Randy Wang Authors

Air Pollution in China: What’s at Stake?

August 04, 2014

How serious is air pollution in China and how is the country addressing it at a policy level? Also, what kind of business opportunities is this creating? A comprehensive look.

If you live in China, chances are the one thing you’d be most concerned about is the level of PM2.5 in the air. PM2.5, or particulate matter of a diameter of 2.5 micrometres or less, reduces life expectancy drastically because of its ability to penetrate deep into the lungs and cause health problems. The World Health Organization’s recommended standard for PM 2.5 is 25 micrograms per cubic meter within a 24-hour period of time, and 10 micrograms per cubic meter aunually. Yet China’s cities routinely cross the recommended levels. Beijing, for instance, hit a PM2.5 level of 600 micrograms per cubic meter and “may even have hit 900” in January 2013. In 2013, the PM2.5 reading averaged 89.5 micrograms per cubic meter.

Given this backdrop, it is not surprising to see that out of 20 cities with the worst air quality globally, 16 are in China. Every year, 1.2 million people in China die of air pollution-related diseases. China’s pollution problems routinely makes headlines in newspapers around the world.

Yet what people may not know is that the air quality is actually getting better. In Beijing, the level of the worst pollutants was cut by one-third during the last decade and that of sulphur dioxide alone was cut by nearly 70%, says Anthony Liu, Visiting Assistant Professor of Economics at CKGSB. In this interview, Liu, who researches environmental economics, talks about the impact of air pollution in China and how the country is addressing it at a policy level.

Q. Who is tackling these pollution issues and how are they doing so?

Professor Liu Antung
Anthony Liu, Visiting Assistant Professor of Economics at CKGSB

A. To look at solutions, you have to understand the sources. The three top contributors are cars, coal, and industry. Heavy industry, which is extremely polluting, can be a big contributor to air pollution, and there are smaller ones as well. Construction, trash burning, or even barbecue can be a big contributor to air pollution.

In each of these areas the Chinese government has moved substantially in trying to cut them. In cars for example, a number of cities in China have recently implemented car restrictions, by which before people could purchase a car, they have to first win the right to do so. They either have to enter an auction, where they purchase a license plate, or they have to win a lottery. My own research suggests that in Beijing, the car lottery will cut the number of automobiles by 10% by 2020. So, this will cause substantial decreases in the number of cars over the next decades. Also, the Chinese government has worked to remove five million of the worst polluting vehicles from roadways–330,000 in Beijing alone. Because it is removing many of the most polluting [vehicles] we should see improvements in pollution, at least the forms of pollution emitted from cars.

The second form of pollution is coal. The Chinese government recently mandated flue gas desulphurization, a technology which removes the worst of sulphur dioxide from coal plant emissions. It allows the release from generating electricity to be much cleaner. We’ve seen sharp improvements around the country in sulphur dioxide, which leads to decreased acid rain, decreased damage to people’s health.

The third area is heavy industry. Here I think the best solution has just been to remove heavy industry from the city, from areas where people live. In [a way] this makes perfect [sense]. Beijing recently ordered 53 heavily polluting companies to move out of the city.

Q. What do you see as a consequence that the public isn’t aware of about this PM2.5 issue?

A. One of the most exciting and important developments in the past few years has been the increased amount of information that has been available to people. The Chinese government has exponentially increased the number of air monitors and the frequency with which these air monitors release data. As a result, the average Chinese citizen can now, for the first time, see the air quality in their area in real time. The increased amount of information has really improved the level of engagement of common citizens because people can adjust their plans in accordance with whether the air quality will be good or bad. That has really improved people’s quality of life with regard to air pollution.

Q. How does PM2.5 affect international relations between China and the regional countries?

A. Air pollution in China has a heavy toll on its neighbors. Countries like South Korea, Japan, and the Philippines, all receive heavy doses of China’s air pollution. One study looked at pollution in California found that a quarter of one type of pollutant could be attributed to a kind of pollutant that only occurred in China. So, even across the Pacific Ocean, air pollution could reach all the way to the US.

As a result, China’s relationships with its neighbors are certainly negatively affected. That’s not to say there aren’t opportunities. China’s environmental problems have created major opportunities for it to engage [in] and gain international prestige.

For example, China is currently the number one emitter of greenhouse gas. Obama recently initiated a 30% cut in the emissions from power plants in the US, and China followed the next day with its own announcement that by 2016 it would begin to cap its own emissions of carbon dioxide. Because China’s emissions are growing the fastest, this was regarded as a major change in the climate change negotiations. So there are major opportunities just by the virtue of China’s status as number one emitter of greenhouse gas, the number one polluter.

Q. Is there a business opportunity for foreign corporations from PM2.5 emissions and problems?

A. When I think about business opportunities in the area of environmental quality I think of two major issues: willingness to pay for a product or service that can improve environmental quality and who is best positioned to capture this value. For both of these questions, the answer is very clearly yes.

For air quality, people have demonstrated a willingness to shell [out] large quantities of money for personal protection, for air masks, for in-room air purifiers, for devices that can shelter them from air pollution problems. This ties in well with the second issue, which is which companies are best positioned to benefit. International companies are currently better positioned to capture the value from environmental goods, because the number one issue in capturing environmental value is trust. International brands have an advantage because they are frankly regarded with some more trust than many domestic brands.

Since there is higher trust with international brands, companies like Johnson & Johnson, GE and Siemens are potentially very well positioned to capture portions of the market for environmental services. If they move into markets that improve people’s health and offer a benefit that people can’t find from domestic markets, there will be huge business opportunities for those companies.

Q. What are some of the unexpected businesses which are going to thrive under this PM2.5 situation?

A. There are some companies that are directly positioned to benefit and some indirectly positioned. For air purifiers I’m thinking of the segment more broadly, from small air purifiers that can clean out a room to large ones in an apartment building or an office space. There is very clear space for those types of firms, but there are many kinds of companies that are going to indirectly benefit from air quality problems, [such as] natural gas companies. Even though China has massive natural resources, it cannot burn coal recklessly. It is going to move away from coal towards natural gas, the other major cost effective source for electricity generation. So I expect companies in natural gas to do very well and companies in nuclear power and in alternative energy as well.

On the consumer side, I think that vacation planning is going to be a big industry. As people consider vacation destinations, they think about going to islands, to areas with cleaner air. Many of these already advertise how clean they [are] compared to many major cities, so I think this will be an increasing attraction for people who want to get away from the city.

Another area that I think will be significantly affected by air quality is real estate. Real estate and property in cities that are cleaner are going to do better as people take in the environmental amenities of those areas.

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