Environment

Xinzheng Shi
SEM, Tsinghua

Spring , 2026

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Pollution

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Pollution

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Sustainable Development

Development, natural-resource use, and the environment have

become inextricably linked.
Water shortages in the major food-producing regions of the
world affect aggregate food supplies and prices. Declining
water quality either requires expensive treatment or imposes
threats on the health of consumers.
Deforestation leads to local changes in rainfall patterns and
greenhouse-gas emissions that contribute to global climate
change, the flooding of lowlands and silting of dams and
irrigation infrastructure, desertification if the use of cleared
lands for agriculture is unsustainable, and loss of biodiversity.

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Sustainable Development

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Sustainable Development

Air pollution contributes to depletion of the ozone layer and

the emission of particulate matters that in turn contribute to
global warming and the melting of the icecaps and glaciers.
Besides, air pollution causes very severe health problems.
Global climate change results in exponentially rising
temperatures and in the destabilization of rainfall patterns,
with cycles of droughts and floods. Global climate change
threatens world food supplies and hurts poor people the most.
Other environmental issues include the widespread decline in
capture fisheries, soil degradation and fertility decline,
mismanagement of irrigation leading to the salinization and
water logging of soils, and overgrazing of pasture lands and
desertification.

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Sustainable Development
The relation between environment and development can be
summarized as the following.

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Origins of Environmental Problems in Development

Market failures due to externalities

Incomplete property rights and difficulties in sustaining
collective action in managing common property resources
Under-provision of public goods
Private discount rates in excess of social discount rates
Society not recognizing sustainability objectives in decisions
regarding resource use
Differential valuation of income and environmental amenities
in poor and rich countries
Missing markets for environmental services

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Market Failures Due to Externalities
Production with pollution imposes negative externalities on
others but private producers do not need to pay for the extra
costs. Therefore, private producers tend to produce more than
the socially optimal level.

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Market Failures Due to Externalities
Policy instrument 1: imposing taxes on producers if we follow
the polluter-pays principle.

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Market Failures Due to Externalities

Policy instrument 2: output-reduction subsidy if the polluter

has the right to pollute.
Policy instrument 3: output or pollution quota following the
command-and-control approach.
Policy instrument 4: tradable pollution permits following the
cap-and-trade approach.
Policy instrument 5: institutional changes in the organization
of production-unitization or cooperation.

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Market Failures Due to Externalities
Policy instrument 6: private negotiations among parties in
accordance with the Coase theorem.
Coase theorem: The government does not need to bring
pollution to socially optimum level, but can set up private
parties to negotiate a system of transfers to reduce pollution to
its optimum level.
One example is shown in the following figure.

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Market Failures Due to Externalities

Case 1: the polluter has the right to pollute

For the polluter, pollution occurs until marginal benefit of
pollution for the polluter is equal to zero.
The pollutee pays the polluter until marginal cost is equal to
marginal benefit.
Case 2: the pollutee has the right to clean air
Initially, the pollution level is zero.
The polluter pays the pollutee until marginal cost is equal to
marginal benefit.

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Incomplete Property Rights

Property rights over an asset have different degrees of

completeness. Ostrom (2001) proposes that they include five
dimensions.
Right to access
Right to extract
Right to manage
Right to exclude others
Right to sell or transfer the asset to another person
Right to access is the most incomplete form of property right
while right to sell or transfer is the most complete property
right.

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Incomplete Property Rights

Case 1: private ownership

With complete and secure property rights, private use is
socially optimum when there are no externalities.
Case 2: open-access resource
An open-access resource is one which everybody has the right
to access and to extract.
Users cannot manage the resource, exclude others, and sell the
resource. Users will extract if the profits are still positive.
There is a market failure as private parties fail to consider the
impact of their activities on others. It is the “tragedy of the
commons”.

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Incomplete Property Rights

Case 3: common property resource

The property right is assigned to a community with well
defined membership and boundaries.
Members have rights of access, extraction, and exclusion of
non-members.
It will lead to overuse of the resource if the community
members who own the resource fail to cooperate in managing
the resource. In other words, each member extracts as with an
open-access resource.
However, the community can define and enforce rules to
manage the resource, codifying and regulating how each
member is allowed to use the resource. In this case, the
outcome can be the same as under private ownership.

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Under-provision of Public Goods

Many environmental amenities and resources have the

character of public goods.
Therefore, they suffer from market failure since individual
suppliers cannot charge for their use. As a result,
underprovision of public goods is prevailing in the market.
Who can provide these public goods?
Government
The church, the rich, foundations, and philanthropic
organizations
Public goods can also be provided by collective action.

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Discount Rates

The decision to postpone or to accelerate extraction from a

resource depends on the present value of the net benefits of
doing so. Lower discount rate means a greater concern for
future benefits extracted from natural resources.

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Discount Rates

A common observation in psychology is that valuation of the

future falls rapidly for small delays but slowly for longer
delays.
The implication is that we make less of a distinction between
two contiguous generations in the distant future than between
two generations close to us.
In terms of abatement to reduce climate change, we are willing
to make smaller sacrifices for our children than we would like
them and all subsequent generations to make for their own
children.

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The Sustainability Objective

Sustainability is defined in the use of a resource as allowing a

level of welfare for the next generation that is not inferior to
the welfare of this generation as a consequence of the level of
use this generation makes of the resource.
There is a market failure in securing sustainability since the
next generation is not here to bid for conservation of the
resource.

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The Sustainability Objective

How can sustainability be achieved?

Sustainability of extraction from a renewable resource: it
requires constant yield. The current generation cannot extract
from the resource more than what will reproduce the current
yield in the future.
Sustainability of yield: it can use successive waves of
technological change to sustain yields on declining soil quality.
All it takes is optimism that waves of technological change will
continue in due time to compensate for the decline in soil
fertility.
Sustainability of income: the current generation can deplete
the resource but tax part of the benefits to invest in other
activities that will secure substitute future incomes.

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Dilemmas in the Environment-Development Relation

In developing countries, people tend to value additional

income more than gains in environmental amenities such as
pollution abatement. However, rich countries tend to value
improvements in pollution abatement more than additional
income.
It is sometimes called as environmental Kuznets curve.
The relation between GDP per capita and pollution level is
inverted-U curve.

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Dilemmas in the Environment-Development Relation

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Dilemmas in the Environment-Development Relation

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Introducing New Markets

In developing countries, markets for environmental services are

usually missing. Therefore, the private reward for forest
maintenance is inferior to its social value.
Introducing payments for environmental services is very
important.
China runs the largest payments for environmental services in
the world with its Sloping Land Conversion Program. This
program reforested vast areas of environmentally sensitive
farmland since 1999 through payments to millions of poor
farmers in mountainous western China.

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Environmental Issues in China

Air pollution in China

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Environmental Issues in China

Air pollution in China

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Environmental Issues in China
Air pollution in China: Beijing as an example

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Environmental Issues in China

Air pollution in China: Beijing as an example

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Environmental Issues in China

Air pollution in China: Beijing as an example

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Environmental Issues in China
Water pollution in China

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Environmental Issues in China
Water pollution in China

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Environmental Issues in China

Water pollution in China

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Environmental Issues in China
Soil pollution in China

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Environmental Issues in China
Soil pollution in China

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Environmental Issues in China
Soil pollution in China

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Environmental Issues in China
Consequence of air pollution (Chen, et al, 2013)

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Environmental Issues in China

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Environmental Issues in China

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Environmental Issues in China

Consequence of air pollution (Ebenstein, et al, 2017)

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Environmental Issues in China

Consequence of air pollution (Ebenstein, et al, 2017)

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Environmental Issues in China
Consequence of air pollution (He, Fan, and Zhou, 2016)
The Chinese government enforced stringent air pollution
regulations in Beijing and its neighboring cities from late-2007
through late-2008.

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Environmental Issues in China

Consequence of air pollution (He, Fan, and Zhou, 2016)

Timing of the regulations during the period of 2008 Beijing
Olympic Games

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Environmental Issues in China
Consequence of air pollution (He, Fan, and Zhou, 2016)
Effects on the air pollution

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Environmental Issues in China

Consequence of air pollution (He, Fan, and Zhou, 2016)

Effects on the mortality

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Environmental Issues in China

Consequence of air pollution (He, Fan, and Zhou, 2016)

Effects on the mortality

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Environmental Issues in China

Main policies taken by China to deal with pollution

Two Control Zones
Acid rain control areas
SO2 pollution control areas
A city was designed as an SO2 pollution control zone if
its average annual ambient SO2 concentration had been larger
than the national Class II standard.
or its daily average ambient SO2 concentrations exceeded the
national Class III standard.
or its SO2 emissions were significant.
A city was designed as an acid rain control zone if
the average PH value of its precipitation was equal to or less
than 4.5.
or its sulfate deposition was above the critical load.
or its SO2 emissions were large.

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Environmental Issues in China

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Environmental Issues in China

Main policies taken by China to deal with pollution

Setting up pollution reduction targets in the Eleventh
Five-Year Plan
Five-Year Plans are a series of social and economic
development initiatives.
The first Five-Year Plan was from 1953 to 1957 and the
eleventh Five-Year Plan was from 2006 to 2010.
A 10% SO2 reduction target was set for China as a whole.
The reduction targets for different provinces are different,
depending on the provincial SO2 emission and the provincial
non-power sector SO2 emission density in 2005.

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Environmental Issues in China

Targets for each province

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Environmental Issues in China
Increased investment in the period of the Eleventh Five-Year
Plan

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Environmental Issues in China

SO2 emissions

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Environmental Issues in China

SO2 emissions in 2005 and 2010

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Environmental Issues in China

SO2 emission target and actual SO2 emission

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Environmental Issues in China

One unexpected consequence of tougher environmental

policies
FDI is driven away from high pollution intensity industries.
Export of firms in high pollution intensity industries is deterred.
It is called as Pollution Haven Effect.

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Environmental Issues in China: Waste Import

China started to import wastes in 1980’s due to the incapable

production ability and the lack of raw materials.
Accompanying the rapid domestic economic growth, China
has become the largest importer of waste in the world.
Imported waste 0.45 million tons (1995) ↑ 4.85 million tons
(2016).
56 percent of the world’s waste plastic was exported to China
in 2016 (Brooks et al., 2018).

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Environmental Issues in China: Waste Import

Distribution of waste imports in 2015-2016

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Environmental Issues in China: Waste Import

Imported waste comprises mainly waste paper, waste plastic

and rubber, and waste metal.
2015-2016: 44.1% waste paper; 22.5% waste plastic and
rubber; 24% waste metal; 9.4% others.
Process of recycling imported wastes generates air pollution.
Unrecyclable portion is burned in the open
Recyclable portion used in production emits air pollution

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Environmental Issues in China: Waste Import

Processing firms
The processing firms must apply for an import certificate.
The imported waste is restricted for use by only the listed
corresponding certificated processing firm.
Any redistribution or reselling across firms is prohibited.
Policy
The Implementation Plan for Banning the Entry of Foreign
Waste and Promoting the Reform of Management System of
the Solid Waste Import (July 18, 2017)
Ban the import of some pollution-intensive waste plastics,
paper, and textiles by the end of 2017.
The catalog was expanded dramatically since 2018.
To stop importing waste that could be substituted by domestic
goods by the end of 2019.

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Environmental Issues in China: Waste Import

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Environmental Issues in China: Waste Import

138 prefectures without waste imports; 148 prefectures with

waste imports. . . . . . . . . . . . . . . . . . . . .
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Environmental Issues in China: Water Pollution

The materials are taken from Ge, Huang, and Shi (2025).
In April 2015, the State Council issued the Action Plan on
Water Pollution Prevention and Control.
Provinces issued their own action plans. For example,
Shanghai issued the action plan in December 2015.
The target of Shanghai plan is to reduce Type VI water to
under 15% by 2017 and finally eliminate it by 2020.

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Environmental Issues in China: Water Pollution

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Environmental Issues in China

The evolution of environmental administration system

2016 reform

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Summary

Sustainable development
Origins of environmental problems in development
Environmental issues in China

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