Assessing the Dragon's Choice: the Use of Market-Based Instruments in Chinese Environmental Policy

Georgetown International Environmental Law Review, Summer 2004 by Shuwen, Jolene Lin

I. INTRODUCTION

The 1972 Stockholm United Nations Conference on the Human Environment was a rude awakening for the Chinese political leadership. They realized, for the first time, that the country was facing an environmental crisis that could no longer be ignored. Forced to confront this environmental crisis, the political leaders promulgated numerous environmental laws and regulations in the hope of Grafting a credible regulatory framework to halt further environmental degradation.

Over the years, China has developed a relatively comprehensive environmental protection apparatus which largely employs conventional command-and-control (CAC) policies.1 However, the regulatory effort has been fraught with many difficulties, particularly the lack of financial resources and agency independence on the part of the regulatory agencies. Having encountered considerable difficulties with CAC regulation, China has been keen to experiment with other types of regulatory policies. Economic incentive policies (EI policies) have been in the spotlight for many years, especially after the United States successfully employed market-based instruments such as environmental taxes and emissions trading. They have also been highly recommended by development banks and environmental think-tanks as being cost effective and environmentally efficient. Convinced that China would benefit from EI policies, the regulatory authorities implemented the first such policy, the pollution levy system, in 1982.2 In recent years, however, attention has focused on another market-based instrument, a national emissions trading scheme. Since 1999, China has been testing the feasibility of such a scheme, which the government hopes will be operational in the next few years.3

Amidst these exciting developments, this article will explore the extent to which EI policies such as emissions trading would benefit China, which is both a developing and transitional economy. I do not dispute that EI policies offer important theoretical advantages over CAC regulation. Further, certain domestic conditions, including bureaucratic corruption and relatively weak environmental protection agencies, make China a prime candidate for a market-based environmental regulatory approach. However, while advocating the increased use of EI policies to create a more cost effective and dynamic environmental protection apparatus in China, I caution against indiscriminate adoption of market-based instruments. As with CAC regulation, there exists a spectrum of EI policies, each requiring different conditions for successful implementation. While EI policies in general will better serve China's needs than CAC regulation, some policies require more mature conditions for successful implementation than currently exist in China. In the case of emissions trading, my concern is that China does not possess the conditions that will allow her to reap the benefits of such a sophisticated market-based instrument. Instead of wasting precious resources experimenting with a policy that is too advanced for China's present conditions, I would recommend a more realistic goal. The pollution levy system has been in operation for twenty years.4 Despite its various infirmities, it has been relatively successful and has the potential to be a much more dynamic EI instrument. Rather than starting from scratch with a resource-intensive and relatively untested policy like emissions trading, it might be more rewarding to build on existing resources by improving and fine-tuning the pollution levy system. Furthermore, the revised levy system could serve as an excellent transitory stage toward increased use of EI policies in the future.

Part II of this article sets out the institutional framework of Chinese environmental protection. Part III briefly examines the differences between CAC regulation and EI policies, the current regulatory instruments, and seeks to explain the regulators' initial preference for CAC regulation. Part IV explains the advantages that EI policies, if well designed and implemented, offer over traditional CAC regulation. It will then argue that much can be gained from the greater use of EI policies in China but will warn against unquestioning embrace of these economic instruments. When assessing the viability of EI policies, policy makers must take into account the limitations and constraints facing China. Otherwise, they would be abandoning what has been characterized as sub-optimal regulation for equally inefficient tools. Part V examines the recent domestic efforts at implementing emissions trading. It will argue that while the desire to experiment with the use of tradable permits is understandable, current conditions in China are not conducive for such a sophisticated market-based policy. Part VI is devoted to a comprehensive evaluation of the pollution levy system. Having demonstrated that China is not ready for emissions trading, I would like to recommend that resources be diverted toward strengthening the pollution levy system. Part VII summarizes the key recommendations that have been put forth in this essay and draws some conclusions regarding the future of Chinese environmental protection policy.