China's take on climate change

President Hu Jintao recently called for a 40-45% reduction in CO2 emissions by 2020 compared to 2005 levels. Although this is voluntary, it's a good thing for combating climate change, even if it falls short of what some in the international community would like.

There's good reason for China wanting to lower its CO2 emissions and pollution in general. According to a World Bank report, air pollution in the PRC carries a cost of 1.2% of GDP, and if you include water pollution the total cost jumps to 3.8% of GDP. This is a large sum of money and would only increase if measures aren't enacted to decrease pollution.

I recall reading some years ago that part of the problem in China's environmental management is that its version of the Environmental Protection Agency holds the same rank as provincial governments. If this is still the case (still looking into it), then China's state agency responsible for enforcing environmental regulations cannot force provinces to comply given their equal status. Moreover, provincial leaders have little incentive to reduce pollution when there is no guarantee that their colleagues in other areas will do the same, presenting a classic free-rider problem.

It should be interesting to see if Hu's call for voluntary action is successful. I highly doubt that it will be without government incentives, as businesses are loathe to do anything that would increase costs in business operations. The free market as it is practiced in China provides little incentive to consider long-term economic sustainability. But then again, which economy does?