1630. Water Pollution Abatement by Chinese Industry: Cost Estimates and Policy Implications

Susmita Dasgupta, Mainul Huq, David Wheeler and Chonghua Zhang
(August 1996)

Data on pollution abatement costs in Chinese industry suggest that the benefits of stricter discharge standards should be weighed carefully against the costs. China's current regulatory system provides an economic incentive to abate by charging a levy on pollution that exceeds the standard. But changing to a full emissions charge system would greatly reduce total abatement costs.

Using factory-level data provided by China's National Environmental Protection Agency (NEPA) and the Tianjin Environmental Protection Bureau, Dasgupta, Huq, Wheeler, and Zhang estimate the costs of water pollution abatement for Chinese industry. Using their econometric results, they analyze the cost-effectiveness of current pollution control policy in China -- and conclude that:

• For each pollutant, marginal abatement costs exhibit great differences by sector, scale, and degree of abatement. Ratios of 20:1 in each dimension are not uncommon.
• The benefits of stricter discharge standards should be weighed carefully against the costs. For a sample of 260 factories, a shift across the existing range of standards entails a present value difference in abatement costs of $330 million.
• Emissions charges as low as $1 a ton would be sufficient to induce 80 percent abatement of suspended solids for cost-minimizing factories. Charges of $3 a ton, $15 a ton, and $30 a ton would be sufficient to induce 90 percent abatement of suspended solids, chemical oxygen demand, and biological oxygen demand, respectively.
• The current regulatory system provides an economic incentive to abate by charging a levy on pollution that exceeds the standard. But the results of this analysis suggest that changing to a full emissions charge system would greatly reduce overall abatement costs. For the sample of 260 factories, the current overall abatement rate could be attained under a charge system with present-value savings of $344 million. At a cost equivalent to that of the current system, uniform pollution charges would produce much better environmental quality.

Approach: To measure the costs of abatement, they use joint abatement cost functions that relate total costs to treatment volume and the simultaneous effect of reductions in suspended solids, chemical oxygen demand, biological oxygen demand, and other pollutants. Tests of alternative functional forms suggests that a simple (constant elasticity) model fits the data as well as a complex (translog) models does, permitting sophisticated policy experiments with relatively simple calculations.

This paper -- a product of the Environment, Infrastructure, and Agriculture Division, Policy Research Department -- is part of a larger effort in the department to understand the economics of industrial pollution control in developing countries. The study was funded by the Bank's Research Support Budget under research project "The Economics of Industrial Pollution Control in Developing Countries (RPO 680-20)." Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Susmita Dasgupta , room N10-035, telephone 202-473-2679, fax 202-522-3230, Internet address sdasgupta@worldbank.org. (23 pages)

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