Valuation Study

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Pollution Control Policies


Medium: Animals, Plants and/or Others

Country: China

Analytical Framework(s): Other

Study Date: 1997

Publication Date: 2000

Major Result(s)

Study Note: China began its program of economic reforms in 1978 and has enjoyed double-digit annual growth ever since. Agricultural reforms were implemented most aggressively. Industrial reforms and industrial growth followed and, as in any rapidly industrializing economy, so did industrial pollution. Indeed, many see the environment as a casualty of two decades of booming growth and the environment has become central to national policy. Premier Zhu Rongji, in the Government Report to the National People's Congress on March 5, 1999, identified sustainable development as one of China's two fundamental strategies for the 21st century. President Jiang Zemin, stressed the importance of environmental protection at the annual workshop on Population, Resource and Environment on March 13, 1999. He announced the aggressive new policy that any enterprise not in environmental compliance by year 2000 would be closed.

Study Details

Reference: Jintao Xu. 2000. China's Paper Industry: Growth and Environmental Policy During Economic Reform. EEPSEA Research Report, No. 2000-RR.

Summary: The central government's position on the competing challenges of environment and development is pragmatic. It aggressively seeks growth but it also desires environmental protection. Its application of a system of pollution levies is the largest application of a market-based regulatory instrument in the developing world. Two questions have been central to all considerations of environmental policy: how severe is the pollution policy constraint on economic growth, and can economic instruments decrease pollution? The government has been willing to try various instruments for pollution control, and it has been willing to modify policy when the instrument of initial choice proves unsatisfactory. In the paper industry, for example, the government has used both standards and charges, closing small mills and taxing the effluents of larger mills. The relative merit of the two instruments is a topic of continued debate, although government confidence in the effectiveness of economic instruments to control pollution seems to be declining. Our objective in this paper is to examine the pollution control policies applied for the paper industry. The paper industry is the source of 10 percent of China's industrial wastewater emissions and one-fourth of its chemical oxygen demand. It is the largest source of rural environmental pollution. Most of the literature on China's industrial growth tend to be general to the full sector. Li (1997), Jefferson et al. (1996, 1992), and Jefferson and Xu (1994) examined improvements in aggregate performance since the reforms began. Wang et al. (1996) examined mill responsiveness to pollution charges regardless of industry specialization. In general, this literature reports increasing efficiency in factor use over time (Li 1997), convergence of the marginal revenue products of factors (Jefferson and Xu 1994), and the expected emission-reducing performance of pollution charges (Wang et al.). Nevertheless, the evidence remains sparse--and confirmation would be desirable. Jefferson (1990), for example, points out the paucity of analysis on the performance of key industries. The lack of firm-level and industry-level panel data is one reason. The absence of good pollution data and the locally selective administration of national pollution policy compound the problem. We addressed the data problem by collecting pollution information in our own survey of 34 paper mills and combining this with mill-level production data from the Council of Light Industries (CLI). The result is panel data for mills of various sizes and production categories from two representative provinces, Fujian and Yunnan, for the period 1982-1994. The mills are all state-owned or managed by collectives. These mill categories have been the main targets of the central government's industrial reforms and also its pollution control policies. The period of our analysis incorporates most of the period of gradual industrial reform prior to the government's very recent decisions to increase the levy and to allow unprofitable mills to close and profitable mills to release surplus labor. 3 We used a three-stage procedure to estimate the effects of pollution levies on the emissions of environmental pollutants and on production efficiency. The first stage provided estimates of the endogenous factors of production, including those environmental factors targeted by the pollution levy. The second stage applied predicted values from the first stage, together with actual values for the exogenous factors, to estimate the production of conventional paper products. We estimated frontier production functions (Cornwell et al. 1990, Kumbhakar 1990) in order to obtain firm- and time-specific measures of technical efficiency. The third stage assessed the relationships between the mill-level efficiency scores taken from the second stage and other influential factors--with special attention to the affect of China's pollution levy on efficiency. The first stage results showed that the system of pollution levies works. Pollution levies decreased the production of environmental effluents--and increasing the levies reinforced their favorable effect. We found no consistent evidence that the pollution levies decreased economic efficiency for most classes of mills, which is more or less consistent with the US experiences (Jafe et al. 1995) and should partially relieve the government's concerns when imposing environmental regulations to its rapidly growing industry. Yet we observed a substantial opportunity to increase efficiency through improved labor productivity. This observation is consistent with the government's recent decision to relax its policy of employment protection for workers in the larger state-owned mills. In addition, increasing returns to productive scale is plausible, and it would be consistent with a second recent government decision to close the most offending small mills.

Site Characteristics: Unlike China's agricultural and forestry reforms, which began with widespread introduction of the household responsibility system in 1978 and resulted in rapid modification of the system of agricultural collectives, China's industrial reforms began later, in 1984, and proceeded more gradually. The results, however, are no less impressive. Three broad classes of reforms characterize the changes in industrial policy: gradual improvements in firm-level autonomy in the selection of inputs and input mixes (a "manager responsibility system"), reform in product distribution (a "dual track" of both centrally allocated and market allocated production with firms permitted to distribute an increasing share of final output directly to the market), and urban reform--which permitted a private manufacturing sector to emerge.

Comments: We cannot examine pollution policy without also examining the industry's pattern of growth because the rapidly changing structure of the paper industry has its own effect on pollution. In general, the industry shares many experiences with the full manufacturing sector, e.g., increasing financial autonomy for individual mills yet great variation in local government influence, continued government control of certain inputs yet increasing market allocation of final products, the emergence and growth of smaller and more autonomous mills, and, of course, double digit annual growth since 1978. The paper industry is a representative industry in these respects. However, each industry is characterized by its own patterns of input use and its own relationship between output growth and the production of environmental effluents. For the paper industry, some evidence suggests that growth in mill capacity is associated with a decline in effluent discharge, yet the expanding number of small paper mills is associated with an increase in pollution. Therefore, inducing some characteristics of growth in this industry may even be a desirable environmental policy, but the targets of such a policy would have to be identified clearly.