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Relic of a planned economy

Chinese business is paying the price for inefficient and unfair green policies. It’s time for the government to re-think its role in environmental protection, writes Tang Hao.

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2010 is the final year of China’s 11th Five-Year Plan. In the first four years, the energy-intensity of the Chinese economy fell by 15.61%, meaning a further drop of 5.29% was needed this year if the overall target of 20% was to be reached. Over the past 12 months, China’s efforts to save power and cut emissions have therefore been bolstered, with local governments going so far as to cut off or limit electricity supplies, close businesses and restrict production in order to hit their targets.

China’s Five-Year Plans are a symbol of the nation’s planned economy. In the past, they set targets and launched mass movements and campaigns designed to shape economic development. And, while the failure of the planned economy subsequently triggered market reforms and a shift in focus, the nature of the plans – a governmental attempt to guide economic development – has essentially remained the same.

When environmental aims become part of these plans, planned economy measures are naturally applied to achieve them: the government announces emission-reduction targets, the government decides how to achieve those targets and closing down businesses in order to reduce emissions makes sense. This process does not happen by formal legislation, nor are environmental groups or the media encouraged to exercise oversight. It happens by executive order of the government. You could call it “planned environmentalism”.

In recent years, this planned environmentalism has achieved impressive results. In particular, as soon as reduction of pollution and emissions was included in the evaluation of local-government effectiveness, energy-intensity started to fall. But there is an obvious problem: planned environmentalism concentrates environmental-protection powers in government hands and concentration inevitably affects efficiency.

A better way of achieving both economic development and environmental protection is the adoption of market pricing – where the price of pollution and carbon emissions is set as a result of a process of negotiation between the market and environmental entities. If China has no market pricing or distributed decision-making, and instead allows the government to set emission targets and sanctions, we will struggle to reach “Pareto Optimality” – a situation where maximum environmental benefit is achieved, without stifling development.

Another major problem with the planned economy is that the appropriateness of any plan it espouses cannot be confirmed in advance. Will resources be optimally allocated? Will supply meet demand? These are problems for the planned economy, and reasons for its replacement with a market-led system.

The same principles apply to planned environmentalism. For example, during the 11th Five-Year Plan, energy-hungry and emission-intensive industries were retained and targets for both growth and emission-reduction targets were set. This is self-contradictory. Sudden shutdowns and electricity rationing are simply a way of forcing firms to foot the bill for the government’s environmental-protection measures. Businesses are paying the price for changeable government planning. 

The negative consequences of planned environmentalism are even clearer when you consider that fairness in government decision-making cannot be guaranteed. For example, planners and environmental authorities treat firms differently when it comes to emissions targets. Large enterprises and state-owned firms have better relations with government and are dealt with more leniently than small and private companies. Worse, the personal interests of officials mean many firms that should be shut down are not, and the economic structure fails to improve. In these examples, the fatal flaw of planned emission reductions is that they rely completely on government, while government itself may not be completely reliable.

Without a clearly identified and sustainable route to cutting emissions, local government has no option but to act as it has been in order to hit central government targets. This can work in the short term, but is hardly an effective long-term strategy. Central government is prioritising emissions reduction now, but when the focus on environment fades, the situation will revert to how it was before, and emissions targets will be missed for the sake of other aims.

The government favours measures like planned emission cuts, not just because it is simple to close down companies and limit their electricity use, but also because such methods retain and even expand government power. China needs to find a way to change its economic growth model at the same time as saving energy and cutting emissions. To achieve this, efforts must be made in the following areas:

First, the government should reform property rights and adjust the market environment in order to lay the conditions necessary for effective environmental-law enforcement. Clearly defined property rights are an essential building block not just of an orderly market economy, but also an effective environmental-protection system. Once that foundation is in place, the target of sanctions for environmental breaches will be clear – unlike the current situation, where there is nobody who can be held responsible for the pollution and emissions of many state-owned enterprises.

Second, use legislation – not administrative orders – to manage the environment. Legislation is more conducive to the construction of long-term mechanisms. If the law is sound, the government can bring firms to court, rather than simply cutting off their power. On this basis, increasing the capacity of the courts and government to enforce the law will be essential for long-term effectiveness.

Third, use taxation to change the country’s industrial make-up by shrinking the proportion of non-environmentally friendly players. A general reduction in business taxes will increase corporate income and reduce the motive to profit from environmental damage. Meanwhile, tax cuts for particular industries can promote high-tech, low-energy and low-emissions firms and incentivise business to apply energy-saving technology. For sustained emissions reductions, the government needs to encourage firms to invest in improvements, but the actual process of change should be led by business rather than government.

Finally, the government should actively work with environmental NGOs – both domestic and international – and civil society to build a distributed environmental decision-making system that can respond quickly to changes in the environmental sector. During this process, public participation and oversight is absolutely vital.

Neither government nor market methods alone can solve China’s environmental problems. It is clear that planned environmentalism is capable neither of meeting the country’s growing ecological pressures nor realising the potential economic benefits of reducing pollution and protecting nature. In order to cut emissions or achieve wider environmental targets, the most pressing task for China’s government is to change the way it thinks about the environment; to move from a government planned environmentalism to one framed around public participation and industrial evolution.

Tang Hao is deputy professor at South China Normal University
, a Fulbright scholar and a columnist.

Homepage image from gov.cn shows members of China's State Council at a summit on energy policy.

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Not necessarily

It’s a fact, not conjecture, that brilliant economic growth can come about under a planned economy. Similarly, it’s possible to achieve energy savings with such a model. Saying “relic” in this way is inappropriate. It goes without saying that creating economic growth will benefit a lot of people, but equitable distribution is a problem. Reducing emissions under a planned system still leaves questions about how to solve economic problems, and not everyone is fanatical about saving energy, so they’re blamed. Procedural methods that are not impartial are also insufficient.

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Can’t completely agree

This is the neo-liberal view.

“A better way of achieving both economic development and environmental protection is the adoption of market pricing – where the price of pollution and carbon emissions is set as a result of a process of negotiation between the market and environmental entities.” In the US, PES (Payments for Environmental Services) in market-based mechanisms have been used for so long, but how many success stories are out there?

Some European scholars are critical of market-based means of energy saving and environmental protection. With problems of market failure, government-led systems can often more easily solve problems that arise through external forces.

What the question approached by the author boils down to is not about whether to be market-oriented, but relates instead to political systems--the effectiveness of public and NGO participation, assessing the performance of local officials or instead following “GDP-ism,” whether or not the environment is dealt with according to law (rule of law vs. rule of man), etc ...

From the standpoint of basic economics, China has been trying a lot of market-oriented initiatives, like having financial institutions introduce energy-efficiency finance projects and using CDM (Clean Development Mechanisms) transactions (note that, in March of this year, Hungary’s CDM trading scandal involved un-resolvable problems of asymmetric information and a lack of systemic regulations within completely market-oriented systems). Emissions trading is also beginning to take hold in provinces. It’s not easy to say exactly how superstructures will change, and in what direction.