A December 2000 report by U.S. Embassy Beijing

Summary: Pollution costs the Chinese economy anywhere from 3 to 8 percent of GDP each year, according to estimates of various Chinese and Western scholars. Ecological damage potentially costs another 5 to 14 percent. Even at the low end of these estimates, environmental damage is roughly equivalent to annual economic growth meaning that the economy is producing little or no new net national wealth. However, the studies all suffer from lack of reliable data, and the results largely depend on the assumptions and calculation methods employed. To date no study has been sufficiently comprehensive and authoritative to persuade Chinese leaders of the full magnitude of the problem.

Green is the Color of Money

Everyone knows environmental degradation in China is serious. But estimates of how much it costs the country’s economy vary widely. A 1997 World Bank report titled Clear Water, Blue Skies drew broad international attention to the issue. That study concluded air pollution alone cost China’s economy more than 7 percent of GDP in 1995 — several times the estimates of previous studies. Chinese scholars and policymakers are critical of the World Bank study, and a World Bank official confided that many of its numbers were “plucked out of the air.” But the report motivated new thinking on the subject that is generally leading researchers to revise their estimates upwards.

Author	Year of estimate	Pollution			Damage to ecology	Total
		Air	Water	Other
World Bank	1995	7.1*	0.6	n/a	n/a	7.7
CASS/EDRC	1993	1.4	1.6	0.2	6.9	10.0
Smil?	1990	0.9	0.7	0.5	5.4	7.5
SEPA	1992	2.5	2.0	0.0	n/a	4.5
Guo-Zhang	1983	2.2	4.5	0.0	8.9	15.6
Jin Jianming	1985	n/a	n/a	n/a	12.5	12.5
Smil-Mao	1992	2.4	1.5	0.2	13.9	18.0
Xu Songling	1993	1.1	0.9	0.8	6.9	9.7

*: Based on “willingness to pay” valuation method; the study also uses a more conservative “human capital” method, which yields an air pollution cost estimate of 3.1 percent.

?: Midpoint estimates; Smil provides a confidence interval of 1.7-2.5 percent of GDP for pollution costs and 3.8-7.0 for ecological damage.

Sources: Xu Songling, Calculating the Economic Costs of China’s Environmental Damage (1998); Vaclav Smil and Mao Yushi (eds.), the Economic Costs of China’s Environmental Degradation (1998); World Bank, Clear Water, Blue Skies (1997).

Assigning economic costs to environmental damage is a controversial enterprise to begin with. In China, the situation is further complicated by the paucity of good data, the scale of the problem and lack of research funding. Also, as an economy in transition from central planning, prices in China do not always reflect true economic values, rendering many standard economic calculations invalid. The major studies conducted to date are summarized in the above table. In addition to methodological differences, they differ in their scope of coverage and time periods analyzed. Some estimate only the costs of industrial pollution while others attempt to calculate the economic impact of deforestation and damage/depletion of other natural resources (lumped together here as “damage to ecology”). The estimates are therefore not strictly comparable but give a picture of the current state of the research.

Direct Evidence

There is ample anecdotal evidence that pollution and ecosystem destruction impose direct costs on China’s economy:

• “Red tides” — abnormal algal growth caused by marine pollution — caused more than US$ 120 million in losses to the fishing industry in the Bohai, Yellow and South China seas in the spring of 1999, according to the Ministry of Agriculture.

• Fishermen in Hebei Province filed suit in November 2000 claiming wastewater from upstream paper mills in Henan Province killed US$ 3 million worth of fish.

• Toxic spills killed 2 million kilograms of fish in two rivers in Anhui Province in July 2000, costing local fishermen RMB 12 million (US$ 1.5 million) in lost catch; sources indicate perhaps a thousand such incidents occur nationally each year.

• A 1999 Georgia Tech study calculated that reduced sunlight due to sooty air may be depressing yields on 70 percent of China’s farms by 5-30 percent; Chinese factories and households emitted more than 23 million tons of soot and industrial dust in 1999, according to the State Environmental Protection Administration.

• The Chongqing Environmental Protection Bureau found that nearly a quarter of the municipality’s vegetable crop was damaged by acid rain in 1993 and estimated damages to all crops and forests there totaled RMB 415 million (US$ 65 million); acid rain falls on about a third of China’s territory.

• Each year another 180,000 hectares of Chinese farmland becomes salinized, causing productivity to fall 25-75 percent, and about 200,000 hectares turns into desert; about 2 million hectares of pasturage are degraded each year.

• Erosion claims about 5 billion tons of China’s topsoil each year, washing away nutrients equivalent to 54 million tons of chemical fertilizer — twice what China produces in a year.

Indirect Costs

In addition to the above-listed direct impacts, environmental degradation imposes important indirect costs on China’s economy. For example:

• More than 80 percent of children aged 5-7 tested in Guangzhou in early 2000 had unhealthful levels of lead in their blood; studies in other cities have also shown rates exceeding 50 percent; lead has been shown to retard children’s physical and mental development and therefore their economic productivity as adults. (some public health experts have told us these results may be biased by the sampling method used, which picks up lead from the skin surface; but the figures are alarming nonetheless)

• Chronic obstructive pulmonary disease is the leading cause of death in China; the rate of death from such disease is twice the average for developing countries and is roughly equal for men and women, even though few women smoke; the American Chemical Society estimated more than a million Chinese deaths a year — one-eighth of total deaths — were attributable to air pollution between 1990 and 1995.

• Pollution-related illness, in addition to direct medical costs, causes workers to miss work or to be less productive on the job; the World Bank estimated China lost 4.5 million person-years of labor productivity due to air pollution in 1995.

• Air pollution corrodes physical structures, increasing maintenance costs and shortening the useful life of buildings and machinery.

• Deforestation can affect local climate and rainfall, as well as soil-retention and siltation of waterways, thereby affecting navigability, hydroelectric output, capacity of reservoirs, availability of irrigation water and flood-control capability.

• Water pollution can spread diseases, reduce agricultural output and impose costs on industries that use water in their production processes.

A Brief Review of the Literature

The first systematic attempt to quantify the economic cost of environmental degradation in China was published by Guo Xiaomin and Zhang Huiqin of Tsinghua University in 1990, using data from China’s Sixth Five-Year Plan (1981-85). That study estimated total pollution damages equaled 6.75 percent of GDP, with water pollution causing twice as much damage as air pollution. Ecological damage was valued at 8.9 percent of GDP — roughly three-quarters from degradation of agricultural land and one-quarter from exhaustion of timber resources. The methodology was somewhat crude, but the Guo-Zhang study established a model that influenced subsequent Chinese studies.

In 1994, the China Environmental Sciences Press published Green Crisis, edited by Jin Jianming, in which a group of Chinese researchers attempted to assign a value to the annual depletion of China’s natural resources, using 1985 as the reference year. Their estimate was about 50 percent higher than Guo and Zhang’s and assigned a much greater weight to degradation of grasslands.

The first Western economist to take a crack at the question was Vaclav Smil of the University of Manitoba, who published a study for the East-West Center in 1996, using 1990 data. Smil’s study makes greater use of modern economic theory than the two earlier studies and is more analytically rigorous, even providing confidence limits for its estimates. Smil concluded air pollution was more important than water pollution and found a more important role for solid waste pollution (more than a quarter of total pollution costs). But his mid-point estimate of total cost for both pollution and ecological damage was less than half the Guo-Zhang estimate.

While conducting his study, Smil assembled a team of Chinese experts to prepare an independent estimate. The results were published in 1998 by the University of Toronto and the American Academy of Arts and Sciences in a report titled The Economic Costs of China’s Environmental Degradation, edited by Smil and by Mao Yushi of the Chinese Academy of Social Sciences (CASS). The Chinese team — Wang Hongchang of CASS, Ning Datong of Beijing Normal University and Xia Guang of the State Environmental Protection Administration (SEPA) — calculated pollution costs in 1992 totaled 5 percent of GDP, deforestation cost the economy 12 percent and damage to other ecosystems totaled 2 percent.

In 1997, Sun Biyan of SEPA’s Environment and Economic Policy Research Center published a study, based on 1992 data, estimating total pollution damages at 4.5 percent of GDP, split roughly evenly between air and water pollution with a negligible role for solid waste.

Later that same year, CASS’s Environment and Development Research Center (EDRC), headed by Zheng Yisheng and Xu Songling, released a study estimating the total environmental degradation price tag in 1993 to be 10 percent of GDP. The following year, Xu published a book analyzing all the major studies to date, including the World Bank’s Clear Water, Blue Skies, and drawing on what he judged to be the best practices contained therein, prepared a composite estimate. His analysis indicated that many of the earlier calculations, including Smil’s, were flawed due to double-counting. Xu also attempted to estimate the cost of pollution from China’s rural township and village enterprises, not captured in previous studies, and the impact of deforestation on the frequency of natural disasters. His estimate for total 1993 environmental degradation costs, probably the most comprehensive yet published, was 9.7 percent of GDP.
 

Common Problems with Existing Studies

Any environmental cost estimate anywhere must confront difficult conceptual, methodological and measurement problems. The task is made all the more difficult in China by lack of good data. In the introduction to his 1998 report, Smil described China as “abounding in dubious statistics and unverifiable claims and peopled by masses of uncooperative bureaucrats prone to treat any unflattering statistics as a deep state secret.” In fact, many Chinese scholars complain that foreign-funded researchers have better access to Chinese data than they do.

In addition to data problems, most studies in China suffer from inadequate funding and unrealistic deadlines, according to Chinese environmental economists. As a result, researchers typically conduct a review of the existing literature and available data, extrapolate from individual case studies and then, facing a publication deadline, punt on the tough questions, cut a few corners and spit out a number.

Clear Water, Blue Skies was no exception, in their opinion. Zou Ji of Renmin University’s Institute of Environmental Economics characterized the Bank’s study as “rough” and “simple” and said it merely transfered research findings from Europe and North America to China. But he said no other reliable research on the topic was yet available. Xu Songling has also been critical of the World Bank report, in particular for understating the cost of water pollution. But he thought its methodology for computing the cost of air pollution was logically sound, even though its findings were several times his own estimates, and noted that it was the first study to estimate the effects of lead and indoor air pollution (very important in China due to widespread use of unvented stoves for cooking and heating, especially in rural areas) . On reflection, Xu now thinks the 5 percent figure frequently cited by SEPA Minister Xie Zhenhua for the cost of pollution to China’s economy is probably too low. Xie himself, in recent public statements, has said pollution costs were 4-8 percent of GDP, a range that would encompass the World Bank estimate as well as the earlier SEPA study.
 

Is There Madness in This Method?

The cost estimates are highly sensitive to the methodologies used in the different studies. The more than seven-fold difference in air-pollution cost estimates between the Smil Study and Clear Water, Blue Skies is attributable almost entirely to the methods used to assign a monetary value to a premature death or illness. Smil employs a conservative approach, based on lost wages and productivity, as well as direct medical costs. The World Bank prefers a “willingness to pay” approach (also known as “contingent valuation”), which uses indirect data on things such as the additional wages people demand to perform dangerous work to infer what people are prepared to pay to reduce their risk of death. Studies from around the world indicate this price is between 50 and 200 times a given country’s per capita GDP. The number of illness cases attributed to air pollution is actually larger in the Smil study than the World Bank study. But the value the Bank assigns to each illness is greater by a factor of more than 100.

Similar problems affect estimates of the cost of deforestation. Here Jin Jianming and Wang Hongchang are the outliers. Jin’s high estimate results from the questionable use of the price of bottled oxygen to calculate the value of oxygen produced by forests (bottled oxygen and atmospheric oxygen are not substitutes). Wang utilizes a so-called “deep ecological” approach, which calculates not the value of the annual decrement of forest resources but the hypothetical annual cost to the economy (due to reduced rainfall, increased siltation, loss of plant nutrients, etc., as well as lumber output) resulting from cumulative deforestation since prehistoric times. He appears to neglect the value of agricultural, commercial, industrial and other activity that would be sacrificed if all of this land (43 percent of China’s territory) were reforested. Nonetheless, others, including Xu Songling, find the cumulative approach appealing. Xu recently published a similar study, estimating the value of ecosystem benefits that would result from reforesting only those areas currently officially designated for forestry, only about half of which are actually forested. His conclusion was that annual costs due to deforestation were a more modest 4.5 percent of GDP (vs. Wang’s 12 percent).
 

Why Bother to Calculate the Cost?

Some Chinese experts question the utility of assigning a monetary value to environmental damage. Renmin’s Zou Ji argues that Chinese leaders have already decided that reducing urban air pollution and acid rain is a priority. So scarce research budgets should be employed to find least-cost methods to reduce emissions rather than estimate the value of the damages. Other Chinese researchers think it is useful to quantify damages in terms of, for instance, numbers of deaths and illnesses that could be avoided by reducing pollution. But they see no reason to translate the damages into monetary terms, since policymakers are skeptical of such calculations anyway. Zhang Shiqiu, an environmental economist at Beijing University, questions the value of even that level of quantification. She says China’s environmental policymakers do not base their decisions on calculations of human health impact. They just follow what other countries are doing.

CASS’s Xu Songling is more supportive of the costing efforts. The Government worries about the cost of controling pollution, he argues. So it is important to point out the cost of not controling pollution.
 

The Search for a Definitive Study

The World Bank, with support from the Norwegian Government, contracted the Norwegian consulting firm Econ to develop an environmental costing model for China from the ground up. A Bank official said this new research effort came in response to SEPA Minister Xie Zhenhua’s desire for a credible costing model to support his requests to the PRC State Council and Ministry of Finance for additional resources for environmental. A report containing the preliminary outlines of such a model was released in August 2000. It contains a thorough review of the existing economic and scientific literature, judgments as to the most appropriate methodologies and some initial coefficient estimates for an input-output table to calculate the impacts of air and water pollution on human health, materials, agriculture, forests, fisheries and industry. The report identified data requirements but made no effort to calibrate the model to actual data. However, it predicted the model would produce estimates of the health impacts of particulate pollution “in broad agreement” with those of Clear Water, Blue Skies, while estimates of the impacts of ozone, lead and sulfur dioxide pollution would probably be greater. The new model would also include a much more comprehensive treatment of the impact of water pollution and acid rain. Its total cost estimate would therefore likely be somewhat higher. Like Clear Water, Blue Skies, it opts for the “willingness to pay” valuation method.

Zou Ji of Renmin University said he was involved in a five-year study funded by the Norwegian aid agency Norad and involving numerous organizations to construct a “bottom-up” environmental costing model with a firm grounding in natural science. He said it was the first large grant to do a complete study on China.

Zhang Shiqiu said Theodore Panayotou of Harvard and Jeremy Warford of University College, London, were doing an environmental cost study for the China Committee for International Cooperation on Environment and Development (CCICED). But she said the Chinese Government wanted the report by next August, so the study would probably be limited to a literature review and a rough input-output table.

Comment

Considering the differences in methodology, approach and coverage, estimates of the cost of pollution to the Chinese economy produced by Chinese and Western environmental scientists and economists are fairly tightly bunched between 3 and 8 percent. The latest World Bank-sponsored study indicates even the higher of those estimates may be too low. In addition, the cost of the annual destruction of natural resources can be conservatively estimated at 5-7 percent of GDP. If even the most conservative of these estimates is accurate, the conclusion upon adding them together is a disturbing one for China’s leaders — with annual growth in measured GDP of 7-8 percent, the economy is producing little or no net new wealth. The value of human and natural capital destroyed each year by pollution and ecosystem damage could be canceling out the increased output of material goods and services. Authoritative research demonstrating this point would strengthen the case of those arguing for devoting more resources to reining in environmental destruction.