Friday, November 25, 2005

Does China Have the Right Incentives to Curb Regional Environmental Externalities?

Recently there has been extensive media coverage of this benzene spill near China's Harbin City. Part of the costs of this disaster will be borne in nearby Russia. What is the dollar damage that the Chinese spill has imposed on Russia? This would require a lot more information concerning how many people live in this part of Russia, how much would they be willing to pay to avoid this pollution exposure, and how is industrial profitability in Russia affected by the spill.

This salient event highlights an important trend. China's economic development is affecting the environmental quality of its neighbors. When China dams a river such as the Mekong this has implications for environmental quality in downstream nations such as Vietnam.

Another example is the growth in manufacturing in the Chinese Guangdong Province leading to a sharp rise in Hong Kong’s particulate levels (September 10, 2002 New York Times). This benzene spill represents a 3rd example. In all of these examples, China's growth exacerbates regional pollution problems.

Given China's size measured in population, military might, and economic market size, is there any economic incentive that "victim" nearby nations can harness to get China to "play nice"? If China is able to "externalize" enough of the pollution costs of economic development, then it is less likely to enact costly regulation to mitigate such pollution problems.

Recently environmental economists have been trying to measure the size of cross-boundary environmental spillovers. I'm thinking of papers by Linda Bui and Hillary Sigman. The next step in this literature should examine Coase Theorem like bargaining to establish the conditions such that externalities are internalized versus when they grow worse over time. I'm concerned that at least in the medium term that China falls into the latter case.

November 25, 2005
China Blames Oil Company for Benzene Spill in River
International Herald Tribune

HARBIN, China, Nov. 24 - The Chinese government on Thursday blamed the country's biggest oil company for a pollution spill that allowed a 50-mile slick of toxic benzene to reach this northern city of almost four million people on the river that normally supplies it with running water.

Residents continued to stockpile bottled drinking water on Thursday, the second day after the authorities shut down the municipal water system and stopped pumping from the Songhua River to minimize the risk of poisoning.

Schools and many businesses remained closed, and restaurants in the city center were mostly empty late Thursday as the environmental disaster led the authorities to mount an investigation that could prompt a criminal charges.

Authorities in Harbin, the capital of Heilongjiang Province, assured residents that adequate supplies of drinking water would be trucked in and warned them to watch for the symptoms of benzene poisoning.

They said that the slick was expected to have passed the city by Saturday and that normal water service could resume by Sunday.

China has also warned Russia about the toxic spill, which is being carried toward Khabarovsk, on Russia's border.

An explosion on Nov. 13 at a China National Petroleum Corporation plant in Jilin Province, 236 miles upriver from Harbin, spewed an estimated 100 tons of benzene compounds into the Songhua River, Chinese authorities said.