Changing the rules of the game

Crackdowns on polluters have had limited success in curbing China’s ecological crisis. Pan Yue, deputy director of the country’s top environmental watchdog, talks to Li Ma about green economics, and why now is the time for a change in strategy.

In a change from the previous strategy of “environmental storms” – strict crackdowns on polluters – Pan Yue, the deputy director of China’s State Environmental Protection Administration (SEPA), proposed seven new green economic policies in a speech to the China Green Forum on September 9, 2007. The emphasis has shifted from the so-called “big stick approach” to a more practical, economic approach to environmental protection. 

In this interview, Pan admits that while crackdowns have had positive effects, they do not help to create systems — and the changes they bring are far below expectations. Pan now wants to see green economic policies put in place, and change the rules of the game.

Ma Li: What are the reasons behind this shift from the “big stick approach” of environmental crackdowns to the search for new economic policies to solve environmental problems?

Pan Yue: Four major crackdowns have taken place since early 2005, and they have had positive effects. But to be honest, the results are far from what we might have hoped for. A number of limitations – restrictions on lawful punishments, limited scope and over-reliance on local enforcement agents – mean that the crackdowns have failed to alter the situation and put a durable system in place.

It has always been our aim to build systems, and so it’s a great shame to find ourselves in this situation. Legal crackdowns have resulted in nothing more than a tug of war. We need to change the rules of the game, and put green economic policies into place. We’re now going to shift from traditional administrative measures to using economic policies – and then to large-scale legislation.

ML: Do you think economic policies can entirely solve China’s environmental problems?

PY: China’s environmental problems involve politics, the economy, society and culture; they are far more complex than the problems faced by developed countries. It’s unrealistic to expect one or two policies to fix it all. All I can say is that, to date, environmental economic policies have been found to be the most effective ways of creating long-term systems.

However, this is a more difficult undertaking than the crackdowns. It can either keep everyone happy or it can be effective, but not both. There will be conflicts of interest between government departments and between regions and industries. The public will also have high expectations, which the final outcome may not meet. We’ve tried in the past, and come up against these setbacks and failures, but we must remain calm and determined.

ML: Other countries are using green economic policies, and Chinese academics have raised them in discussion. Why does China still not have any?

PY: There are a lot of reasons for this, but perhaps the most important is that they would affect the powers and interests of many government departments, regions and industries. When a new policy conflicts with established interests it is likely to be set aside.

Therefore, the theoretical discussion of these policies is not enough – I want to call on the economic authorities and any authorities with an environmental remit to work together in developing policies to curb emissions and energy use. And let me make this clear, we would be happy to play a supporting role if any economic authority wants to take a lead in making this happen.

ML: The “green credit” system was put into operation this year. How is it progressing?

PY: In July 2007, SEPA, the People’s Bank of China and the China Banking Regulatory Commission (CBRC) published a paper about how to use environmental policies and regulations to reduce credit risk. SEPA and the People’s Bank of China have entered the details of 15,000 breaches of environmental law into a database that has been made available to commercial banks. Some of those banks are now using that information to refuse credit to companies that have broken environmental laws in the past. The CBRC has also sent banks a blacklist of companies that have polluted certain river basins and are not to receive credit. Some overseas banks, such as Standard Chartered Bank, are also planning to work with us on green credit.

ML: How would you evaluate this experiment? Based on its progress so far, could you call it a success?

PY: It’s too early to say it’s a success. But the current state of the environment doesn’t allow us to wait until we’ve come up with flawless policies. We need to evaluate, research, experiment and reach conclusions – all at the same time.

ML: Trials of compulsory environmental liability insurance are about to start. Can you tell us where those trials will take place, or what the actual policies are?

PY: Currently we’re working on this with the China Insurance Regulatory Commission (CIRC) and putting together plans and supporting technology for the trials. We still need to clarify further the actual scope of compulsory insurance, define liabilities, compensation standards and processes. The actual locations and industries have not yet been finalised.

ML: PetroChina and Sinopec have both said that large industrial enterprises should not be covered by these rules, on the basis that they have ample financial resources with which to cover any environmental compensation costs. What’s your opinion of this?

PY: Neither of those companies has formally presented that view to SEPA, so it is not a question I can answer. All I can say is that there are examples abroad of petrochemical firms that incur huge bills for compensation after major incidents. These firms also need to have environmental liability insurance to spread the risk.

I hope large state-owned enterprises will look at participating in this system. As to whether it will be made compulsory for these firms, we’ll need to look at that during the trials, and listen to a range of opinions.

ML: Environmental tax has been talked about for many years, but progress has been slow. Why is that? Will there be any progress over the next two years?

PY: The planning and implementation of green taxes is an incredibly complex task. Designing the tax itself and its relationship to other taxes, setting the tax rate, the cost of collection and analysing its impact on the economy – it’s not going to happen quickly.

The good news is that it is now on the agenda. The State Council’s plans for reducing emissions and energy consumption actively call for research on green taxes, and the Ministry of Taxation is actively looking at using a tax to bolster environmental protection. With the current pressure for reductions in power use and emissions, a breakthrough on this issue can be expected in the near future.

ML: We have heard a lot about environmental compensation over the past two years, but have not seen any progress. What’s holding it back, and how are the environment authorities going to push it forward?

PY: Some localities have been actively exploring environmental compensation mechanisms. But in general, progress has been slow. It affects many different interests, and there is not yet any clear legislation provided or a debate over the source of funding, distribution channels, methods and standards. There is also a strong degree of departmentalism, with no single framework or plan for implementation. Many well-designed policies get lost in “further discussions” between different government departments.

Establishing an environmental compensation policy should focus for the moment on protecting water resources. This will create the conditions for a more general policy. This should also be a method of transferring funds from developed areas to less-developed areas, from cities to villages and from wealthy populations to the poor. It should transfer money from the lower reaches of rivers back to the source, and from polluting industries to clean enterprises. When it is successfully implemented, it will lay the foundations of a fair system.

Background: the road to the new green economics

When Pan Yue revealed his plans for seven new green economic policies to the China Green Forum on September 9, he called on the economic authorities and government departments responsible for the environment to work together in researching and conducting trials of these proposals.

Pan’s proposed policies include green taxes, which would tax individuals or groups based on their use or misuse of environmental resources.

Green capital markets would leave polluting enterprises unable to obtain credit, or do so only at punitive rates of interest. Polluters would be unable to issue bonds or increase their investments, while environmentally-friendly firms would enjoy lower interest rates and other benefits.

Environmental insurance policies would force polluters to take out insurance against environmental risks. In the event of a pollution accident, the insurers would pay compensation to the victims.

Other policies include: environmental charges; environmental compensation; an emissions trading market; and a green trade policy.

Pan has revealed that SEPA’s next step is to join forces with the Ministry of Finance for research and trials on environmental tax and compensation policies. The China Securities Regulatory Commission will audit the environmental records of listed companies. The CIRC will hold trials of compulsory environmental liability insurance, and the Ministry of Commerce will strengthen its oversight of export firms’ environmental standards.

SEPA and its partners hope to unveil these policies within a year, says Pan, and have trials up and running in two years. This means, he says, that the first stages of China’s green economic policies should be in place within four years.


This interview first appeared in Beijing News.

Ma Li is a reporter for Beijing News

Pan Yue is deputy director of the State Environmental Protection Administration

Also by Pan Yue on chinadialogue:

“The rich consume and the poor suffer the pollution”

The environment needs public participation