The Green Leap Forward 绿跃进

External costs (i.e. cost not accounted for in the price tag, such as environmental, public health and other social costs) of coal in China totaled RMB 1.7 trillion (about US$250 billion) in 2007, equivalent to 7.1% of China’s 2007 GDP, according to a landmark report commissioned by Greenpeace, Energy Foundation and World Wildlife Fund released yesterday. “The True Cost of Coal” (Chinese version; English version) is the second high profile report on the Chinese coal industry to be released this month, following one by a group of MIT researchers which we previously discussed here.

Pictured (L-R): Ms. Yang Ailun of Greenpeace, Professor Mao Yushu of the Unirule Institute of Economics, and Dr. Yang Fuqiang of the Energy Foundation at the press conference announcing the release of “The True Cost of Coal” on October 27 at the Swissotel, Beijing.

Professor Mao Yushi of the Unirule Institute of Economics and chief author of the report summarized the rationale of the study:

Environmental and social damages are underestimated while using coal in China, as a result of market failures and weaknesses in government regulations. In order to address these problems, China needs to count these external costs and make the coal price reflect its true costs.

So what makes up this RMB 1.7 trillion bill of external costs?

• Environmental costs of mining: loss due to water shortage (washing one ton of coal uses 4 to 5 cubic meters of water) and wastewater (for every ton of water produced, 2.5 tons of water is polluted); loss from land subsidence; land erosion and loss of ecosystems; coal gangue storage and treatment; air pollution from coal mining.
• Environmental costs of coal combustion: health; agriculture; industry, transportation, materials, buildings and infrastructure; water pollution; pollution of heavy metal to soil; solid waste of coal burning and electricity generation.
• Environmental costs from coal transportation: noise; waste gas; damage to roads; traffic accidents
• Distortion costs from government regulations: electricity price influence on coal price; lack of safety investment; under-compensation for deceased miners; low cost of land; low price of coal resources (in many cases, royalties have not been collected for a long time); cost of overloading coal transportation.

The following video, produced by Greenpeace China, tells of the human costs of coal production through the voices of those directly involved:

The report also takes care to offset certain cost elements that have inappropriately been internalized into the existing price of coal, such as the high social burden of coal enterprises to provide a broad array of social benefits for its employees (which is not in itself a bad thing, but is done in a very wasteful manner), and what the researchers consider to be excessive mandatory contributions by coal enterprises to the Railway Construction Fund (RMB 22 billion in 2006 alone, amounting to 33% of total profits for the coal industry).

Taken together, the report concludes that based on an average coal prices of RMB 498 per ton in 2007, the total direct external costs are RMB 698 per ton, or 140% of the average market price of coal in 2007. What makes the reports findings all the more astounding is that it does not cover climate change impacts caused by carbon emissions from China’s coal sector. Because of the limited existing research on the economic effects of climate change impacts associated with coal use, the research team made the determination that it would be difficult to value such impacts and omitted such analysis.

The Costs of Internalization

The report doesn’t just stop short of presenting its quantitative analysis, but goes on to provide a 5 year policy prescription (see next section below) to internalize these costs. Although external costs amount to 140% of coal prices in 2007, the report calculates that if its policy recommendations are adopted, it would result in a “only” a 23% increase in current coal prices. Even more comforting is the conclusion that when such increase in coal prices works its way through the Chinese economy, the net impact on its GDP (at 2007 levels) will be a mere 0.07% decrease. [GLF note:  Prices of coal have risen sharply from 2007 average prices this year to as high as RMB 800 or 900 per ton.  At the press conference, the researchers maintained that such a price increases does not significantly affect the final numbers of the report's analysis.]

According to Yang Ailun, the Climate and Energy Campaign Manager for Greenpeace China, such seeming inconsistencies in the size of the externalities versus ultimate costs to GDP can be explained by ancillary benefits to the economy by other sectors. In response to a question posed by The Green Leap Forward at yesterday’s press conference announcing the release of the report, she said:

Although there is a 23% increase in the price of coal, there will also be benefits resulting from an emerging environmental services industry and renewable energy, so the net impact of internalizing the externalities is not as large as one would expect.

The report also points out that the costs of preventing external costs is significantly less than the external costs themselves, leading to a softer impact to GDP than one would expect. In addition, there are offsetting social benefits to the environment and public health that may not get captured in GDP numbers. In fact, the report projects an increase of RMB 942.3 billion in net social wealth if external costs of coal are internalized.

Interestingly, the 23% in coal prices would result merely in a 9.6% decrease in coal production and 6.9% decrease in coal consumption. Viewed it the context that coal accounts for some 70% of China’s primary energy, these findings essentially suggest that even if the direct externalities (leaving climate change impacts aside) of coal are completely internalized, coal will continue to be a dominant fuel source for China. This is not an incredibly uplifting conclusion. However, it is worth pointing out that the report’s analysis probably makes no predictions on the development and expansion of clean energy alternatives, but is instead based on the state of China’s energy cost structure today. So the good news is that as the development of clean energy systems continue to mature and become cost competitive over time, renewable energy will start to take even more market share away from coal power.

A Five-Year Policy Roadmap

The report’s policy prescription, the most provocative of which is the proposed implementation of a carbon tax, includes the following measures to be enacted over a period of five years:

• Increase mine tolls
• Levy energy, SO2 and carbon taxes
• Abolish the coal-electricity tariff automatic adjustment mechanism and gradually establish competitive tariff systems for power generators
• Establish fair coal extraction entry systems
• Establish a mechanism to account for the true cost of land
• Abolish the Railway Construction Fund
• Improve railway transportation capacity for coal
• Implement liability rules for coal safety accidents, transportation overloading, road accidents and environmental pollution

There are much more details to each bullet point in the report, but this blog would like to highlight the proposed carbon tax, which would start at RMB 100 per ton starting in 2012, increase to RMB 150 in 2020, and to RMB 200 in 2030. In response to skepticism expressed by a journalist at yesterday’s press conference as to the political feasibility of such taxes and other measure mentioned above, Dr. Yang Fuqiang of the Energy Foundation and one of the leading co-authors of the report pointed out that the Ministry of Finance is already currently studying the feasibility of implementing a whole range of energy, environmental and carbon taxes. This is consistent with what this blog has previously reported here (under subheader “Green Taxes”) and here (last paragraph).

Can the Plan Fly?

How realistic is the proposed plan? Although it is reasonable to question the political feasibility of enacting such a sweeping plan over a short period of time, I think such a question is irrelevant. The true value of such policy recommendations is to provide policy makers with a complete menu of policy options to start getting the prices right, and to impress upon them that, leaving aside the question of political feasibility, such measures can in fact be adopted in a reasonably short period of time. Of course, adopting measures, and implementing them, are two different things, and the institutional capacity of enforcing new laws and regulations is something would have to be addressed.

There is no question of that this is a first-of-its-kind study that has massive potential policy implications, and all credit goes to the research team for such a monumental effort. The next step for the authors is to take this report to the decision makers in the central government. To make any sort of headway, the report will have to convince policy makers not of the moral or qualitative arguments of internalizing coal’s external costs (such arguments are plain for everyone to see), but that its numbers make sense, i.e. that the short term economic and social costs of coal reforms will indeed be minimal, or at least manageable.  Any policy that has the potential to negatively affect GDP is sensitive in China, as the recent demise of China’s “Green GDP” project illustrates.

Whether rightly or wrongly, the reality is that such short term calculations probably weigh more heavily in the decision-making of individual government officials than any long-term projections of net increase of social wealth. In the eyes of the central government, there is clearly an imperative to keep the economy humming as the reactions to the latest “disappointing” GDP growth figures clearly demonstrate. Whether “The True Cost of Coal” has succeeded in making this economic argument remains to be seen. The final numbers look good, but the inner workings of the economic/valuation models that the research team used are necessarily complex and may thus seem to be a bit of a black box to a lay-reader of the report.

In light of this, the challenge for the report’s authors is to help policy makers understand, with more words rather than numbers and in as clear and logical a way possible, how the internalization of massive external costs (RMB 1.7 trillion) of coal requires just a small net sacrifice to GDP (0.07%). Such effective communication of science to policy makers is not only consistent with the “scientific development” (科学发展) tenet of the current central government’s socio-economic agenda, but also vital for China to emabark on its Green Leap Forward.

October 28th, 2008 | Tags: carbon tax, China, clean coal, coal, external costs, externalities, government, green taxation, internalization, policy | Category: coal, government, policy | Subscribe to comments | Leave a comment | Trackback URL