The Economics of Environmental Protection in China

February 14-15, 2014
Joseph Fan of Chinese University of Hong Kong, Matthew Kahn of University of California, Los Angeles, and Randall Morck of University of Alberta, Organizers

Junhong Chu and Ivan Png, National University of Singapore, and Yehning Chen, National Taiwan University

Climate change in China: Communism is cooler

With most of the world experiencing extreme temperatures, one country seems to stand out: China. Here, Chen, Chu, and Png report on a dataset of daily maximum temperatures between 1929-44 and 1951-2010 at 65 stations in mainland China and 21 stations on China's eastern periphery (Japan, Korea, Taiwan, and Hong Kong). The dataset includes newly compiled historical weather records of mainland China between 1929-44. The authors find that daily maximum temperatures (as recorded) in summer in mainland China apparently became less extreme in 1954 and then more extreme in 2001. By comparison, there was no such change in the peripheral stations. The authors explore and rule out various explanations of the apparent "summer cooling": aerosol effects, urbanization, and changes in meteorological standards and procedures. One explanation that is not ruled out is under-reporting of extreme temperatures to help local governments cope with national directives on health and safety during hot weather.

Maoyong Fan, Ball State University; Guojun He, Harvard School of Public Health; and Maigeng Zhou, Centers for Disease Control and Prevention

The Effect of Air Pollution on Cardiovascular Mortality: Evidence from the 2008 Beijing Olympic Games

Exogenous air pollution variations induced by the 2008 Beijing Olympic Games provide a natural experiment to estimate the health effects of air pollution. He, Fan, and Zhou find that air pollution has a significant effect on cardiovascular mortality in China. A 10 µg/m³ (10 percent) decrease in PM10 mean concentrations decreases monthly cardiovascular mortality by 13.6 percent, implying that more than 67,000 premature cardiovascular deaths could be avoided each year by a 10 percent reduction in PM10 concentrations. The estimates are robust to a variety of specifications.

Dalia Ghanem, University of California at Davis, and Junjie Zhang, University of California at San Diego

"Effortless Perfection:" Do Chinese Cities Manipulate Air Pollution Data?

Ghanem and Zhang use unique data on daily air pollution concentrations over the period 2001–10 to test for manipulation in self-reported data by Chinese cities. First, the authors employ a discontinuity test to detect the cities that reported dubious pollution data around the cutoff for "blue-sky days." Then, they propose a panel matching approach to identify the conditions under which irregularities may occur. The authors find that about 50 percent of cities reported dubious PM10 pollution levels that led to a discontinuity at the cutoff. Suspicious data reporting tends to occur on days when the anomaly is least detectable. The findings indicate that the official daily air pollution data are not well-behaved, which provides suggestive evidence of manipulation.

Ruixue Jia, University California at San Diego

Pollution for Promotion

Jia provides evidence on the impact of political incentives on the environment using the case of China's pollution. Guided by a simple career concerns model, the author examines empirically how promotion incentives of provincial governors affect pollution. To find exogenous promotion incentives, she explores within-governor variation in connections with key officials attributable to reshuffling at the center and documents the fact that connections are complementary to economic performance for governors' promotion. The data confirm the model prediction that connections increase pollution. Auxiliary predictions of the model are also confirmed by the data.

Jing Wu, Tsinghua University; Yongheng Deng and Bernard Yeung, National University of Singapore; Jun Huang, Shanghai University of Finance & Economics; and Randall Morck

Incentives and Outcomes: China's Environmental Policy (NBER Working Paper 18754)

In generating fast economic growth, China is also generating growing concern about its environmental record. Using 2000–09 data, Wu, Deng, Huang, Morck, and Yeung find that while spending on environmental infrastructure has visible positive environmental impact, city spending is strongly tilted toward transportation infrastructure. Investment in transportation infrastructure correlates strongly with both real GDP growth, a measure of tangible economic growth relevant to city-level Party and government cadres' promotion odds, and with land prices, which affect city governments' revenues from land lease sales. In contrast, city governments' spending on environmental improvements is at best uncorrelated with cadres' promotion odds, and is uncorrelated with local GDP growth and land prices. These findings suggest that, were environmental quality explicitly linked to a cadre's chance of promotion, or were environmental quality to affect land prices substantially, city-level public investment in environmental improvement would rise.

Ming Lu, Fudan University, and Cong Sun and Siqi Zheng, Tsinghua University

Congestion and Pollution as the Consequences of Cross-Zone Schooling in Beijing

Douglas Almond, Columbia University and NBER; Shuang Zhang, University of Colorado Boulder; and Maigeng Zhou, Centers for Disease Control and Prevention

Air Pollution and Short-Term Mortality in Beijing

Shanjun Li, Cornell University

Better Lucky Than Rich? Welfare Analysis of Automobile License Allocations in Beijing and Shanghai

Economists often favor market-based mechanisms (for example, auctions) over non-market based mechanisms (such as lotteries) for allocating scarce public resources on grounds of economic efficiency and revenue generation. When the usage of the resources in question generates negative externalities and the amount of externalities is positively correlated with willingness-to-pay (WTP), the efficiency comparison can become ambiguous. Both types of mechanisms are being used in China's major cities to distribute limited vehicle licenses as a way to combat worsening traffic congestion and urban pollution. While Beijing employs non-transferable lotteries, Shanghai uses an auction system. Li empirically quantifies the welfare consequences of the two systems by estimating a random coefficients discrete choice model of vehicle demand to recover consumers' WTP for a license. Rather than relying on the maintained exogeneity assumption on product attributes in the literature, the author employs a novel strategy by taking advantage of a control group as well as information from household surveys to identify structural parameters. He finds that although the lottery system in Beijing has a larger advantage in reducing externalities from automobile use than a uniform price auction, the advantage is offset by the significant welfare loss from misallocation. The lottery system results in nearly 36 billion RMB (or $6 billion) in social welfare foregone in 2012 and the auction would have generated 21 billion RMB for the Beijing municipal government, more than covering all the subsidies to the local public transit system.

Ines Azevedo and Long Lam, Carnegie Mellon University, and Lee Branstetter, Carnegie Mellon University and NBER

The Unsustainable Rise of the Chinese Wind Turbine Manufacturing Industry

China has emerged as the world's largest carbon emitter by an increasingly large margin, and the high levels of pollution in its major cities have drawn global attention. A growing stream of research stresses that China is also an increasingly important source of innovation in clean energy technology. The message stressed by this countervailing research stream is that China-generated innovation can cure China-generated environmental externalities, and proponents cite the growing global dominance of Chinese firms in wind and solar power hardware as proof of their assertions. Lam, Branstetter, and Azevedo investigate these claims made on behalf of China's wind manufacturing industry and find that they do not stand up to scientific scrutiny. Although various studies in the received literature attest to the growing innovative capability of the Chinese wind turbine manufacturing industry (Ru et al. 2012), a careful examination of market data and patent data from the PATSTAT undermines these claims. The authors map out the growth of the Chinese wind turbine industry and point to the government policy initiatives that have been important in promoting that growth. They assess the patenting activity for the wind industry by country in terms of patent counts, then undertake a citation function analysis of global patenting in technologies related to wind turbine manufacturing. They show that even at the global level, invention in this domain has become increasingly incremental in nature. Nevertheless, Chinese firms have received almost no international patents protecting their "inventions." Given the strong and clear incentives these firms face to protect innovations in large markets such as Europe or the United States, it is hard to resist the conclusion that Chinese enterprises have simply not come up with any technology worth patenting. Chinese firms have managed to push the costs of existing technology to low levels — a factor that undergirds their modest but growing exports to the rest of the world. However, even this achievement may not be fully sustainable. A wave of industry consolidation in China suggests that the final steps of its producers down the "learning curve" required widespread pricing below marginal cost. An analysis of the recent financial statements of major surviving firms suggests that even with a modest recent increase in hardware prices, leading producers are not deriving enough income from their core manufacturing business to cover their interest costs. The authors do not believe the current period of consolidation will end in the death of the Chinese industry. To the contrary, they believe that leading China-based indigenous producers are likely to remain important global players for the foreseeable future. Nevertheless, further progress in terms of cost reductions is likely to slow substantially relative to the recent past, as is the growth rate of the indigenous industry, even as the industry slowly regains financial health. In turn, the slowdown in the rate of cost reduction has global implications.