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Policy Instruments and Market Measures for Environmental Protection under the Market Econmy

1994-09-22author:Jerme J. Warford*source:

  A. Introductory

  1. Increasing pressure on natural resources and the ability of the planet to absorb waste material has led to worldwide concern that environmental degradation threatens prospects for continued economic development. At the same time, evidence is mounting of the significant and pervasive effects on the natural environment of policies at the macroeconomics and sector level. Environment then, is mot something that should be seen as distinct from economics; indeed, it is clear that environmental management should become an integral part of economic policy making. All countries, and China is certainly no exception, therefore need to develop the capability to: (a) use economic and other instruments explicitly designed to achieve environmental objectives, and (b) reconcile environmental objectives with overall economic and sector policy reforms.

  2. The massive structural changes that are currently taking place in China's economy are in general characterized by a shift from an administered system to one that is becoming increasingly reliant upon market forces. One of the keys tests o f the success of this process is its environmental impact, that is, whether market liberalization is likely to result in sustainable development. It is safe to say that at present, we simply do not know.

  3. Some aspects of the market liberalization process are clearly beneficial for the environment. Although rapid changes are taking place, resource prices in China still do not reflect their economic, social and environmental costs. In effect, use of key natural resources such as land, energy and water, and in particular use of the natural environment for disposing of waste material tends to be heavily subsidized. Such a policy results in wasteful and economically inefficient as well as environmentally unsound production and consumption patterns. The market system, in bringing about closer relationships between prices an d the real economic costs of supply can in general be expected to be environment ally beneficial in that in encourages efficient (non-wasteful) resource use.

  4. However, judging from the experience of more mature market economics, it is apparent that a free market system cannot be relied upon to ensure that resource u e is at once economically efficient and environmentally sound, Thus it can be expected that market failure in the form of environmental externalizes, e.g. the costs of industrial water pollution suffered by downstream users, will be a growing problem. In China, industrial


  *Visiting Professor, Centre for Economic and Social Research on the Global Environment (CSERGE). University College London.

  enterprises, hitherto having significant social goals-and often soft budget constraints-are now encouraged to maximize profits, and abandonment of environmental objectives, and re-assignment of environmental staff, is already occurring This trend might be compounded by scale effects, For example, even if the average quality of industrial effluents improves, the very success o f the market in generating increased economic activity may result in an increase in total pollution loads.

  5.Attainment of environmental objectives therefore typically requires government intervention. So do a number of income distributional and other social objective s which may not result automatically from an unfettered market system. Growing income disparities between occupational groups and geographic regions are already being observed in China, This is specially evident in this transitional period, in which unevenness in the pace of development requires that many policy reforms-including some related to environmental management-must be introduced gradually. This is illustrated by the inability of the older and less efficient industrial enterprises to pay for the large clean up program that is required. A long term strategy must therefore be developed to address these interrelated social and environmental issues, Meanwhile it is necessary to identify measures that can be taken in the fairly short term, most of which in practice should build upon existing policies or instruments.

  B. Market Failure: Instruments for Pollution Control

  6. The inherent failure of a free market system to allocate resources efficiently where externalizes exist implies the need for government intervention, either by the use of economic or regulatory instruments. Determining the criteria for selection of alternative instruments has traditionally been a central part of environmental economics. Alternatives may be judged in light of their contribution to the achievement of technically efficient, economically efficient, nor cost-effective solutions, as well as their fiscal and social consequences and administrative feasibility, Market based instruments (MBIs), which employ economic incentives, can be contrasted to Command and Control (CAC) methods which provide mandatory regulation of the quantity and quality of environmental damage that may be permitted, Economists tend to favor MBIs on the grounds that where the cost of environmental damage is fully reflected in the price or tax a polluter or user of a natural resource has to pay, resources are allocated more efficiently, and environmental objectives achieved more cheaply, than under quantity rationing.

  7.The destination between MBIs and CAC is particularly relevant in addressing one of the most difficult environmental issues in China, namely control of the pollution generated by large numbers of town and village enterprises (TVEs), which for m the most rapidly growing segment of the Chinese economy. Monitoring and regulation of enterprises on an individual basis presents massive administrative problems, and there is a need to develop policies at this stage which will reduce this burden as much as possible, Such policies, if they are to be workable, will depend heavily upon a successful effort to make pollution control in the financial self -interest of the polluters themselves. Explicit pollution control measures will have to be complemented by macroeconomics or sector level policies aimed at achieving efficient (i.e. non-wasteful) resource use. The main types of intervention that have been developed as explicit means of addressing environmental issues are briefly summarized below.

  8. Effluent or Emission Charges based upon quantity and quality of effluents discharged by enterprises, The "polluter pays principle" has merits on efficiency, equity and fiscal grounds, The existing pollution levy system in China falls into t his category, but charges have traditionally been very low, Economic efficiency would require charges, to equal the economic costs of damages caused, for example to downstream, water consumers or fisheries, or the public health costs of air pollution, Such charges based upon marginal damage costs and levied upon individual discharges have the potential advantage of ensuring that ambient quality standards are achieved at least cost to society as a whole since it gives each discharger the opportunity to weigh the costs of damage versus the costs of taking remedial abatement measures. Ideally the charges should reflect regional variations in ambient air or water quality objectives. Difficulties arise with regard to the measurement of damage costs, and in particular to their impact upon health, as well as in determining the responsibility of individual waste discharges for damages caused. An advantage of charges is of course that they raise revenues, which may of may not be used for pollution control purposes by government.

  9. Product Charges, In practice, effluent or emission charges reflecting damage costs are rarely used in industrial of developing countries. One reason for this is the difficulty of monitoring large numbers of waste discharges. There is however a growing recognition of the potential importance of economic instruments as a means of controlling environmental pollution, and one answer to the monitoring problem is to use blunter instruments, such as taxes on inputs, as proxy for the polluting outputs, Such indirect methods of levying pollution fees are becoming common in industrialized countries and are starting to be introduced in China. Examples include taxes on gasoline, pesticides, fertilizers, lubricating oils, or on the sulfur content of coal, While not as efficient as effluent taxes, in that they do not encourage improvement in the quality of discharges, they clearly do have some incentive effects, and are relatively easy to administer. At the municipal level, a water charge incorporating the waste disposal costs expected to result is an example of such an indirect instrument.

  10. Standards. Standards for effluent discharges are often set for specific industries, with a distinction usually being made between old and new plants. Performance standards (a variant of which is the discharge permit system now in place in China) specify the amount of pollutants that can be discharged. But leave it to firms to find ways of meeting the standard. The objective of influencing ambient air or water quality ideally requires the standards to vary according to location. Monitoring problems are similar to those required by an effluent charge system. While performance standards based upon quantity and quality of effluents are feasible for the largest waste dischargers, smaller firms might be subject to an alternative approach, which would ease the monitoring problem, namely use of technology standards required for individual industrial processes. This constrains firms' freedom of choice, and is therefore less efficient, but may be the best alternative for small scale industry, where the large number of firms may preclude defective monitoring of actural discharges.

  11. Compared with a system of emission charges, performance standards have the ad vantage of greater predictability in their environmental effects. The impact of introducing or raising effluent fees is uncertain, and an iterative solution (experimenting with different fee levels) would be required to arrive to a determined emission or ambient quality target. The administrative and political difficulties inherent in such an approach clearly offsets, to a greater or lesser degree, the potential cost-effectiveness of emission charges.

  12. Subsidies. Clearly contrary to the "polluter pays principle", governments frequently find subsidization of industrial expenditures on pollution control a necessary complement to pollution taxes or regulatory instruments. Thus in China, a proportion of the revenues derived from the pollution levy system is returned to industrial enterprises to encourage them to invest in pollution control, While inefficiencies in capital markets and considerations of equity may justify such subsidies during the transition period, it would be desirable if this policy were t o be phased out over time, Explicit subsidization of pollution control equipment may distort investment decisions, e.g. by favoring end-of-pipe treatment rather than (often cheaper) industrial process changes, and of course they impose a fiscal burden on government. Subsidies from national to provincial or municipal agencies may however be justified, even beyond the transition period, on grounds of equity or where cross-jurisdictional benefits may result from environmental improvements.

  13. Other Instruments. A variety of other instruments which make use of economic incentives may also be employed. These include tradeable permits, in which licenses to pollute are allocated among various enterprises, which can then sell those rights to other enterprises. In principle, this, in common with the emission tax, can also result in the least cost means of achieving ambient targets, Certainty in t he attainment of environmental targets is also achieved, and the initial issuance of permits can yield revenues. This system, little used even in industrialized countries, is probably inappropriate for most developing countries. On the other hand, use of performance bonds and deposit refund schemes (similar to those already used in parts of China for returnable bottles),could be introduced relatively easily.

  14. in practice, economic instruments still tend to be underutilized in both industrialized as well as in developing countries. A general explanation for this probably lies in the prevailing incentive systems: for example, those responsible for pollution control are typically judged in terms of the achievement of environmental objectives alone-considerations of social costs rarely enter their decision criteria. The greater certainty in achieving environmental objectives associated with regulatory rather than most types of economic instrument tends to be the dominant consideration.

  15.As a survey of OECD countries has shown, even where they are employed, the objective of MBIs is rarely to influence consumer behavior (which economists would often argue is the single most important aspect). Charge levels are usually low, and so they have a minor fiscal role, although may be used to defray the costs of implementing regulatory and monitoring systems. While the trend is clearly to rely more heavily upon MBIs such as pollution taxes, other mechanisms such as tradeable permit systems; subsidies; regulations establishing standards for emissions or ambient quality, or indirect controls such as technology standards or zoning, may all have a role to play. A sound environmental management policy in China, as in other countries, requires a judicious mix of these various instruments.

  C. Environmental Impacts of Economic and Sector Policy Reform

  16.The countrywide economic reforms now underway in China will doubtless have major impacts upon environmental quality. The leverage exerted by sectoral and macro level economic policies as well as other institutional, legal and social policies is of fundamental significance in determining environmentally related behavior. Economy-wide policy reform, and specifically the adjustment process, should there fore be carefully assessed in light of its environmental consequences. However, due to the large number of physical, social, and economic variables involved, these linkages remain imperfectly understood. In the last few years, considerable efforts in China and elsewhere have been made to improve understanding of the ways in which economic incentives impinge upon environmentally-related behavior, with attention increasingly focusing on the impact of macroeconomics and sectoral policies.

  17.Highlighting the impact of environmental degradation at the national economic planning level is required, since conventional national accounting methods inadequately reflect environmental concerns. For example expenditures on pollution clean-up programs are treated as additions to GNP, while depletion of natural resources in typically not reflected as an offset to income. In recognition of this, many countries are now experimenting with "green" national income accounting. It should however be noted that national income accounts are inadequate in many ways as indicators of human welfare, and will remain so even after such adjustments have been made. In particular, any of the most important environmental impacts are not quantifiable in economic terms, and therefore can never be fully commensurate with traditional components of GNP. Complementing the adjustment of national income accounts themselves, it would therefore be appropriate for China to develop, as several other countries are in the process of doing, systems of satellite accounts, by which physical changes in the natural environment can be related to conventional national income measures.

  18.It is now generally recognized that most environmental problems are less the result of individual large scale development projects that have gone wrong than the combined consequences of many relatively small scale activities, such as unsustainable agricultural practices, pollution caused by large numbers of small, inefficient factories, and decisions made by individuals to enter and destroy tropical rainforests. Subjecting each such decision to social cost-benefit analysis, environmental impact assessment or regulation, or indeed to a system of environmental taxes that requires monitoring of individual actions, is rarely administratively feasible.

  19.The foregoing implies the need to search for the underlying causes of such activities, and identify policy interventions (which will often have to be somewhat blunt instruments) aimed at the source, rather than the symptom of the problems, Priority should be given to amending government interventions in the market that are economically and environmentally perverse, and introducing interventions (such as pollution taxes) when market forces are inadequate. These actions should be accompanied by efforts to address underlying causes of natural resource degradation and to improve understanding of what affects the environment and how.

  20.It follows that the traditional project-by-project approach, while important and deserving of more effort, must be supplemented by the integration of environmental management into economic policy making at all levels of government. Policies with a wide ranging impact - i.e. those of a sector-wide or macroeconomics nature - are specially relevant. A variety of government policies may have a profound impact-for good or ill - on the environment. Fiscal, exchange rate, energy and agricultural pricing, or land tenure policies might be expected to have major environmental implications; special attention should be given to the design of economic incentives to induce environmentally sound behavior, so not only individual investment projects, but also economic policies should be subjected to environmental evaluation. It is apparent that the sheer scale of the structural changes now taking place in China's economy make this task both highly complex and highly important.

  21.Understanding the chain of causality leading to environmental degradation is required. Proximate causes are relatively easy to identify; much more difficult, but of primary importance, is the analysis of underlying causes. Typically these will be found in economic incentives, often combined with a complex mix of social and political factors. For example, it may be easy to identify the source of air pollution as the inefficient productive processes of certain industrial enterprises. It is however more difficult to understand the forces that bring this about, and to determine the policy reforms that will not simply affect individual plants, but have pervasive effects, impacting on a wide variety of industrial operations.

  22.China's reform program recognizes that environmental degradation has often stemmed from market distortions, which may be explained by externalizes or "commons" problems, and which may be addressed by the kinds of measures referred to in paragraphs 8 to 13 above. It also recognizes that other problems have been created where those who demand environmental goods are not required to pay for the true social costs involved. This is exemplified by the subsidization of irrigation and municipal water, electricity, and agricultural chemicals.

  23.In the case of public utilities such as water supply and electricity, it is essential that pricing be used as a serious management tool. Artificially low prices encourage wasteful use, and generate inadequate revenues for system operation and expansion. Decline in service quality is accompanied by greater difficulty in raising prices, resulting in a vicious circle of underfunding and shortages. The cost to consumers of a service not being available is often more than the cost of expanding the service, even when costs are rising. Underpricing - or subsidization - of resource use is therefore typically unjustified in economic and financial terms. It frequently has perverse income distribution consequences, places a fiscal burden on government, and is often environmentally unsound as it encourages wasteful use .In such cases, the scope for policy reform with multiple advantages is therefore considerable, but due to an established tradition of subsidizing public services is often difficult to achieve. Unfortunately this kind of situation is al l too common in developing countries and is one which China would do well to avoid.

  24.Some aspects of China's move toward a market economy, which includes the above type of reform, are therefore likely to be environmentally beneficial. Equating prices to the real economic costs of supply of key natural resources can be expected to yield environmental benefits by discouraging wasteful resource use. Other elements of the reform process such as improved efficiency of credit markets and grater trade openness may also be environmentally benign to the extent that technological and the establishment of cleaner, modern industry, is encouraged.

  25. However, the environmental consequences of China's economic reform process may not always be favorable. It is clear that while "getting prices right", a key element of the adjustment process, is a necessary condition for sustainable development, it is far from sufficient. For example, at the sector level, electricity price reform may not be effective if consumers lack adequate information about energy-saving devices, if industrial management structures do not contain incentives t o use resources efficiently, or if in general there are distortions in the prices of substitutes or complements to electricity. Adverse environmental consequences due to inefficiencies or inequities elsewhere in the system (possibly compounded by the scale effects induced by successful economic growth policies) may there fore result. For example, in China a pollution levy system has been in place for a umber of years, but since price and profit incentives in general did not exist, they had little effect.

  26.Adoption of "second best" solutions will therefore frequently be required; introduction of price incentives in situations where prices in general do not reflect real resource costs, are likely to have perverse results, and a gradual replacement of command and control by price incentives will often be the correct approach. Considerations of social equity reinforce this conclusion. The unevenness in the pace of development often means that price reforms will unduly harm the poor. During the transition period from a command and control to a market economy, the economic, the efficiency and growth objectives must certainly be modified to consider distributional issues.

  27.Inthe sort term, therefore, economic reforms may have unanticipated effects which require complementary or compensatory interventions. In some countries, the very success of the adjustment process in stimulating industrial growth has itself be en the cause of environmental problems where pollution control measures have bee n inadequate. Trade reform may be of special concern: encouraging exports, if not accompanied by adequate pricing policies in the country concerned, could lead to over-exploitation of underpriced natural resources, such as forests. In such cases, freer trade itself would not be the culprit, but failure to address inefficient conditions prevailing elsewhere in the economy would be. Compensatory intervention may also be required to remedy legal and institutional deficiencies.

  28.Such constraints to the success of economic policy reform are a pervasive problem, and they take many forms. One of them refers to the allocation of property rights, upon which the effectiveness of price refer a ultimately depends. Whether in relation to farmers' security of land tenure, or to the fight to extract timber by logging companies, uncertainty normally results in environmental degradation. Price reform, if unaccompanied by adequate legal and institutional frameworks, including regulatory capacity, may have perverse results in both economic and environmental terms. This appears to be a particularly important issue in China in its current transition period.

  29.Although reforms might be complicated by the presence of such inefficiencies elsewhere in the system, there are nevertheless any opportunities for policy reform in China. Indeed, environmental considerations typically provide additional reason for policy reforms that are justified in their own right. As noted earlier, improved pricing for electricity and water supply would be justified on environmental and economic efficiency grounds. It also has potentially major fiscal implications, and should be a central element of any policy of "green taxation" aimed at shifting the tax burden from productive activities such as labor and enterprise toward unproductive activities such as depletion of resources and generation of waste. The search for such policy reforms should continue to command high priority, particularly as the costs of environmental degradation are borne disproportionately by the poor.

  30.The pervasive and complex linkages between economic activities and the environment imply that a general equilibrium approach is required if economic policy is to be managed in a sustainable way. Ideally, comprehensive general equilibrium models which include, environmental, as well as strictly economic variables, should be employed, but for the foreseeable future, data limitations are likely to preclude reliance upon this approach. However, a comprehensive analysis of economic-environmental linkages is possible with an approach which focuses on key relationships within a selective partial equilibrium framework. This is equally challenging; the presence of a wide range of variables of an economic, geographical, physical, institutional or cultural nature, implies tat seriously multidisciplinary efforts are inescapable if the complex forces that lead to environmental degradation are to be understood. Creating the analytical and institutional capacity to do such work would seem to be a high priority in China, although experience shows that organization of multidisciplinary work itself raises formidable problems.

  31.Aithough data deficiencies remain, and more research is needed, it is however al ready possible to make rough assessments, not simply of he environmental impact o f projects, but also of certain economic and sector policies. The use of standard economic techniques combined with existing natural resource information can improve the way environmental issues are addressed by policies at the sector and macro levels. Where the environmental impact of the economic reform process is potentially adverse, such assessments would form the basis for identifying measures to counteract these effects; where on the other hand they are likely to be positive, complementary measures might be devised to maximize this impact. A conclusion from t he foregoing is that, while environmental impact assessments are now conducted routinely for large scale development projects, it is now even more important to develop institutional capacity to conduct environmental assessment of economic policy reform.

  D. Implementation

  32.Introducing economic instruments for explicitly environmental objectives, and developing the ability to integrate environment into overall economic management involves many parallel actions of a technical, legal and institutional and social nature. Some of these, of particular relevance for the foregoing discussion, are briefly referred to below.

  33. Standards and Fees. The apparently obvious recommendation to eliminate subsidies or increase prices of environmentally degrading activities is not always as straightforward a policy option as may appear. The consequence of unevenness in the process of economic development in China may be illustrated by the case of private abstraction of water by farmers. In contrast to domestic water supplies, for which full cost recovery is quite feasible even from the lowest income groups, farmers may be unable to pay a price for water equal to its true social cost, particularly where price controls exist on farm products, or where production quotas exist. Similarly, industrial enterprises may be precluded from operating efficiently by a variety of government price controls, limited access to credit and other restrictions.

  34. Distributional equity as well as efficiency and fiscal considerations suggest that in such cases improved pricing for water and other public services - or for degradation of the natural environment - must be introduced gradually, in accordance with overall trends in market reform. In any case, the impact of price changes may take time to work out; demand becomes more elastic as the possibility of substitution becomes greater; among other things this suggests that education al campaigns need to accompany price reform. A long term strategy is there fore required.

  35. Nevertheless, over time, in parallel with economic growth and market liberalization, pollution charges and standards should be gradually increased, and regulations and penalties more strictly enforced. This will require the strengthening of the existing pollution levy and permit systems. Currently there are a number of shortcomings not only in terms of levels and standards, but also of the record of compliance. Prior to increasing standards and fees, the present system should be in working order. It is necessary now to lay the administrative foundation upon which successive improvements can be built. A time limit should be established after which all waste discharges should be required to comply with established standards or pay the appropriate fee or penalty. Regional variations in ambient quality targets should be established during this period.

  36. As emphasized earlier, monitoring and measurement difficulties are inherent in the field of environmental management. The costs of metering the consumption of municipal water supply or irrigation water, traffic using city centers, or discharges of waste into waterways or the atmosphere must be carefully weighed against the economic benefits that will result. Chinese environmental agencies will requite assistance in these areas.

  37. While the intention should be to require emission performance standards on t he part of larger industry, the monitoring problems inherent in dealing with large numbers of smaller industries might in practice suggest the use of technology standards; these could be introduced at the time that permits are granted for new industrial investments. In addition to its responsibility for determining standards for actual pollution control technologies, the National Environmental Protection Agency (NEPA) has a critically important role vis a vis other concerned government ministries and the National Technical Supervision Bureau in ensuring that industrial technology standards are adequate from an environmental standpoint.

  38. Environmental Impact Assessment (EIA). A systematic EIA process should be en forced for new industrial plants, as well as for expansion or modification of existing operations. A satisfactory EIA (involving, as necessary, technology standards) should be a condition for industrial operating permits to be issued. Even though older industrial operations might find it financially difficult to improve its environmental performance, this should be less so of new investments. Social constraints, such as the unemployment resulting from plant closure apply to a lesser extent, and investment in pollution control at the same time as process investment is taking place is also cost-effective. Relocation of industries to industrial parks, with collective treatment works, built into an overall regional plan is required if cost-effective solutions are to be achieved. Regional development plans and their implementation should incorporate the views of environmental protection agencies at the level concerned.

  39. Staff training in EIA and improvement in monitoring capability will be required, but there is considerable expertise available for this task world-wide. The EIA procedure, as it now exists, could be improved by tighter controls over qualifications of those conducting the assessments and over the quality of the work actually performed; extension from the current concentration on individual projects to regional development schemes; greater public involvement, and attention to social issues. Efforts should also be made to quantify environmental impacts in economic terms, even though only rough approximations will often be feasible. Above all, efforts should be devoted to developing the capacity to conduct EIA of economic, sector and regional development policies (see research needs below).

  40. Policy Reform by Other Agencies of Government. Prioritizing the implementation of various policy instruments - which could be undertaken in various levels and parts of the government structure - is complicated by the often conflicting objectives of different agencies and the task of predicting and quantifying environmental impacts. Alternative policy instruments that should be considered include not only those which relate specifically to pollution control, but also those which relate to general economic policies and other underlying influences, such as trade openness (facilitating access to technology); improved access to credit, and better pricing of raw materials and energy. Some of the environments lie outside of the jurisdiction of the environmental agencies themselves, with the Ministry of Finance, and various agriculture, energy and industry ministries and bureaus being of prime importance.

  41. A general conclusion from the above is that the closely interrelated issues of environment and development require a strengthening of the concerned public agencies. Unfortunately there are instances in which the reverse is happening; for example, environmental staff in some municipal industrial bureaus are being shifted to other jobs, as the role of such agencies becomes increasingly perceive d as the maximization of profits. Enforcement of reporting requirements on the p art of industry with regard for example to location of new factories or plant expansion is also in danger of being weakened; there have been recent cases in which municipal environmental protection bureaus have not received the information that they used to obtain as a matter of routine, thus weakening their power to influence industrial development. This problem is compounded by the legal uncertainties that currently prevail; replacement of the planning system by market mechanisms requires a sophisticated legal framework to set the rules within which enterprises can operate efficiently. At present, ambiguities surround the respective rights and responsibilities of enterprises and municipalities with regard to the management and financing of pollution control operations. These include responsibilities for conducting environmental impact assessments, for operating and financing collective treatment works, and for handling hazardous waste.

  42. Research. Research needs abound: with regard to the role of economic instruments and policies, the previous discussion suggests two areas that merit priority. The first refers to the need to be able to estimate the true economic cost of producing and consuming key natural resources, or of damaging the environment b y the discharge of wastes. This cost should be used as the basis for pricing or taxing purposes. The second is to better understand the impact of macroeconomics and sector policies on the environment. The ability to anticipate the impact of economic policy changes on the environment will assist environmental agencies in influencing the policies themselves, or in taking the necessary defensive or complementary measures.

  43. Estimation of the true economic and environmental cost of natural resources is required when the market does not work perfectly, i.e. when there is a divergence between private and social costs and values. Such circumstances are likely to remain even when market reform in China is determined to have been completed. Estimation is particularly important in the current transition period, when prices of some resources accurately reflect true social costs, while others do not. The research now being conducted by the Economic Working Group of the China Council initially focuses on coal, water and forest resources, but will be extended to other resources such as iron ore, petroleum, and prairies, and will also address the problem of urban transportation.

  44. Case studies now underway estimate the social cost of utilizing the natural resource. In theory resource prices should equal their marginal opportunity cost s (MOC), and therefore consist of the sum of marginal production costs (MPC), marginal user (or depletion) costs (MUC), and marginal environmental costs (MEC), or for tradable the international price of the resource, whichever is greater. Having estimated MOC, the next step is to develop a strategy for price reform, including specific attention to alternative instruments, such as pollution taxes, royalties, and charges for energy and water use. In this phase, obstacles to p rice reform will be analyzed. These will include such things as institutional weaknesses; measurement and monitoring problems; fairness; uncertainty; unclear property rights; financial and fiscal objectives and constraints; political constraints; the need to introduce improved pricing in line with the overall pace of pr ice reform in the economy; and other strategic economic objectives of the Chines e government.

  45. As noted, macroeconomics and sector policies may be expected to have a major impact upon the natural environment, but in ways that may not be at all transparent. Ideally, EIA should be conducted for such policies. Environmental agencies at the national, provincial, municipal and county levels should be able to under stand the root causes of environmental degradation and thus be in a position to respond to or influence economic policy changes. Research currently underway in NEPA is designed to develop such capacity. Two sets of case studies are being carried out, one relating to the control of pollution from TVEs, the other to sustainable agriculture. In each case, a series of future changes in macro or sector level prices and policies are assumed, and their impact upon the future outputs and inputs of TVEs and farmers estimated, assuming profit-maximizing behavior in each case. The environmental consequences are then drawn, and the required policy responses identified.

  46. Public Awareness and Human Resource Development. There is no doubt that a necessary condition for rapid improvement in the environment is the pressure brought to bear by an informed, articulate population. A highly successful media campaign at the national level should be complemented by a similar effort at the local level. Improved public awareness and understanding of environmental issues would also help to address the problem of monitoring large numbers of industrial operations, and make existing complaint mechanisms more effective.

  47. Finally, while certain key elements of China's economic reform process, namely those aimed at improving efficiency in resource allocation and avoidance of waste, are a necessary condition for sustainable development, it is by no means certain that they will be sufficient. Indeed, much controversy remains over whether economic growth itself is sustainable. Ultimately everything depends upon technical and socio-political capacity to substitute man-made for natural capital sufficient to accommodate economic and population growth. It is safe to say that w e do not know if this will be so, but the Chinese tradition of stressing human resource development, including health, education, and equality of opportunity, are clearly essential ingredients of any successful strategy.

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