Pollution emission trading: a possible solution to China's enforcement obstacles in fighting against air pollution?

• Author: Li, Jiangfeng

1. INTRODUCTION II. OVERVIEW OF THE AIR POLLUTION PROBLEM IN CHINA III. ENFORCEMENT OBSTACLES IN AIR POLLUTION REGULATION IN CHINA A. Economic Reasons B. Legal Reasons C. Political Reasons D. sociocultural Reasons IV. THEORETICAL FOUNDATIONS FOR POLLUTION EMISSION TRADING AND ENFORCEMENT A. Theoretical Foundations of Pollution Emission Trading B. Emission Trading and Enforcement C. Performance of the United States' [SO.sub.2] Emission Trading Program D. Enforcement Assessment of the United States' [SO.sub.2] Emission Trading Program 1. Participation Enforcement 2. Compliance Enforcement V. Pollution Emission Trading in China A. China's Application of Pollution Emission Trading 1. The Starting Period (1987-2000) 2. The Experimental Period (2001-2014) 3. The Expansion Period (Post-2014) B. Performance of China's Pollution Emission Trading Practice C. Enforcement Assessment of the Emission Trading Programs in China 1. Participation Enforcement 2. Compliance Enforcement D. Prospects of China's Emission Trading Programs in Dealing with Enforcement Problems VI. Conclusion I. INTRODUCTION

   In recent years, air pollution problems in China's major cities, such as the recurring serious smog and haze in Beijing, has reached a "crisis level," raising widespread public criticism of the government's sluggish response to this problem. (1) To manage the historic air pollution levels, the Chinese government "declared a war" against pollution in March 2014. (2) Additionally, in August 2014, China's central government announced that it would expand the application of its emission trading mechanism after experimenting with a market-based approach through several pilot programs beginning in 2007. (3) The announcement stated China's ambition to establish a nationwide emission trading market by the end of 2017. (4) However, since China has experienced serious enforcement problems with its previous environmental protection initiatives, (5) it is uncertain whether China's emission trading programs have actually succeeded and whether this market-based approach can really provide a solution to China's longstanding enforcement problems.

   To shed light on these uncertainties, this paper will undertake a study of China's pollution emission trading programs and their actual performance with the goal of uncovering whether the emission trading programs have helped solve, or at least reduce, these enforcement obstacles. Since China's emission trading programs were developed in light of the United States' experience with such programs, emissions trading in the United States provides important context for understanding China's emission trading practices. This paper thus includes results from a comparative analysis of emission trading practices in both China and the United States.

   This paper is composed of the following five sections. Section I provides an overview of the seriousness of China's air pollution problem. Section II discusses the major obstacles for China's environmental regulation enforcement. Section III introduces the theoretical foundations of pollution emission trading, the relationship between those foundations and enforcement, and how emission trading was adopted and enforced in the United States. Section IV presents an empirical study of the actual performance of the emission trading programs in China, with the goal of showing how these programs have responded to the enforcement problems. Finally, this paper will conclude with some policy implications.

2. OVERVIEW OF THE AIR POLLUTION PROBLEM IN CHINA

   China's air pollution has become a nationwide problem that severely threatens public health and China's long-term economic development. (6) The negative externality of China's air pollution has also potentially impacted the air quality of neighboring or even distant countries.

   First, most of China's major cities have suffered from air pollution. According to a report issued by Greenpeace, a nonprofit environmental organization, among the seventy-four Chinese cities monitored by the Chinese central government, (7) sixty-nine did not meet the national standard for average annual air pollution concentrations of particulate matter 2.5 (PM2.5) (particles with a diameter of 2.5 micrometers or less). (8) In fact, none of the seventy-four cities met the minimum standard of the World Health Organization's (WHO's) recommendations for PM2.5 levels. (9)

   According to the WHO standard, healthy air shall have a PM2.5 concentration below 10 [micro]g/[m.sup.3] (10 micrograms per cubic meter of air annual arithmetic average), while China's standard only requires a concentration below 35 [micro]g/[m.sup.3]. (10) Notably, the most polluted cities on the list are all northern cities, with Beijing ranked thirteenth. (11) Interestingly, all of the top ten most polluted cities (with an annual average PM2.5 concentration level above 100 [micro]g/[m.sup.3]) surround Beijing. (12) In addition, all of the most polluted cities are those with concentrated industries employing low-efficiency uses of coal, such as industries for electricity generation and steel manufacturing, which are major sources of air pollution. (13)

   Due to the continuously intensifying air pollution problem, China's public health and the sustainability of its economic development are in danger. According to a research report issued by the Proceedings of the National Academy of Science of the United States of America in January 2013, air pollution resulting from the Chinese government's arbitrary policies may cause "500 million residents of Northern China to lose more than 2.5 billion life years of life expectancy." (14)

   It was also reported that in 2010 alone, air pollution caused the death of 1.2 million people in China. (15) Such pollution also placed a huge burden on China's economic development. For example, a Massachusetts Institute of Technology (MIT) study showed that China's economy incurred a cost of $112 billion in 2005 due to lost labor and increased need for health care arising from the pollution. (16) In addition, China has had to divert more funding and resources to deal with the damage caused by pollution. (17) In 2010, it was estimated that the Chinese government would have to invest about USD 1.4 trillion to address China's air pollution problem. (18)

   Moreover, since it is impossible to direct the air from one region to another, it was also reported that other countries were suffering the externality of China's air pollution. For example, China's neighboring countries like Japan and South Korea all reported concerns about the impacts China's air pollution would have on their air. (19) Some scholars' studies even suggested that strong global winds have spread polluted air from China to the United States' West Coast, thus intensifying air pollution in cities like Los Angeles. (20)

   As illustrated above, the air pollution problem is so serious that China must take immediate action to effectively address it.

3. ENFORCEMENT OBSTACLES IN AIR POLLUTION REGULATION IN CHINA

   Despite the severity of China's air pollution, it has not been effectively addressed mainly due to the difficulty of enforcing environmental laws and policies. Professors Erin Ryan and Wang Canfa each provide a comprehensive analysis of these enforcement problems in their respective work. (21) According to them, China has already built a comprehensive legal framework for environmental protection, (22) but a lack of law enforcement is the major obstacle to effectively implementing those laws. (23)

   To better understand the overall picture of China's enforcement problems, this paper divides the major obstacles of China's environmental protection regulation into economic, legal, political and sociocultural reasons. The following will briefly discuss each of them.

   1. Economic Reasons

      Since China's opening policy in 1978, economic development has always been the national priority. In 1987, the Chinese central government even announced that economic development is the "one central task" for the Chinese government. (24) To achieve this goal, China adopted the economic development model of the xian wuran, hou zhili, i.e., "pollute first, control later." (25) Such a model mainly relied on low-efficiency uses of natural energy such as coal to build up China's heavy industries, including steel manufacturing. (26) For example, in 2009, China consumed nearly half of the world's coal, which accounted for about seventy percent of China's total energy use. (27) But the use of coal is very inefficient and has heavily contributed to environmental pollution, including air pollution. For instance, in 2011, China consumed twenty percent of the world's total energy, but only generated about ten percent of global GDP. (28)

      With this backdrop, any environmental policy that aims to transition from low-efficiency to high-efficiency energy use will inevitably impose a burden on China's current economic growth, conflicting with the Chinese government's central task. Currently, China has not achieved economic maturation and is still striving for maximum economic growth. (29) In recent years, the Chinese government has sought to refocus its development from heavy industry to diverse high-end industries and to build up an environmentally-friendly economy. (30) As long as the conflict exists between environmental protection and economic growth, however, the government still lacks a strong incentive to fully enforce and implement the environmental protection goals.

      Accordingly, economic motives were the fundamental factors that caused China's environmental problems and served as major impediments for effective enforcement of environmental regulation. These factors also explain why there was widespread "superficial enforcement" as described by Professor Wang Canfa. (31)

   2. Legal Reasons

      Generally speaking, China lacks a workable legal system to enforce its environmental laws and policies.

      First, although China has established a...