Watching China Run

New York Times Op-Ed "Watching China Run" (February 13th, 2010) very misguidedly suggests that the U.S. should be as heavily invested in environmental technologies of the future as China, whose rapid industrialization has also come with rapid increases in pollution.

China also has become the world’s largest manufacturer of solar panels and is pushing hard on other clean energy advances.

The article continues:

We’re in the throes of an awful and seemingly endless employment crisis, and China is the country moving full speed ahead on the development of the world’s most important new industries. I’d like one of the Washington suits to step away from the photo-op and explain the logic of that to me.

Though not Washington suits, Corrections will happily explain. There are two reasons that a country like China, whose air pollution is the stuff of legends, would be expected to invest more in energy than the stable United States.

First, the price of using old energy technologies is higher for China than the US, so by the law of demand, they use fewer of these technologies. While a slight increase in air pollution would go unnoticed in Chicago, the same increase would decrease the quality of life in Chongqing, China--the city with the fifth worst air pollution in the world, according to the World Bank. (Note that China has 12 of the top 20 most polluted cities--the United States has none!) Such a decrease in the quality of life is a price that this city would have to pay, in addition to its direct costs, for using "old energy." Eventually, that price is too high and the city will prefer more directly expensive but cleaner technologies. Chicago can get away with producing the same amount of pollution without having to pay for the inconvenience of foggy air.

In addition, an environmental Kuznets curve would explain why China should be first to invest in cleaner energy. The environmental Kuznets curve gives an inverted U-shape for the relationship between national income per capita and environmental health indicators, as depicted below (click here to enlarge).  This would suggest that a clean environment is a luxury good.  As China's income per capita grows, so too does its environmental investment.