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MARKET INCENTIVES TO PROMOTE THE CIRCULAR ECONOMY
来源:博鳌亚洲论坛      发布时间:2013-11-27 13:32:53     浏览次数:238679次

DANIEL J. DUDEK

There has been much discussion about the circular economy, enough so that I believe we all understand that the goals of the circular economy are: sustainable development, a reduced ecological footprint and more economic well-being.  In fact, the circular economy is one of the main strategies for building the environmentally friendly and resource saving society – two key aspects of the nation’s goal to deliver the xiaokang society.  However, beyond these goals, I am not sure that there is widespread agreement about the exact nature of the circular economy and how exactly to go about producing it.
 
The main drivers for the circular economy
 
To consider this process more systematically, we can think of 5 main elements or drivers for producing the circular economy.  The most important one is public policy which is responsible for establishing clear goals and setting the framework within which the economy’s actors operate. The second is efficiency, the core concept underlying both the circular economy and the theory of scientific development.  The third main driver is economic incentives, particularly prices, which are the main signals which direct the economy’s actors. If prices are low or nonexistent, we are signaling that the resource or service is not very valuable.  The 4th main driver in the technology producing the circular economy is enterprises drive for profitability.  The last driver is consumers, the voters at the economic ballot box.  Consumers have tremendous power to change enterprises’ behavior by rewarding or punishing businesses through their purchasing decisions.
 
Current Barriers to Achieving the Circular Economy
 
For enterprises, the question about whether they are efficient or not largely depends upon the quality of managerial decisions to achieve the company’s goals.  But, enterprises are guided by profitability which depends upon prices.  Prices for key resources and the environment depend in turn upon the framework established by government.  So, if the prices of water and energy that firms face are low, why should they buy more expensive technology to save inputs that are so cheap?  That would not be a profitable decision.  So for society, achieving efficiency is largely dependent upon the effectiveness of public policy to internalize externalities, i.e. to make companies face the costs of their environmental decisions. 
 
The main barrier to achieving efficiency is the set of economic incentives that decision makers face.  Decision makers are rational.  They do not make decisions against their self-interest.  In the process, they take the incentives they face largely from the market, but the market fails to incorporate the environmental damages resulting from waste discharges which degrades the efficiency of their decisions.  Companies produce too much pollution as a result.  There is some attempt by society to augment market prices to compensate for this failure.  The pollution levy system (PLS) is an example.  However, the PLS itself provides inadequate incentives.  Consider the case of flue gas desulphurization, the main technology used by power plants to remove SO2 which causes acid rain.  The variable cost, i.e. the costs of operating the FGD, vary from 400 rmb per ton of SO2 removed to more than 4,000 rmb per ton depending upon the sulphur content of the coal.  The PLS is currently set at 630 rmb per ton of SO2 discharged.  Consequently, only for very high sulphur content coals does it make financial sense for power station’s to operate their FGD and of course they don’t.  This is not exactly the outcome intended for one of the key pollutants targeted in botht eh 10th and 11th five year plans. 
 
Consumers are also responding to the signals they face, but consumers also often face an information gap that companies don’t.  They are not armed with information about companies environmental performance.  As a result they are unable to reward or punish companies by directing their purchase decisions to those with good environmental track records.
 
How can we Harness Market Forces to Achieve the Circular Economy?
 
If we want to produce a circular economy, then society needs to augment market signals so that firms face the consequences of their actions.  Specifically, we want to close the gap between private and social efficiency.  One way to do this is to set quantitative performance goals like those set in the policy known as Total Emissions Control.  But goals alone are not enough.  We need to create real financial consequences for non-compliance.  These consequences will get factored in along with market signals to change decisions for rather than against the circular economy. 
 
The first thing to do in order to produce the circular economy is to change the penalty structure for non-compliance so that the financial consequences actually deter pollution.  Not long ago, there was an environmental storm here in China concerning 30 projects that had not received official approval of their environmental impact assessment prior to construction.  Certainly the EIA is an important tool for achieving the circular economy.  However, the maximum penalty for failing to secure the necessary permit is 200,000 rmb.  Yet, these projects were each worth many billions of rmb.  The financial consequence is simply too low to deter non-compliance.  The costs of project delay are simply too high in comparison.  If there are real financial consequences from non-compliance, enterprises will take a life cycle view of their investments.  They will reduce pollution before it is generated by investing in cleaner and more efficient technologies up front.
 
In addition to penalties, liability rules also play an important role in insuring that firms face the consequences of their pollution decisions.  In the U.S., the superfund law has been a powerful example of the effectiveness of liability rules.  Current and former owners of a polluted site are pursued for clean up costs.  The result has been much more effective internal waste management by companies.  Establishing clear liability for pollution damages will insure that the environmental management of enterprises receives as much attention as producing their products.
 
More effective market-based policy tools such as emissions trading and water trading need a more developed institutional structure if they are to spread and support the direction of the circular economy.  If these tools are to function, they need a strong legal foundation and supporting policies to be developed.  They need to be integrated with existing policies to remove conflicts -- a much needed, but seldom followed practice for policy success. 
 
Information is also a powerful tool.  In the United States, a program know as the Toxics Release Inventory was introduced.  It required companies to report their discharges of chemicals to all environmental media – air, water and land.  Many companies had never undertaken a complete inventory of discharges prior to this requirement and were surprised at the numbers.  More importantly, the reported data was made available to citizens.  Environmental Defense took this raw information and made it accessible via the internet in the website www.scorecard.com.  Anyone can get on-line, access the site, type in their postal code and get a list of all of the companies and emissions in their local area, a ranking of their area in relation to others across the country, and information about the potential health consequences of these discharges.  Embarrassed by these figures, companies began to voluntarily control their emissions so that they would appear to be better neighbors to local residents.  This is the power of public opinion.
 
Conclusions:
 
China faces a set of intertwined problems and objectives.  On the one hand, the nation wishes to create the xiao kang society.  Viewed from the nominal perspective of pure economic growth, it is well on its way to doing so.  On the other hand, aspects of this rapid growth seem less than socially beneficial.  In fact, concern about the consequences of rapid economic growth is at the heart of the new theory of scientific development.
 
Everyone sees the speeding car, but no one has a clear understanding of how to steer it.   Clearly, the circular economy delivering the xiao kang society is where we should be headed. 
 
The circular economy is a powerful concept.  We are likely to never reach it.  But to even begin to move in this direction we need to be sure that obstacles are removed and that the energy of the important economic actors is guided by market forces embodying environmental performance.  We should might the right thing easy and the wrong thing hard.