China’s war on pollution

(NY Times) In the first 4 months of 2014, China has imposed more than $1.7 million in fines against polluters.

Zhong Chonglei, an environmental official, told the state-run China News Service that the amount of the fines was double from the same period in 2013. Mr. Zhong said that in March and April, inspections of 3,300 companies and business enterprises took place, and 171 violations were discovered. In March, the Ministry of Environmental Protection reported that 71 of 74 cities monitored by the central government failed to meet minimum air quality standards last year.

Last month, the National People’s Congress, largely a rubber-stamp legislature, approved revisions to China’s environmental protection law that gave officials more power in imposing fines on polluters. Li Keqiang, the Chinese prime minister, has said that China is ready to “declare war against pollution.”

Economists love well-designed economic incentives. Here, polluters have an incentive to not violate pollution standards because if they do, they face a fine. While this is an incentive, it wouldn’t be considered a well-designed one from an economic point of view. The reason is that the pollution standards almost certainly were not designed in the first place with a goal of economic efficiency.

Economists would probably prefer a policy where each polluter is taxed per unit of pollution emissions. That way, polluters who can cut down on emissions more easily (at a lower cost) will do so (because it’s cheaper than paying the emissions fee), and polluters who can’t cut emissions cheaply will pay the fee (because it’s cheaper to pay the fee than cut down on emissions). With this type of policy, emissions are reduced in the cheapest way. The “pollution standards” currently in place probably (I say this based on experience with such policies – I don’t know the details of China’s policy) do not consider the fact that costs of reducing pollution vary across different polluters.

To environmental economists, the fines that polluters face for violating a pollution standard wouldn’t really be considered an “economic incentive” because they are not designed for economic efficiency. Rather they are just a means of enforcing some existing pollution regulation which is probably relatively inefficient from an economic point of view.