How China Buried the Green GDP

Ask Chinese officials why their nation's environment is so toxic; you'll get a list of scientific-sounding explanations. The population is huge and dense. Arable land per capita is alarmingly sparse. Despite stunning rates of economic growth, many Chinese remain poor and rural, prone to ungreen behaviors such as tossing pollutants and trash into the rivers. But the real question is why China fares poorly in Yale and Columbia's Environmental Performance Index (it ranks 101st overall, but dead last in its income category). Its weaknesses are legion: air pollution, stifling levels of industrial ozone, poor fishing practices, bad water quality and other ills.

The problem is not a lack of good intentions. For years President Hu Jintao and Prime Minister Wen Jiabao have been reciting the mantra of sustainable development (and, for good measure, "Green Olympics"). They've set serious goals but have yet to institute the tough regulatory reforms needed to achieve them. Enforcement lags and market mechanisms aren't in place to give industry incentives to adopt green practices. Groundbreaking initiatives—most recently an effort to establish a "Green GDP" to measure the environmental progressiveness of each province—have languished due to lack of cooperation within the government.

China's environmental headaches run the gamut, but most can be linked to the scorching pace of economic growth. Factories that emit copious amounts of smog, soot and carbon have sprouted quickly and cheaply. Polluting, unsafe coal mines are so busy (and lucrative) that coal czars are loath to curb China's overriding dependence on coal as an energy source. As a result, China scores poorly on key categories such as water pollution, industrial CO2 emissions and indoor air pollution (which in some cases is linked to the prevalent use of burning coal bricks for warmth during winter). One third of China's rivers and three quarters of its major lakes are "highly polluted," according to the OECD, which late last year reported that up to 300 million people drink contaminated water.

Hu Jintao and other leaders have exhorted the masses to create a "resource-saving, environment-friendly society." But compelling local apparatchiks to follow this slogan is a huge conundrum because for decades the biggest factor in their promotions has been their localities' economic-growth rate. This has come at a huge cost to the environment. According to the World Bank, pollution and other environmental damage costs the Chinese economy as much as 12 percent of GDP annually (including medical expenses and damage to crops and fish). The Green GDP was supposed to incorporate those costs.

Pan Yue, a reformist vice minister in Beijing, was an early champion of the notion of using a Green GDP to rank officials by their greenness and punishing those found wanting. Pan managed to win the tacit support of his bosses in Beijing, but the project was a nonstarter in the provinces. Authorities in hardscrabble regions with a lot of polluting industries—such as Ningxia, Hebei, Shanxi and Inner Mongolia—opposed the Green GDP idea from the get-go and refused to invest in improving the impact of their operations on the environment. "One has to pay a big price" to realize Green GDP, says Chinese Academy of Social Sciences researcher Li Shi.

The first report on the nation's Green GDP was issued in 2006 by what was then the State Environmental Protection Agency and the National Bureau of Statistics (NBS). It quantified the economic losses resulting from environmental abuses in 2004 at 3 percent of GDP, but due to a lack of data the actual damage was thought to be higher. Almost as soon as the report came out, the two agencies began bickering over methodology, funding and, of course, political frictions—especially as top Communist Party officials vied for promotion ahead of the 17th Party Congress that autumn. Green GDP team leader Wang Jinnan blamed foot-dragging local governments. Shortly thereafter, representatives of the National Bureau of Statistics, notorious for underreporting growth figures to undercut fears of economic overheating, stopped attending Green GDP meetings. Without any numbers to crunch, the initiative languished. The next year's report was postponed indefinitely.

The Green GDP fiasco put the bureaucratic resistance to reforms and the need for coordination among government ministries into focus. Currently there's a ministry-level unit handling climate change; another for oceans; yet another tackling sandstorms and deforestation, and three ministries responsible for soil and groundwater, villages and farmland, and lakes and rivers, respectively. When the toxic-algae crisis erupted in 2007, devastating fish farms in eastern China's Taihu Lake, provincial authorities wanted to release water upstream to clear out the algae clogging the lake, but first had to navigate a bureaucratic maze. They appealed to the Agriculture Ministry, which is in charge of fish farms; the Construction Ministry, which controls water-treatment plants; the Science and Technology Ministry, and the State Development and Reform Commission, before pleading with the Ministry of Water Resources, which opened the floodgates.

In an effort at streamlining, in March Beijing elevated the former State Environmental Protection Agency to full ministry status, giving Vice Minister Pan more clout to coordinate environmental policy. The new Ministry of Environmental Protection is now lobbying other ministries to share pollution data, a key to enforcement. It has hopes of a breakthrough in lakes, rivers and streams. Pan is also sponsoring ambitious surveillance projects such as a nationwide "Water Pollution Map" and taking a high profile in battling pollution emergencies such as the Taihu algae crisis. His latest initiative is a "green economics" program that would provide preferential access to insurance, credit and IPOs for businesses that meet certain green criteria. Later this year the MEP expects to co-launch trials, together with banking, insurance and securities regulators.

The MEP still has to compete with other chunks of China's vast bureaucracy. For instance, so far the ministry is having a tough time persuading China's business ministries—such as Commerce, Finance and the Tax Bureau—to push forward emission taxes for car buyers and pollution taxes for enterprises. But Pan is regarded as a charismatic leader and skillful lobbyist. "He can do things others can't," says a source who requested anonymity because he isn't cleared to talk with foreign media.

The Green GDP project did succeed in galvanizing some like-minded provincial leaders, particularly mayors of modest-size cities where green industries have been taking root. In Changshu, for instance, local plants have recently launched recycling projects and a carbon-credit scheme. Green advocates also took heart that the final political work report at last autumn's Party Congress placed greater emphasis on sustainable development and environmental protection than ever before. But China is a victim of its own success. One reason it ranks last in its income decile—sabotaging its "we're too poor to be green" argument—is its addiction to rapid growth. Party leaders fear that going too green too fast will hurt their business partners and their people, who are already feeling the pain of inflation and rising production costs. Beijing must forge incentives within its own bureaucracy before it can convince the rest of the country that the price of going green is worth paying.