The following is part of Cornell Contemporary China Initiative lecture series
under the Cornell East Asia Program. The arguments and viewpoints of this
talk belong solely to the speaker. We hope you enjoy.
And uh for our last talk today we have our very own Professor Shanjun Li,
who joined the Dyson school in 2011 as an economist, and he had been working prior to that
with a think tank in D.C., yes, had been there several years since finishing his PhD in economics
at Duke. So we're very happy to have him here. Since arriving here, he has of course published uh
many interesting things but also has recently uh co-founded, together with Panle Jia,
the CICER, the Cornell Institute for China Economic Research, which is often partnered
with us, CCCI, with this lecture series. Uh so, without uh further ado, let us welcome Shanjun.
Alright, and thanks to you all for coming, alright, um so I have to warn you today I'm
going to show a lot of things that that are quite depressing and you know in this kind of weather,
in this type of political environment, uh but in the end there will be something more positive,
so stick with me till the end if you can. Okay, um, so I'm going to talk about environmental and
energy challenges and policy options in China. Okay, in 2005, China was the largest energy
consumer accounting for 24 percent of world total energy consumption, okay? 24 percent. I want you
to think about these numbers really for a moment. By far the largest coal consumer: 50 percent of
world total coal consumption. The largest CO2 emitter: 30 percent of world total. The largest
automobile market, 26 percent of world total automobile sales, okay? So these shares are only
getting bigger, that is, these things are really have very big implications if you think about it.
Think about energy demand, right? We know energy demand, for example, oil is inherently now
actually world market, so anything happens in China, in terms of automobile demand, in terms
of gasoline demand, is going to put pressure or affect oil market, affects the price, affect the
price [vp, unintelligible] here in the United States. Okay. Think about CO2 emission, right?
CO2 we know is a global pollutant. A ton of CO2 emitted from China is no different from one-time
CO2 emitted in the U.S. in terms of its impact on climate, in terms of impact for the world,
okay? So we care about not only CO2 emissions from here but also in China and elsewhere, right?
So domestic policy in China really have global impacts and that's why we really need to,
we really should understand what's happening in China, and really,
that can inform us in terms of policy making in the U.S. Because of these numbers that I mentioned,
okay, air pollution and traffic congestion really uh have become the most pressing challenges in
major urban areas in China. I'm going to talk about these two issues and actually going
to focus on traffic congestion in the later half of of the talk. Um in turn these were,
air pollution traffic we know actually affect quality of lives in urban areas, it really affects
firm location, affects labor productivity, affects human capital investment, and affects,
in the end, economic growth in the long run. Okay, so this shows a GDP growth on the right
axis and energy consumption on the left. For the past um 50, actually more than 50 years,
can look at the increase in GDP that, that is this black line here, so we all know annual
average is about 10 percent during the last 35 years. If you look at uh coal consumption this
this uh gray area it's increasing roughly the same speed. If you look at oil consumption increase,
look at gasoline, sorry this is natural gas, and hydro and nuclear is the blue,
okay? so you can look at this this, the majority of, of the um fuel source is coal.
So in 2014, 89 percent of energy uh was from fossil fuel including: coal 66 percent,
oil 18 percent, this is really mainly for automobiles, okay, very little uh gas, uh
natural gas, if you look at in look at U.S., this will be for coal, would be roughly 30 percent,
uh natural gas would be would be larger share, oil would be I think roughly the same here,
okay? So fossil fuel, especially coal, is the dominant source, and if you look at all the uh
resources here coal coal is the dirtiest one, okay? By far the dirtiest
one. That that was the consumption. What about energy balance? So this is the difference between
what China produced, what China consumed, so this, these are negative. We look at this,
for the majority of this, actually, these are negative, meaning China has been importing oil,
okay? And also increasingly uh coal, natural gas, from other countries, okay? That's why I said in
the beginning that domestic demand in China actually has important implications for the
world market as a whole. So this is new automobile sales in China. This is uh annual sales uh in
China in 2001, was less than 2.5 million, now um it's here, actually 2015 the total new vehicle
sales was over 21 million units in China. This is for the U.S., China surpassed the U.S. in 2009
to become the largest automobile market, okay? So the dramatic increase here in uh in coal, sorry in
oil consumption was largely driven by the increase in vehicle ownership in China.
Alright. So this is crude oil consumption uh in China in orange, and the world blue. This
is relative to 2001 level so everything is relative to 2001. If you look at, if you
look at the increase in oil consumption in China and then the blue bar are the world total
consumption relative to 2001 again, if you look at this uh orange bar relative to the blue bar,
China accounted for 46 percent increasing oil consumption during this data period.
So this is CO2 emission again relative to 2001 level, orange is for China, blue is for the world,
during this period 2001-2013, the increase in CO2 emission in China accounted for 60 percent
of growth in global total. So the next, I'm going to show you um a few slides about environmental
quality or environmental issues in China. And before I show them, and we all understand there's
big issues, environmental degradation is a big problem there, and if you think about why we
had these issues, uh I call this here, I call them, really, this is a perfect storm for China,
so several really important factors combined together that contributed to the really dramatic
degradation in terms of environmental quality in China during the past 15 years,
okay? So the first one, we all know, is the in unprecedented growth in the industry sector and
vehicle ownership that I showed you and the, we, re, China heavily rely uh relies on fossil fuels
especially coal for energy, as I showed you as well. We also know the political environment,
the political personnel system, is a top-down approach, that is the government officials
at the federal level appoint provincial government officials then they in turn appoint uh
government officials in the municipal and in county levels. And the most important criteria,
used to be really the sole criteria for promotion was GDP growth, okay? Um, as a result,
government officials really have a very strong incentive to do all kinds of things
to increase their GDP growth, including attract a lot of very dirty industries: petrochemical, um
plastic production, petroleum refinery, those type of stuff,
to increase GDP without giving really a lot of thoughts about the environmental consequences.
So environmental protection really was after uh was an afterthought for a lot of government
officials in making decisions, how to actually balance economic growth and environmental
protection, okay? It has changed during the last uh, during the last five years. I'm going to talk
about them toward the end. So as, at the same time we have, we have, China had really very relaxed
environmental regulations and enforcement and uh to give you a sense, China's, we know in the
United States the environmental regulation agency is Environmental Protection Agency, the EPA.
China's counterpart is Ministry of Environmental Protection, was established only in 2008
as a cabinet level ministry, okay? In the U.S., we have about 17,000 employees under EPA.
China's MEP employs about 2,600 people. Think about, compare the size with uh
the uh the population, the country um and this is, this is much much smaller number of course, right?
Another important issue is that local government bureaus, local environmental regulators
or think about these are local MBP offices, are actually part of local government. In the U.S.,
EPA has regional offices, but those region offices are directly managed
from EPA in D.C., okay? So regional directors are actually appointed by EPA director.
But in China, the local environmental bureau chiefs are actually appointed by local government
officials, right? And think about, these are really environmental uh enforcers,
right? Regulation and also monitors. And they have to monitor people who will appoint them later on,
right, or promote them later on. So this creates, of course, perverse incentive
in terms of environmental regulation in China, okay?
Alight, so I'm gonna, you know, as I mentioned, show you some quite uh nice pictures. Uh so this
is one of them, this air pollution. Uh this is from uh from Hebei, uh which is the largest
uh steel producer in the world, if you don't uh consider China as a whole as a country,
okay? Um so there is a saying that if you look at steel production in the world, China is the first,
Hebei province is actually second, okay? Now let's look at graphically, compare
Beijing's PM2.5 and L.A. L.A. is considered an area in the U.S. with the worst air pollution,
right? For those those of you who don't know PM2.5, this is called particular matter,
these are fine particular matter, particular matter with diameter that is
less than 2.5 millimeter, okay? 2.5 millimeter is about 1-30th of a human hair, so tiny tiny um
particular matter, and these are really damaging to human health.
During the past 20 years, actually 25 years, there were a lot of medical research,
and really a lot of research, that looked at health impacts PM2.5 and found them to be
very damaging to human health, because they are really small, you can breathe them, they can
then go deep into your lung and blood streams, cause lung cancer, and cause uh heart problems,
okay? So if you look at the daily concentration here in China, in orange, from 2012 to 2013,
and the black is for, sorry, this is for Beijing, and this is for L.A., okay? I also want you look
at the EPA categories here. So this level is good to moderate. This this range is unhealthy. This
is very unhealthy. This level above is what EPA calls header, hazardous, meaning EPA actually
will advise people not to go outside, okay? But that happens quite often in Beijing, for
those of us who lived in Beijing, we all know this, but this is the record, uh before 2000,
before the state was near, nearly 600 micrograms per cubic meter, this is the measurement we use.
I mean if you look at L.A. again, this is the most polluting city in the U.S. There's no comparison.
So another thing mentioned that U.S. has a daily standard that's 35 micrograms per cubic meter,
right, and for L.A., actually, most of the days were below this 35 line there, okay?
This is for whole China PM2.5 concentration on an annual basis, okay? So if you look at this dark
red um and this, this red provinces, their annual level is about, it's over 50 or even over 70, okay
micrograms per cubic meter, this is the unit we use, if you look at the U.S. annual standard 12,
okay, WHO, World Health Organization guidelines is only 10. So for most actually we all we know that
this part of China has a lot of population, so for most of these areas the concentration level is
four, five, six, seven, times the WHO guideline, okay? Okay we know air pollution is bad, okay,
what is the cause of air pollution? So there are a lot of research on that, uh, well it's not
quite recent anymore, because this old slide, there was article in Nature September 2015,
they estimate that air pollution economy for 1.3 million premature deaths in China in 2010,
and this number accounted for 40 percent of world total premature deaths.
2007 world report, they estimate the cost of pollution in China,
um and the health cost of air pollution health costs alone is, uh was 1.2 to 3.8 of GDP in 2013.
I can give you a quick idea how the estimate this cost. What they use is so called dose response
functions, right? They have data, for example, in terms, air pollution and mortality
and morbidity rates in different locations in the U.S. or elsewhere, they try to find the
relationship between pollution and mortality rate, and they try to estimate that relationship, that's
called dose response relation, is well established in the medical literature and
then they can use those functional relationships to estimate, well if China's air pollution was
was lower than what we had before, for example, as low as the World Health Organization guideline,
what would happen to their premature deaths, right? And these are what happened to all kind
of diseases, and health cost is only one part of the cost, of course, okay, there are other costs.
Okay a 2012 MIT study estimates that health cost air pollution uh to be 112 billion U.S. dollar
in 2005, five percent of GDP, okay? So these are really big numbers if you think about it, okay?
Alright, soil pollution: about 20 percent China's farmland are polluted, from industry wastewater
and levels of organic pollutants are often 20 times the standard.
Water pollution: 60 percent of groundwater are contaminated,
90 percent for cities, and two-thirds of China's rural public population use water
contaminated by human and industry waste, okay? As a result, especially for rural areas, um Ministry
of Environmental Protection um classified 459 villages as cancer villages. There are,
if you look at location, it's not surprising, these are located in heavily industry areas,
uh with actually a lot of so-called industry clusters, okay? Cluster of textile firms,
cluster of steel uh mills, etc okay? And if uh research has found that water pollution
is the main cause for cancer villages, okay? These are really, um as mentioned in the beginning,
kind of dire [unintelligible] pictures. You might ask, what, where do we go from here, okay?
So some of you actually saw these pictures before, so I put these two pictures,
these are two pictures in different uh continent, and different time period,
okay? I want you to guess what is this about, what was this, and then what what was this? Exactly,
this is actually Dust Bowl from the from from the U.S. in the 30s that happened in the Great Plains,
Texas, Oklahoma, those areas, and the main cause of the dust bowl, as well, a combination of weather
but mostly erosion of topsoil due to intensive uh agriculture um and this,
and this is this is Ningxia in uh in 2000 in 2010 in China,
okay? This is one of the sandstorm um you know episodes, okay? Okay, so these two,
uh well, this is New York City, George Washington Bridge, okay? This is, uh was from 1970
okay? And this you can't really see this much of this, right?
And then this, is this is Beijing, okay? Um sometime, actually very often, this is Beijing,
okay? So you think about, well, you know, U.S. had, you know, very bad environmental issues
um in the 60s, 70s or 50s, 40s even earlier, you know, we all know if you study environmental
history um there were a lot of environmental disasters, right? One of them was land and smog,
1952, 4,000 people died during that uh a few days, right? So there were incidents
like this in the U.S. in Pittsburgh, in a place called Donora, there were,
many people died in a short span, few days, because combinations of air pollution and
bad weather conditions. So how did U.S. do it, right? How did U.K. clean up their air? Okay,
environmental regulations in the U.S. So 1970 was a very important year,
and before 1917 many things happened, including, I don't know whether you know this book called the
Silent Spring by Richard Carson, and many also bad environmental incidents, and that lead to
environmental movement, and Richard Nixon created EPA in 1970. They also passed Clean Air Act.
This act is very important, uh, the goal of that act was to regulate air pollutions,
so they set up what they call National Ambient Air Quality Standards um,
and um for six pollutants including carbon monoxide, uh sulfur dioxide, particular matter,
it was PM10, uh NOG, NO2, and ozone, and lead. They said, well, for each county,
right, you have to actually comply with the the national standard. If you don't comply,
then we are going to pull out federal fundings, you are going to suffer from consequences,
so you have to do anything you need to do to make sure you comply with the air quality
standards. So different states use different strategy to do that. This was a very important
regulation in the U.S. in terms of environmental regulation. Numerous laws passed since 1970,
they addressed a lot of things: clean air, clean water, energy conservation hazardous waste,
pesticides, and more recently toxics from power plants, okay? Okay, let's look at what
what happened from 1970, okay, actually to large extent due to environmental regulation. Look at
SO2 air quality, right, so from 1980 to 2010 there was a 23 decrease in national average. In terms
of SO2, in terms of NO2 there was a 52 percent decrease in national average, okay,
carbon monoxide, 82 percent drop, and 28 decrease in ozone,
so it's a remarkable uh uh improvement during this 20 years, actually 20, 30 years, right?
Okay, um, what's the result of environmental, like, these effects of environmental legislations?
Well, we all know the air now is is very good, but if you look at the uh, the health consequences, or
health benefits, right? If you look at 1990 alone, there are studies show that clean air programs
prevented this year alone over 20,000 premature deaths, this many cases of chronic bronchitis,
and you know heart disease, asthma attacks, uh all these things, and also 10 point million loss
IQ point in children from lead reductions, right, these are these are numbers that are produced by
researchers, okay, and you know these are these are the health benefits in 1990 alone, okay?
And there are recent studies that actually show, that try to quantify the benefit of clean air
act uh in risk, in more recent years. For example, they found that uh that you know premature deaths
was reduced by over 160,000 uh in 2010 due to uh due to Clean Air Act uh regulations, okay?
So I showed you uh the progress that U.S. made during the last 30, 40 years,
okay, and I mentioned briefly the environmental regulations, the big really regulations,
and now I'm going to go through very quickly
approaches to environmental regulation, okay? So think about China, there are many options on
the table, right? Um some have tried by other countries, some have not, on a large scale,
okay? So Chinese government are thinking about these policies
and we need to decide: what are the policies that that we should use uh to address the issues? So
economists tend to categorize different approaches into three categories. The first,
we call that command-and-control approach. To give you example, for example we ban DDT,
this is pesticide, um we ban CFCs, these are ozone depleting CFCs, and we have these type
of regulations, complete prohibition, okay, of use of some of the chemicals,
we can do that. Second type of command-and-control approach, is is less forceful but
the government essentially mandate firms, okay, coal fire plants or chemical companies or
petroleum refinement companies to use the best available technology on the market in
terms of environmental performance, right, you have to do that, so government can mandate um
that, um so these are called uh these are kind of uh are within
um this command-and-control approach, okay? Think about the pros and cons, right? Well because you
have, the government has a lot of control, right, so you can expect some results will be achieved,
right, in terms of the environment performance you can expect that
certain improvement will be achieved, okay, but you have to think about at what cost, okay?
The second approach called market-based approach okay, this approach basically consider
clean air, clean water as resources, as natural resources, okay, and we need to think about how
to allocate these resources just as we think about how we allocate goods on the markets,
computer, uh you know clothes, or anything that we purchase on the market, right?
And we know for things that we purchase on market, price is the mechanism which
guides us where these goods should go to or who the goods should go to,
right? The goods should go to those who value these um this um those who value them the most,
right, um so um so this approach basically says well let's think about really treating air and
water as natural resources and let's think about use market mechanism to re-allocate
resources, right? That is, if you uh power plants, you pollute,
your generate pollutions, that is, you are using clean air for your production,
right? And you need to pay for the input, that is clean air. Under this approach, for example,
as I mentioned, if you need to pay for clean air, that's we call that tax, example is carbon tax,
if power plants you generate carbon emissions, for each time carbon emission, you need to pay
a price, okay? How much you need to pay depends on the damage carbon does to to the society,
okay, so we need to quantify the damage. Gasoline tax is another uh kind of uh tax
that try to actually control for this damages. Subsidy on electric cars, on other fuel saving
technologies, okay? This is essentially putting a price on using these resources, okay, for subsidy
basically you give you a subsidy to reduce your pollution, okay. That's the opposite to the tax.
Cap and trade, this is, you hear a lot about this cap and trade, that's another type of market-based
approach. The idea is that, if you want to use tax, for example, use carbon tax, okay,
a lot of times people, consumers, or general public do not like the idea of tax, okay,
especially in the U.S. and in other countries as well. One of the reasons is they don't trust
the government in terms of how they are going to use those tax revenues later on,
right, so some economists suggest well let's think about alternative way to do this,
right? We call that cap and trade. Um the idea is that if we want to reduce air pollution,
for example, if we want to reduce carbon emissions, okay, in order to, um
a word, uh in order to prevent, from uh, prevent the, you know, disastrous scenarios
to happen, okay, so let's think about well carbon emissions should be below this certain threshold
okay for many many years onward from, this year onward, and so we need to set a cap; that is,
each year we cannot emit more than this, okay, then we are going to have licenses
allocated to firms so that when firms are made, each time carbon,
they need to surrender one unit of license to the government, okay? So in the end,
the cap is uh is um should not be, um should not be violated, okay? Um once you allocate
the permits to firms, so there are many different ways to allocate permits, but one of them is
based on history uh emissions. Once you allocate these permits, and actually firms then can trade
among themselves. For example, if I am the for, as a firm get 200 tons of permits,
okay, but during my production process, I emitted 250 tons, then my own permit is not enough,
but what I can do, I can actually go to the market and buy permits from other firms, right?
If I produce only 150 tons of CO2 that year, but I have 200 permits, then I can sell the extra
50 tons permits on the market to other firms, okay, so you allow firms to trade. In the end,
the permit, the right to pollute, you can think about, will have a market price,
okay? The market price was determined by the cap, by actually the cost of the firms,
in reducing their pollution. What happens in this system is that
the permit price actually is going to guide, as actually signal or mechanism, to guide firms
optimally choose their abatement behavior, or behavior of reducing emissions, okay? For example,
if I am a very very efficient firm, I can easily reduce my air pollution without incurring much
of a cost, okay? Another firm, that is a firm that is not very good in terms of technology,
so it's going to take a lot of efforts or cost for that firm to reduce emissions, so think
about what would happen to this type of firms, well, if I'm very good at reducing pollution,
in the end, I'm actually in in that I'm going to reduce a lot of pollution, and I'm going to
sell a lot of premise to the other firm, who is not as good reducing pollution, so he will not
reduce a lot of pollution, but he, that firm is going to use a lot of permits from the market,
he's going to buy a lot of permits from the market uh to to do that, because for that firm
reducing pollution by himself actually is more costly than buying from the market,
okay? So in the end, you, we we actually showed through theory, through empirical studies,
based on past experience, this type of system cap and trade, can be very cost effective
in reducing emission. That is, if you want achieve that cap, or certain level of emission,
and this actually is very efficient in doing that, so we are going to use the
lower cost in achieving the same amount reduction. Than, for example, this type of approach,
because this type of approach, you do not give firms a lot of freedom
in choosing their best strategy, okay, so this type of strategy for example technology mandates
basically assumes the government knows a lot about the technology, and we will choose the
best technology which actually is not often the case, okay? So there are a lot of examples
uh in the U.S., for example, in the 80s, the U.S., the way that the U.S.
phase out leaded gasoline was through this type of idea, and that program was actually
under Ronald Reagan, okay? SO2 permit trading, which is very big, very successful program in
reducing SO2 was authorized by first Bush in 1989. So cap and trade actually was a Republican idea,
okay, but we all know in recent years and a lot of lawmakers call that cap and tax, right,
they didn't really like this idea. They blocked a lot of actually uh proposals in the Congress. Um
emission trading for CO2, so this is European Union emission treaty for CO2, this is the largest
emission trading program or cap and trade program in the world, started from 2005.
And we're going to talk about China's CO2 cap and trade programs.
So this is one of the policies that are really being used or being considered
in many parts of the world to deal with not only local pollutants such as SO2,
but also global pollutant such as CO2, okay? So the third category, call them information,
you know, let consumers know that the the cause of climate change, the damage of climate change,
therefore, think about more carefully, how much electricity you use, how much heat do you use,
and then think about the actions you take, right, moral suasion, norms, social pressures, this is
uh, these are really in one this category, right? This could be uh useful it could be helpful,
uh many many very often they will be helpful when you combine this and this together, okay?
As I mentioned, traffic congestion is really one of the, to me, really one of the two most
pressing issues in urban China, and there are many options to deal with traffic congestion,
and I'm going to talk a specific approach that we propose. Uh it's a market-based approach,
and look at how we actually set up uh that poli- that policy, and how to implement it,
what would be the consequences of that policy. In this paper, this really a combination of
economic insights, okay very basic fundamental economic insights,
and big data on a very important social issue, okay? So if you rank world cities
in terms of traffic congestion, okay, the top one is the worst, okay, so Mexico City was the worst,
it's top 15. If you look at them, seven of those cities are actually from China, okay? A lot of
them, if you look at them, actually, are not are actually from mid or or mid-income countries,
okay? L.A. has the worst traffic congestion in the United States, it's number six, okay?
This is based on 2015 data. So this is Beijing 15 years ago, actually, yeah, 15-16 years ago,
and this is Beijing now. I showed you the the dramatic increase in vehicle ownership before.
From economics perspective, traffic congestion is very simple, actually,
okay, it's fundamentally, it is excess demand of road capacity, okay,
and why there is excess demand? Okay, we think, well that's because mispricing.
If a good resource is free of charge, and if this is something that is, that is good
thing for people, and it is free, then the demand for that will be will be high, right?
That's true for road capacity. So there are two broad strategies to deal with traffic congestion,
or to deal with exit demand issue, okay? One type of strategy, we call that supply side strategy.
For example, building more new roads, improving public transportation.
Think about what what will that do if you build more roads, right? Well it's going to reduce
congestion for sure, but that will also reduce the cost of travel for people, okay? That is,
reduce the price that people have to pay for travel, the time, the price that I'm talking
about, think about that's the, uh the cost of time, right? If something becomes cheaper,
then the demand for that will be higher. So what I'm saying is when you build more road, you're
going to reduce travel cost, therefore you're going to lead to more driving, higher demand for
driving, that will in turn will lead to congestion again, right? So in the short term, supply side
policies can work, and tend to work, but in the long term, they cannot fundamentally deal
with or address congestion issue. Another set of strategies, we call them demand side strategies,
for example the command-and-control approach that I mentioned driving restrictions that
are being used in many uh cities in the world, including Mexico City, Bogota, some other South
American cities, and Beijing, and uh probably New Delhi soon, right? The idea here is that, well,
if there are too many cars on the road, why can't we restrict some of them from driving,
right? So in Beijing, what they do is, depending on the last digits of your license, well you can
only drive four days out of five days, right? Um so this is kind of very straightforward kind
of linear thinking, right, if there are too many cars let's take some of the cars off the road by
forcing people or prohibiting people from driving, right, by not allowing people to buy cars,
okay? This we call them command-and-control approach. They might work, sometimes actually
might not work. The other approach, as I mentioned, we call that market-based or
price-based approach. So here we are going to use actually price signals as a mechanism to
allocate resources. The resource here is road capacity. The same thing as clean air, right,
we can use price signal to thinking about allocate resources but if you compare command approach and,
with the price-based, we call that congestion pricing, congestion pricing is going to be
much more effective or it's going to achieve the same goal with the lease cost. The reason, as I
mentioned a moment ago, is that when you use this market-based approach, or congestion price in this
instance, you have a lot of margins. You have, actually, you give travelers a lot of margins
to adjust their behavior. For example, when you have a congestion pricing, well, that can induce
adjustment uh for travelers in many margins, such as trip frequency, how many times they travel,
what kind of mode they use, what's the time of travel, and what's the route they use,
so they are going to adjust their behavior or travel behavior accordingly um in an optimal
way under this pricing strategy, okay? So this is actually what we call first-best policy
in addressing traffic congestion, okay? And this first-best policy addressing congestion was first
proposed uh by William Vickrey in 1955. William Vickrey is a Nobel prize winner in economics,
1992. He had he made a lot of very important contributions in many areas in economics
including auction, and in 1955 he proposed congestion pricing to
deal with urban congestion in New York City, and then he, he talked about congestion pricing for
urban transportation in general in the U.S., okay? In 1963, in his American Economic Review article,
he he mentioned this, he said, well, no other areas are pricing practices so irrational,
so out of date, and so conducive to waste as in urban transportation, okay? So basically arguing,
well, pricing practices in the U.S. was really out of date. Essentially there was no pricing,
so we had very serious mispricing of road capacity, as a result we have congestion issues
everywhere, right, in urban areas. Okay, if you think more about it, okay,
congestion is what we call, economists call, a classic a classical classic externality.
Externality arises when one's action, when my action inadvertently affects other people,
okay? For example, when I drive on the road, I will actually slow down other people on the road.
But when I make my decision in terms, well, when I'm going to travel,
how far I'm going to travel, I actually don't consider my impact on others into my decision,
right? So my action is causing impacts or impacts or affecting others that I'm not considering
or taking into account, and that really my uh, the the impact of my trouble on others is externality,
okay? The same thing is pollution, right, when firms make, uh produce electricity, for example,
they will make their decision based on the cost of the input, based on the price of the output,
but they don't actually take into account the amount of pollution they will produce,
right, and therefore they are going to lead to health consequences. We call them externalities as
well. Pigou, author Pigou in 1920 actually talked about externalities, and he proposed use tax
to correct for this externality generating activities. We call that Pigouvian tax. So
congestion pricing is essentially one type of congestion cost, that is, if you are, your action
is hurting other people, you have to pay for your actions, for for the damage that you cause,
right? So in in terms of congestion, you actually need to pay the cost that you impose on other
road travelers, okay? How much do, should you pay? Well, that's called congestion pricing,
right? What's the level of congestion pricing? But that's an empirical question.
Let's look at, so this is the cost of travel, this is the, think about this as a demand of travel,
this is a density, number of vehicles on the road per kilometer, okay? And at, a certain level,
below this level of density, then, this is the cost, the travel cost is flat, travel cost,
including time cost, including operating cost, and road maintenance cost, okay?
This is flat, but when the number of vehicles is above this threshold, is above this threshold,
then there will be difference between, this is what we call a cost average, sorry we call that
marginal um private cost, think about the cost that travelers pay themselves, and the cost to
the society, okay, this we we call marginal social cost. So there will be a difference
between the cost to the society, and the cost to individual travelers. The reason there is
difference is because congestion, right? At this point, when we add one more traveler on the road,
it's going to slow down other people on the road, therefore, they are gonna, it's gonna take longer
for them to travel, and there will be a cost, because um time is money. So the difference
that we, between these two lines, is externality, from congest, from uh congestion, okay, um
and uh and this is, this is what we call a demand curve for travel, when price is high,
you travel less, price is low you travel more. So Pigou in 1920 said, in this type of situation,
right, he looked at other type of externalities. Well we can actually impose a tax, okay,
so that, as a society of a whole, we achieve the best outcome. If you don't do anything, if
the government does not do anything, then in the the society actually will achieve this outcome,
this level of density, and there will be big wedge between the social costs and private costs,
there'll be a lot of congestion. This is not ideal from a society point of view.
From a society point of view, this point is the best, okay?
So in order to achieve this point, this level of density, or travel demand, we actually need
to impose a tax. So the tax, the amount of tax should be this much, okay, so this this is the
[unintelligible], we call that congestion charge, okay? So in this paper, what we are going
to do, we are going to look at Beijing, we are going to try to actually estimate these curves,
this curve, this curve, this curve, and try to estimate the congestion pricing, okay?
So that is how much you should charge road users so that in the end, if we
achieve a level congestion, that it actually is optimal for the, for the society point of view.
Okay, alright, um so there are many cities around the world using congestion pricing, starting from
Singapore in 1975 um, you know there are several European cities adopt in early 2000s,
the studies show that this congestion pricing practice is actually reduce congestion by
10 to 30 percent in different cities of the world, okay? So Beijing Municipal Government
uh in two thousand, December 2015, announced that they will introduce congestion pricing,
so now they are actually studying congestion pricing think about how to implement it think
about the potential impacts of the policy, okay? So what we are going to do is, actually,
really provide suggestions or information for them to use to think about how they
should implement the practice, okay, so this is Singapore to just give you an idea, what they do,
this is called electric road pricing, so every car has a uh, what do you call that, um
receptor or um and there's also a credit card here, uh when this car passed this this point,
this will this will you know have a received signal, and um there are different um things on
the different, you know, uh at different points on the road, there are many uh structures like this,
um and uh at the end of a month, essentially your charges will be deducted from the credit card, um.
This is uh, this is, we call that second generation elect- um congestion pricing.
The third generation of, which they are thinking about, they are actually planning to adopt in
Singapore is based on gps. In that case, you don't need this anymore, okay, what you need actually is
a transponder on your car, um and um that will that will basically tell the central operator
where you are at a given point in time, and if you drive very often during the rush hour,
and on congestion road, you will receive a larger bill during the end of the month than if you drive
during more during non-rush hours or less congested road, okay? So this type of policy will
really guide people, make their optimal decisions in terms when to travel, where to travel. Our
goal, as I said, is to estimate that congestion pricing, okay? The optimal congestion charge,
the optimal congestion charge is going to be effect- it's going to be essentially,
this is externality or or the cause that you impose to other people,
okay? When you drive on the road. And that, to estimate this, we actually need to know
the relationship between the density and speed, okay? So essentially what we need to know is that,
given point in time, if there are already 10 cars on the road, okay, if you now decide enter
the road, you become the 11th car, how much you are going to red-, how much uh you are going to
reduce the speed, therefore how much cost you're going to impose on other road users. Therefore,
we need to know this relationship between how many cars on the road, and the speed of those cars,
okay, and this is going to tell us, allow us to actually estimate the cost you cause
or impose on other road users, okay? So the data we we have is from Beijing,
um so these are uh this uh orange dot is location for uh monitoring stations,
traffic monitoring stations in Beijing, there are more than fifteen hundred of them here,
and uh we have data for every two minutes, we know the traffic speed and flow in each point here,
and for a whole year this is about half billion observations, okay, so we aggregate the data
into our interval so we know for each point, we know how many cars
on the road segment during given point in time, and we know the speed, so based on,
essentially the observations, on density or number of cars on the road, and also observed speed,
we can try to infer or estimate that relationship between density and speed, okay? So we aggregate
the data, so we have over 12 million observations, and we have other variables including weather,
you know wind speed, visibility, temperature, all these things could affect speed, okay, so we,
in the regression, we we control those variables. This is the raw data, it shows you the average
density and also speed. Of course, when there are fewer number of cars on the road, the speed
is higher and there are more cars on the road, you know, per kilometer the speed is lower, okay, so
you see this relationship. So what we are going to do actually, we are going to estimate a function,
speed as a function of density, okay, and there are some uh technical or econometric issues that
we have to deal with uh that I will escape, but when we do the estimation, so you regress speed
as a function of density, so this is the last column that that you can focus on different
specifications, try to control weather conditions, baseline traffic speed during different railroad,
etc. Okay, so the last column basically says, if you increase the number of cars per kilometer by
one, okay, going from 10 to 11, 11 to 12, or etc. then the speed is going to reduce by 0.3 kilometer
per hour, okay? That's the relationship. It's a linear relationship that'll be estimated because
if you look at the curve here, it's it's quite linear, especially this part of the curve, okay?
Okay, now there are some issues uh with technical issues um if if you do that and then in this table
we actually try to address the issue, we call that endogeneity in economics,
and we believe this is actually a better specification, or better estimation results,
so the last column basically says, well if you increase number of cards by one, going from 10
to 11 per kilometer, then the speed is going to reduce by one kilometer per hour, okay,
so the effect of density on speed is actually much larger when you try to deal with some of
the technical issues in the relationship, okay? So in the end, we are going to use this number,
and try to estimate the congestion cost. We call that marginal external
congestion cost, so this is the cost you impose when you drive on the road to other road users,
and this cost essentially comes from the time loss, because you slow down other people,
and time worth money, we translate really lost time to money uh term, that's the external
congestion cost, right, there are a lot of assumptions that we have to use including,
for example, what's the value of time? How much does one hour worth to people? And we estimate
um this marginal, this congestion cost curve. So that congestion cost curve of course varies
depending on the traffic density. If there are already a lot of cars, you enter into the road,
that's going to cause a high, much higher cost to other road users than when there are fewer cars
on the road, right? You see this relationship when there are a lot already a lot of cars on the road,
the congestion cost will be higher, okay, because you slow down other people much more,
right? So for Beijing, focus on this, we do this for different days, for of different hours of the
day, for different location, for example, this is within the second ring road, second to the third,
third to the fourth, fourth to the fifth, outside the fifth ring road. So for example this point
basically says well, if you travel during this time of the day, roughly uh five or six pm in
the afternoon, within the six, sorry, within the second ring road, for every kilometer you travel,
you are going to impose 92 cents on other road users, so this is the cost to the society
when you travel one kilometer during five or six pm within the sixth ring road, right? This
is the cost to the society but you do not take that into a consideration in your own decision,
right? You only consider your time cost, your fuel cost, etc. but you don't consider
the cost imposed on other people, okay? So this is the external cost that we estimated for different
hour of the day, as I said, different location, if you look at outside fifth ring road, there is
really not much of a congestion cost because uh, congestion is not not bad outside, I mean, there
are not many cars simply there, okay? Okay, so now come back to this graph, so we essentially we can,
we estimate these two lines here, and then we can also estimate this curve, uh once we do that,
we can then estimate the congestion charge, okay? Think about these are the curves we estimated,
right, this is the the private cost that road users need to pay, they need to pay,
incur, these are the social cost right, so the difference is, as I said, is the congestion cost.
So now let's think about, if we want to impose the first scheme, we call that uniform pricing,
okay? That is, you are going to charge a same price per kilometer, no matter when people drive,
where people drive, so that is, if you drive in Beijing, any time of the day, anywhere in Beijing,
you are going to need to pay a certain price, okay? If we want to find that price,
well that's going to be this, okay? So this will be the price, that's one strategy,
okay? But this is not the best strategy, because we know during different time of the day, during
different places, the city, at different place of the city, the congestion cost is different,
right? Um, as I showed you, so here, what we do is, we are going to look at a time-varying
pricing, that is, if you think about, well if you travel during peak hours versus non-peak hours,
this will be the demand curve for peak travel, peak travel demand, this is non- peak hours,
and this is gonna be the optimal congestion charge during peak hours, this is optimal
congestion charge during non-peak hours, okay? This graph says, well, during peak hours,
from seven to nine in the morning, five to seven uh in the afternoon, you have to pay a higher
price when you travel during non-peak hours. The last one is more complicated. This is time-varying
and location specific so we separate time into peak and non-peak location, into more condensed
areas within the third ring road, less congested third to fifth and outside fifth ring road, okay,
so this basically, is the congestion charge during peak hour within the third ring road,
this is during non-peak hours within the third ring road, peak hour between third and fifth
ring road, non peak hour between third and fifth, right? Um so this is the uniform pricing that I
told you. If you travel in Beijing, if we want to use this structure, that basically means
no matter when you drive, no matter where you drive, you need to pay 10 cents per kilometer,
okay? So think about, if you enter Beijing proper, you need to pay 10 cents every
kilometer you drive. This is one strategy, and this is the time-varying strategy that I said,
that I mentioned. During peak hour, you pay 13 cents per kilometer during 9 peak hour you pay
9 cents, okay? But we can also look at more elaborate strategy, that is time-varying and
location-specific. So location, we have three kind of categories, within third ring road,
between third and fifth, outside fifth, right? During the peak hour, you need to pay 33 cents
within third ring road, 20 cents within third ring road off peak hour, and um you'll pay less between
third, fifth, and uh even, even more, even less outside fifth ring road. Let's let's look at just
the impacts on speed, um so that basically says, if we use this uniform pricing, the reduction in
speed is going to be 1.4 percent, um and if you use time varying price, it's going to be this,
if you use the other more elaborated strategy, as I said, time-varying and location-specific,
we should expect four to six percent reduction within the third ring road in terms of congestion,
reduction, oh sorry, increase in speed, uh reduction in congestion, yeah. This uh this uh
exercise shows we can actually use uh some principle, economic principles to thinking about
how to address a very important social problems in China, right? What we need to do here actually
is to apply that economic principle to the problem using using data, using empirical analysis, right?
So in the end, the policy we're going to make actually need to be based on empirical evidence,
right? Think about, as I said, if we want to adopt congestion pricing, what should be the right level
of congestion pricing? For different time of the day? For different locations of the day? And what
kind of impacts we should expect from these type of policies, so our our framework actually allow
us to do those things? So policymakers in China actually increasingly aware of economic social
all kinds of air pollution and also congestion. I talked about, in 2015,
Beijing Municipal Government actually announced they were, they plan to use congestion pricing,
use market-based pricing mechanism, to deal with the congestion they're actually doing a
lot of things also, or thinking about doing a lot of things, in terms of air pollution,
as well. Thirteenth 5-year plan for China, we know that that is for 2015, 2016 to 2020,
okay? In that five-year plan, if you read it, they actually set a goal for PM2.5 reduction.
The goal is to reduce non-compliance days by 18 percent for major cities,
and this is the first time ever in a five-year plan they actually mentioned PM2.5, and Beijing
Municipal Government has also its own five-year plan, and the, their goal is reduce PM2.5 by
30 percent by the end of the five-year plan, okay? Now there was a 12-year plan of course, twelfth
5 year plan, these were the targets for all kind of things, not PM2.5 as I mentioned, but
energy intensity reduction, carbon intensity, uh sulfur dioxide, NOx, you know, chemical, you know,
COD, these are water pollutants, and forest coverage, okay and these are the achievements,
uh at the end of the five-year plan, that is in 2015, they actually achieve all these
targets. These are the targets for thirteenth 5-year plan, so this is for 2016 to 2020,
these are the plan, these are the goals, right? So again, there are quite ambitious goals in terms of
energy intensity, carbon intensity, all the other things. As well as PM2.5 reduction, okay? Alright,
we all know in 2014 China U.S. announced, when President Obama visited Beijing, they announced
this U.S.-China agreement on climate change, they said um bilaterally we are going to actually uh
agree on these things, as part of the Paris Agreement that was later on made in 2015
but U.S. pledged to do, is, the U.S. aims to reduce emission by 26 to 28 percent below its
2005 level in 2012, or 2025, China's goal was to peak its emission, carbon emission by 2030.
Okay, so that is, you should allow us to increase carbon emissions over time because we are still
developing, but we promise, by 2030, our uh carbon emission will be peaked. We're gonna, not gonna
increase beyond 2030. We're going to do a lot of things uh to to achieve that including
increased dense fossil fuels in energy consumption by 20 percent by 2030. Okay,
we all know that our president-elect want to abandon the Paris Agreement,
okay, but Chinese government said we are going to fulfill and honor its commitment to agreement,
so this is very welcome, right, news. In fact, actually, China has been doing
carbon reduction programs, such as cap-and-trade programs in seven regions starting from 2013.
So in seven uh locations, including Beijing uh Guangzhou and Chongqing and Hubei uh et cetera,
they set up cap-and-trade programs for for carbon emissions. The goal was to actually, to have a
national program start starting 2017, okay, so these are pilot programs. The idea is that let
government agencies, let firms understand how this program work, and then in 2017, we are going to
have a national program, uh that's gonna, this program is gonna be larger, will be larger than
the current E.U. emission trading program, okay, and there will be significant benefit to reducing
local air pollution. Although this program, the goal of these programs is to peak carbon emission,
but as we know, when you reduce carbon emission, for example, from using natural gas rather than
coal, actually the majority of the benefit will be local pollutants, will be reduction in PM2.5
and and associated health benefits from the reduction of local pollutants rather than
actually climate change benefit itself, right? There are many studies, for example, look at
U.S. SO2 program, where they show the majority of the benefit actually not come from
reduction in SO2 but the co-benefit, reduction in reducing PM2.5,
okay? So I believe that in the process, in the process of cleaning up China's own air, China
actually is uniquely positioned, really, to be a leader in climate change, and more importantly in
actually producing clean energy for China, for the U.S., for the world as a whole, okay? Which China
has been doing, but right now, uh I think China is in an even better position to do that, uh moving
forward. Okay, so my overall thought, uh so this is my overall thought, um so Chairman Mao said,
in 1945, that the future is bright but the roads are you know, twists and turns, so there are a
lot of things we need to do, but in the end, I think China, I I actually I have confidence
that Chinese government will be able to actually address the environmental issues
uh although not in the immediate short term, but in a 20, 30 years period or even shorter.