Global Economics

What's it Going to Cost to Clean Up China?

Just how costly is China's environmental mess? The working assumption is that the situation is somewhere between really bad and off-the-charts ghastly. Yet getting a real statistical grip on the scale of the problem has been tough for Chinese leaders and outside observers alike. To its credit, President Hu Jintao's government is trying to remedy that and has just published a statistical portrait of the mainland's ecological woes that makes for some disturbing reading.

In early September, China's State Environmental Protection Administration and the National Bureau of Statistics of China published a two-year study that takes a stab at analyzing the real economic costs of the mainland's world-class industrial pollution problems.

The aim here is to adjust China's supersonic economic growth—the mainland clocked 10.6% growth in the first half—to reflect the price tag of environmental damage in terms of public health, lost agricultural production, and productive use of land and water from pollution. (You can find an English-language summary of the study at here.)

HUGE BURDEN. The study estimates that the economic cost from China's industrial pollution reached $64 billion in 2004, or about 3% the country's gross domestic product (GDP). "This striking figure just tells us that environmental pollution is quite severe at present," the report concludes. It's also a huge burden for a developing economy like China that still has big pockets of population barely making ends meet.

The cleanup cost of that mess in 2004 alone would have cost another $36 billion. China actually spent about a third of that amount two years ago, according to Stephen Greene, senior economist at Standard Chartered Bank, in a Sept. 25 report on the study.

What's worse, these numbers no doubt underestimate the real economic costs on the ground, as the report by the two agencies readily concedes. For instance, the analysis doesn't look at China's serious groundwater and soil contamination, which has hit agricultural productivity hard and will be costly to reverse. Nor does it examine the cost of depleted or poorly used land, forests, water, or fishery assets, and long-term ecological costs of, say, China's massive acid rain problem.

BRAKE ON ECONOMY. Even so, and putting aside these research shortcomings for the moment, the two agencies figure China would need a one-off investment of $135 billion to install the latest pollution-control technology to deal with the industrial pollution at its source and thus make a real lasting impact. That's about 7% of China's economic output. "The calculated figures again prove that environmental crisis is more and more severely restricting economic development of China," according to the environmental impact statement.

In its latest economic five-year plan, that runs from 2006 to 2010, China will commit $175 billion in a multi-year effort to clean up industrial pollution. It will probably take more money to get that job done, given the omissions in the current study.

China, of course, isn't the first high-speed developing economy to grapple with the tradeoffs between prosperity that lifts millions out of poverty and environmental damage that degrades living standards. But it does need to do a better job on cracking down on industrial polluters and enforcing environmental protection laws already on the books.

THE PARTY FACTOR. Pan Yue, vice-minister of China's State Environmental Protection Administration, has predicted that the "pollution load of China will quadruple by 2020" if nothing is done. Already, some 20% of the population lives in "severely polluted" areas, according to SEPA estimates, and 70% of the country's rivers and lakes are in grim shape, according to the World Bank.

One big problem for China's regulators, as Standard Chartered's Greene points out, is that local environmental regulators owe their allegiance to local Communist Party officials who control budgets and promotions. "When SEPA attempts to investigate, fine, or close down polluting facilities, localities often simply ignore them," he says.

Beijing deserves credit for trying to get a handle on the economic costs of its pollution scourge. But it's going to take a lot of political will, as well as money, to really deal with the problem at its source.

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