A Big, Dirty Growth Engine

Pollution still chokes China, but green technology is starting to emerge

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The 2008 Beijing Olympics don't look like much today. At most of the sites around the city, ground has barely been broken. But look a little closer and you'll find that the games have already had a dramatic impact in the form of a thorough pollution clean-up.

China's leadership knows the Olympics may define the country's international image for decades. So officials have spared nothing in their efforts to show how green they can be. On clear days it's now possible to look down Changan Avenue and see the peaks of the Western Hills, which had been obscured for years. Most homes and businesses have converted from coal heat to natural gas, many diesel-belching tractors and trucks have been banned from city streets, and 58% of sewage is treated. Beijing has moved nearly 130 factories out of the city and is building cleaner, gas-fueled power stations while installing scrubbers in older ones. It's even putting up wind turbines to help power the Olympic village. When the Games start three years from now, the city and its residents will have spent $13 billion on the transformation. By the time the Olympic torch is passed, a sparkling Beijing may well wow the world.

And the world will be misled. The reality is that despite all the effort spent on cleaning up the capital and a handful of other big cities, China is at best at a standstill in its fight against environmental degradation. For all its efforts, China's unrestrained growth makes it one of the world's worst polluters. Most of the nation is still reeling from the devastation wrought by three decades of communist industrial development and the subsequent 25 years of quasi-capitalism. In 2025, China will consume 14.2% of the world's energy, compared with 9.8% in 2001. Because most of China's electricity comes from power plants that burn high-sulphur coal but lack effective emissions controls, acid rain falls on one-third of the country. And 70% of its lakes and rivers are heavily polluted, largely because more than 80% of China's sewage flows untreated into waterways. Six of the world's 10 most-polluted cities are in China, according to the World Bank, which estimates that pollution costs China more than $54 billion a year in environmental damage and health problems.

China's soaring energy use and resulting pollution are a serious threat to the country's continued prosperity and growth, not to mention the well-being of its citizens. China has spent more than $85 billion on environmental cleanup in the last five years and could shell out $380 billion -- 4% of gross domestic product -- between now and 2010. But even those outlays aren't enough to offset the pollution generated by the country's annual growth rate of more than 8%. The problems are compounded by China's inefficient use of electricity, oil, and coal. China consumes nearly five times as much energy as the U.S. to produce each dollar of GDP -- and almost 12 times as much as Japan. Alarmingly, the nation is getting less efficient, not more. After making steady progress in energy efficiency for two decades, China has been consuming energy at a rate faster than its GDP since 2002.


IN most of the country, enforcement of environmental regulations is lax. The State Environmental Protection Administration (SEPA), which oversees the environment nationally, is woefully understaffed, with a workforce of just 300 in Beijing and only 100 more for the rest of the country. That means monitoring and enforcement generally fall to local officials, or even factory managers -- whose first priority is to create jobs, whatever the environmental cost. A chromium factory was ordered to close in May, 2004, after dumping toxins into a river for five years. But just two months later the local environmental protection bureau let the plant begin producing again even though no new environmental protection measures had been installed, the state-controlled China Youth Daily reported. "The environmental bureaus of local governments would rather develop GDP than perform their role" as pollution watchdog, says Zhao Jian Ping, senior energy specialist at the World Bank in Beijing.

What's more, even where waste-treatment gear is installed, some Chinese companies opt to pay fines rather than operate expensive equipment. The cost of cleaning up wastewater from a yeast plant can reach $610 per 1,000 cubic meters, while the penalties are just $490 per 1,000 cubic meters. Furthermore, noncompliance is preferred by local officials, since fines shore up budgets. SEPA says that while most major industrial plants have water-treatment facilities, one-third don't operate them at all and another third only use them occasionally.


Coal may be the biggest culprit. China has tens of thousands of small mines that pay scant attention to environmental concerns or safety. Such neglect helps keep costs down, making coal the preferred source of energy. Even though the price of Chinese coal has jumped 29% in the past three years, that's far below the 79% increase globally. So coal-based electricity generation costs a fraction of alternative energy sources. In Inner Mongolia, for example, wind power costs about 6 cents per kilowatt hour, more than twice the price of coal power.

The good news is that plenty of companies selling green technology are sensing an opportunity in China. Chinese enterprises are buying everything from scrubbers for coal-fired power plants to alternative power sources such as wind turbines and methane gas from decomposing solid waste. China will invest $61 billion in city wastewater treatment facilities between now and 2010. Scrubber sales could reach $1 billion a year. "China is at a crossroads, shifting from a focus on buildup of capacity to more environment-friendly and energy-conserving technologies," says Steven Fludder, chief executive of GE Power (GE ) China, which has sold more than $1 billion worth of natural gas and wind turbines to the country since 2003.

GE isn't the only foreigner helping out. Some 400 non-Chinese companies now sell pollution-control equipment in the country. A joint venture between Westport Innovations of Vancouver, B.C., and Cummins Inc. (CMI ) has equipped more than 2,500 buses in Beijing with engines powered by natural gas at a total cost of $26 million. Veolia Environnement (VE ) of France has invested $800 million in 10 water-treatment projects -- some under contracts that stretch to 20 and 50 years and offer a 12% rate of return -- and two facilities that generate power with methane gas released from solid waste. Sweden's Purac Environmental System has sold equipment to dozens of companies in China. Its biggest customer, state-owned Huatai Paper in Shandong Province, has spent nearly $7 million to clean up effluent that looked like "thick, cloudy Guinness beer" flowing into the river, says Purac China chief Lennart Huss.

Those foreigners are facing increased local competition. Beijing Monitor Environment Technology Co. last year saw revenues of $3.1 million selling emissions-monitoring equipment to power and petrochemical plants. Beijing-based Golden State Environment Corp. had sales of $60 million last year and has worked on more than 2,000 water-treatment plants and landfills in some 250 cities. And Anhui Guozhen Environmental Protection Science & Technology Co. says it has won five contracts worth $13 million annually to build and operate water-treatment plants for cities around the country.

One promising development occurred on Feb. 1, when the Kyoto Protocol on greenhouse gases took effect. The accord allows companies in developed countries to purchase gas emission "credits" from enterprises in developing nations. Effectively, corporations in Japan and the West buy the right to keep emitting carbon dioxide pollution. But under the terms of the protocol, the companies that sell their emission credits then have to reduce their pollution levels, the cost of which is presumably covered by the proceeds of the trade.

Such deals in essence subsidize the sale of pollution-control equipment in the developing world, where it's often cheaper to make bigger gains in emissions reduction. Three Chinese projects are benefiting from the trade in credits: a wind farm on the grasslands of Inner Mongolia, a power station fueled by methane released during coal mining in Shanxi Province, and a power-generation project using methane produced by solid waste in Anding, south of Beijing. "This is the beginning of a market that has vast potential," says Andres Liebenthal, head of environment and social development for China at the World Bank's Beijing office. Clean air is a commodity China desperately needs.

By Frederik Balfour

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