The real cost of growth

The discovery in the US of mercury and other airborne pollutants from China's coal-fired power plants and factories has heightened global concern about the true size of China's environmental footprint. But just as China is not alone in bearing the brunt of its pollution problems, it was not alone in creating them. All those who have contributed to and benefited from the China growth story have in some way contributed to the environmental degradation.

The government could even go so far as to say the price of doing business in China is no more pollution. It is certainly facing increasing pressure at home and, as the nascent environmental movement grows, inaction could threaten social stability.

While foreign countries and companies may have a moral duty to assist China down a cleaner path, there are also compelling bottom line reasons. As China puts its money where its mouth is on environmental reform, foreigners can provide the technology and expertise required.

In April, a panel of experts met as part of the annual Milken Institute Global Conference in Los Angeles to discuss the real cost of China's growth, moderated by CHINA ECONOMIC REVIEW editor at large Graham Earnshaw. Despite a mixture of optimism and pessimism, the panelists agreed that the cost of doing nothing was untenable. To read a full transcript of the conference, click here.

Critical Mess

According to the World Bank, China contains 16 of the world's 20 most polluted cities. Among the most pressing issues are poor air quality, water pollution and water scarcity, but endemic problems such as land degradation, drought and flooding are increasingly cause for concern, each exacerbated by human activity (See: Living beyond the edge: the price of pollution).

"China didn't destroy the environment just to destroy the environment," said Shelly Singhal, chairman and CEO of fund managers SBI Group. "A byproduct of Deng Xiaoping pulling 150 million people out of poverty between 1990 and 2000 was some serious environmental issues, and now they have to solve them."

There are strong economic incentives for finding that solution. Overall costs to China's economy from environmental pollution and degradation are estimated to be 8-12% of GDP annually. Economic losses attributed to water shortages were estimated at US$28 billion nationwide in 2003, while acid rain costs agriculture and forestry around US$13 billion every year.

But while business has so far shown an extraordinary ability to plough ahead in the face of escalating environmental degradation, people are not so resilient. This poses a threat to political stability, argues Paul Smith, an associate professor at the US Department of Defense's Asia-Pacific Center for Securities Studies (See: Fighting for change: the environmental lobby).

"We are talking about lives here," he said. "We are talking about people in China who are dying from the effects of environmental degradation – of women with stillborn children, of people developing cancer at young ages. This is very real and it affects people on a very personal level and one way it is manifesting is in protests."

Green cadres

Nathan Nankivell, a senior researcher at the Canadian Department of National Defense believes the Chinese leadership is doing its best. "Wen Jiabao has stated on numerous occasions his support for the environment," he said. "Hu Jintao is definitely onside and the targets in the 11th Five Year Plan have indicated that they want to have sustainable development from this point in time."

These statements are nothing new, though. The first national environmental protection law was passed in 1979 and around 375 environmental standards and more than 900 local environmental regulations have been enacted since. According to Perry Wong, a senior research economist at the Milken Institute, the challenge is making officials at local level, where implementation of environmental policy is largely nonexistent, willing to enforce the rules. The balanced growth model outlined in the latest five-year plan is a step in the right direction, but it remains to be seen whether it will prevail.

A plan for a "green measure" of GDP – whereby the standard figure is adjusted for the impact on the environment – was scrapped recently on the grounds that it is "virtually impossible to calculate accurately". This may just be a reflection of how hard it is for a country in the middle of its own industrial revolution to find a solution to the by-products of rampant growth.

China is integrated so tightly into the world economy that pollution is not China's issue alone, argues the Milken Institute's Wong. Not only will pollution generated in China cross national borders, but foreign-invested companies, which are responsible for around 57% of China's total exports, share some of the blame. "[Foreign] firms have to be responsible to look at how they and their subcontractors produce their goods," he said. "At the least, they need to bring the most up-to-date technology to China to enable them to consume less energy and generate less pollution."

Providing this technology can also be a lucrative business for foreign firms. With a significant amount likely to be invested in environmental solutions in coming years, the country will need private know-how and capital from abroad. According to a Deutsche Bank research report, improving the drinking water supply and treating waste water alone will require at least US$200 billion over the next 15-20 years.

Emphasizing the importance of international cooperation, Canada's Nankivell spoke of a Canadian International Development Agency project in China investigating the use of coalbed methane technology for cleaner burning coal. Small-scale hydroelectric and solar power projects also have potential could also deliver new energy solutions to the world, he said.

"This is something they could never have got through in Canada – there just wouldn't have been support for it because of the energy infrastructure already in the country, whereas I think China is a far more willing partner," he said. "The problem is finding the resources."

He called for foreign governments and companies to do whatever it takes, including suspending intellectual property protection on environmental technologies if necessary, to help China down the road to reform. "I think we can say that China could be the model for revolutionizing green GDP," Nankivell said.

Two steps forward, one back

Of the major economies, only Russia has a worse record on energy efficiency than China, according to Energy Information Administration (EIA) figures. Some estimates have suggested energy efficiency, measured in primary energy consumption per unit of GDP, could be boosted between 30 and 50%.

It is not just the quantity of energy used that is a problem, but also the type of fuel used and the quality of generation. Around 74% of China's electricity comes from coal, often using antiquated power stations with no desulphurization facilities. Factor in the effects of industrial plants with few if any filters, and you have the root cause of much of China's poor air quality.

Central planners want to limit coal generation to 68% of total electricity output by 2010 and 60% by 2020. Central to the government's target is renewable energy, with a target to meet 10% of the country's needs from these sources by 2020.
With US$150 billion expected to be invested in renewable technologies over the coming years, some officials have even touted a 15% target, more than double the current renewable output. China is also aiming to increase nuclear capacity 400% over the next 15 years, with up to 30 new nuclear power plants expected to come on stream by 2025.

However, experts are skeptical. The consulting firm Capgemnini estimated earlier this year that China would need to generate an additional 280 gigawatts of energy by 2020 on top of the 950GW already planned, eating into the gains made from alternative fuel sources. The high price of oil is also expected to cause a rethink in China's coal goal, with cheap domestic coal becoming increasingly attractive in the face of US$70-a-barrel oil.

"It's a typical China economic story where they face many choices and sacrifices that they have to make," said the Milken Institute's Wong. "They have to revert back to coal production knowing that by burning coal to generate electricity they will actually pollute the air more."

Go to WWW.CHINAECONOMICREVIEW.COM to read the complete transcript of the Milken Institute Global Conference panel discussion, "China and the Environment: The Real Cost of Growth", courtesy of the Milken Institute.

Fighting for change: the environmental lobby

With pollution comes civil unrest. According to the government, there were around 87,000 protests, demonstrations and "mass incidents" in China in 2005, up 6.6% on 2004. While there is no clear evidence linking these to pollution specifically, it has been singled out as one of four social problems that create disharmony.

According to Paul Smith, an associate professor at the US Department of Defense's Asia-Pacific Center for Securities Studies, environmental protest represents the nascent rise of a civil society in China. "We have seen this in Taiwan and Japan," he said. "As environmental movements grow alongside civil society you have increased democratic pressure by people to do something, make this change."

Smith argued that the government must be tolerant to environmental concerns, rather than suppressing them, illustrating his case with a video of a man shot by police at a power plant protest in December last year. "This is the downside of government overreaction to protest – the government perceives this not as an environmental protest but as an attack on its legitimacy or an attack on its authority," Smith said.

Ultimately, if the government is serious about local officials implementing its eco-friendly reforms, the growing environmental movement could be a strong ally. "Nothing is going to change in China unless it happens at the grassroots," said Smith. "The bottom line is that environmental awareness – instead of a negative thing – is a positive thing that could lead us to environmental protection."

Living beyond the edge: the price of pollution

The true cost of China's growth can be counted in the statistics that nobody wants to see. And these statistics are "alarming", said Nathan Nankivell, a senior researcher at the Canadian Department of National Defense.

Per capita water scarcity in China is on a par with sub-Saharan Africa, with more than 66% of Chinese cities facing water shortages. Around 75% of the water in the country's seven most important river systems is of a quality unfit for human consumption according to SEPA figures, and only 7.5% of water in inland fresh water lakes and artificial drinking water reservoirs is of an acceptable standard.

Chinese officials have acknowledged that 300 million people drink contaminated water on a daily basis – the World Bank estimates 700 million – and of these, 190 million drink water that is so contaminated, it is making them sick.

Drought in the north, northeast and southwest is now affecting 41 million acres of farmland and threatening the drinking water supplies of 14 million people. Meanwhile, floods in central, eastern and southern regions have killed 10 people and affected about 4.5 million since mid-April, with direct economic losses of over US$330 million. Severe degradation or desertification claims around 25% of China's land, and is advancing at around 3,000 square kilometers per year.

The state of China's skies is equally dire. Respiratory illness causes premature death of some 400,000 people in China annually, though estimates vary on how many of these can be directly linked to pollution – the World Health Organization (WHO) says 250,000.

China's carbon dioxide emissions increased 33% between 1992 and 2002, according to a recent World Bank survey. Meanwhile European Space Agency tests found that Beijing's skies hold the world's largest amount of nitrogen dioxide, which causes smog. Suspended particle levels were recorded at a dangerous 300 micrograms per cubic meter.

Russia's criticism of the secretive handling of the spill in the Songhua River in northeast China, which threatened to contaminate Russian water supplies as well as Chinese ones, shows regional neighbors are growing concerned about China's outsized environmental footprint.

But the global impact of China's economic growth hit home when US researchers traced the surprise reappearance of sulphur and mercury on the Washington coast to emissions from coal-fired power plants and factories 3,000 miles away in China. It proved beyond doubt that what is bad for China is bad for everyone, everywhere.