Pollution in China.

©cbc

One of the big stories coming out of China recently is not one of economic success, it is on the topic of pollution. Despite what is being widely reported, the problems in China do not only stem from air pollution; earlier this month thousands of pigs were found flowing down one of Shanghai’s main water supply rivers (reuters).

This has become a real issue, with it being the most publicised news story in Chinese newspapers for months now.

What makes this an interest to economists?

Pollution is a negative externality, not only does it affect the producer (factories) but it also affects 3rd parties (you and me). The lack of internalising this cost to society makes it a situation where the government has to step in. One example is smoking, which causes the negative externality of poor health (to passive smokers and smokers alike) and the government has helped to internalise this cost by introducing taxes on the cigarette companies.

What is happening in China to sort the pollution?

Pollution in China is believed to have caused 1.2 million premature deaths (npr) and resulted in a number of working days being lost as conditions become unbearable to work in. The government has recently announced it will spend $16 billion over the next 3 years to help reduce pollution in China (bloomberg).

However, rather ironically, one of the plans by the Government is to build five rubbish incineration plants (bloomberg), which seems to this blogger as replacing one problem, rubbish pollution, with another problem, air pollution. Nonetheless it is good to see the Chinese government working towards fixing pollution, and one hopes the incineration plants are highly efficient and low in pollution.

Possible other methods of reducing pollution?

There is one method that the European and American governments have really taken a liking to, and that is theCarbon Emissions scheme. In Europe this become popular in order to meet the requirements of the 1997 kyoto protocol.

How does the Carbon Emission scheme work?

Factory owners are issued permits for a certain amount of pollution, with a declining number of permits issued each subsequent year (to prevent the permits loosing value). Companies that don’t use all their allowances can sell them to companies that exceed their limits, resulting in a free-market for emissions (businessweek).

The hope is that companies will reduce emissions, as permits would be expensive enough to disincentivise factories from polluting but also provide the factory with the incentive to reduce their emissions, so they can sell the permits for profit.

However, despite good intentions the carbon emission scheme is not have such a great time at the moment. In order to achieve the target of reducing emissions and increasing the use of renewable energy, policymakers in the EU estimated that CO2 would have to cost $30-40 a ton (businessweek). As of the 22nd March CO2 permits cost $4.82 a ton.

With this in mind, we have to hope that China will find a reasonable solution to their pollution problems, as being an economist it is always disconcerning to hear about market failure. It is important that the government doesn’t take too much action, as there is the possibility of government failure; where if the government intervenes in the markets too much it could of a damaging affect on the economy. It is therefore important that the Chinese learn from the Carbon Emission Scheme in Europe and use the lessons learnt to help implement a more effective program in China.

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