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 one of the longest-running single initiatives of the China Project.

The economics research 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 been a central component of a series of China Project interdisciplinary studies that integrate the economic framework with the Project’s emissions, atmospheric chemistry, and environmental health components to analyze the costs and benefits of national emission control policies.
Click on "More Publications" below for a full list of publications supported by the Harvard-China Project in this research area. 

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Early Development of the Model

The earliest effort, by Jorgenson, Ho, and Dwight H. PERKINS (Harvard 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, mortality and morbidity, and 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 Engineering and Environmental Health Research

The above model development helped to set the stage for the major book-length study published as Clearing the Air: The Health and Economic Damages of Air Pollution in China (Ho and Nielsen 2007) by MIT Press, detailed in separate links here and here. This study developed 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).

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 and the U.S. Environmental Protection Agency, 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 Garbaccio of U.S. EPA's National Center for Environmental Economics and YANG Hongwei of the Energy Research Institute of the National Development and Reform Commission. Reported at the Third SED in Beijing in December of 2007, a fuller academic version of the Harvard-Tsinghua economic analysis of the 11th FYP policy is reported in the 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 its 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 the Project's bottom-up emission inventories and its GEOS-Chem atmospheric model of China. This collaborative expansion resulted in a new book assessing the fuller 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 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

Recently the economics team has been developing new sub-models of household demand, including of energy, to incorporate into its larger modeling framework. Both urban and rural surveys are used to estimate household consumption functions to show how expenditure patterns change with rising incomes, changing family structures and prices (Cao et al. 2016). Upcoming papers will discuss the changes in inequality in consumption to complement studies of income inequality. These new results will also broaden the Project's upcoming interdisciplinary assessments of the effects of policies on energy use, including at the household level, and ultimately on atmospheric environment.

Acknowledgments: The economics research of the Harvard-China Project have been funded by awards from the Harvard Global Institute, Energy Foundation China, Harvard's Weatherhead Center for International Affairs, Harvard China Fund, and the Cheung Yan Fund of the Harvard Department of Economics. 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. Publisher's VersionAbstract

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. 

Jing Cao, Mun S. Ho, and Huifang Liang. 2016. “Household energy demand in urban China: Accounting for regional prices and rapid economic change.” The Energy Journal, 37. Publisher's VersionAbstract

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.

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