responsible for 24.8% of the world’s energy-related CO2 emissions, whereas in 2000 the share was only 13.9%.6 Various scenarios indicate that any further delay would require an accelerated pace if the necessary global mitigation of climate change is to be successfully achieved.7,8 However, how rapid mitigation could be feasibly achieved, particularly in China with its many unfavorable conditions, is a question that has not been adequately and especially systematically examined. Besides other critical measures, pollution mitigation often involves facilities such as those installed in coal-fired power plants to remove SO2, NOx, particles, mercury, and CO2, together with renewable energy facilities such as wind turbines and solar panels, and hybrid and electric vehicles. Two major factors determine how rapidly a country could utilize these facilities for pollution mitigation. First, there must be a strong demand for their rapid deployment and normal operation. Environmental pollution is often explained as a market failure © 2013 American Chemical Society

which requires governmental intervention. However, in China the government (and especially local government) still accords priority to economic growth, and this constrains the political will for pollution mitigation. Furthermore, there is poor enforcement of environmental laws and policies in China and other developing countries.9 Essential monitoring, reporting, and verification (MRV) systems are often not available because of limited budgets and high costs.10 Second, if the demand is rapidly put in place, enough supply capacity should be rapidly established to meet the demand. As a developing country, China could take the late-comer’s advantage to utilize the supply capacity in developed countries. However, because of China’s sheer size, the rest of the world might not be able to accommodate its huge demand. With constrained supply capacity but significantly greater demand, the international price of pollution control facilities could rise sharply, and this would discourage their utilization and also slow down the pollution mitigation process. Rapid pollution mitigation in China relies greatly on the rapid establishment of a domestic industry. China’s rapid mitigation could contribute significantly to global CO2 pollution mitigation. On the one hand, China is the largest CO2 emitter in the world with high growth rates in business-as-usual scenarios.7,8 Globally effective climate mitiReceived: Revised: Accepted: Published: 9596

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field work over the past four years. A more detailed description of the data is in the Supporting Information. In order to reach the required depth of understanding, two comparative and prominent cases on the mitigation of two major pollutants are carefully selected and examined. The first case is on SO2 mitigation in coal-fired power plants over the past decade. Secondary sulfate particles originating from SO2 emissions are responsible for between one-eighth and one-fifth of the total fine particulate matter in China’s megacities.24 The second case is on wind energy development over the same period to replace CO2-intensive coal electricity. Each of the two cases addresses a critical pollutant in China, both forms of mitigation having achieved rapid progress over the past decade from low starting positions. On the demand side, in the SO2 mitigation case, an independent estimate reported that SO2 emissions from China’s power plants decreased rapidly from 15.7 million tons in 2004 to 6.6 million tons in 2010; this was even though emissions from industrial sectors went up from 11.9 million tons to 20.4 million tons over the same period.25 The emission rate was 9.1 g SO2 per kWh of coal electricity in 2004 and 2.0 g in 2010, a 78% decrease in six years (Figure 1). By comparison with the United

gation requires China to rapidly bring its own emissions under control. On the other hand, a large Chinese supply industry of pollution control facilities could enhance the global capacity to meet demand for rapid pollution mitigation, and “The China Price” would suppress the global price of facilities and hence encourage their more rapid deployment.11 The comparative advantage theory was originated by David Ricardo to analyze the development of international trade.12 In a two-country, two-product model, even though a country may have lower productivity or absolute disadvantage in producing both products, it still could specialize in and export one product based on comparative advantage and import only the other. Heckscher and Ohlin further developed the model to attribute the origin of comparative advantage in a country’s factor endowment.13 It later became the foundation of a development theory which argued that a country should base its development on its comparative advantage.14 Lin et al. employed this theory to explain the rapid economic growth of China and other countries.15 Before the economic reform in 1978, China adopted a leap-forward strategy to develop capital-intensive heavy industries against its comparative advantage, and this resulted in slow and unsustainable economic growth, whereas after the reform, the comparative advantage of labor was better utilized to achieve rapid economic growth and upgrading.15 Considering both the demand and supply sides of pollution mitigation, the impacts of environmental regulation may not be straightforward. Although empirical studies generated mixed results on the “pollution haven hypothesis” in the Chinese context,16−18 its key root cause − poor environmental regulation, including weak policies and poor enforcement − is argued to potentially benefit polluting firms for not acting on, delaying, or complying only partially with pollution control.19 For example, relative to the Euro4 fuel quality standards, the poorer Euro2 standards in China could reduce costs by 1.1 and 1.9 U.S. cents per gallon for gasoline and diesel, respectively.20 The cost burden also acts as a political and regulatory hurdle to bring polluting firms under full compliance. From the supply perspective, weak regulation could lower market entry barriers to encourage competition, innovation, and the establishment of industrial capacities for pollution control.21,22 In China, policies on environmental protection and business standards were recognized by firms as less important barriers to market entry.23 The comparative advantage theory in international trade involves both intercountry and intracountry comparison. The comparative advantage strategy in this article is built on the theory but weakens its intercountry perspective to focus primarily within a country. At the initial stage, although barriers may be high from all aspects of pollution mitigation, some should be lower than others to become a comparative advantage for initial breakthrough and further progress. This article examines how China could follow its comparative advantage to rapidly reduce pollutant emissions from the demand and supply perspectives. Section 2 introduces data and two comparative case studies on SO2 mitigation in coal-fired power plants and wind energy development. Section 3 analyzes the first case, and Section 4 focuses on the second to explore how each could fit into the comparative advantage strategy. Section 5 discusses where to make improvements in the current practice.

Figure 1. SO2 emissions intensity of coal electricity in China and the United States (grams SO2 per kWh).25,29,51

States, after the widely recognized and successful Acid Rain Program enacted in the 1990 Clean Air Act Amendment, that country witnessed its SO2 emissions decrease from 9.0 g SO2 per kWh of coal electricity in 1990 to 2.7 g in 2010, a 70% decrease in 20 years (Figure 1). From this perspective, China achieved more in six years than the United States did in 20 years. The deployment and normal operation of SO2 scrubbers, or Flue Gas Desulfurization facilities, in coal-fired power plants were the key reasons for the Chinese improvement.25−27 In 2004 China had 28,100 MW of SO2 scrubbers in 9.2% of its coal-fired power capacity, whereas the number and ratio went up to 595,600 MW and 91.3% in 2010 and 668,000 MW and 94.5% in 2011.28 In the wind energy development case, in 2004 China had only 770 MW of wind capacity to generate 1,280,000 MWh of electricity, whereas the numbers increased to 62,410 MW and 73,200,000 MWh in 2011 (Figure 2). By 2010 China had accumulated the largest wind energy capacity in the world, and it surpassed that of the United States.6 On the supply side, in the early stage of both cases, China had few domestic companies and barely any commercialized technolo-

2. DATA AND METHODS This article employs publically available data and, most importantly, first-hand information collected in the author’s 9597

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3. CHINA’S RAPID SO2 MITIGATION IN COAL-FIRED POWER PLANTS The progressive paths in China and the United States have been dramatically different in reaching the wide deployment of SO2 scrubbers in coal-fired power plants and their normal operation of high SO2 removal rates (Figure 3). From the very

Figure 2. Wind energy development in China and the United States.6

gies. The Chinese markets were dominated by foreign companies and foreign technologies. After a decade, a large number of companies entered the market to meet the newly emerged demand for SO2 scrubbers and wind turbines with prices under control. The similarity of these two cases on the supply and demand sides provides a great opportunity to examine whether a common strategy has been applied. Furthermore, their substantial differences help to explore potential improvements of the strategy. The “product” of SO2 mitigation − the avoided SO2 emissions − does not have a natural market, whereas electricity from wind energy does. The first case represents the mitigation of pollutants that the government or a third party should verify when the “product” is delivered, including all conventional pollutants and CO2 with CO2 capture and storage technology. The second case represents low-carbon energy development for CO2 mitigation where the existing regulatory systems could be largely shared. Another significant difference is on the competitiveness of the SO2 scrubber and wind turbine industries, as could clearly be seen from the reaction of the United States to China’s rising industrial prowess. Over the same period as China’s rapid growth was taking place, the United States also witnessed significantly wider deployment. From 2004 to 2010, its SO2 scrubber capacity grew from 100,200 MW to 180,600 MW, and its wind capacity grew from 6,750 MW to 40,270 MW.29 “The China Price” is a critical reason for trade disputes between China and the United States. In 2010, the price tag of SO2 scrubbers in China was about $20/kW, as revealed in the author’s field work, whereas in the United States it was $206/kW.29 For wind turbines, the average price in 2010 was $700/kW in China and $1,460/kW in the United States.30,31 However, the much greater price advantage of China’s SO2 scrubbers barely made any news in trade disputes between the two countries, whereas those of wind turbines were highly visible.32 From another perspective, the Chinese SO2 scrubber industry did not contribute to the international SO2 mitigation, whereas its wind industry strengthened the global CO2 mitigation capability. The discrepancy of the two cases could help us to examine how to design the strategy to create not only a large industry for pollution control facilities but also a strong one.

Figure 3. The progressive paths on the deployment and operation of SO2 scrubbers in China and the United States.26,28,52−55

beginning, the normal operation of SO2 scrubbers in the United States has been mainly through the deployment dimension (Figure 3). In contrast, China deployed SO2 scrubbers with poor operation in the early stage and then proceeded simultaneously in the dimensions of deployment and operation until the technical limits of SO2 removal rates were reached (Figure 3). Using the comparative advantage strategy as a theoretical framework, this section explains why China did not follow the U.S. path and why the Chinese path is more feasible and faster-track under its specific situations. The Demand Side. When decision-makers are deciding which path to take, the major inputs are political will and enforcement capacity. Following the comparative advantage strategy, the chosen path should follow the direction where the input’s “productivity” is comparatively higher. In this case, the “productivity” was higher for the deployment of SO2 scrubbers at the early stage, and it later increased until their normal operation was attained. The deployment and normal operation of SO2 scrubbers require different amounts of resources for MRV − a critical capacity for environmental policy enforcement. On the one hand, the MRV on the physical existence of SO2 scrubbers is straightforward and the huge sizes − for example, an absorbing tower is generally several meters in diameter and tens of meters high − make them easily visible. The one-by-one inspection indicates that the corresponding MRV costs for each SO2 scrubber do not greatly differ, regardless of how many have been deployed. On the other hand, the MRV on the installation is just a one-time event, but when in operation they demand significantly more resources on a day-by-day basis. A wellfunctioning MRV system has significant initial costs of establishment. Additional MRV costs for one more SO2 scrubber are largely borne by the polluting firms that are responsible for installing their own monitoring equipment. For policy enforcers, the MRV costs have a great economy of scale, and they increase relatively modestly with wider deployment of SO2 scrubbers. After SO2 scrubber capacity has reached a 9598

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make efforts to establish well-functioning MRV systems and overcome the political resistance, more SO2 mitigation will be achieved for each unit of their effort if the focus is on further deployment rather than on operational improvement. With more and more SO2 scrubbers in place, any improvement in the operation of the growing stock will lead to a greater reduction in SO2 emissions. The rational choice of decision-makers, according to the comparative advantage strategy, leads to a path in which initial progress was made mainly in deploying more SO2 scrubbers, and it was only afterward that their level of operation caught up. The Supply Side. Two important barriers on the supply side could slow down the deployment of SO2 scrubbers in China. No existing supply capacity could meet the unprecedented peak demand of over 100,000 MW a year,28 and the capital costs of around $65−90/kW (Figure 4) were initially too high, they being over 10% of the costs of building new coal-fired power plants.34 If the large labor force and industrial base in China could be effectively mobilized for the deployment of SO2 scrubbers, the supply capacity would not have a major problem in meeting the rapidly growing demand. The lack of significant restrictions on foreign direct investment indicates that both foreign and Chinese companies could tap into the labor force. Whether the supply potential could be released depends on whether existing companies could expand their capacity and (more importantly) whether new companies could emerge. Although the U.S. market has only about ten companies, and with new companies rarely entering, the Chinese market has over 60 companies − almost all of which are newly established, most being domestic but some being foreign − thereby indicating much lower market entry barriers (Figure S1). In the past decade, the annually added capacity of SO2 scrubbers increased significantly both in China and the United States, but the evolution of unit capital costs showed a rapid cost reduction in China and a cost spike in the United States (Figure 4). In China, the rapidly rising demand triggered intensive market entry to create fierce competition followed by a cost reduction, whereas competition in the United States was rather limited, and this constrained the expansion of the supply capacity. When the demand for SO2 scrubbers grew, the price was pushed up. The most important barrier to market entry relates to technological advancement. The comparative advantage strategy in creating the demand could largely explain why it has been low in China. The deployment of SO2 scrubbers took off around 2002, but the normal operation was improved significantly only in about 2007.26,27 In the five gap years, many managers of installed SO2 scrubbers did not plan to operate them normally and cared very little about the quality, and quality is closely associated with the technological advancement of a supply company. In addition, China’s reform in the power sector in 2002 created multiple independent power corporations to encourage competition − this was even though all of these were state-owned. The rapid construction of new power plants strains their available financial resources to create strong incentives to minimize capital investment for each new project, while the poor quality of SO2 scrubbers could substantially reduce capital costs. Furthermore, the low requirement on quality is strengthened by the largely separate decisions of capital investment and daily operation and by the different incentives of respective decision-makers. Managers of coal-fired power plants should have an incentive to install high-

certain level, the MRV costs for policy enforcers are more closely related to SO2 removal rates than to deployment. The political resistance against the deployment and against the normal operation of SO2 scrubbers also differs. The normal operation and maintenance (O&M) costs are significantly higher than the annualized capital costs, especially for SO2 scrubbers with compromised quality.26 Quality has a great impact on the capital costs of SO2 scrubbers. For example, SO2 scrubbers in Hong Kong’s two coal-fired power plants were contracted with companies from mainland China, and the unit capital costs were three to four times those of similar projects in mainland China, although still about half of the comparable costs in the United States. Hong Kong’s SO2 scrubbers require high-quality equipment, engineering and construction, and enough redundancy, and they take about twice the amount of time from contract to completion. Beyond higher labor costs, the higher price in Hong Kong above “The China Price” could be mainly explained as a quality premium. Considering the reduction of capital costs in the Chinese market (Figure 4), the

Figure 4. Annual average unit capital costs of SO2 scrubbers in China and the United States.28,29,56 (China’s average unit capital costs refer to limestone-gypsum wet scrubbers. Annual average exchange rates were used for currency conversion. Data from 2000 to the peak year of deployment are shown.)

investment for one more SO2 scrubber will decrease to indicate that the political resistance dwindles when many SO2 scrubbers have been deployed. The O&M costs for each SO2 scrubber vary little along the deployment dimension because of the necessary consumption of electricity, limestone, and water. More SO2 scrubbers lead to greater overall O&M costs, and this increases the overall political resistance. However, installing SO2 scrubbers without normal operation wastes financial resources, and it conflicts with environmental policies. The associated political pressure for each SO2 scrubber from the civil society, despite its underdeveloped status in China, and from within the government increases when more SO2 scrubbers are deployed to make the problem more visible. The overall net political resistance against the normal operation of existing SO2 scrubbers could increase at the very early stage of deployment and then shrink when more SO2 scrubbers are in place. China does not have a well-established rule of law. Instead, goals play important roles in the governance, and this leads to a greater focus on results − in this case, how much SO2 could be removed.33 At the early stage of deployment based on the above analysis, when Chinese government decision-makers 9599

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systems are not well established. The lack of direct economic benefits also restrained governments, especially local governments in tackling SO2 mitigation. In comparison, the MRV systems for wind electricity delivery had been largely established despite wind energy being a new energy type for electricity supply. Furthermore, because electricity generation has direct and significant economic benefits to local governments, the political will for greater demand and better management was much stronger than in the case of SO2 scrubbers. Because the poor operation or quality of wind turbines would affect wind electricity generation and thus the revenue, investors in wind farms value quality substantially more than those investing in SO2 scrubbers. When the deployment of wind turbines became sufficiently wide, the Chinese government started to pay more attention to their operation. Problems in the quality and operation of wind turbines emerged with their deployment to threaten not just wind electricity generation but more importantly the safety of the electric grid and to push for greater focus and higher requirements.38 In 2010, the National Energy Administration published a plan to enact 247 technical standards for wind energy development, including several which were already in force.39 However, at least until 2011, more than five years after China started the rapid deployment of wind turbines, the performance of an average wind turbine had not caught up with the U.S. level, and this in part indicated that wind turbines had a persistent quality gap (Figure 2). The Supply Side. Again similar to the SO2 mitigation case, the comparative advantage strategy on the demand side helped to lower market entry barriers. The electric grid was required to issue prioritized access to wind farms with certified wind turbines,40 while the domestic certificates were more easily granted with low technological requirements. In 2006 the Chinese market had 12 companies who supplied wind turbines, and the number rose to 29 in 2012.41,42 Many component suppliers along the supply chain also actively entered the market.43 However, the lower market entry barrier at the early stage of wind energy development was still much higher compared to that of SO2 scrubbers; this was because of the greater attention to quality and normal operation. Although costs were much lower in China than in the United States, a race to the bottom on quality and price did not happen, and the price of China’s wind turbines remained stable (Figure 5). In addition, compared to wind turbine manufacturers, market

quality SO2 scrubbers, while capital investment is within the authority of the upper levels of management in power corporations. The low requirement on quality and technological advancement substantially lowered the technological market entry barrier not only just for the SO2 scrubber companies but also along the entire supply chain. In contrast, the quality requirement and technological market entry barrier in the U.S. market was much higher. However, despite the success in building up the supply capacity and achieving cost reduction, China’s large SO2 scrubber industry did not become competitive in the international market, as indicated by the nearly 10-fold price difference in the Chinese and U.S. markets (Figure 4). Many SO2 scrubbers were of low quality, and this increased the operation and maintenance costs and shortened their lifetimes. Although the delayed improvement on the operation of SO2 scrubbers was critical for lowering the initial quality requirement and technological barriers to market entry, after 2007 when the normal operation of SO2 scrubbers was largely expected, they stayed low. The gap between 2002 and 2007 was too long, and China was trapped in a low-quality bottom. The huge quality premium presents serious financial challenges to power corporations. In addition, the quality of SO2 scrubbers is quite opaque to investors, and only the SO2 scrubber companies have the best knowledge of the product. In the five gap years, a race to the bottom had pushed the quality and price of SO2 scrubbers to reach a minimum and stable level. Because no SO2 scrubber company had established a reputation for quality, any significant price increase would put the company in a disadvantageous position in competition. Even when China started to allow BOT (Build, Operate, Transfer) contracts for SO2 scrubbers to better integrate the decisions of capital investment and daily operation,35 the trap remained a difficult one to escape from. Another important reason for the segregation of the Chinese and U.S. SO2 scrubber markets lies in the restriction of technology licensors. Almost every major Chinese SO2 scrubber company licensed and relied upon foreign technologies felt themselves constrained in the Chinese market.36 Even projects in Hong Kong required special permission from technology licensors.

4. CHINA’S RAPID WIND ENERGY DEVELOPMENT The Demand Side. Similar to the SO2 mitigation case, the initial stage of wind energy development also focused more on the deployment to follow the comparative advantage strategy. For example, in China’s 11th Five-Year Plan for Renewable Energy Development, the major goal for wind electricity referred to generation capacity, whereas actual electricity generation served as a supplementary goal.37 During recent years, one average kW of wind capacity consistently generated much less electricity in a year in China than in the United States, and this partly indicates poorer operating conditions in China (Figure 2). However, the operational requirement never dropped to a bottom as in the SO2 scrubber case. One critical reason lies in their different regulatory foundations. Although the enforcement capacity for the deployment and operation of SO2 scrubbers could be built on the existing regulatory system, the weak environmental policy enforcement indicates that such a system had not been satisfactorily established in China. The large gap between required enforcement capacity and reality requires that substantial efforts should be made. Corruption and collusion are difficult to control if such effective MRV

Figure 5. Average prices of wind turbines in China and the United States.6,30,31 9600

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consistently slower (Figure S3). However, this article should not be read to argue against the rule of law in China. Indeed, the better progress in wind energy development has been largely due to its better policy enforcement. Although under currently unfavorable conditions the comparative advantage strategy could achieve more rapid pollution mitigation, China should make efforts to gradually strengthen its rule of law. The strategy could be applied in other sectors and other countries for rapid progress based on their respective comparative advantages. The comparative advantage strategy essentially takes regulations on pollution mitigation as the driving factor. The ecological modernization theory, for example, may provide an alternative explanation that connects environmental protection with economic modernization.47,48 China did plan to build domestic − although not necessarily domestically owned − industries from the beginning, as indicated in the localization roadmap for SO2 scrubbers in 2000 and the 70%-localization requirement for wind turbines in 2005.49,50 Substandard facilities might, therefore, have been expected. However, field interviews found little evidence that the initially weak regulation of the operation, especially of SO2 scrubbers, was due to strategic thoughts on industrial modernization, and it was the resulting poor operation that created critical incentives for poor quality. More likely than not, the path was not deliberately chosen but unintentionally led by China’s comparative advantage. A famous quote from Voltaire, a French writer, is that “the perfect is the enemy of the good”. The comparative advantage strategy for rapid pollution mitigation requires that the perfect is not the enemy of the good. China should not wait for a perfect solution before taking action. Developed and developing countries have very different comparative advantages in pollution mitigation and industrial development. If developing countries follow the path of developed countries, they might find that the hurdle is too high to overcome. The comparative advantage strategy could provide an intermediate − although imperfect − stepping stone, but it is necessary to prevent a country from being trapped there. The rule of men, lack of democracy, and an immature civil society might have made China more tolerant to the intermediate imperfections and hence able to utilize the comparative advantage strategy. As demonstrated in the two comparative case studies, the depth of the low-quality trap could be determined by the length of time for which the operational improvement of pollution control facilities is delayed. The delay should be long enough for the domestic supply capacity to become established but short enough to prevent a race to the bottom on quality and price. Another influential factor on the depth of the trap is the strength of the initial enforcement capacity. Because electricity generation corresponds to much stronger enforcement capacity than the mitigation of conventional pollutants, China could have a better chance to build internationally competitive industries for renewable energy that generally has to be converted into electricity. Low market entry barriers on quality and technological advancement are a key factor to make the Chinese market and industrial development vibrant. In the later upgrading, China could focus more on raising the corresponding requirements but keep other barriers low to minimize the negative impacts of such enhancement.

entry barriers were even lower and the technologies were less complex for component suppliers, and this resulted in fiercer competition and thinner profit margins. Furthermore, unlike SO2 scrubber companies, the Chinese companies in the wind industry licensed their technologies from a very different category of foreign companies. Foreign licensors of SO2 scrubbing technologies were generally major companies that were closely involved in the downstream business of installing SO2 scrubbers.36 In contrast, major foreign wind turbine manufacturers were largely reluctant to license technologies to Chinese companies, and most foreign licensors were design firms or small manufacturers that focused more on upstream technological development. This phenomenon is explained in the theory of markets for technology as the rational choice based on the respective industrial structure.44 The early disadvantage of accessing the mainly immature technologies also brought a later advantage because the technology licenses generally did not constrain the licensees into the Chinese market. Some licensees eventually bought their licensors or acquired intellectual property rights through joint research and development.45 The good-enough quality, lower price, and no geographic constraints of technology licenses made the Chinese wind industry potentially competitive. Despite the highly visible trade disputes between China and the United States, the actual trade in wind turbines was minimal. In 2011, the total capacity of exported wind turbines was equivalent to only 1.3% of that installed domestically.42 Although four Chinese wind turbine manufacturers had been ranked among the largest ten in the world, unlike the other six as regional or global suppliers, they remained largely domestic.46 Besides other influential factors, one important reason could be the quality gap that made the Chinese wind turbines fail to reach the technological market entry barriers in developed countries. However, the Chinese wind industry could have a promising future. If the price difference between China and the United States is taken as the upper limit of the quality premium or the depth of the quality trap, the wind industry would be much more likely to escape the trap than the SO2 scrubber industry.

5. DISCUSSION A model is constructed to simulate the pollution mitigation path (see the Supporting Information for details). In a comparative advantage strategy, decision-makers are assumed to maximize the impacts of their efforts on avoided pollutant emissions and choose to work between further deployment and operational improvement at each step. The results of the very simple model fit the actual mitigation path surprisingly well (Figure S2). In a rule-of-law strategy, one additional constraint is that the choice should give a higher priority to the normal operation of existing pollution control facilities. Deploying pollution control facilities but not operating them normally involves illegal activities in almost every country, whereas countries without a well-established rule of law tend to have low compliance rates. The rule-of-law strategy mandates China to first deter such illegal activities, which is what the United States did in the case of SO2 scrubbers (Figure 3). At the early stage, more pollutants will be emitted, but the two strategies will converge afterward (Figure S3). If in a third scenario considering the supply constraint to reflect the research finding that higher market entry barriers in the rule-of-law strategy could hinder the establishment of adequate supply capacity and push the price higher, the pollution mitigation pace will be 9601

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ASSOCIATED CONTENT

S Supporting Information *

Text and Figures S1−S3. This material is available free of charge via the Internet at http://pubs.acs.org.

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AUTHOR INFORMATION

Corresponding Author

*Phone: +852-3943 6647. Fax: +852-2603 5006. E-mail: [email protected]. Notes

The authors declare no competing financial interest.

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ACKNOWLEDGMENTS The author thanks Rob Socolow, seminar participants at CUHK and three anonymous reviewers for valuable comments, Zifeng Lu for providing SO2 emission data, Zhanfeng Dong for providing the SO2 removal rate in 2010, and David Wilmshurst for language editing. Funding comes from the National Basic Research Program of China (2012CB955803), the Geographical Modeling and Geocomputation Program under the Focused Investment Scheme, and a direct grant (C0012021063) from the Chinese University of Hong Kong.

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