Mr Minister, Friends, Colleagues, Ladies and Gentlemen:

　　It is a great pleasure for me to be in Beijing and to participate again in the annual meeting of the China Council. On this occasion, I am pleased to be able to present to you the main conclusions and recommendations of the OECD Environmental Performance Review of China. Amongst other things, I hope that this might give you further food for thought as you discuss the issues to be addressed in the fourth phase of the China Council.

　　The OECD Environmental Performance Review of China

　　The conclusions and recommendations of the Review are available at the back of the room. One thing that sets them apart from many of the policy conclusions and recommendations that pass your desks is that they have been discussed and agreed by all OECD countries and China. This agreement was reached here in Beijing over the last two days in a meeting of OECD's Working Party on Environmental Performance. It was the first time that a meeting of an official OECD body was held in China – so this event marked an important step in OECD-China cooperation. It builds on several other cooperative activities in the last year or so. In this period OECD has conducted an Economic Survey of China, reviewed China's agricultural policies, analysed China's system of governance, and examined Chinese public expenditure management.

　　A second factor that helps distinguishes this report from others is that it has been conducted within a "peer review" framework which is a characteristic working method of OECD. This approach emphasises peer learning and mutual accountability, and is based on a solid analytical base and benchmarking of performance. Most OECD countries have been through the same exercise twice, and the same methodology was applied to them as to China. Representatives from nine OECD countries participated in the review of China together with the OECD secretariat. They benefited from inputs from Chinese officials in different ministries, from the provincial level, and from business, NGOs and the independent sector. They also benefited from many of the reports produced by the China Council's Task Forces.

　　I would like to commend the Chinese authorities for their willingness to open themselves to external examination by OECD countries. It is not an easy thing to do, but I am confident that it will benefit both China and OECD countries.

　　The draft report of the OECD Environmental Performance Review is now being finalised in light of the discussions over the last two days. It will be published in March or April next year, and together with our Chinese colleagues we plan to disseminate the findings widely. As I mentioned, the conclusions and recommendations have been agreed by China and OECD countries, so this enables me to share with you some of the key issues emerging from this work.

　　51 recommendations were agreed, so it will not be possible to present them all in the time available. Rather I will focus on three issues which I hope will be of interest to this audience. The first two have to do with addressing the policy implementation gap that exists in all countries but which is particularly challenging in China. The third issue has to do with some new challenges at the international level that China is facing because of its growing weight in the global economy and environment.

　　Issue 1: Institutional arrangements

　　What are the institutional arrangements needed to achieve China's environmental policy objectives. These issues are also addressed in the China Council's Task Force on Environmental Governance which will be discussed tomorrow afternoon. We are pleased to see a good convergence in the analysis and recommendations emerging from the two exercises. We both agree that State Environmental Protection Administration (SEPA) should be upgraded to a Ministry. We also both recommend that mechanisms for policy integration should be strengthened and that establishing a Leading Group on environment or sustainable development could be an effective way to address this.

　　But the issue I would like to emphasise, and one which would repay more analysis and discussion, is environmental management at the sub-national level. It closely relates to how fiscal, political and other powers are allocated between central and sub-national levels.

　　In China, local Environmental Protection Bureaus (EPBs) receive guidance from SEPA but generally are institutionally and financially subordinate to local authorities. This has created an incentive structure that led some local authorities to shield local enterprises from the actions of EPBs. The Chinese government has recognised this problem and has proposed a variety of innovative approaches to address it including revising the criteria used to assess the performance of local political leaders, (and pilot projects on "green GDP.") Given the disparities in income levels across China, it will be a major challenge to establish an environmental playing field in China – and beyond – based on the implementation of the "polluter pays" principle (PPP), and the consistent enforcement of environment regulation across the country.

　　Within OECD, we are just launching a project to conduct a comparative analysis of national environmental enforcement and compliance systems. We would invite China to join us in this project so as to better understand the types of approaches for bringing about compliance with environmental policy measures that work well, or less well, in different contexts.

　　Issue 2: Market mechanisms and the environment

　　The second issue I would raise is pricing and the role of market mechanisms; another set of issues closely related to effective and efficient policy implementation. The OECD review makes several recommendations related to charging for environmentally-related services, and to using taxes and charges as instruments of environmental policy.

　　As an economic organisation, it is no surprise that OECD has been an advocate of market-based approaches for many years. However, what we have found is that while our Member governments generally agree that this is the theoretically correct approach, they face social and political opposition when implementing it from those who may be adversely affected by such measures. We have seen the same in China. In order to assist our members, we have turned our attention in recent years to what you could call the political economy of market-based approaches for environmental protection. Similarly in the Review of China we have recommended that various "flanking" measures should be deployed to facilitate the implementation of such approaches.

　　Let me give two examples of such approaches. In many countries, including China, there is a reluctance to increase water tariffs to cost-recovery levels because of the impacts that it could have on poorer households. This encourages over-consumption of water, undermines the financial health of water utilities and often government budgets, and provides an implicit subsidy to the rich. A more effective approach would be to design the pricing of water to cost-recovery levels, with build in attention to the poor. This could be done by a block tariff system which provides a first volume of water at low or no cost, and the price increases for increasing volumes of water used. Support to poorer households could be provided when water bills are paid or through the social security system. In China income disparities need to be fully taken into account, and the approaches deployed in the richer east will not be the same as those in the poorer waste.

　　The second example is environmentally related taxes which in OECD countries and China are mostly levied on the energy and transport sectors. However, a major barrier to the implementation of such measures is a fear that they will impact negatively on industrial competitiveness. In OECD we have established, together with the European Environmental Agency, a data-base on environmentally related taxes. It shows that over 1000 exemptions, refunds or other provisions have been introduced to reduce the tax burden on energy-intensive industries, thereby undermining the environmental effectiveness of these policies. We have also examined the flanking measures that could be introduced to strike a balance between competitiveness concerns and environmental policy objectives. These include: recycling the taxes back to the affected industry; pre-announcing and phasing in the tax over an agreed timetable; coordinating the introduction of taxes internationally to level the playing field; or applying border tax adjustments.

　　We would be pleased to share the results of work in this area with China, and perhaps the China Council could provide one mechanism for doing so.

　　Issue 3: China's changing environmental role in the global economy

　　The third issue I would like to address that emerges from the OECD review is China's changing environmental role in the global economy. Although the review examines Chinese environmental performance in relation to multi-lateral environmental agreements, and makes recommendations on these issues, let me focus on the environmental behaviour of enterprises and integrating environment into development cooperation.

　　In today's interdependent global economy, multi-national companies from OECD countries and China are involved in operations all over the world. In most cases they bring significant benefits for the local economies and societies. However, in some cases they do not, and the host countries can bear significant economic, social and environmental costs. These cases have been publicised by the media and can adversely damage the reputation of the companies concerned, as well as the countries in which they originate. OECD countries have had to face up to this issue. One of the tools they have developed in response is the OECD Guidelines for Multinational Enterprises. The Guidelines are supported by OECD governments and a mechanism has been established whereby governments can be notified of instances in which firms originating in their jurisdiction are not in compliance with the Guidelines. The Guidelines cover most areas of corporate behaviour, including environment. We have also produced a handbook that describes the tools and approaches that companies are using to comply with the environmental component of the Guidelines. The OECD review recommends that China improves its oversight and the environmental performance of the overseas operations of Chinese corporations, along the lines of the OECD Guidelines on Multinational Enterprises. OECD would be pleased to work with the Chinese government and enterprises to this end.

　　The Review also recommends that China "integrate environmental considerations systematically into China's growing development cooperation programme." For this reason, I was very pleased to see the prominence given to environment and sustainable development issues in the Action Plan adopted at the Beijing Summit of the Forum on China-Africa Cooperation which was held last weekend. Amongst other things this Action Plan calls for a doubling of Chinese aid to Africa by 2009.

　　Last April, OECD Environment and Development Ministers met to discuss how environmental considerations could be better integrated into development cooperation policies. They adopted two documents which provide the framework for further work in this area: a Framework for Common Action Around Shared Goals and a Declaration on Integrating Climate Change Adaptation in Development Cooperation. We are just launching a new work programme to follow-up on what Ministers agreed, and we would be happy to explore with China how it could best benefit from this new activity.

　　Concluding remarks

　　Mr Chairman, let me draw my remarks to a close. I would draw your attention again to the conclusions and recommendations emerging from the OECD Environmental Performance Review of China. There are many that I have not mentioned that I know are of interest to the Chinese government, including material flows and the circular economy, environmental health, environmental indicators, finance, and environmental democracy.

　　I would be happy to discuss these issues with you and eventually to share with you the final report of the Review. I am also looking forward to exploring how OECD could best provide further support to the work of the China Council, and how we can continue to learn from its important work.

　　Thank you for your attention.