“Smog Economics”- How Much Does It Cost to Clean up China’s Air?

On high pollution days, a question that often makes me scratch my head is whether I should go out for lunch or have it delivered. If I go out (to nearby places by foot), I’d breathe in the hazardous air. (Many places are now equipped with air purifiers, which can more or less reduce the pollution indoors.) If I order a takeout, it usually comes with excessive packaging. Also, the courier service would emit extra pollutants, which could have been avoided, if everyone would give up on takeout food. Even an ordinary person ponders over the choice of personal health and that of environmental protection, it is little wonder that policymakers seem rather hesitant to act. Probably the most crucial question that they ask themselves and their think tanks is how much it will cost to clean up China’s air.

I’ve derived the title of this post from the term environmental economics. The impacts of smog on China’s economy are far more profound than the booming markets of masks and air purifiers. In fact, they manifest themselves in resource prices, industrial economics and macroeconomic statistics. For policymakers and economist, there is no getting around it.

Economist Fang Sihai revealed in 2013 that he considered environmental governance, as represented by air pollution control, as the second most important variable when forecasting the short-term trend of China’s economy. He predicted a 0.5% slowdown of economic growth for 2014. The real GDP growth in 2014 was 7.4%, 0.3% lower than that of the previous year. Most affected by environmental governance are those energy-，pollution- and emission-intensive industries.

Also in 2013, Wang Jinan, deputy director and chief engineer at the Chinese Academy for Environmental Planning (CAEP) of the time, estimated that the Action Plan on Prevention and Control of Air Pollution (mentioned in a previous post, hereafter referred to as the Action Plan) would restrain the growth of the steel, cement and coke industries, causing 81.2, 16.7 and 14.2 billion RMB loss respectively. Eliminating backward productivity would cause a total GDP loss of 114.8 billion RMB as well as the loss of 140 thousand jobs. According to a more recent study (published in 2015) made by CAEP and the Clean Air Alliance of China, eliminating backward productivity would cause a total GDP loss of 776.3 billion RMB and the loss of 892 thousand jobs in the five-year implementation period (2013-2017).

Redistribution of resources promotes the adjustment and upgrading of the industrial structure. By contrast to the traditional energy-，pollution- and emission-intensive industries, agriculture, forestry, the transportation equipment manufacturing industry etc. could benefit from the environmental governance and become new growth points. Also according to the 2015 study, the Action Plan would drive GDP growth of 2.04 trillion RMB and increase 2911 jobs. The direct investment required was estimated to be 1.84 trillion RMB, thus resulting in an input-output ratio of 1:1.11-a close tie.

It is worth noting that air pollution control would also lead to considerable health benefits, which were not included in this calculation. And even if the input were higher than the output, would it be legitimate to take no action at all? Here lies my concern about environmental economics in general: environmental problems are often characterised by their longevity, complexity and comprehensiveness. How do we monetise such things that we do not fully understand? I understand that efforts must be made, but it should not become our only criteria when making a decision.

Economist Zuo Xiaolei opposes the view that air pollution control slows down the economic growth. Rather, she believes that its essence is the removal of bubbles from China’s economy. Another economist Liu Shengjun also pointed out that air pollution has merely made the environmental costs of economic growth explicit and “equalised” (ie. borne by the entire society). The following question, naturally, would be whether the expenses of air pollution control should also be splitted by citizens. It is then a question of legitimacy.