The Environment Quality and Economics Growth in China-A literature Review and Discussion

The Environment Quality and Economics Growth in China-A literature Review and Discussion
The Environment Quality and Economics
Growth in China-A literature Review
and Discussion
Master of Science Thesis
Stockholm, Sweden 2012
The Environment Quality and Economics
Growth in China-A literature Review and
Liu Qianqian
Master of Science Thesis INDEK 2012:15
KTH Industrial Engineering and Management
Master of Science Thesis INDEK 2012:15
The Environment Quality and Economics
Growth in China-A literature Review
and Discussion
Liu Qianqian
Kristina Nyström
Björn Hårsman
Considering that the coordination of economic development and environmental protection has
become a worldwide concern and that China's environmental pollution and ecological destruction
are mainly attributable to limitation of its future economic development, this paper presents a
discussion on the symbiotic relationship between the economic development and environmental
protection. The presentation is based upon an extensive literature overview with a strong focus on
Chinese research publications.
According to the overview China is facing a growing imbalance between economic achievements
and the quality of the environment.
In the paper, the Environment Kuznets Curve (EKC) and
findings from the overview are uses provide explanations as to why China is facing this kind of
problems. At last, the concept of a circular economy is presented and used to discuss possible policy
measures that might be applied in order to mitigate the describe conflicts.
Key-words Circular Economy; Environment Kuznets Curve; Externality
Table of Contents
Introduction ..................................................................................................................... 1
Research Background ................................................................................................................ 1
Research purpose ....................................................................................................................... 3
Overview of this paper .............................................................................................................. 3
Chapter 2
China’s Current Environmental Problems ...................................................................... 4
Environmental Situation in China ............................................................................................. 4
Land Issue .............................................................................................................................. 4
Water Scarcity ........................................................................................................................ 6
Energy Waste and Shortage.................................................................................................... 8
Pollution and Gas Emission and its application to China .................................................... 10
Chapter 3
Analysis on the Relationship between Environment and Economic Growth in China 13
Reviews on the Study of the Relationship between Economy and Environment. .................. 14
Review of China's Economic Growth Mode and the State of the Environment ..................... 19
Environmental Kuznets Curve ................................................................................................ 20
Theoretical Framework ........................................................................................................... 27
Growth Models .................................................................................................................... 27
Externality of Social Cost Goods ......................................................................................... 28
Chapter 4
Environmental Issue Influences the Economic Development ...................................... 31
Internalization .......................................................................................................................... 32
Comparative Advantages ......................................................................................................... 33
External Pressure ..................................................................................................................... 34
Direct Economic Loss ............................................................................................................. 35
Chapter 5
Major Reasons Explaining the Imbalance Relationship between Environment and
Economic Development in China ...................................................................................................... 37
Present Level of Economic Development ............................................................................... 37
Limitation of Traditional Administrative System .................................................................... 38
Particularities of the Environmental Problems ........................................................................ 40
Political Issues ......................................................................................................................... 41
Influence from Developed Countries ...................................................................................... 42
Chapter 6
Concluding Discussion ................................................................................................. 45
Build the Circular Economy .................................................................................................... 46
Specific measures for Developing Circular Economy ......................................................... 47
Develop Renewable Energy ................................................................................................. 49
International Cooperation on the Environment and Resources ............................................... 50
Eco-tax System ........................................................................................................................ 51
Construction and Implementation of Green Accounting Methods GDP ................................. 52
Chapter 7
Conclusion .................................................................................................................... 53
Chapter1 Introduction
Research Background
Statistics from the National Development and Reform Commission show that China's economic
development has been very strong in the recent 50 years, particularly in the last 20 years, and is
related to growing trade with overseas countries as well. Since 1949, China's GDP has increased by
10 times, which was a remarkable achievement, and consumption of mineral resources has also
increased by over 40 times. According to the study Ren Haiping (2007), China's economic growth
has gone through an unprecedented 20 years from 1985 to 2004, GDP’s average annual growth rate
is about 8.7 percent, and is still growing, a period often called the most glorious history of China.
However, China has paid a high price for these achievements, particularly in the ultra-conventional
use of natural resources and extraordinary loss of eco-environment. Since 1980, energy efficiency
has always been China's national policy. Still, in the late 90's, the rate of increase in energy demand
was 1.5 times that of economic growth per year, and China’s energy consumption was more than
three times that of the world average to produce per dollar of GDP. And Alice Hams den (1996)
point out that the pollution of environment is uncontrollable, especial waterways pollution, include
inland and coastal. And it also costs enormous to clean up the pollution. Furthermore, John
Warburton and Leo Horn (2007) suggest that China has a bad prospect. The environmental crisis of
China’s threatens the domestic growth of future. According to research by the World Bank, the State
Environmental Protection Administration (SEPA) and a team of international experts, the combined
economic costs and human health impacts costs of outdoor air and water pollution for China’s
economy amounts to around $US100 billion a year, or about 5.8 per cent of the country’s GDP..
Other estimates range from 3 to 20 per cent, the comment from China’s President, Hu Jintao, that
China’s economic growth is depended on an excessively high cost of resources and the
Several other Chinese studies have reported negative environment effects of the rapid economic
According to Yang Xingguan (2006), the rapid economic growth has resulted in over- use and
over-exploitation of natural resources and destruction of the eco-system. And Xia Guang, Pei
Xiaofei and Yang Xiaoming (2008) point out the economic growth in addition interacts with natural
environment, population, industrialization, urbanization and energy. And its scale, speed and modes
have been closely related to the causes and characteristics of environmental problems. All these
cause the severe environmental problems of China. Such problems as destructions of land and
forests resources as well as waste of water resources are increasingly serious, plus environmental
pollution caused by industrial and agricultural waste water and gas, and the emission of waste
residue and the use of chemical fertilizer, are all closely related to the economic development.
Li Tie (1999) suggests that China's current economic development mainly depends on the added
capital, labor, material resources and other production factors. Expanding inputs to increase output
is called an extensive mode of growth, while an intensive growth mode is different in essence and
implies that the economic growth mainly relies on the progress in science and technology,
improvement in labor quality, implementation of modernization and scientific management.
China's industrialization begins after the developed countries. Yang Dongping (2006) point out,
as China unilaterally supportedeconomic growth during the traditional process of industrialization,
and by long-term use of extensive economy growth mode which requires high material
consumption, high energy consumption and high pollution, great damages was caused to the
eco-environment. This extensive economic growth mode has resulted in an over-emission of waste
and environmental pollution, and even aggravates shortage of energy and resources. In a study of
study the relationship between the environment and economic growth, Tao song(2008)using
Chinese provincial waste water and solid wastes and GDP data over 1985–2005, finds that
economic growth is fast, but the problems of environmental pollution are becoming increasingly
Though China has created a huge economic development at the cost of tremendous damage on the
eco-environment, its eco-environment and economic development are developing out of phase. The
parallel growth of consumption may also have exerted a negative impact on the environment, but
this has been less studied and I will focus on production effects.
As for China, environmental pollution and ecological destruction have been mainly blamed for
harm of our health, economic development and social stability. So it seems necessary and urgent to
develop a symbiosis strategy to protect our environment and develop our economy.
Research purpose
I am writing this paper to shed light on the relationship between economic growth and the
environment, to analyze reasons causing imbalance, and to shed light upon possibilities to improve
the environment quality while keeping our current level of economic growth. This paper will
summarize the perspectives of some scholars only rather than covering specific econometric
Overview of this paper
Chapter 1 is the introduction which describes the research background and purposes.
Chapter 2 presents facts about China’s existing environment problems.
Chapter 3 analyzes the relationship between the environment and economic growth by the literature
review and the Environmental Kuznets Curve.
Chapter 4 focuses on the converse impact of environmental protection cost on the economic
Chapter 5 discusses the reasons that cause the imbalance between economy and environment.
Chapter 6 proposes some tentative solutions for solving China’s current problems.
Chapter 7 is the conclusion.
Chapter 2 China’s Current Environmental Problems
In recent years, the impact of China's economic development on the environment has become
increasingly serious, and the eco-environment even more fragile. Russell Smyth (2008) suggests
that the welfare of Chinese people has been significantly impacted on the environmental factor. Nan
Yangzi (2011) considers that present with economic growing, China's energy consumption and
environmental pollution problems are huge. Zhe Dongfeng (2006) indicates that the environmental
issues made China's economic growth lose the potential ability for sustainable development. Further,
through China's economy is at rapid growth, its natural environment is seriously destroyed
simultaneously. At present, China is paying the fiddler in respect of environment for the rapid
development of the economy, and potential contradictions have emerged continuously, including
environmental pollution and ecological imbalance. Ecological degradation puts China involved in
environmental issues, constraining its sustainable economic development. Even in agriculture, it has
done great damage on environment. Liangzhi You (2010) shows that with the increase in grain
yields, it results in much environmental degradation. Furthermore, as the increasing demand of
grain, it drives the intensive use of physical input. In return, the intensive use also leads to
environmental degradation, such as soil degradation, water scarcity and severe pollution.
China needs a strategy to solve the rising environmental problems which could in turn change the
current mode of economic development, and to adjust the economic structure to build sound basis
for economic development.
Environmental Situation in China
Resources are not effectively used and protected in China.
Land Issue
Qu Yan (2009) said, in recent years, with the accelerated progress of industrialization and
urbanization, more land resources should be objectively offered for industrial manufacturing,
infrastructure and urban construction. But in terms of management, some local governments pursue
political achievement unilateralism by abuse of land, and take land resources as a local "primitive
accumulation" and fiscal resources of government consumption, and also they take much
advantages in the transform of land-use and a large number of added values of land capital for their
primitive accumulation, resulting in the unreasonable utilization of land resources, especially in
grim situation of farmland protection.
Qu Yan (2009) point, only about half of the area in China is habitable. so the most population
among 1.3 billion lives around the arable land, which only accounts for 7% of the world. The
development of industrialization and urbanization has exacerbated the seriousness of environmental
problems. In the past 20 years, about 200 million people migrated from the rural to urban areas. It’s
estimated that by 2020, 300 million people will migrate, which will cause increase in demand of
residential land and put land resources on unprecedented serious situation.
By using high-resolution Landsat Thematic Mapper and Enhanced Thematic Mapper data of
1989/1990, 1995/1996 and 1999/2000, Liu Jiyuan, Zhan Jinyan, Deng Xiangzheng(2005) map
urban land expansion in China and analysis its expansion characters and the driving forces
underlying this process during 1990–2000. They find that it adds 817 thousand hectares in China's
urban land, and 80.8% of it occurs during 1990–1995 and 19.2% during 1995–2000. By the studies
of the 13 mega cities data, it shows that the demographic change, economic growth, and changes in
land use policies and regulations lead to urban expansion.
Li Xiubin and Sun Laixiang(1997) examine the major driving forces, which is behind the
conversion of arable land to non-agricultural uses in China during 1978-1995, find that it has played
an equally important role in reducing the gross quantity of arable land that industrialization and land
losses due to land degradation have.
Using provincial data, Tan Shuhao(2008) examines the impact, of which cultivated land transform
to agriculture and the environment. He finds that the center of grain production is gradually
becoming more fragile and water scarce areas, and this put more pressure on the environment. In
the 1990s, as land conversion, ecosystem service values have loss so much. But since 2000 large
scale ecological restoration programs, which compensate for such losses, have been implemented.
China's current per capita cultivated land is about 1.5 Mu①, less than half of the world average, and
the arable land is still in decrease at the speed of ten million acres per year. According to the latest
statistics by the Ministry of Land and Resources of P.R.C., during the last 7 years, China's total
arable land has been reduced by 1 million Mu, and more than 600 counties and cities have less than
0.8 acres per capita which is below the warning level of the world per capita arable land.
As forests and water are closely related to human life, forest reduction and pasture land degradation
caused by human’s irrational economic activities trigger such environmental problems as scarcity of
water resources, land desertification and global warming (Jiao Zhiyan, 2004). Those not only will
affect people's life but also restrict the sustainable development of our society.
In the past 20 years, dozens of rivers in north China have dried up and caused the ecological
destruction in large areas. Deserts covers 18% of China's land area, and now overspreads at a speed
of hundreds of thousands of square kilometers per year. China's current forest area is about 16
million hectares, but the forest coverage rate and forest per capita are only 61.3% and 21.3% of the
world average respectively.
The soil pollution in China is very serious, and has already become a threat to the
eco-environment’s sustainable development, food security and agricultural development. According
to rough investigation, there are about 1.5 million Mu(① Mu=0.165Ac )contaminated arable land
across the country, most of which are concentrated in the economically developed areas.
Water Scarcity
Wang Jusi (1989) points out that in China, two of the most important environmental problems are
water pollution and water shortage. In the 1950s, Water pollution started, and become worse in the
1970s. Rivers, lakes, oceans and groundwater have been all polluted to different extents. According
to the survey of Liang Tao (2007), the situation of water resources is not optimistic. The water
resource per capita is 2140 cubic meters in China, only a quarter of the world's average, ranking
110th among the world’s poorest countries of low water resources per capita. Over 400 cities have
the problem of water supply shortage. The total urban water shortage is 60 billion cubic meters per
year, i.e., 2/3 medium-sized cities are short of water currently and the irrigation of 1-2 million Mu
of arable land cannot be guaranteed. Experts predict that China's population in 2030 will reach 1.6
billion, and water resources per capita volume will be only 1750 cubic meters, indicating China will
face serious water shortage.
According to Deng Xiping (2006), water shortage is very serious in China, especially in the north
and northwest of China, which occupies half of China, but has less than 20% of total national
available water resources. And in this region, the efficiency of irrigation water use is only about
About one-third of the world's population has no source of safe drinking water. As for China, a
developing country, water pollution has become the main factor that harms the public health. Pang
Pengsha (2004) points out that in 2004, China reported 753 incidents of water pollution, for which
industrial waste plays the main role, and meanwhile, the non-degradable and toxic chemicals in the
agricultural waste, sewage and solid waste have caused serious damage to soil and underground
water resources. Small rural industries cause a serious water pollution problem in China. In China,
the water quality of over half of all river is unsafe for human, and the serious water pollution costs
several per cent of GDP, estimated. Mark Wang (2007) argues that rural industry is the basis of the
economic, but it plays the same important role that causes the serious water pollution problem in
Chou Baoxin (2005)’s work tell us, China's current water price is low when compared to the
international level, which can be attributable to its low water utilization rate, and China is in
shortage of water resources, so it still has to tackle water waste issues . Big gap exists between
China's water resources utilization efficiency level and the international advanced level. In 2003,
China's GDP water consumption was 465 million cubic meters, four times that of the world average.
Integrated water utilization efficiency in agriculture is only 0.3-0.4, indicating 70% water is wasted.
The country's industrial added value of water consumption is 5-10 times that of the developed
countries. Only less than half of urban sewage could be used after recycling and about 20% of water
gets wasted due to pipeline leakage in the urban water supply process.
Chinese government points out that the primary task in water pollution prevention and
environmental protection is to assure people of safe drinking water, and to take the most stringent
measures to resolve the hazards of polluted drinking water effectively. The official statistics show
that more than half of China’s surface water in seven major rivers is not safe to drink, and serious
pollution problem makes water supply even more difficult. Further, about 320 million rural
residents are facing shortage of drinking water, and some Chinese scientists also warned that if the
temperature keeps rising by 2.8 degrees Celsius by 2030, China's grain output will be reduced by
Energy Waste and Shortage
As the first in the world to consume coal, steel, copper and the second to the United States in
consumption of oil and electricity, China, is a big energy consumption country.
F. Gerard Adams and Yochanan Shachmurove (2007) use an energy balance framework to forecast
future energy demands and import needs of China in 2010 and 2020, suggest that the imports of oil,
coal, and gas will rapidly increase in 2020. They point out that as to increases in motorizations, the
energy imports growth is not so sensitive to the rate of economic growth. Chinese petroleum
imports will be likely to amount to almost 12 million b/d, almost 20% of world, coal amount to
more than 50% of world trade, in 2020.
At present, China has entered the stage of heavy chemical industry. One of the features of this stage
is that the energy and resources demand will rapidly increase for reason that the fast growing
industries like machinery, automobile, iron and steel consume high energy. In the process of
urbanization, after a large number of rural populations rushed into cities, demand of houses, cars
and electrical household appliance was in increase, causing energy consumption per capita of the
urban population 3.5 times that of rural areas, indicating that we entered a new phase of
consumption structure. In a new distribution of global industries, China is becoming a large-scale
global manufacturing base, and receiving relocation of some high-energy consumption
manufacturing industries here.
Relatively speaking, China is in lack of resources. Pan Jiazheng(2006) pointed out in 2006 that as
economic development is inseparable from the support of resources, the carrying capacity of
resources also constrains economic development, and many resources are not inexhaustible. At
present, the energy consumption of industrial sectors accounts for more than 70% of the total, while
the energy-consuming industries such as iron and steel, nonferrous metals, chemicals, building
materials consume 70% energy of the total, i.e. energy consumption of China’s high-energy
industries almost accounts for half of the total. The large-scale expansion of these low-level
industry results in the intense situation of China's energy and important raw material supply. In
addition to the consumption of energy and raw materials, the current development mode has also
caused great damage to the environment. At present, the local GDP growth is at the cost of the
sacrificing of natural environment.
Zhao Jingwen(2007) points out that fundamental problem of China's petroleum consumption is of
low technological content and high-waste consumption pattern. China's petroleum dependence on
foreign countries has more than one-third and “this trend” is still growing. This figure means that
China's high dependence pattern on foreign oil has begun to show. China's shortage of resources has
become increasingly exposed, in the future the domestic resources constraints playing a more and
more important role in economic development. If China still relies on this development mode, it is
bound to face bigger bottlenecks in the development in the future.
Hu Jinli and Wang ShiChuan(2006) use a newly introduced index to analyze energy efficiencies of
29 provinces in China during 1995-2002. Through the data envelopment analysis (DEA),they find
the target energy input of every region at every particular year. In the DEA model, the four inputs
respectively are labor, capital stock, energy consumption, and total sown area of farm crops used as
a proxy of biomass energy; the single output is real GDP. According to the newly index rankings,
they point out that the central area of China, whose total adjustment of energy consumption amount
is over half of China’s total, has the worst energy efficiency. The new indexes can be calculated as
TFEE (i, t ) 
T arg etEnergyIn put (i, t )
ActualEner gyInput (i, t )
TFEE is total-factor energy efficiency, and i denotes region, t denotes time.
TFEE (a, t ) 
T arg etEnergyIn put (r , t )
ActualEner gyInput (r , t )
In this equation, a covers r regions, so it means area a’s TFEE at time t is how many.
Use of the extensive production mode by many enterprises causes the grievous coal waste. Current
coal recovery rate is only 40%, in particular that of small coal mines is only 15%. From 1980 to
2000, 28 billion tons of coals were wasted, and it’s estimated that by 2020, approx. 56 billion tons
of coal will be wasted.
Considering increase rate of generating capacity, Fan Jitao (2007) said that power shortage in China
is the result of extensive use of electricity rather than supply shortage to a large extend. Power
consumed by the vast majority of steel companies in China for production of per ton steel is much
higher than that in the United States and Japan. Even hydropower plants, thermal power plants and
other power supply companies waste a lot of energy themselves during production, for instance,
hydro-electric power plant wastes 10% of electricity within the plant. Also, not high average level
of quality of the population and low awareness of environmental protection, energy-saving and
consumption reduction lead to excessive waste.
Whether the increasing demand of energy, or the high dependence on foreign imports of oil, iron or
ore, all the information point to one thing: although China has achieved a rapid growth, the
extensive mode of growth and high energy consumption makes it difficult to protect resources in the
high economic growth, exacerbating the pressure on shortage of resources and energy, and bringing
in utilization tension of coal, electricity and oil. The entire economy has been stretched too tight. So
if we do not change the mode of current economic growth, it will not be difficult to maintain the
speed of economic growth, but also may lead to economic downs.
Pollution and Gas Emission and its application to China
Charles I. Jones (1998) say, Goods that suffer “tragedy of the commons” are rivalries but have a
degree of excludability. Hardin (1968) point the typical example of such goods is that cost of
overgrazing common lands was shared by British peasants during the middle age. The cost of one
peasant choosing to graze an additional cow on the commons is shared by all peasants, but the
benefit is captured solely by one peasant. The result is an inefficiently high level of grazing that can
potentially destroy the commons.
As a result of the indivisibility of property rights of environmental resources, it is difficult to define
cost or the defined cost is very high, the environment will become certain public goods and has
public characteristic, thus we can use the environment resources without exclusion, and users may
disregard the public nature of the environmental resources and the will of the community as a whole;
also they may use and explore the resources without control. This would eventually lead to serious
environmental pollution.
Through ‘intensity-of-use’ analysis in resource economics, S.M. de Bruyn(1998) estimates for
three types of emissions ( CO2 , NOx and SO2 ) in Netherlands, UK, USA and Western Germany.
He discovers that with the economic growth, these emissions increases and that while the structural
and technological changes in the economy, the emission reductions may happen.
Shang Guan and Tie Liang (2000)found out that as a result of the irrationalism structure of energy
use in economic development, the share of coal and oil is too large and the ratio of water, electricity,
natural gas and nuclear energy is too low. In 2000, China's primary energy consumption was l.17
billion tons of standard coal, the utilization share of energy use was that coal accounted for 61.03%,
26.69% of oil, 3.06% of natural gas, 8.98 % of hydropower and 0.24% of nuclear power. China is
the only country that takes the coal as the dominated energy consumption of power structure in the
world. The coal-dominated energy consumption structure will for sure form tremendous pressure on
transport and ecological and geographical environment, and also will exert direct impact on the
efficiency of energy use. This low-quality coal-dominated energy structure causes a series of
problems, for example: air pollution in China is very serious. China's air pollution is mainly caused
by burning coal, which will then produce dust and acid rain (sulfur dioxide).
The irrational emission method also exacerbates the severity of air pollution. There is a large
amount of greenhouse gas emitted, so if amount of greenhouse gas emitted continues to increase,
then the temperature will increase even high, and higher temperature will cause glaciers melted, and
brings in flood and risk of freshwater resources shortage. Coal combustion emissions have led to
acid rain pollution nationwide, which caused a huge indirect economic loss. Therefore, the
coal-dominated energy structure cost too much considering the environmental and ecological
benefits. It is estimated that China's annual economic losses is as high as 95 billion U.S. dollars
because of the air pollution.
In China, the current air pollution has become a threat to human health. More than 30% of China’s
area has an issue of acid rain. If the carbon dioxide, sulfur dioxide and nitrogen oxide emissions
continue to rise at the present rate, then by the year 2010, air conditions in most China cities will be
impossible to breathe.
Chapter 3 Analysis on the Relationship between Environment and Economic
Growth in China
One rather general way to review the economic growth and the environmental quality is provided in
the following diagram.
Fig. 3.1
Relationships between Production and Environment
Most of the literatures deal with the relationship between production and the environment which is
also what I focus on.
For instance, I have used the following a box-figure to show the structure of the literature review
that has mentioned in my thesis.
In this chapter I will analyze the relationship between the economic growth and environment quality
by means of the literature review and Environmental Kuznets Curve.
Reviews on the Study of the Relationship between Economy and Environment.
Fig, 3.2 Literature Review Structure
Besides, through analyzing of CO2 emissions in the U.S. states, Aldy(2004) suggests that
emissions-intensive trade leads to at least some extent the income-emissions relationship. He also
finds that the estimated EKCs look different by state. And from study the non-stationary income and
emissions data, he points out that the estimated income-emissions relationships could be spurious
for some states. Anamika Barua (2009) finds it is temporary that the pollution falls during the
process of economic growth. On the other hand, the pollution tends to rise with further income
growth. Joseph E. Muhammad Shahbaz (2010) researches the relationship between CO2 emissions,
energy consumption, economic growth and trade openness in Pakistan. His result suggests that there
is EKC in the variables in this country for long run.
Western economics has involved in study of the environmental resources from the classical
economics which focuses on the production in the economic theory, and emphases the research on
the elements of production Jin Lan and Wang Gentang (1993). They emphasize the importance of
labor and land resources in the reproduction, at the same time they began paying attention to the use
of the renewable energy Statistics from the National Development and Reform Commission show
that China's economic development is very important in recent 50 years, particularly in the last 20
years, and is concerned by overseas countries as well. Since 1949, China's GDP has increased by 10
times, which was a remarkable achievement, and consumption of mineral resources has also
increased by over 40 times. According to the study Ren Haiping (2007), China's economic growth
has gone through an unprecedented 20 years from 1985 to 2004, GDP’s average annual growth rate
is about 8.7 percent, and is still growing, which can be called the most glorious history of China.
However, we paid a high price for these achievements, particularly in the ultra-conventional use of
natural resources and extraordinary loss of eco-environment. Since 1980, energy efficiency has
always been China's national policy. At the late 90's, the rate of increase in energy demand was 1.5
times that of economic growth per years, and China’s energy consumption was more than three
times that of the world average to produce one dollar GDP.
Xu Zhongming (2003) According to Ricardo’s differential rent theory that diminishing return on
resources is a natural law of restrict the economic growth. In Malthus’s population theory, that the
sustained growth of population is the biggest constraint for economic development. (Clark CW,
1973) The neo-classical economic theory which was developed in the latter half of 19th century
advocates establishment of the balance systems between production and consumption, and keeping
of the equilibrium of supply and demand to achieve Pareto Efficiency. However, this optimal
system does not consider the natural resources their own.
The discussion of the relationship between economic growth and the environment has at least three
different points of views, namely: pessimists, optimists and neutralist in environmental protection.
Xiong Peng (2005) argue that environmental protection pessimists represented by neo-classical
economists believe that strict environmental protection measures will surely increase the private
cost of the manufacturers, reduce their competitiveness, and bring the negative influence to a
country’s economic development. For example, Jaffe (1995) pointed out that U.S. went through a
trade deficit for more than a decade all because of its government's environmental control policies.
Environmental Protection brings high economic cost, which seriously impedes productivity growth
and enterprises’ competitiveness in the international market.
Zhao Yan (2007) mentions that traditional economists generally agreed that the opportunity cost of
protecting the environment is too high, which cause negative impact on the economic development.
Pashign (1984) considered that companies have to increase investment in environmental protection,
including the cost of purchasing the environmental protection equipment, managing these facilities
and paying pollution taxes. In addition, as Brock and Evans (1986) say, the production process will
become more complicated due to the pollution-cutting step for sake of protecting the environment,
thus increasing the difficulty of management and expenses of administration, which will increase
the enterprise cost.
According to Abdul Jalil(2011), there is a negative coefficient relationship between financial
development and environmental pollution in China. That means financial development has driven a
decrease in environmental pollution. And this also points out three cases, which is national income,
energy consumption and trade openness, determines the carbon emissions in the long run.
Study the Nan yingzi (2011), present china’s economic growth is fast, but there is a huge energy
consumption and pollution problems. He suggests that is necessary taking industrial ecology and
green GDP accounting obtain the management targets for maintain long-term sustainable economic
development, and achieve intensive economic growth.
In another aspect, enterprises’ price raise will lead to lower demand plus lower output and profit
Christiansen & Havelunan, 1981; Siegel & Johnson (1993). Feinck and Rowland (1991) conclude
that any change of environmental factors that influence the marginal cost of production will affect
enterprises’ selection of new location.
More importantly, expense for investments in pollution prevention and control requires sacrifice of
opportunity cost for other revenues from some more productive activities. The Government has also
be required to pay on specified standards, inspection and enforcement, which will eventually be
paid by consumers and manufacturers (pointed by Xiong Pen (2005)). Jaffe (1995) also believes
that the result of strict environmental protection will reduce net-export in short-term and seriously
affect the trade balance, and if it is possible to improve in long-term, even serious price depreciation
consequences will be difficult to measure in short period. In addition, re-allocation of production as
a result of environmental protection in short term①will increase the social costs, in particular, this
"short-term" at least will last several years or even more than a decade, so the increasing cost in the
so-called transition period which influences enterprises cannot be ignored.
On the other side, Professor Michael Porter put forward the claim of defending the environmental
protection in 1991, and suggests that the strict environmental protection could lead to innovation to
counteract the cost which can generate net income without increasing manufacturers’ cost, so to
make manufacturers more competitive in the international market, which is known as the “Porter
Hypothesis”②. The Porter Hypothesis provokes the theoretical framework on the environmental
protection of the traditional neo-classical economics, resulting in exacerbated conflict between the
economy and ecology.
Altman (2000) proposed the manufacturers’ behavioral model to analyze the offset cost caused by
the enterprises engaging in the pollution prevention and control. In his view, it will not lead to
increase in the average cost if increase in input of pollution prevention and control can be offset by
the increase in productivity factor as a positive effect, which can be attributable to the offset effect
generated by the environmental protection through the upgrade productivity to offset cost, resulting
in not only reduction in pollution but also manufacturers’ ability to be more cost competitive. In
addition, to prevent and control pollution requires large investment. Although the strict
environmental protection will cause manufacturers to increase their short-term costs, this is only
temporary in the transition period, and in the long term, they will spread the benefits of
environmental protection based on the spillover effect to lower costs.
A short period: here means the period from pollution-intensive production to other industries.
Porter hypothesis: Environmental regulations can induce efficiency and encourage innovations that help improve commercial
competitiveness. The hypothesis was formulated by the economist Michael Porter.
Salter and Angel (2000) considered that the companies who use environmental protection
technology can also get a series of competitive advantages, including the innovation, efficiency and
integration advantages.
Gable Sinciair--Desgagne (1998) believed that environmental protection would stimulate economic
development, and can gain both the economic and environmental benefits under certain
circumstances. They also believed that enterprises can adopt production of green products as a
differentiation strategy to occupy the green market to gain extra revenue.
Due to precondition of the Porter Hypothesis and the theory of neo-classical economics according
to different foundations, both have their own views to the environmental impact on economic
development which is based on the distinct theoretical arguments and empirical evidence.
Based on neo-classical economic theory, the Chinese Government has implemented a strict
environmental protection policy to shut down certain domestic manufactures to a certain extent.
Since the purpose of environmental protection is to internalize the negative environmental
externality so to increase the social benefits, this certainly will sacrifice the interests of
manufacturers. Porter and others believe that the assumptions of traditional economic analysis does
not take into account the conditions of incomplete information as well as the non-efficiency of
manufacturers and the potential innovations, thus enterprises’ cost of pollution control are
over-estimated, productivity benefits promoted by the innovation which control department to
induce manufacturers are ignored. Therefore, Porter and others are advocating the implementation
of strict environmental protection policy to achieve industrial objectives, and they want to stimulate
manufactures engaging in R&D to achieve technological innovation with appropriate environmental
standards and strict implementation of the Government. This will lead to cost-offset effects, and
enable manufacturers to reduce the pollution load and enhance their competitiveness at the same
The argument caused by the Porter Hypothesis and the traditional neo-classical economics of the
relationship between environmental protection and economic development led to the thoughts of the
China’s status.
The representative in the research of the economy and environment in China’s academic circles is
Zhao Xikang(2006), who considered that the implementation of environmental protection policy is
not conducive to the development of enterprises in the near future. But in the long run, the positive
factors such as innovative technology and changes in macroeconomic conditions will offset the
added cost and the adverse effects of environmental degradation by the industrial development.
Review of China's Economic Growth Mode and the State of the Environment
China, as a developing country, has a large population and rich natural resources. The
comprehensive research on China's national conditions shows that since the 1980s China’s
economy has maintained rapid growth in GDP per capita GDP is higher than the past, but economic
growth seem to have been gained by consuming a large number of resources and causing
environmental damage.
From an economic perspective, we notice that China’s rapid growth depends on increased capital
investment in huge capital, promotion of international trade, a cheap and growing labor force, rich
land resources, and a huge domestic consumer market. However, from the angle of environment
and resource economics, China’s rapid growth also is based on high energy consumption, high
pollution emission and perhaps over-reliance on the increase in investment. High consumption of
resources is the main reason for environmental pollution. In the production process, only parts of
raw materials have been transformed into products, with the remaining parts being wasted and
discharged into the environment, causing environmental pollution.
Foreign developed countries have adopted the strategy of “first pollution then control”, which can
be seen from the well-known Environmental Kuznets Curves①. Panayotou (1993) pointed out that
the extent of environmental pollution will get more serious if a country’s economy is transmitted
from agrarian to industrial. However, historical studies show that some developed countries also
cause serious environmental problems in the process of achieving rapid economic growth.
Simon Smith Kuznets (April 30, 1901-July 8, 1985): He was a Russian American economist who discovered an inverted-U
relationship between income and income inequality.
Zhang DongYong(2007) indicates that the low economic performance some extent resulted in its
improved environmental performance with the study of Chinese state-owned enterprise (SOE)
(Zhengzhou Abrasive Company (ZZAC)). However, other factors have had a positive impact by the
economic performance. For example, investment in pollution abatement is influenced by the
economic performance. At last Zhang suggests that it makes a significant difference to their
perception of trade-offs between economic growth and the environment that the characteristics of
the stakeholders, as well as their positions in the local economy. And the characteristics of the
stakeholders, as well as their positions in the local economy, will finally affect environmental policy
making in China.
China, as a developing country, is now at the different historical stage, in which the developed
countries have already consumed a great deal of resources during their developing process. By
studying the practice experience of the changing economic growth model is to govern
environmental issues and find a fundamental solution to solve China's environmental problems.
3.3 Environmental Kuznets Curve
In the process of economic development, Niu Qianyuan( 2005) argue that the environmental
support capacity can be divided into three phases: During the industrialization phase, with the
economic development, the load on environment increases continuously which causes the
acceleration of environment deterioration. The situation continues till it enters stagnate phase when
the economy develops to certain stage. Then the growth of environmental load slows down and
inversely declines gradually once it reaches apex; In the third phase, the economy develops
continuously in coordination with nature, this mode enables that load on environment reduces
constantly till to a lower degree. The developed countries have now reached the third stage. This
process is recognized as the Environmental Kuznets Curve (EKC), which indicates the degree of
economic development impact on the environmental pollution through the per capita income and
environmental index. i.e., in the process of economic development, the environmental conditions
will first decline and then gradually improve.
Grossman and Kragman(1995) analyze the change of pollution emission in different regions of six
countries over several years. They state that the relationship between environmental quality and per
capita income can be visualized as an inverted U-shaped curve, i.e. the Environmental Kuznets
Curve (Figure 3.3). At the early stage of industrialization the environment is less affected by
economic development, but when the industrialization speeds up, natural resources and waste
emission are beyond self-purification capacity of the environment, causing more serious
environmental deterioration. As a consequence, the contradiction between economic growth and the
environment becomes more acute, resulting in negative impact to certain degree, which means the
faster the economy grows, the much the environment will be destroyed.
Fig. 3.3 Environmental Kuznets Curve
The Environmental Kuznets Curve (across-country) shows that when the economy shifts from a low
level to a high level of income, that is when the per capita income increases from a lower level to a
higher level, the pollution index will increase as well but when the per capita income continue to
increase to a certain level, the pollution index will begin to decline with this income increased.
Many economists have used the model for empirical analysis; some by means of cross-country or
cross- regional data others by means of time series data. According to the estimates of World Bank
(1992) and Grossman and Krueger (1995), the turning point of the pollutants emission is around
8000 U.S. dollars for the general pollutants. According to most studies from different countries or
regions of the cross-sectional regression analysis (pointed by Hettige, Mani and Wheeler (1997)),
the air and water pollution will continuously increase before the per capita income reach the point
of 5000 ~ 8000 U.S. Dollar. Passing that income level, the pollution will began to drop and the
environment quality will be gradually improved.
According to the Environmental Kuznets Curve, the environmental and economic development has
a turning point between the "dilemma" and "win-win" range, but the turning point is of course not
fixed but related to e. g the national policy adopted and the institutional set-up.
A relatively flat U-shaped curve indicates that the pollution caused by economic development is
rather small and a relatively steep U-shaped curve indicates that economic development results in
large quantities of pollution. The Environmental Kuznets Curve indicates that economic
development is the fundamental way of improving the environment. With the growing national
awareness of environmental protection, a relatively low turning point can be achieved in the
Environmental Kuznets Curve at the lower economic development and less environmental damage
level. This is because many industrialized countries in the early stages of industrialization neither
pay enough attention to the environmental problems nor adopt any effective measures to promote a
balanced development between the environment and economy. So the newly industrialized
countries should learn from the developed countries’ experiences to do so as early as possible. By
doing so they will to reduce the maximum of the Environmental Kuznets Curve (as shown in Figure
3.1) and hence slow down the environmental degradation.
Wu Ruilin(2006) believes that China has no ecological conditions to solve environmental problems
by relying on “Environmental Kuznets Curve". Any hypothesis of economics has stringent
preconditions, and the “Environmental Kuznets Curve" implies an important one, i.e. the
environment’s carrying capacity is large enough. It’s assumed that no matter how serious the
pollution is, the eco-environment is reversible and recoverable, and thus turning point will always
appear. If on the other hand the eco-environmental degradation is non-reversible it might be
impossible to reach the turning point of the “Environmental Kuznets Curve" after passing a certain
level of environmental degradation.
China's current environment is very fragile, and also its current national per-capita GDP is only
1,703 U.S. dollars, far beyond 8,000 US dollars①. It is an open question if the environmental
The turning point for United States is 10,000 U.S. dollars, and Japan is 8,000 U.S. dollars. (Schmalensee, Stocker and Judson 1997)
degradation in China is close to or has already passed the point making it possible to hope a turn
down of the environmental Kuznets curve.
From the above views, we can see that the “Environmental Kuznets Curve” should be different
across countries, especially among the developed and developing countries.
The Environmental Kuznets Curve should add the cross-country prediction. While Stockey(1998)
shows the differences across countries make the model’s turning point relevant to the countries’
initial income level. The developing countries will reach the highest environmental deterioration at
their peak. But the environmental quality across developed and developing countries will converge.
Moses Abramovitz (1986) points out, at any given income level, the environmental quality will
relatively higher in the developed country than in the developing country. The other pre-condition
of the model is to range the pollutants by their characteristics such as permanence, toxicity and their
instantaneous disutility.
William A. Brock (2004) shows the growth model could predict both rising incomes and falling
pollution index by use of three elements, namely 1) scale - emission to economic activities; 2)
composition; 3) technique - explanation of productivity.
Scale effect: With the increase of the per capita income, economies of scale have become larger and
larger. As Grossman (1995) pointed out, a developing economy needs more resources investment.
Composition effect: Meanwhile, economic development has also produced a change to its economic
composition. Panayotou (1993) pointed out that when a country's economy changes from a mainly
agrarian model to industrial model, the extent of environmental pollution will deepen. The reason is
that along with acceleration of industrialization, more resources are exploited and utilized, and that
resource consumption rate begins to exceed the regeneration rate. The quantities of waste sharply
increase resulting in a decline of environment quality. When the economy develops to a relatively
higher level, the industrial structure will be transform from the energy-intensive heavy industry to a
technology-intensive industry and services, Hence, the pollution will be reduced as a result of the
changing composition of industries.
Technology effect: In fact, the composition effect implies the technology effect. Upgrading the
industrial structure requires technical support; the technological progress makes the cleaner
technology rather than polluting alternatives to improve the quality of the environment. It is
precisely because of the balance between scale and technology effects that make the first upgrade
industrial structure deepen the environmental pollution and the second upgrade industrial structure
reduce the environmental pollution. So that environment and economic development relationship
was appeared like the inverted "U"-shaped curve.
Using the above analysis, it might be possible to assess the main relationship between the
environment quality and the economic production (applicable to the developing countries). The
stock of pollution as well as waste emissions has negative effect on the environment quality and the
carrying capacity is probably positively correlated with the environment quality. On the other hand,
the output is decided by the scale, composition and the technology.
Zhang Lianzhong and Zhu Tan (2003) conducted an empirical analysis using a model suggested by
Antweiler (2001). The results show that scale effect will aggravate the environmental pollution
while the structural and technical effects will reduce it in China. Lan Tian (2004) has reached the
same conclusion by his econometric models as well.
In order to examine the existence of the EKC in China, Groot, Withagen, and Zhou (2002) use a
cross-section, time-series panel data set for Chinese industrial waste gas emissions to test for it. The
data covers 30 provinces during the period 1982 to 1997. There are three ways (in per capita terms,
in levels, and as a proportion of Gross Regional Product (GRP)) to measure emissions in the study.
By the study, there are different curves in the gas emissions/per capita, income and per unit of
output, and the curves are the typical EKC, N-shaped and U-shaped, respectively. Besides, Shen
and Hashimoto (2004) use a provincial-level panel data set of one solid pollutant, four water
pollutants and two air pollutants to examine EKC in China. They also find different shaped curves.
For dust and industrial solid waste, the curve is an N-shaped curve, but for the water pollutants and
SO2, it is an inverse-U shaped curve. But according to Zhao, Li, Wang and Zhou (2005), there is a
weak inverted-U shape for soot emissions, and the expected EKC pattern is not observed for waste
gas and SO2 emissions, with per capita GDP during 1981-2001. And they point that the economic
growth is still on the rising position of the EKC in China, but there is no stable EKC relationship
exists for these three pollutants.
According to Victor Brajer and Robert W. Mead (2011), the income-pollution relationship differs
dramatically. Some pollutants potentially have periods of decline, but others may be continuously
However, China, as a developing country, is likely to give priority to a continued high level of
economic growth implying an expanding production scale. The resulting scale effect will cause a
negative impact on the environment and move China’s carrying capacity closer to the critical point
Wu Ruilin (2006). A counter action would be to improve the technology for clean production. The
resulting abatement effects will release the environment pressure. (Ceteris Paribus).
Wei Ming Huang (2008) observes that there is a quasi-L-shape curve between the economic
development and GHG emissions in Economies in Transition. That means it will generate a lot of
‘‘hot air’’ with the economic growth, which is important to carry out the Kyoto Protocol.
To study the relationship between environmental pollution and economic growth in China, based on
the environmental Kuznets curve hypothesis, Tao song (2008) use Chinese provincial data over
1985-2005. In his study, the environment indicators are waste gas, waste water and solid wastes,
and the economic is GDP. And he uses the homogeneous EKC model (as below) to examine if the
EKC relationship between environmental pollution and economic growth exists. The results show
that there are different shaped curves in Gas-GDP, Water-GDP and Solid-GDP (as below).
The homogeneous EKC model:
ln( )it = αi + θt + β1 ln⁡(
)it + β2 [ln⁡(
)it ] + β3 [ln⁡(
) ] + μit
P it
Where the subscript i denotes a region index ( i  1,2,..., N ), and t stands for a time index
( t  1,2,..., T ), i represents the individual specific intercept, time dummy, t is time (specific)
effect,  shows a stochastic error term which is in general allowed to be serially correlated. And
S stands pollutant, e.g. waste gas emission (in 100 millions of metric cubic meters), waste water
emission (in ten thousands of metric tons), and solid wastes generated (in ten thousands of metric
tons), GDP stands gross domestic product (in 100 millions of RMB yuan),P represents population
(in ten thousand).
The different shaped curves:
Fig. 3.4
Relationships between emission and per capita GDP
Theth se inverse U-shaped curves indicate that the higher economic growth, the more waste gas,
waste water and solid wastes created. When arriving at the turning points, they begin to decline.
Although the estimates show that there is an inverse N-shaped relation, the Water-GDP relation
seems an inverse U-shaped (see Fig. b). This is because another solution (=421 yuan) (sitting in the
left) of the first-order derivative is too low. The curves of waste gas and solid wastes seem similar
(see Fig. a and c), having two close turning points, while for waste water the turning point is lower
than the former two. It is denoted that gas pollution and solid pollution has decreased much harder
than water pollution.
So the conclusion is that: According to the curves the pollution first becomes increasingly severe.
But after passing the maximum the problems become less severe.
Theoretical Framework
Growth Models
The earlier theory refers to the classical economic growth theory wrote by Adam Smith and Malthus.
In 1776, Adam Smith proposed in "The Wealth of Nations," that the land is relatively large
compared to the remaining population, in order to encourage the farming to stimulate the economic
development by offering free land. So Adam Smith believed that labor is the only element in the
economic growth, which was later developed into a theory titled Labor Theory of Value by other
economists. In the less developed agricultural economy, Adam Smith's theory can well explain and
guide the economy at that time.
After the appearance of industrial economy, the classical economic growth theory can not explain
the new economic situation any more, resulting in emergence of the neo-classical growth theory
which thanks to Solow (1956)①. This theory recognizes that technological progress and capital
accumulation can also speed up economic growth besides the contribution done by the labor force.
Technological progress and capital deepening could overcome the law of diminishing marginal
returns. The most influential representative of this neo-classical growth theory is MIT's Robert
Merton Solow and Solow growth model as follows:
Macro-production function is “ Y  AK  L1  y  Ak  , y  Y , k  K ”, which is a
Cobb-Douglas function, where Y denotes the total production in an economy A stands for
technology, K and L represents capital and labor, respectively. And y , k is the per production
and per capita, respectively. Then saving function is given “ I  sY ”, I is a portion s of the total
production Y . And after that the capital change is given by “ K  sY  Kd ”, where d stands for
depreciation. And the end, the workforce change is “ L t 1  Lt (1  n) ”, and n is the rate of
population growth.
So we can get the following diagram:
Robert Merton Solow (Agu.23th, 1924): He is well known of his contribution on the theory of economic growth that culminated in
the exogenous growth model.
Fig. 3.5
external factor and new equilibrium
Those three figures indicate how the economy returns to the steady, how the equilibrium change
facing the external factor differ. Figure a shows, when the k
is not at the “right” point k 0 , how the
economy return. When k is lower than the right one, the investment is bigger than depreciation
which drive the k up. When k is higher than the right one, the investment is smaller than
depreciation which drive the k down. Figure b show the k increase with the saving rat up. Figure c
denote the negative relationship between the population growth rate and k.
Externality of Social Cost Goods
Natural resources are good with externality as its main feature. The cost to use this resource is
considered as a social cost.
Externality theory was first proposed by the well-known economist Marshall in 1910 and then
enriched by his students Pigou(1920)①. When Pigou is analyzing the marginal social and marginal
private net value of output, he found that the social cost and the private cost are different in the
process of production. The gap between these two costs constitutes the externality.
Pigou (1920) in his book “The Economics of Welfare” said that economic externalities exist
because when A provides services to B, often this will benefit or damage others, but A does not
obtain compensation from the beneficiary and does not pay any compensation to the injured person".
In other words, the existence of externalities makes some social costs or gains do not response on
the market price of certain products or activities. The externalities can be divided into positive and
negative external. The economic activity with negative externalities will have higher expected
standards, because the society has undertaken part of its cost. The economic activity with positive
externalities is inadequate because they cannot receive compensation. By analyzing perspectives of
resources allocation, the externality is a phenomenon of low-efficiency that some benefits or costs
are ignored by the decision-makers.
In the west economic theory, the externality explains the reason why the environmental problems
occur. This theory considers that private use of resources and the environment will cause the
negative external effect and prejudice the economic interests of the whole society. Such harm will
damage the environment and reduce limited resources.
For example, the up-stream farm U of a river will damage the water quality if fertilizers are used,
which affect the down-stream farms D and cause loss of production and daily life which constitute
the social cost of the farm U. However, supply and demand equilibrium price in the traditional
market system does not reflect the external social costs. This results in environmental problems that
the sewage and other economic activities which damage the environment do not pay necessary
social cost and lead to the excessive harm to the environment. The beneficial economic activity
such as forest planting is shrinking without corresponding to the comparison compensation.
Arthur Cecil Pigou (Nov.18, 1877—Mar.7, 1959): He is an English economist whose work covered various fields of economics,
especially in the area of welfare economics.
In an overlapping generation’s model with environmental externality, Tetsuo Ono (1996) think three
tax plans to internalize the negative effects of the consumption on the environment and the
intergenerational long-run effects. And we can achieve the optimal allocation in every tax plan.
According to Erik T. Verhoef and Peter Nijkamp (2002), they develop a general spatial equilibrium
model of a monocentric city. In the model, two types of externalities occur, one of them is
environmental externalities, and the other is agglomeration externalities. They test free-market for
first-best and second-best optimal spatial equilibrium, and suggest that the pursuit of environmental
goals may sometimes lead to at the expense of reduced agglomeration economies, and on the other
hand it may actually sometimes stimulate the economies.
Chapter 4 Environmental Issue Influences the Economic Development
Human’s survival and development depend on natural environment, but meanwhile human’s
survival and development will in turn affect our natural environment. The relationship between
economic development and natural environment is shown as follows: first is the impact of economic
development on the natural environment, including extortion of natural resources and spaces to
enjoy the eco-system services, discharge waste into the environment; second is the counteraction of
natural environment on human being, including limitation of resources and environmental on
human’s economic development; negative impact of natural disasters, environmental pollution and
ecological degradation on the economy.
In order to illustrate the relationship between economic growth and environment, Anastasios
Xepapadeas (2003) did a great job.
Based on these Theoretical foundations, the author has an experimental test and then comes the
conclusion. If a steady state for the undiscounted optimal growth exists, that means a sustainable
state for the economy and the environment is possible. Furthermore, if it is possible that sustained
growth without pollution accumulation; that stands for that there is also a sustainable state for the
economy, since the environmental stock does not decline in the long run. So, optimal growth paths
are also sustainable in that case.
Environmental issues could influence and constraint the economic development in two aspects: first,
although the environmental protection will increase the social benefits but will also increase the
costs of the private companies and degrade the competitiveness in the international market, this
implicit offset effect will also bring negative effects of China’s economic development, and this
effect will primarily reflect in the international trade. As a developing country, China has its
economic growth depended on the international trade to certain degree, so cost of environmental
protection will certainly affect its partial economic development. On the other hand, the
eco-environment is increasingly fragile; the negative effects from the limitation of resources will
also constraints the healthy development of economy in China.
From Sherry Bartz (2007), some scholars believe the theory, which the inverted U-shape results
from a corner solution in which less developed countries do not abate pollution; while others not
think so. In order to analyze the causal relationships between economic growth, human
development, Valeria Costantini and Salvatore Monni (2007) combine the RCH and EKC models,
and they find that in order to build a sustainable development path, it is importance of high
institutional quality and investments for human capital accumulation. From Shi Baojuan (2010), we
can’t see an obvious EKC relationship between environmental indicators and GDP per capita
besides industrial dark matter emission. And he considers that it will continue to rise that the
emissions of industrial waste water and industrial solid waste.
Most environmental problems are caused by the market failure, and main failure is prices cannot
reflect social benefits or real market cost for reason that we have to internalize the environment
Environmental costs mean the environmental damage and the resources wastage in the production
process or mean the use of goods. Bring the environmental costs into the cost of production is
defined as the internalization of environmental costs. The internalization of environmental costs in
the international trade refers to bring the various environmental costs into the prices of trade goods
and afforded by the producers and consumers in order to promote the rational use of resources and
effective protection of the environment.
On one hand, trade policies that stimulate the economy may distort market structure, causing harm
to the environment; on the other hand, the trade policies with too much emphasis on the protection
of the environment may not be conducive to normal economic development, thereby affecting the
benefits of the environment. For instance, as a developing country, China has its economic
fundamentals which determine the government to lower its environmental standards, and the other
way adopted by the developed countries is to transfer their pollution industries into the developing
countries. At the same time, the developed countries may use the excuse of protecting the
environment to create non-tariff barriers to constraint the economic development for the developing
countries by trade barriers, whereby to whittle the national power of the developing countries.
The internalization of environmental costs in the international trade is a complicated issue. Not only
because of the difficulty to evaluate worthiness of the environment but also irregular economic
development level of each country. There are no unified model and index system to measure the
value of the environment. As a developing country, China may lose the economic interest by the
internalization of environmental costs. For instance, this internalization may cause the rise of the
prices of raw materials and primary products which will decline the export competitiveness. Finally,
internalization of environmental costs will be likely to stand advantages by trade protectionism to
call for China to carry out the internalization of environmental costs. China's environmental
protection may have some positive effect but it would adversely affect the economic development
in which the economic interests will be involved.
The conflicts between the developing and developed countries in the environmental and trade issue
are due to the vary degree of economic development of each country. The industrialization level in
the developed countries which has experienced the profound lessons of environmental pollution is
very high. Therefore, they attach great importance to environmental protection during the economic
development process and have more stringent environmental standards and environmental
regulations. China has relatively low level of industrialization and put less emphasis on the
environment, and also has backward technology to protect the environment and reduce the pollution.
In this case, if the developed countries call for China to use the strict environment standard of
export in the international trade, another new non-tariff barrier will be led to. So, when the issue of
environmental protection combines with economic development, an opposite relationship between
these two will be formed.
Peter H. May(1996) points out that despite competitive disadvantage, if we internalization of
socio-environmental costs of such dislocation, the production would best have been left where it
was. And Kostas Bithas(2011)thinks that their internalization or neutralization in the traditional
way cannot lead to sustainability, if there are externalities prevail in the real world.
Comparative Advantages
The internalization of environment cost to some extent could explain that if China carries out the
high standards of environmental control policies, high economic cost will be caused and
competitiveness of manufacturers in the international markets will be reduced. After internalization
of environmental costs, companies have to increase their investment in the environmental protection,
including the cost for purchasing equipment and managing these facilities. Enterprises have to
improve their existing production technologies to reduce the pollution in the production process,
which makes the production flow more complicated and expensive. Those measures will increase
the management difficulty, and force the enterprises to raise commodity price, and lead to the lower
demand. Finally, the profit will decline. So this will weaken the competitiveness of enterprises in
the international market.
Traditional international trade theory does not take into account environmental costs, and the prices
of tradable goods do not reflect the environmental costs. Environmental elements dose not base on
the price market factors, so that different countries have different environmental standards. As a
developing country, China sets down lower environmental standards which cause lower
environment cost. According to the theory of comparative advantage, China has the comparative
advantage of the environment. This often leads to China’s economic development structure
depending on environment sacrifice and predatory exploitation of the natural resources to obtain
competitive advantage in the international market. The developed countries have higher
environmental standards, and they use trade measures to transfer pollution into the developing
countries. Once China has also implemented high environmental standards, the competitive
advantage in the international market will weaken or disappear. This will be a direct cost in the
economic development as protection the environment.
According to Matthew A. Cole(2003), as the global decline in trade barriers, the environmental
regulations now potentially play a more and more significant role in a country’s comparative
advantage. As consistent with the Porter and van der Linde hypothesis, Valeria Costantini (2007)
also suggests that environmental regulation stands for an important source of comparative
advantages. Those strongly show that the environmental regulations now are very important in this
External Pressure
The developed countries should take responsibility for the current situation of pollutions such as
“greenhouse effect”. But that pollution situation gives the developed countries an excuse to restrict
the environment protection to the developing countries. This is so unfair.
Difference level in the economy and technology of the North-South, together with the present
production and trade structure between the North and South, will certainly make the developed
countries occupy a dominant position in the economic development. China, as a developing country,
surely is at the subordinate status. The internalization of environmental costs will weaken the
position of the developing countries in the international trade which could deteriorate the
North-South trade relations. The asymmetry between the developed and developing countries
realizing the internalization of environmental costs put the former in an initiative to occupy the
dominant position, and the latter in a passive and cooperation status. This difference will generate a
direct adverse impact on the environment in China, and will also cause the obstacle to the North and
South in trade. This opposition will hamper the economic development in China.
From the study Hemamala Hettige (1996), the environmental pollution intensity is negatively
associated with scale, productive efficiency, and the use of new process technology. According to
Keith Brouhle (2008), if participation in the GPA, it will place several forms of external pressure,
which is the regulatory threaten, industry trade association membership, the level of environmental
giving in a state, and a number of neighborhood characteristics.
Direct Economic Loss
In case of relative shortage of resources, fragile eco-environment has gradually become a major
problem in China’s economic development.
First, the environmental problem is restricting the economic development. The World Bank
estimated that China’s air and water pollution caused it lose 8 percent of GDP in 1995; according to
Survey Western Ecological report, the ecological destroy caused direct economic loss of 13% local
GDP in 2001; experts from Chinese Academy of Sciences estimated that the environmental
pollution and ecological destroy caused 15% GDP loss in 2003.
Experts from the Chinese Academy of Sciences estimated that the pre-development cost of energy,
transportation, communications, environmental protection, ecological construction and other
infrastructure construction is 1/4 higher than the world average, including 10% for inherent fragility
of the environment, 7% for the environmental pollution, 4% for the irrational structure and
mismanagement respectively. High development costs will for sure affect the economic
development and competitiveness.
The second is that the environmental problems harm people’s health and social stability. The
environment is closely related to human health. According to the international research results, the
level of environmental pollution is positively correlated with the cancer and respiratory system
diseases. According to the United Nations Development Program 2002 Human Development Report
in China, the population dying of lung cancer at the serious air-polluted regions is 4.7-8.8 times
than that at good air regions.
In China, not only the air pollution but also the water pollution is a serious hazard to the public
health. For example, in 2004, pollution incidents in three cities in Tuojiang Sichuan influenced
millions of people’s drinking water, and caused economic loss of about 200 million Yuan.
Environmental degradation put residents at hard conditions for living in some area, and “ecological
refugees” aggravates the burden of China's economic development.
By studying Wen Zongguo (2007), it is 435.2 billion Yuan, 4% of China's GDP that the total loss
from air pollution in 2002; and for water pollution, it is 650 billion Yuan, 6.1% of GDP; for noise
pollution, it is 1.6 billion Yuan. And the total cost of environmental pollution is 1092 billion Yuan,
10.2% of GDP in 2002. Using the “willingness-to-pay” metric, Wang Xiaoping (2005) find that
total health damages due to year 2000 anthropogenic emissions from Zaozhuang, which in eastern
China heavily depends on coal.
Chapter 5 Major Reasons Explaining the Imbalance Relationship between
Environment and Economic Development in China
From the above analysis, we can see that although the level of economic development in China has
been improved to certain extent, negative impact on the eco-environment by economic development
has also beyond its carrying capacity. The relationship between China's overall environmental
pollution index and the per capita GDP is still at the climb stage of the Kuznets Curve, indicating
that China's economic development and environment are not in harmony, and many reasons can be
attributable to such situation.
Present Level of Economic Development
China's present level of economic development determines its lower level in the environmental
As China has just entered the take-off stage of economic development, so its economic
development level is not high. The Environmental Kuznets Curve shows that China is still at the
rising period on the inverted U-shaped Curve. Due to the limitations of the economic development
level, the backward production technology and equipment determine that China has the extensive
industrial production during this period. This high-consumption production will inevitably bring
high pollution. China's low-level economic development constraints the environment in the
following main areas:
Firstly, China has a large population which forms a great pressure on the resources and environment.
Paul (Paul Ehrlich 1972) proposed the environmental impact equation in 1972, namely Impact =
Population × Affluence × Technology, from which we may notice that the population size,
economic development level, and technology are the three important factors that may affect the
environment quality. Environmental issues are closely related to the population problems, which
makes it difficult to solve the environmental problems. Victor Brajer’s(2011)view was in favor of
the inverted U type assumption and the use of aggregated indices. In order to make a research of the
existence of an EKC for China, Shen and Hashimoto (2004) used a provincial-level panel data set
of one solid pollutant, four water pollutants and two air pollutants. They come to the conclusion as
follows: for dust and industrial solid waste, they provided support of an N-shaped curve, while they
gained the expected inverse-U shaped relationship for the water pollutants and SO.
Secondly, China's enterprises, especially the large state-owned, are at a lower level in terms of the
technology equipment, management skills, and scientific research. The extensive mode of
production has resulted in serious waste of resources during a long period, which aggravates the
burden on the environment as well. There are nearly more than two thirds of industrial enterprises
are small-sized. The township-run enterprises have developed rapidly in the last 20 years, but also
have backward technologies and equipment, which seriously wasted raw materials and energies. As
in the absence of proper environmental protection measures, reasonable layout and improved
management skills, they caused serious environmental pollution.
Thirdly, Chinese government focus on economic development causes ignorance of its duty to
protect the ecology and environment, and even failure to take adequate measures to ease rising
confliction between the economy and environment subject to the related laws and regulations.
Fourthly, the poor level of economic development indicates China’s low level in science and
technology, and in education as well; weak environmental awareness of citizens makes it even
harder to fulfill the environmental protection task.
Limitation of Traditional Administrative System
It’s difficult to solve the contradiction between the environmental protection and economic
development with China's traditional administrative system.
On one hand, the externality and cross-boundary of the environmental problems can be mainly
attributable to aforesaid difficulty, and impact will then be caused by the environment pollution and
ecological damage without geographical constraints or subjection relationship among administrative
areas. Each administrative region will build “benefit plan” by considering its own interests jointly
with the pollutant discharging units to a certain degree. They will transfer the cost of environmental
pollution to other regions and thus give rise to the pollution incident of "the upstream get rich and
downstream get disaster".
On the other hand, the traditional environmental management in China mainly uses administrative
measures, i.e. “economy relies on the market, and environmental protection counts on the
government.” indicating too much expectation on the government. While the executive function of
government has multiple characteristics, which means the local government not only has to protect
the public interest or promote the sustained and healthy social development but also has to do
everything possible to protect the production and development of the local enterprises. When the
conflict happens between environmental protection and economic goals, local government may
sacrifice the environment for short-term economic interests.
The government’s pursuit of economic goals puts the environment protection in shortage of
financial support. Zhou li’an (2007) indicated that promotion tournament on basis of GDP growth
is the sticking point to explain the amazing growth, which lack of environment protection.
According to experts statistics, using 2%-5% of the GDP for ecological construction can curb the
continuous deteriorate of the eco-environment; while using 5%-8% can improve the
eco-environment. China has just ploughed into less than 2% of GDP on the ecological construction
which clearly means that it’s difficult to guarantee the sustainable development of the
eco-environment. Besides Environmental policy efforts have lacked availability, which confirmed
the persistence of a disjuncture between promise and implement. Olivia Bina (2010) made an
analysis in her paper which reveals weaknesses in all three EPI-type responses: normative,
organizational and proce-dural. The disjuncture is confirmed, but according to EPI’s normative
perspective, she advised that the reasons for this should lie as much in the framing of the promise as
in the implementation.
The reason why the effect of environmental protection will be restricted to a certain degree is that
the government lack of law enforcement strength, backward law enforcement equipment,
unimproved environmental legal system and inadequate sector coordination mechanisms. Polluters
and destroyers will objectively make a series of environmental pollutions and ecological destroys in
ignorance of laws to maximize their economic benefits. The extent of administrative intervention
measure which mainly depends on control system has defect itself. Therefore, it is difficult to
guarantee the efficiency; sustainability and equity of environmental management by solely counting
on the administrative measures or reinforcing laws and regulations. In consideration of overall
situation for a long-term, it’s a must to use appropriate economic instruments based on market
mechanisms to address environmental issues.
Particularities of the Environmental Problems
Particularity of the environmental problems adds it more difficult to solve.
As a result of externality of environmental pollution and the publicity of environmental protection,
the balance between environment protection and the economic development is constrained by
multiple factors.
First, the level of economic development, economic legal system and environmental protection
awareness in China differs a lot from that of the developed countries. Graeme lang(2002) indicate in
his paper that china has the least measures to protect the environment in most of these countries, but
it is the only agency able to handle many reasons of deforestation.
Second, whether the environmental resources market could be effectively operated. We cannot
account all of scarce environmental resources into the market, because the price determines supply
and demand relationship. The external diseconomy of environmental pollution exists in various
manufacturing enterprises, and the short-term behavior industrial production combining the
irreversible environmental damages caused by some of the serious pollutions has determined that
China is still unable to provide an effective market of resources and environment.
Third, whether the economic-environment coordinates with policies including the public item
policies, industrial policies, economic incentives as well as emission control policies and
macroeconomic policies. Furthermore, the industrial, economic and macroeconomic policies of
China's environment-related industries have less coverage. On the other hand, the implementation
power is also weak, bringing high management cost.
The economy and the environment, as a subsystem of large-scale social systems, are not only
restricted by the natural environment and economic operation law inside the subsystem but also
affected by technology, education, culture, or demographic and other social factors outside the
subsystem. In order to promote the sustainable development of economy and environment,
government should strengthen and improve the environmental management and economic policy,
and meanwhile control the speed of industrial development, maintain an appropriate investment on
environment, and improve business skills and technologies, so to technically solve environmental
problems. The economy and the environment will develop coordinately only if all applicable
policies and measures are combined for use by all means.
Political Issues
At present, the issue of environmental resources has become a global concern, and China’s
resources and environment also lead to a series of political and diplomatic issues which caused a
huge pressure in turn and affect China's economic development.
Firstly, the rapid increase in demand of resources and raw materials in the economic development
will inevitably lead to the tight supply and rising prices of raw materials and market-related
resources in the international market, and then cause the global inflation. Acceleration of the
economic development in China keeps the demand of resources and raw materials growing, which
makes the developed countries feel the pressure of competition for resources, thus affecting the
supply-demand and price level of market-related resources and raw materials in the international
market, or even generating the linkage effect between the demand conditions in China and the
international market price level. Increasing cost of production will for sure affect the economic
development of other countries and cause other countries dissatisfaction on China's fast economic
Secondly, some developed countries have been aware of the fact that China has grown from the
low-cost energy-export country into the import country. Based on the strategic point of view, energy
is essential for a country’s survival and development. China's rapid economic growth makes a lot of
money and energy flows into China, breaking the original energy pattern which is a grave threat to
the vested benefit of developed countries. China's positive efforts on oversea business have been
treated as ulterior motives for the strategic expansion.
Thirdly, China's original economic development type is based on the resource consumption.
National Bureau of Statistics show that China’s heavy industry has developed rapidly in the first
quarter of 2007, especially the high energy-consumption industry. The developed countries are
beginning to focus on the responsibility for climate change and environmental degradation by
economic development of developing countries, particularly China in the recent G8 summit (the
group includes the US, Russia, Germany, France, Japan, British, Canada and Italy) which involved
in climate issues. They attempt to limit China's economic development by the excuse of
environmental and climate issues. Tao Song (2008) thinks that the environmental pollution are
increasingly severe along with the rise of economic growth. Environmental degradation of most
provinces has being still worse, and only few high-income regions have realized the importance of
environmental improvement, especially for waste gas and solid wastes. Nan Yingzi (2011) conclude
that China's economic growth is at the sacrifice of the huge energy and environment.
Fourthly, at present, China's low-cost of resources and the environment led to increasing China's
favorable balance of trade to some extent. This caused the trade friction between China and other
countries, especially the United States. The United States put continuous pressure on RMB
appreciation of this issue.
These political and diplomatic pressures in turn affect China's economic development, and barriers
directly lead to decline in trade export. The diplomatic pressure to the energy and environment
forced us to adjust the industrial structure quickly. Many enterprises suffered heavy losses by lack
of buffer capacity and the sharp appreciation of the RMB directly resulting a seriously interests
damage to a huge number of export enterprises.
Influence from Developed Countries
First of all, in the early process of industrialization of western countries, a large amount of raw
materials, energy and labor are easily available from the undeveloped countries with low price, and
these western countries may adopt whatsoever ways that may result in high input, high consumption
and high pollution without considering resources and environmental consequences. However, this
era has gone forever. At present, environment capacity of natural resources become increasing
smaller to all countries in the world compared to the growing demand. Western industrialized
countries are doing everything possible to economize the use of resources and energy to reduce
environmental pollution. Developing countries such as China do not have conditions of
resource-consumption growth any more, and we cannot get cheap natural resources and
environmental capacity, so we must pay higher economic and social costs of environmental to cover
damage. There exists relationship between FDI capital stock and SO2 emission ,which is increasing
1% in FDI capital stock, industrial SO2 emission will increase by 0.098%, in which the emission
increase due to the impact of FDI on economic growth and composition transformation balances out
the emission reduction result because of FDI's impact in reinforcing environmental regulation He
Jie(2005). Dean (1998) used a simpler simultaneous system to research the relationship between
international trade and industrial wastewater emission in China. She supposed that international
trade increases pollution by “pollution haven” effect, but trade also conduces to economy growth,
which reduces emission because higher income strengthens public exigency for a better
Secondly, in the early process of industrialization in the West, some prevention and treatment of
environmental issues have also been restricted by the period. They lack scientific understanding of
environmental issues and have less preventive treatment measures in a long term. But the situation
is completely different now, we can not only have scientific analysis of the dangers on
environmental pollution but also have the necessary technology and corresponding policy
instruments which can be done to balance economic development and the environment.
Thirdly, in the West, in the early process of industrialization, environmental problems were
basically confined in one country which is not bound by the international community, but the
situation is different now, environmental issues have become global issues. In order to protect the
human environment, the international community has developed a number of legally binding
environmental treaties. Anyone who violates the provisions of these treaties will be condemned or
even sanctioned for major economic loss thus caused. China should strive for justice of the right to
develop in the international community and to fulfill its international responsibilities undertaken.
Finally, the developed countries’ development process of primitive capital accumulation depends on
plundering of other countries’ resources, especially those of undeveloped countries. However, the
development of our country is mainly dependent on the domestic market, resources and
environment. Major developed countries in the era of heavy industry relied on mass production, and
consumed huge resources and energies, and even generated huge waste. However, China has no
conditions to use this type of development model, on account that iron, ore, aluminum, copper, oil
and other major means of production cannot be self-sufficient, and China experienced the energy
Chapter 6
Concluding Discussion
Through the afore-said analysis, China has to carry on the sustainable development to release the
pressures on the environment and solve the contradiction between the economic growth and
environment deterioration.
Wang, S.S and Zhou, D.Q and Zhou, P and Wang, Q.W (2011) investigate the relationships between
CO2 emissions, energy consumption and economic growth in China based on the panel data for 28
provinces over the period 1995-2007. And they find that the long-run co-integrated relationships
between the three variables. They suggest that China government should attempt to change the
coal-dominated energy consumption structure and reduce the shares of energy intensive industries
in economy, and need a necessary policy option for reducing CO2 emissions. And Nan Yingzi and
Wang, S.S and Zhou, D.Q and Zhou, P and Wang, Q.W (2011) used the panel data for 28 provinces
over the period 1995-2007 to study the relationship between CO2 emissions, energy consumption
and economic growth in China. And they find that among the three variables there has a long-run
cointegrated relationship. They advised that China government should try to alter the
coal-dominated energy consumption structure and reduce the shares of energy intensive industries
in economy, and need to make some necessary measures to reduce CO2 emissions. Nan Yingzi
and Gao Yuying(2010) think that the government should set industrial ecology and green GDP
accounting as the management targets ,so that we can maintain long-term sustainable economic
development, and achieve intensive economic growth. Han Shangjuan and Zhu Jingping(2010)
think that, we should take some measures to realize the coordinated development among energy,
economy and environment. The policies are as follows: 1) Try our best to exploit new clean energy
resources and gradually adjust Chinese energy consumption structure that coal is the main fuel. 2)
Change current extensive economic growth way, and increase technical innovation inputs,
especially R&D investment in manufacturing sectors. 3) Build thorough environment legislation
system and environmental standard system, guaranteeing the implement of environmental laws, and
establish a social supervision mechanism about environment.
Jonh Sterman( 2009) suggested definition of the sustainability is as followed:
The renewable resources shall not be used as quickly as they are regenerated
The waste shall not be produced as quickly as they start to present damage
The nonrenewable cannot be used during a long period
Build the Circular Economy
The essence of the so-called circular economy refers to eco-economy, abbreviation of the
closed-loop flow of substances. Such economy is in compliance with material circulation of the
natural eco-systems and law of the energy flow, advocates economic system reconstruction, and
stands up for clean production, waste utilization, ecological design and sustainable development.
Circular economy sticks to the policy of reduction, recycling and safety disposal of wastes, and
features closed-loop cycle of the material energy utilization.
In the traditional economy, humans intensively extracted the Earth's resources and energy and then
discharged a great deal of pollution and waste into water, air and soil. Extensive and disposable use
of resources is to achieve increase in economic growth through the way that put resources into a
waste. The circular economy is different from the traditional one. The former advocates the
economic development model which is consistent with the environment, and requires forming of
economic activity into a feedback process, like "resources - products - renewable resources",
characterized by low exploitation, high-use and low-emission. All materials and energies in this
economic circle must be reasonably and sustainable used to reduce the impact of economic
activities on natural environment as less as possible. Characterized by the resource conservation and
recycling utilization, the circular economy is also known as resource recycling-based economy.
The circular economy provides the strategic theory paradigm on how to transfer the traditional
industrial economy into sustainable economy during the industrial period, which could solve the
long-term sharp conflict between the environment and economic development. The circular
economy not only concerns about GDP growth but also the quality of growth. This new-type
economy put emphasis on saving and effectively using resources in the process of production and
consumption in order to reduce non-effective and destructive growth. It uses the low-energy and
high-utilization mode to maximize economic benefits with minimal resources and environmental
China's annual environmental pollution, natural disaster and water shortage caused the economic
loss cumulatively equivalent to 8% of the annual increase of China’s GDP. The fossil energy and
mineral industry account for a high proportion of the output value of the national economy,
indicating that the energy, resource, environment and disaster issues have crucial impact on China's
sustained economic growth. The contradiction between the eco-environment and the economic
growth cannot be resolved by the traditional economic development model.
In the 21st century, China's GDP still grows at the speed of 7% - 8% per year, which undoubtedly
brings great pressure to the environmental protection. China's energy stock and environmental
carrying capacity cannot burden the high intensity of resource consumption and environmental
pollution under the traditional economy model. We have to change the current extensive economic
growth as soon as possible and vigorously develop the circular economy, which is the best for
breaking the bottlenecks to achieve sustainable development. Taking a new road of industrialization
is an effective measure of protecting the national ecological safety to coordinate with the
development between human and nature.
Specific measures for Developing Circular Economy
Transform the population concepts
Change concepts and foster ideas that development of circular economy is the fundamental way of
creating a harmonious eco-environment and developing the circular economy. China is taking the
development model as "first pollute and then control" for a long-term. At present, the “bottleneck of
the resources and the environment become more and more prominent, we should completely left the
process of industrialization behind and take the procedure of “treatment and pollution together”, and
implement the whole process control. Enhance education and training on the advantages of the
circular economy to gradually turn the awareness of environmental protection into specific action.
At the same time, intensify development of circular economy and China's long-term economy by
combining the social development plan to achieve sustainable development.
Government function
Government is mainly responsible for developing the circular economy that could make full use of
the administrative, legal, economic, financial and other means to settle the market imperfections and
regulate the sustainable development of circular economy. First of all, strengthen policy guidance,
study and formulate laws and regulations relevant to the direction of industrial structure; observe
restrictions and encouragement to develop the low-resource consumption and high added-value
industries, eliminate and restrict the "high consumption, high pollution" industries. Establish
measures for financial, taxation, prices, emissions trading and environmental tax system in order to
form the new mechanism to protect the environment. Then, implement the conception of circular
economy in all economic development plans, and finally change the current examination and
computation economic system, and build a green accounting system to input the environment
benefit index in.
Technology support
The progress of science and technology is important for development of circular economy. It is
difficult to fundamentally achieve the economic and environment symbiosis growth without
advanced technology. To promote the collaboration of the academic, industrial and governmental
departments in the cycle of technology development in order to break the technical constraints of
circular economic development as soon as possible, firstly it is necessary to increase investment in
science and technology to enhance the level of technology and equipment. A considerable number
of enterprises in China are still using outdated equipment and poor process to produce “old heavy
crude” traditional products, which involves serious waste and low-added value. We have to change
this situation by actively developing and applying new technologies, adopting advanced equipment
and new materials to enhance technology integration, so to gradually increase the equipment level
on recycling of energy. This step will promote products level and reduce consumption and
emissions. Secondly, strengthen high-tech research and development, and constantly develop new
technologies and materials to replace non-renewable scarce resources. Finally, enhance the
international cooperation in science and technology, and actively introduce in advanced foreign
Law system construction
There is nothing wrong for enterprises to pursue profit, but it is unrealistic to rely on the initiative
environment protection if in the absence of relevant laws and regulations as well as social pressure.
It can be seen from the experience of the developed countries that the laws play an important role in
restricting the governments, enterprises and citizens’ fulfillment of their obligations of building a
recycling-oriented community. In order to change the mode of economic growth, it is necessary to
conduct a comprehensive reform of the system, allow people to freely establish an environment
protection organization and promote the liberty of the press and independence of judiciary. China
should also establish the circular economy legislation, and expressly specify the obligations and
responsibilities of consumers, enterprises and governments, and take the environment as a resource
in the government's public administration areas.
Develop Renewable Energy
In order to protect the environment, not only we have to reduce expenditure on extant resource but
also to search alternative resources. Presently, China should make great efforts to develop the
renewable sources of energy to reduce the burden on scarce resources.
Han Shangjuan and Zhu Jingping (2010) advised that the government should exploit new clean
energy resources and gradually adjust energy consumption structure that coal is the main fuel, in
order to achieve the object of the coordinated development among energy, economy and
environment. Wang Hong (2010) also considered the renewable energy is not enough in China.
To solve the energy and sustainable development dilemma in China, Yuan JiaHai and Kang
JianGang and Zhao ChangHong and Hu ZhaoGuang(2008) proposed that first of all we need to
strengthen energy supply security and guarantee enough energy to supply, especially to afford
adequate electric power supply and set up national strategic oil reserve in the short time; then, we
should enhance energy efficiency and diversify energy sources, actively exploit renewable energy
and draw out corresponding policies and measures; and finally the most important thing is altering
development pattern and reducing reliance on resource-and energy-dependent industries in the long
run. Li Fei and Dong Suo Cheng (2011) mentioned that in the future we must find new and
important ways as soon as possible, to transfer the current economic growth pattern and develop
low-carbon economy and circular economy actively. Above all, we should incorporate construction
of resources-saving societies with environmentally-friendly societies for the construction of
innovative countries.
The development and utilization of the renewable resources including solar energy, wind energy,
geothermal energy and ocean energy, are important for the sustainable development of economy
and energy. The renewable energy is abundant but generates fewer pollutants. This will be
considered as an important complement of the energy recently and the basis of the future energy
structure. A further increase in energy demand is unavoidable in China’s economic growth. If we
rely solely on coal, oil and other conventional energy sources, contradiction between supply and
demand will be intensified. In order to ensure the support of energy, we should develop the
renewable energy and promote the energy efficiency. In addition, China's coal-dominated energy
structure causes great pressure on the environment and cost too much to realize the quality
utilization. Main consumption of oil and gas will inevitably lead to overfull reliance on the
international market. The lack of inherent storage capacity of natural resource will cause high-risk
by the international political and economy. In the long run, human is bound to transit consumption
structure to a new one which mainly relies on the renewable energy.
International Cooperation on the Environment and Resources
The international cooperation experience tells us that active involvement in international energy and
environmental cooperation would enable us to effectively ease domestic pressure on resources and
environment by use of external resources.
Dimitrios A.Giannias and Joseph N.Lekakis(1996) tests input-output controls, social input prices,
bilateral water trade, a water market for all water users, and a fixed water allocation agreement, as
possible water policies for cross border river water sharing by using a simple economic-ecologic
model. And the analysis implies that bilateral water trade can show a practicable, efficient and
sustainable policy for cross border water sharing.
Ing-Marie Gren and Henk Folmer (2003) develop a simple model that explained uncertainty in the
degradation of water quality and abatement impacts, which due to the diffusion of nitrogen
pollutants in the drainage basins to the coastal waters as a result of coastal and marine transports of
the deposited nitrogen and variation in background depositions. At the same time their empirical
results for the Baltic Sea has also tested the theoretical results, and the higher risk aversion, the
lower abatement and the smaller net benefits. There has been another important result that net
benefit in each country has a positive effect. This means that there exists a major incentive for
nitrogen abatement: no country will suffer a loss because of cleaning up its act. Nevertheless, no
country will incur a loss, but some countries will acquire larger benefits than others. And this may
lead to an implementation of a redistribution scheme of the increase of the net benefits owing to
China should establish a good relationship with upstream-resource countries for economic
co-operation, and meanwhile realize the diversification of import resources.
China should strengthen its efforts in coordinating and organizing the existing international
environmental agencies to improve their efficiency and level.
Eco-tax System
Pigou ( 1920) has mentioned in his book The Economics of Welfare that government should assess
tax according to the damage caused by the polluter’s pollution level and levy taxes to make up the
gap between the private and social costs. This kind of tax which equals the marginal social damage
caused by the polluters is well known as the Pigouvain tax.
Zhang Huiping (2002) argues that externality theory provides a theoretical basis for the
environmental taxes; one of the solutions is to internalize the externalities through taxation which
could reflect the current actual level of demand. So, producers will assume the cost of pollution
control by themselves to reduce its marginal revenue, and also will reduce production activities that
may pollute environment, and put pollution activities under control.
N.Johnstone and K.Karousakis(1999) mentioned that the Pigouvain taxes used in combination with
a fuel tax, would generate some outcomes that are more economically efficient than many of the
other measures suggested or implemented. Meanwhile an analysis of vehicular emissions in the
American vehicle stock supported the view. Shi-Ling Hsu and Joshua Walters and Anthony Purgas
(2008) offered some empirical evidence for these theories by gasoline taxes; they thought that
pollution taxes are the most cost-effective means of reducing pollution. And they also put forward
an effective means of reducing opposition to gasoline taxes, which is “revenue recycling” the use of
tax proceeds to reduce other taxes.
Following China’s stylized status, there are several specific suggestions below to reform the tax
1) Increase tax on utilization of water resources to solve the growing problem of water shortage.
Introducing tax on the land resources to regulate the utilization system of land resources.
Increase tax on forest resources and grassland to reduce or avoid ecological destroy
4) Reform the consumption tax
Construction and Implementation of Green Accounting Methods GDP
Included the environmental resources into the development costs to avoid the intentionally expense
on environment to achieve economic growth of the local economy. The green accounting methods
GDP could create a good macro-economic condition for the balanced development of the
environment and economy.
Chapter 7
The relationship between economic development and environmental protection is not only unity but
also inverse and contradictions between the two may be solved by a compromising solution.
Economic development brings environmental problems on one hand, but on the other hand it
enhances our ability to solve environmental problems, i.e. sustainable development of economy can
be strengthened if environmental problem can be solved.
The Chinese and western literatures mentioned in this paper stand at different angles in viewing the
relationship between the environment quality and economic growth in China. All those literatures
have their own point of view based on different economic theories.
Combined with China’s actual conditions, and based on literature reviews herein, I conclude that by
regulating life and social production with economic instrument, environment could be properly
protected and resource could be reasonably used without waste to some extent.
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