The Economic Cost of China's New De-sulfur Policy During Her Gradual Accession to WTO: The Case of Industrial SO2 Emission

To understand the potential impacts of China's accession to WTO in her new de-sulfur policy (gradual reduction of 10% of annual SO2 emission by 2005 with respect to that of 2000), we construct a CGE model in which SO2 emission is directly linked to energy input consumption in production. The model equally considers the substitution possibility between energies of different SO2 effluent ratio by including energy as traditional production factor as labor and capital in the constant elasticity of transformation production function. The positive externality of trade on China's economy is also included. This model is then calibrated into a 55-sector Chinese SAM for the year 1997. Four policy simulations (Business as Usual, Openness policy only, De-sulfur policy only, and the combination of openness and de-sulfur policy) are firstly made for 1997 till 2005. The results show the environmental impact of trade, though proven to be "negative", stays rather modest. This is owing to the industrial composition transformation that deviates the specialisation of Chinese economy towards labour-intensive sector under the new trade liberalization process. We do not find proof for "pollution haven" hypothesis. Although seemingly to be ambitious, the new de-sulfur policy will only bring very slight economic growth loss. The pollution reduction will mainly be realized by the substitution between polluting and less or non-polluting energies. The combination of the trade liberalization and pollution control policies seems to give China more flexibility in adapting her economy to the new de-sulfur objective. Considering different aspect together, the total economy loss due to new de-sulfur policy will be limited to only -0.26% under the presence of trade liberalization. The second part of this research contributes to double dividend analysis, where we further add to the two scenarios in which the new pollution control policy is applied along with two tax reform schemes aiming at reducing the distortion in original producer's tax system. The results confirm the double dividend hypothesis. Instead of transferring directly in a simple lump-sum form to households, the increased environmental tax revenue due to new de-sulfur policy, if used to reduce (either partially or thoroughly) the original distortion in producer's tax, can not only bring obvious economic efficiency and welfare improvement, but also facilitate the substitution of coal by the other less polluting energies and finally aid China to achieve her de-sulfur objective.