Groupe de Recherche en Économie et Développement International Cahier de recherche / Working Paper 06-27 Economic Determinants for China’s Industrial SO2 Emission: Reduced vs. Structural form and the role of international trade

This paper discusses the validity of the Environmental Kuznets Curve hypothesis for the case of China’s industrial SO2 emission through both reduced and structural model. The estimated Chinaspecific EKC curve for per capital industrial SO2 emission predicts the turning point of 9000 yuan (2750 USD, PPP). However, given China’s fast population expansion speed, the decreasing trend in the per capita emission will not bring an immediate reduction in total industrial SO2 emission. Our structural EKC model succeeds in decomposing industrial SO2 emission density into the contribution from its three famous structural determinants and a marginal impact from international trade. The latter is actually composed of a significantly negative direct impact and indirect ones going through the composition effect, which further depends on the current capital/labour abundance ratio and the actual income level of a province. Summary In this paper, based on provincial level panel data of China from 1992 to 2003, we test, firstly, the existence of Environmental Kuznets Curve for industrial SO2 emission. Following, we decompose the economic determinants of this SO2 emission density into: income effect (GDPPC), scale effect (Industrial GDP per km) and composition effect (K/L, capital abundance ratio). Finally, we study the direct and indirect role of international trade intensity ((X+M)/GDP). The estimated China-specific EKC curve for per capital industrial SO2 emission predicts the turning point of 9000 yuan (2750 USD, PPP). However, given China’s fast population expansion speed, the decreasing trends in the per capita emission will not bring an immediate reduction in total industrial SO2 emission. We equally succeed in decomposing industrial SO2 emission density into its three famous economic “effects”. However, different from our expectation, the composition effect, measured by industrial capitalistic ratio K/L in this paper, instead of being a pollution-increasing role as generally accepted idea, turns out to lead industrial SO2 density to reduce as a technology-reinforcing factor. We find that for the role of trade, besides a significantly negative direct impact, its indirect impacts on emission also go through the composition effect. This indirect impact actually depends on the current capital/labour abundance ratio and the actual income level of a province. Although we traced some supportive evidence for the “pollution haven” hypothesis, given China’s extremely rich endowment in labor force, trade liberalisation only plays marginal role in reality (via composition effect). For most provinces, the currently existing negative environmental impact of trade is actually due to their relatively low capital/labour abundance ratio with respect to their actual income level. To change this situation, their economic growth should be accompanied by faster capital accumulation, which can help to update production and abatement technology and therefore reduces pollution.