Trend: Companies that can help China clean its air and water will find a huge market with money to spend.
Jim Jubak at MSN Money describes China's pollution problems and how the Chinese cannot continue to produce goods as cheaply in the future. Excerpts below.
Link: How long can China pollute for free? - MSN Money
...Chinese companies have a sizable cost advantage over their rivals in the developed world because many of the environmental costs of doing business in the United States, Europe and Japan are still externalities in China. Polluting the air, water and ground at no cost to the company's bottom line makes it easy to undercut the prices charged by companies that don't have a right to pollute for free.
Closing the "externality gap" between China and the developed world would eliminate one source of China's cost advantage and slow the country's economic growth rate. If we want to know how sustainable China's current growth rate of 10% per annum is, we need to look at how quickly current environmental externalities will get on the corporate books.
There are two factors that determine the speed of that process. First, how long will it take until China's environment is at a breaking point that will force an end to polluting for free? Second, how quickly will the global economy force the Chinese economy to change its ways?
The environmental figures out of China, even the official ones, are appalling. More than 400,000 of China's 1.3 billion people die from air-pollution-related illness each year, according to the Chinese Academy on Environmental Planning. About 300 million Chinese don't have access to clean drinking water, and 400 of the country's 668 largest cities are short of water. Acid rain falls over 30% of the country. Of the 20 most polluted cities on earth, according to the World Bank, 16 are in China.
The situation is getting worse fast. By 2020, 550,000 Chinese a year are likely to die from air-pollution-related illness. Human health costs from air pollution, according to the Chinese Academy for Environmental Planning, now at 2% to 3% of China's GDP, will reach 13% of GDP by 2020, if current trends continue.
China is rapidly running out of water. Industries can't get enough. City dwellers can't get enough. Farmers can't get enough. Parts of the country look like they're headed into permanent drought as surging demand teams up with falling supply -- from desertification and wasteful water-diversion projects -- to produce scarcity no matter how much water the clouds bring.
For the past 25 years, China has been able to feed itself -- one of the country's greatest achievements. But the water shortage is bad enough to put this in doubt. According to James Kynge in his 2006 book, "China Shakes the World," China uses seven to 20 times more water per unit of GDP than the developed countries of the world. All you have to do to fix that is start charging a market price for water that's high enough to produce major gains in the efficiency of water use.
Beijing is working with the United Nations to set up the first carbon-trading exchange in a developing country. The exchange would trade the carbon credits set up under the Kyoto Protocol on climate change. Under the trading system, companies that reduce greenhouse gases generate credits that they can sell to companies that are over their greenhouse-gas quota. China's industries are huge emitters of greenhouse gases, but even small investments in emission controls can yield big improvements. Carbon credits can be quite a tidy profit center. In the first nine months of 2006, developing countries generated $3 billion in carbon credits, and China accounted for about 41% of the total.
This will give many of China's companies the cash incentives they need to get started on converting environmental externalities into income statement items. And as more Chinese companies develop global brands, they'll get another push from consumers in the developed world, who increasingly want to feel good about the companies they buy from.
But this will be just a start. And the cash it will provide to China's companies is just a drop in the bucket. I'd expect that local officials and local company executives will fight tooth and nail for their right to pollute for free.
Eventually, though, Chinese companies will adopt something like the global economy's standards of accounting for pollution. That will help further narrow the cost gap between China and the rest of the world, and slow China's growth rate from the current breakneck pace.
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