Abstract
China began enforcing a system of pollution levies in 1982. However, senior environmental officials expressed doubt that this system was improving the environment and, in 1996, they began to place greater reliance on mill closure as the penalty for poor environmental performance. Since then, managers have found means of subverting many of the intended mill closures, and this causes us to return to the question of the abatement efficiency and effectiveness of the levies. This paper uses production evidence from 34 papermills in two representative provinces to examine the abatement efficiency and effectiveness of the levies. The paper industry is an important industry for this question because it is the largest polluter of China’s rural environment. We use a distance function to determine individual output-based and revenue-based shadow prices for each mill during the years that the levies were the main environmental incentive. The output-based shadow prices for pollutants display no recognizable trends over time and they are very different for firms in different locations. The revenue-based shadow prices are widely variable between mills and locations as well. These findings indicate that the marginal opportunity costs of abatement were also widely divergent and that there was no trend toward improved abatement efficiency. The way to correct this is to improve the performance of the market—not to reject the market altogether as the more recent reliance on mill closures does. This observation suggests that a system of tradable permits would be an improvement on relatively less successful administrative measures such as forced mill closures.
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Notes
Premier Zhu Rongji, in the Government Report to the National People’s Congress on March 5, 1999, identified sustainable development as one of China's two fundamental strategies for the twenty-first century. President Jiang Zemin, stressed the importance of environmental protection at the annual workshop on Population, Resource and Environment on March 13, 1999.
Output distance functions measure differences in technical efficiency between any one firm and the most efficient firm. They reflect the full production process, not just the abatement response. The full production process is important in our case because China’s policies emphasize end-of-pipe measurement and enforcement. End-of-pipe enforcement encourages the adoption of new abatement technologies, but these are costly and the available technologies were generally developed for North American and European mills of much greater scale. Therefore, China’s mills have turned to managing inputs and outputs within existing technologies as their response to pollution control—and a description of the full production processes is necessary to model this response.
The econometric evidence of Xu et al. (2003) supports this expectation.
Jefferson et al. (1996) review this problem. They too prefer to use net capital stock for their production analysis but they add a term, the ratio of net capital to original capital, to adjust for inflation. We remain uncertain as to what is the best reformulation. Therefore, we replaced our measure of capital with a measure of investment and re-ran our basic production model. There are no fundamental differences between the two equations, and both measures of capital perform as expected.
The policy distinguished between permanent and contract labor. Managers had discretion to release contract labor, but they only began to exercise the option during the economic downturn of 1990. For those with permanent employment, employment was essentially a birthright and cases of excess labor were so extreme that managers paid some laborers to stay home—a sure indication of negative marginal productivity. When the government finally allowed managers to release redundant labor in 1998, managers of state owned enterprises removed seventeen million workers from their payrolls, more than one-fifth of the total labor force of state owned enterprises (Wilhelm 1999; Saywell 1999).
In a separate analysis, we conducted a Chow test comparing the OLS versions of the stochastic frontier functions for the two provinces (using data from 1986 to 1992, the years for which the data are complete). After comparing the Chow value [F(7, 150) = 0.3185] with the critical F value for 95% confidence, we cannot reject the hypothesis that the last seven slopes for conventional production inputs and mill characteristics are similar for the two separate provincial estimations.
We examined other functional forms as well. Functions with time variables performed better.
Output distance values like these measure the loss of physical output per unit reduction of pollutant. They are less comparable across mills employing different technologies and producing different products. Therefore, calculations of their mean values and C/Vs would not be meaningful.
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Acknowledgments
We would like to thank Knox Lovell, who was generous with his advice and assistance throughout our research on this and related topics, Tommy HuTao and Tao Wendong for their assistance with data collection, and Li Liya for her help with data entry and editing. We also acknowledge the generous sponsorship of EEPSEA and the EfD Initiative launched by SIDA.
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Xu, J., Hyde, W.F. & Ji, Y. Effective pollution control policy for China. J Prod Anal 33, 47–66 (2010). https://doi.org/10.1007/s11123-009-0153-7
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DOI: https://doi.org/10.1007/s11123-009-0153-7