How to Control China's "Export" of Air Pollution--Posner
Two weeks ago the New York Times published an article on pollution in China: "As China Roars, Pollution Reaches Deadly Extremes," Aug. 26, 2007, section 1, page 1. The point of interest is this: "Sulfur dioxide and nitrogen oxides spewed by China's coal-fired power plants fall as acid rain on Seoul, South Korea, and Tokyo. Much of the particulate pollution over Los Angeles originates in China" (p. 6). These effects are separate from China's growing contribution to global warming: it is possible that by the end of this year China will surpass the United States as the leading emitter of carbon dioxide into the atmosphere. Although China is making some efforts to curb pollution, its efforts are more likely to reduce the rate of growth of pollution than to reduce it from its current level, because of the continued rapid expansion of the Chinese economy, which includes a rapid growth in the number of vehicles using China's roads.
Global warming affects the entire earth, though unequally, but Chinese air pollution is "exported" mainly to a few nations, mainly Korea, Japan, and the western United States. Other differences between the carbon-emission and conventional air-pollution phenomena are that there is far more uncertainty about the magnitude of the threat posed by global warming, and far greater costs to arresting global warming, than in the case of China's external air pollution, and this enables one to see the problem of international control of air pollution in rather clearer terms than that of controlling carbon emissions.
It is a problem of externalities. The costs of Chinese air pollution to Koreans, Japanese, and Americans are not costs to China, and the benefits of abating this external pollution would not be benefits to China. But this description of the problem ignores the Coase theorem, one version of which is that if transaction costs are low, the market itself will internalize externalities and thus solve the externalities problem. We might think of the present legal regime as one in which China has a property right in the activities that give rise to pollution, or stated more precisely that its ownership of coal-fired power plants, gasoline-powered vehicles, and so forth carries with it a right to pollute. If so, then Korea, Japan, and the United States (assuming they are the only countries seriously affected by Chinese pollution) could persuade China to reduce its pollution by paying China an amount of money just slightly above what it would cost China to reduce its pollution "exports" to these countries to the level desired by the "victim" nations. This assumes that the cost of the negotiations, both among the victim nations and with China, would not be so great as to prevent a deal that made all the parties involved better off; but it is not clear why those costs should be particularly high. Nor is there a serious danger that China would increase its polluting activities in order to extort more money from the other nations, since pollution hurts the people of China far more than it hurts any other population (the pollution described in the Times article is grotesque in its magnitude and lethality).
The transaction would be efficient, but it would also bring about a transfer of wealth from what I am calling the victim nations to China. But this is a common kind of market event. A real estate developer who wanted to create a residential community on land adjacent to a funeral home, and feared that the funeral home's presence would depress house values by giving the occupants of the houses an unwelcome reminder of their mortality, could pay the funeral home to relocate.
And if buying off a polluter seems crass--"Greens" would denounce it for conveying the message that pollution is a legitimate byproduct of economic activity (a "commodity" for the victims of air pollution to buy from the polluter)--there are other means of inducing China to reduce air pollution. There are things that China wants from Korea, Japan, and the United States, and these countries can give China some of those things in barter for China's strengthening its enforcement of its existing pollution controls or adopting and enforcing newer, more stringent ones.
An alternative would be to negotiate an international agreement by which China and all other nations surrendered control over their pollution to an international environmental protection agency. But the transaction costs would be prohibitive, in part because of extreme uncertainty about the policies that the agency would adopt. Nations do not surrender their sovereignty lightly.