Economy and Policy

The development of a general equilibrium model to study economic growth and energy utilization in China, and to consider their effects on environment, has been the longest-running single initiative of the China Project.

This effort is led by Dale W. JORGENSON (Samuel W. Morris University Professor of Economics), Mun S. Ho (Harvard China Project), and CAO Jing (School of Economics and Management, Tsinghua University). It has also contributed to a series of China Project interdisciplinary studies that integrate the economic framework with the Project’s emissions, atmospheric chemistry, and environmental health research components to analyze the costs and benefits of national emission control policies, from technology mandates to market-based policy instruments.
 

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Dale W. Jorgenson (Samuel W. Morris University Professor of Economics) and Mun S. Ho (Institute for Quantitative Social Science and Harvard China Project) have led the longest-running single initiative of the China Project, incrementally building up a general equilibrium model to study economic growth and energy utilization in China, and to consider their effects on environment. Long-time collaborator and Harvard alumna CAO Jing (School of Economics and Management, Tsinghua University) now co-leads the economic research with Jorgenson and Ho.

The initial effort, with Dwight H. Perkins (Department of Economics), was confined to a projection of Chinese economic growth and carbon emissions, using an aggregate growth model without industry detail (Ho, Jorgenson, and Perkins 1998). Jorgenson and Ho then developed a multi-sector model of Chinese economic growth in collaboration with Richard Garbaccio [then-Harvard Kennedy School of Government (HKS), now U.S. EPA], paying special attention to the dual plan-and-market features of the Chinese economy in the 1990s (Garbaccio, Ho, and Jorgenson 1999a1999b). With Karen Fisher-Vanden (then-HKS, now Penn State), this was followed by a version of the model with perfect foresight dynamics (Fisher-Vanden 2003a2003b). Much of this work was done in cooperation with the Development Research Center of China’s State Council.

The next version incorporated population projections including the changing demographic structure, projections of productivity growth, enhancements of labor quality, and changes in household spending and savings behavior. In parallel the team analyzed Chinese energy use at the industry level, using data from the 1987 and 1992 input-output tables, informing projections of industry energy use. At this stage the model incorporated a sub-model of local health impacts of SO2 and total suspended particulate (TSP) emissions, using information provided by Gordon Hughes and Kseniya Lvovsky of the World Bank. This version was first used to examine the reduction in local health damages due to a policy to reduce carbon emissions. The subsequent analysis focused on the effects of “green tax” policies, designed to reduce local air pollution damages, on economic growth, on reductions in mortality and morbidity, and on carbon emissions (Ho, Jorgenson, and Di 2002).


Clearing the Air: The Health and Economic Damages of Air Pollution in China (2007, MIT Press)

Integrating the China Project's Economic Model with its Environmental Health and Engineering Research

The above model development set the stage for the book-length Clearing the Air study published by MIT Press (Ho and Nielsen 2007) and described in a separate link here. This study built new collaborations of the economists with environmental health scientists from the Harvard School of Public Health and environmental engineers from Tsinghua University and the Harvard School of Engineering and Applied Sciences. An update of the economics of the Clearing the Air is reported here in the Review of Environmental Economics and Policy (Cao, Ho, and Jorgenson 2009), and is also summarized in an article in Harvard Magazine (Ho and Jorgenson 2008).

U.S.-China Strategic Economic Dialogue

In 2007 the integrated model developed in Clearing the Air was applied in the macroeconomic component of the environmental research initiative of the U.S.-China Strategic Economic Dialogue (SED) of U.S. Treasury Secretary Henry Paulson and China's Vice Premier WU Yi (and later Vice Premier WANG Qishan). Coordinated by China's State Environmental Protection Administration (Policy Research Center for Economy and Environment) and the U.S. Environmental Protection Agency (Office of Air and Radiation), the first objective of the "Joint Economic Study (JES)" of the SED was to assess the costs and benefits of the China's measures to achieve a 10% SO2 reduction and a 20% energy efficiency improvement under the 11th Five Year Plan (2006-2010). These measures included, among others, retirement of inefficient small thermal power plants and new mandates in flue gas desulfurization. The macroeconomic research team included China Project economists Jorgenson and Ho of Harvard and Cao of Tsinghua, along with Richard Garbaccio of U.S. EPA's National Center for Environmental Economics, and YANG Hongwei and colleagues at the Energy Research Institute of the National Development and Reform Commission. Click here for the Executive Summary of the JES reported at the Third SED in Beijing in December of 2007. The full academic version of the Harvard-Tsinghua economic analysis of the 11th FYP policy is reported in the journal Review of Environmental Economics and Policy (Cao, Garbaccio, and Ho 2009).


Clearer Skies Over China: Reconciling Air Quality, Climate, and Economic Goals (2013, MIT Press)

Integrating the China Project's Economic Framework with the Project's Atmospheric Model and Emission Inventories

In recent years the economics team has worked with China Project atmospheric scientists, engineers, and health scientists at both Harvard and Tsinghua University to achieve an interdisciplinary breakthrough: linking the economics-engineering-health framework of Clearing the Air with bottom-up emission inventories led by Tsinghua and the Project's GEOS-Chem atmospheric model of China. This major collaborative expansion has resulted in a new book assessing the full economic and environmental costs and benefits of both air pollution policies of the past in China, and prospective carbon taxes of the future,Clearer Skies Over China: Reconciling Air Quality, Climate, and Economic Goals (Nielsen and Ho 2013, MIT Press). The results were also featured in an op-ed in the New York Times by Chris Nielsen and Mun Ho of the China Project, and have been cited in a number of articles in other media sources in China and the U.S. This major initiative is described on a separate page here

Supported as part of this interdisciplinary initiative, the economics team is developing new sub-models of household demand, both in urban (Cao et al. in press, 2016) and rural contexts, integrating them into the larger CGE economic model. 

Acknowledgment: The economics research of the Harvard China Project has been generously supported by the Cheung Yan Fund of the Harvard Department of Economics. The economics components of the integrated studies immediately above have been funded by awards from the Energy Foundation China, Harvard's Weatherhead Center for International Affairs, and the Harvard China Fund. Earlier economics research of the China Project was funded by the U.S. Environmental Protection Agency, the China Sustainable Energy Program of the Energy Foundation, the Harvard Asia Center, the China Council for International Cooperation on Environment and Development, the V. Kann Rasmussen Foundation, and the U.S. Department of Energy (grant DE-FG02-95ER62133).

Related Publications

Nan Zhong, Jing Cao, and Yuzhu Wang. In Press. “Traffic congestion, ambient air pollution and health: Evidence from driving restrictions in Beijing.” Journal of the Association of Environmental and Resource Economists. Abstract

Vehicles have recently overtaken coal to become the largest source of air pollution in urban China. Research on mobile sources of pollution has foundered due both to inaccessibility of Chinese data on health outcomes and strong identifying assumptions. To address these, we collect daily ambulance call data from the Beijing Emergency Medical Center and combine them with an idiosyncratic feature of a driving restriction policy in Beijing that references the last digit of vehicles’ license plate numbers. Because the number 4 is considered unlucky by many in China, it tends to be avoided on license plates. As a result, days on which the policy restricts license plates ending in 4 unintentionally allow more vehicles in Beijing. Leveraging this variation, we find that traffic congestion is indeed 22% higher on days banning 4 and that 24-hour average concentration of NO2 is 12% higher. Correspondingly, these short term increases in pollution increase ambulance calls by 12% and 3% for fever and heart related symptoms, while no effects are found for injuries. These findings suggest that traffic congestion has substantial health externalities in China but that they are also responsive to policy. 

Understanding the rapidly rising demand for energy in China is essential to efforts to reduce the country's energy use and environmental damage. In response to rising incomes and changing prices and demographics, household use of various fuels, electricity and gasoline has changed dramatically in China. In this paper, we estimate both income and price elasticities for various energy types using Chinese urban household micro-data collected by National bureau of Statistics, by applying a two-stage budgeting AIDS model. We find that total energy is price and income inelastic for all income groups after accounting for demographic and regional effects. Our estimated electricity price elasticity ranges from - 0.49 to -0.57, gas price elasticity ranges from -0.46 to -0.94, and gasoline price elasticity ranges from -0.85 to -0.94. Income elasticity for various energy types range from 0.57 to 0.94. Demand for coal is most price and income elastic among the poor, whereas gasoline demand is elastic for the rich.

Haikun Wang, Yanxia Zhang, Xi Lu, Chris P Nielsen, and Jun Bi. 2015. “Understanding China's carbon dioxide emissions from both production and consumption perspectives.” Renewable and Sustainable Energy Reviews, 52: 189-200. Publisher's Version Abstract

China is now the largest emitter of CO2 in the world, having contributed nearly half of the global increase in carbon emissions between 1980 and 2010. The existing literature on China’s carbon emissions has focused on two dimensions: the amount of CO2 emitted within China’s geographical boundaries (a production-based perspective), and the drivers of, and responsibility for, these emissions (a consumption-based perspective). The current study begins with a comprehensive review of China’s CO2 emissions, and then analyzes their driving forces from both consumption and production perspectives, at both national and provincial levels. It is concluded that China’s aggregate national CO2 emissions from fossil fuel consumption and cement production maintained high growth rates during 2000-2010. National emissions reached 6.8–7.3 billion tons in 2007, nearly 25% of which were caused by net exports (i.e., exports minus imports) to other countries. However, emission characteristics varied significantly among different regions and provinces, and considerable emission leakage from the developed eastern regions to inland and western areas of the country was found. The objectives of China’s policies should therefore be broadened from continued improvement of energy efficiency to accelerating regional technology transfer and preventing mere relocation of carbon-intensive economic activities from developed coastal regions to less developed, inland provinces. To rapidly and effectively cut down China’s carbon emissions, moreover, its energy supply should be aggressively decarbonized by promoting renewable and low carbon energy sources.

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Related News

beijing air pollution

Op-Ed in Fortune by Ho and Nielsen on China's Red Alert Pollution Struggles

January 10, 2017

Project Economist Mun HO and Executive Director Chris NIELSEN have an op-ed in Fortune (and in Chinese at Fortune China)on the underappreciated reasons China's red alert air pollution episodes are proving so difficult to control. Factors range from atmospheric chemistry and meteorology to economics and politics.

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