Estimation on Economic Cost of China's New De-sulfur Policy During Her Gradual Accession to WTO: The Case of Industrial SO2 Emission

Abstract

To understand the potential impacts of China’s accession to WTO in her new de-sulphur policy (reduction of 10% of SO2 emission in 2005 with respect to that of 2000), we construct a CGE model in which the SO2 emission is linked directly to energy intermediary consumption in production. The positive externality of trade on China’s economy is also included. This model is then calibrated into a 55-sector Chinese SAM of year 1997. Four policy simulations (BaU, Open, Desulfur, Open+Desulfur) are made for 1997 till 2005 and the Divisia index decomposition method is used to analysis the simulation results. The principal results show the environmental impact of trade, though proven to be “negative”, stays rather modest. This is due to the effect of industrial composition transformation that deviates towards labor-intensive sector specialization under the new trade liberalization process. We also find supposed some modest trade externality effect to contribute to pollution reduction and we do not find proof for “pollution haven” hypothesis. Although seemingly to be quite ambitious, the new de-sulphur policy will only bring very slight economic growth lose. The most part of pollution reduction will be realized by the substitution between polluting and less or non-polluting energies. The combination of the trade liberalization and pollution control policies seems to give China more flexibility in adapting her economy to the new de-sulphurs objective. Considering different aspect together, the total economy loss due to new de-sulphur policy will be limited to only –0.18% under the presence of trade liberalization.Externality., Energy substitution, Industrial SO2 pollution, Trade, CGE