Economic and Environmental Effects of Water Pollution Abatement Policy in China: A Dynamic Computable General Equilibrium Analysis

The rapid economic growth in China over two decades has unfortunately been accompanied by severe pollution problems. The environment pollution has increased dramatically and environmental cost wherefrom is enormous. In particular, water pollution situation remains a challenge in China despite substantial pollution control investments in recent years. Chinese government has been seeking effective policy instruments to curb the increase of pollution while seeking high economic growth. Implementation of environmental pollution control policies such as command-and-control measures, pollution charge levy system and voluntarily measures play a big part in leveling off or even reducing pollution loads, particularly in certain targeted industrial sectors. However, to date, very little quantitative evidence is provided for which policy is actually effective and suitable in China. Therefore, exploring the pollution situation and control practice in the past years and evaluating effect of a series of abatement policy is a big concern and what are sustainable mechanisms for financing water pollution control is an imperative question for policy makers. This paper aims to examine a series of water pollution abatement policy alternatives applied in paper &pulp industry using MCHUGE-WAT for China--- a dynamic general equilibrium model of the Chinese economy incorporated with environmental module. All of these policies alternatives are focused on reducing COD. For model specification, in this study, we integrate various water pollution control activities with economic activities in a CGE framework. The environmental module includes mainly: (1)various pollution indicators including the levels of pollution abatement and water COD intensity, linking water pollution with production activities by pollution intensity, upgrading this intensity to 2010;(2) decomposition effect of water pollution discharge ;(3)water pollution abatement module disaggregating the industry into two types-“new industry” which adopts the water pollution abatement measure and “old industry “ which does not, to depict the policy of closing old and small-scale industry and the activity of purchase of wastewater abatement facilities by new industry, simulating the historical change of wastewater discharge standardmeeting rate; (4) water pollution taxes, i.e. production pollution emission taxes. The model can be characterized as an integrated economic and environmental model in the line of the CGE approach. Taking paper &pulp industry as an example, it is disaggregated as new and old industry and the database of water pollution discharge and water pollution tax is built in reference of data of Environmental Yearbook. The historical baseline of macro-economy and water pollution discharge is upgrading basing on the data from 2005 to 2010 and the forecast baseline is developed as well. For simulation design, firstly, the business-as-usual scenario is presented as baseline without any shock. This paper divides the paper industry into two groups: treated industries and untreated industries and assigns them to different pollution intensity. Then a historical simulation is presented to explain the big drop of total pollution intensity for paper industry. Then in scenario 1 ， this paper simulates the economic and environmental effect of cumulative environment investment as the fixed capital ---water treatment equipment. Scenario 2 the effect of increase of operational costs like energy consumption and labor costs for water treatment is simulated. In scenario 3, environmental service is bought by government which is financed by pollution tax. In scenario 4, the increasing pollution tax rate is simulated