November 1, 2007


The real cost of China’s steel production can be measured in lives lost and a vast territory polluted for generations to come.

China could be the first developing country that will truly test how far a nation can go poisoning its people, its land and the world in the name of economic development.

Today it stands as the world’s leading steel and aluminum producer and second-largest consumer of energy, burning some 14% of the global total and belching millions of tons a day of noxious gases and chemicals that sicken and kill hundreds of thousands of people each year. Only the United States looms larger, as it gobbles 22% of the globe’s energy.

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Steel production in China consumes at least 8% of the country’s own energy, according to the Organization for Economic Cooperation and Development (OECD), the Paris-based economic research and support group. But metals production alone does not begin to describe fully the industry’s ravenous energy appetite, or the extent and costs of its lethal environmental and human contamination.

Those can only be appreciated by tracing steel’s polluted footprint from the coal mine and the electric power plant, through the transportation system for raw materials to the mill gate and out the other side. Then, of course, as finished steel products flow into the countryside and global markets, the severe consequences of manufacturing and energy inefficiencies and inadequate environmental controls continue. Every Chinese-made steel product, from toys to telephones, from construction pipe and re-bar to stainless, exacts an intensely poisoned price on the country and the world.

China’s low-priced goods, in other words, exact a stunningly high cost when viewed through the prism of widespread environmental degradation. North American manufacturers and metals companies, which in many cases fight a losing battle against impossibly low-priced Chinese merchandise, have begun to identify the almost complete lack of Chinese environmental controls as a significant downside to Asia trade. No one claims that the environmental record of North American mills and smelters is unblemished, but environmental laws are taken seriously in the United States. and Canada and are largely obeyed. This adds to the cost of North American production, but avoids the environmental quagmire that is China.


Increasingly, organizations including the OECD, World Bank, World Health Organization (WHO) and even some investment banks attempt to quantify the environmental cost of this pollution, not only in China itself, but also around the world. In China, particularly, it is extremely difficult to gather such data. Most of the industrial pollution numbers are “self-reported” by Chinese companies themselves and spottily verified at best. The Chinese equivalent of the U.S. Environmental Protection Agency (EPA) has by its own count just 300 employees. The U.S. version, by contrast, employs at least 17,000, and Environment Canada employs 6,000. No surprise, then, that even results of one of the more thorough reports to date on the subject, the World Bank’s “Cost of Pollution in China,” released in July 2007, have been called only “plausible suppositions.”

In fact, by all accounts, the World Bank and most other evaluators are quite conservative in their estimates. Even so, the Chinese government hardly troubles to hide its attempts to suppress assessments it believes are damaging. It worked closely with the World Bank to evaluate the country’s pollution costs on its citizens and environment in the “Costs of Pollution” study. But when the report’s conclusions were nothing short of grim, the government persuaded the World Bank to excise them from the report, arguing that they might cause “social unrest.” Drafts and preliminary versions were already circulating, however, so the World Bank numbers and analysis are now known.

Conservative though they may be, estimates of the extent of the problem provide a devastating picture of Chinese contamination produced by industries from cement to steel, feeding exploding consumption of goods from cars to televisions, and aided by indifferent local and national governments. This is a case where costs in dollars, deaths and illnesses only begin to convey the stench and sickness, the grey haze that catches in the lungs, the stomach-churning water unfit for industrial, let alone human consumption. And all in the name of keeping the Chinese economy “on fire” literally and figuratively.

China’s consumption of energy, which involves primarily the burning of coal, is a very dirty business. By most reckonings, China is the world’s largest greenhouse gas producer. Likewise, its coal-induced soot and particulates are so prevalent and persistent that they now drift in clouds across the Pacific to aggravate smog and other air contamination in the already short-of-breath U.S. West Coast. The EPA estimates, for example, that up to 25% of Los Angeles smog can be traced to China’s effluents.

China’s economy is growing at more than 10% a year by most reliable estimates. Millions of its citizens are hurtling into the ranks of the middle class with all its demand for better housing, cars, toasters and cell phones. But that also means that China’s energy consumption will double in the next dozen or so years, says the McKinsey Global Institute. McKinsey may be underestimating. UBS Investment Research in London predicts electric power consumption alone will quadruple in China in the next 15 years, and 70% of that will still be generated from coal plants.


It’s not easy being green in China. For Chinese activists, it can lead to police beatings and jail time. For Americans and Europeans, the consequences of environmental action, although frustrating, are far less severe. And lately, some officials in China have been listening.
“For 10 years, we’ve been telling them what we think they could be doing to clean up their environmental mess,” says Barbara Finamore, China program director for the National Resources Defense Council (NRDC), one of the largest of the U.S.-based activist groups. “This past year, for the first time that I can remember, they have been asking us for help and telling us what we can do. The other encouraging thing is that the level of Chinese government officials talking to us keeps rising. We are working with top people now.”
Many of the major U.S. and European environmental groups have China programs. Some, like the Sierra Club, bring Chinese activists to the states for workshops on economic incentives for reducing greenhouse gases.
Finamore, who has lived in China for 17 years, has been the NRDC’s program director there for the past 10 years. The group seeks to reduce greenhouse gases through a campaign to persuade the Chinese to install energyefficient technologies.
“From steel to power production to building construction, just using existing technologies, we can cut energy use in half,” she says.
Others, like the World Wildlife Fund, have worked in China for more than 25 years to preserve species, such as the giant panda, and their habitats. Likewise, the Nature Conservancy’s China Project works to preserve the endangered Yunnan golden monkey. The conservancy has also helped establish national parks and pilot programs for alternative energy generation.
Still others, like Washington, D.C.-based Worldwatch Institute, concentrate on research and publications, particularly valuable in countries like China where reliable data is hard to obtain. The New York-based Blacksmith Institute combines research, such as its annual list of “most polluted places,” with in-country work. Two Chinese cities, Linfen in Shanxi Province and Tianying in Anhui Province, made Blacksmith’s most recent top 10.
For North American and European groups, progress is slow. Activists have been allowed to engage in limited pilot projects or produce research reports and recommendations that are usually ignored.
For the Chinese, on the other hand, activism of any kind can have harsh consequences. So-called non-governmental organizations must register with the government. Of an estimated 30,000 such groups, the government says only 20% are registered and therefore operating legally. These legal groups admit they engage in a lot of self-censorship to stay out of trouble.
Bold activism can be dealt with harshly. Most recently, publicity has focused on Wu Lihong, a salesman who campaigned for years to persuade officials to stop polluting China’s third-largest freshwater lake, Lake Tai. Two years ago, Wu was declared an “Environmental Warrior” by the National People’s Congress, and provincial officials tried to shut him up with gifts and job offers. But Wu kept protesting, since some 2,800 factories continued to dump effluent into Lake Tai. Its waters are now unfit for human consumption, and Wu has been sentenced to three years in jail.

Last year, for example, China burned the energy equivalent of 2.7 billion tons of coal. It was not supposed to hit that rate for at least another eight years. This only means China will continue to be the world leader in greenhouse gas emissions as its economy grows further. Coal burning produces 25% more greenhouse gas than oil and fully 45% more than natural gas. China’s use of coal is expected to double in the next dozen years.

McKinsey Global says China’s steel production will expand at a steady 7% a year, and by 2020 will control 43% of the world’s steel market. The World Bank says China mills burn 20% more energy per ton of steel produced than the international average. Little wonder that UBS estimates that China’s CO2, or greenhouse gas, emissions per ton of steel is about double the North American average. One result: the International Iron and Steel Institute estimates China is responsible for at least 51% of all carbon emissions from the worldwide steel industry.

This is unlikely to change for the foreseeable future, McKinsey says. “Despite continuing improvement in energy efficiency, the average energy intensity of [China’s] steel production will increase as scarcity of scrap steel will lead to a rising share for more energyintensive, integrated steelmaking.”

It is the Chinese who take the biggest hit. “The combined health and non-health cost of outdoor air and water pollution for China’s economy comes to around $100 billion a year, or about 5.8% of the country’s GDP,” says the World Bank’s China chief, David Dollar.

But Dollar has missed it by half, says Elizabeth Economy, senior fellow for Asia with the U.S. Council on Foreign Relations in New York, who points to numbers from China’s own environmental agency. Economy literally wrote the book on environmental degradation in China (“The River Runs Black: The Environmental Challenge to China’s Future,” Cornell University Press). Writing in the June 2007 Harvard Business Review, Economy says, “China’s State Environmental Protection Administration [SEPA] concluded in June 2006 that environmental degradation and pollution cost the Chinese economy the equivalent of 10% of GDP annually. This figure is echoed in more specific costs reported in the Chinese press: up to $36 billion in lost industrial output from a lack of water to run factories, $13 billion from the degradation and health impact of acid rain, $6 billion from the spread of desert regions, and the list goes on.”

It certainly does. The World Bank reported that some 750,000 Chinese die prematurely from cancer and chronic respiratory and heart disease from breathing filthy air in China’s largest cities. UBS research estimates that 300 million Chinese drink contaminated water each day, and at least 190 million suffer some water-related illness, such as chronic diarrhea or intestinal parasites. Economy writes, “According to China Daily, two-thirds of China’s 650-plus cities do not have enough water for their needs and 100 are facing severe shortages. … About 40% [of the country’s water] is so polluted that it is unusable for any human, industrial or agricultural purpose. And about 90% of water in aquifers is now polluted.”

SEPA’s surprisingly outspoken vice minister, Pan Yue, has said publicly that five of the world’s 10 mostpolluted cities are in China. He is on record, further, that acid rain, primarily from sulphur dioxide, an effluent from coal and manufacturing, including steel, affects one-quarter of China’s overall land mass and one-third of its agricultural land. This slashes agriculture output by some $4 billion a year, according to the World Bank. In addition, China’s big city air is packed with suspended-particulate-matter at more than twice the highest level the WHO regards as safe. The result is that national mortality rates from chronic respiratory disease are more than four times that of the United States. Among younger people, asthma has reached epidemic proportions, the bank’s study says.


What is the Chinese government doing to clean up this mess? Fair to say that as recently as five years ago, the answer was virtually nothing. At that time, provincial and local government officials were graded on the number of jobs they could create, the amount of business they could generate. Poisoning the air, water and people were acceptable by-products, or “externalities,” to use an economist’s term. They were and still are aided and abetted by multinationals and governments of developed countries, including the United States, the EU and Canada, that have been more than happy to have low-cost products and raw materials while letting the Chinese who produced them suffer.

To some economists, this made perfect sense. Lawrence Summers, then the World Bank’s chief economist, later treasury secretary in the Clinton administration and afterward briefly president of Harvard University, wrote a memo in 1991 concluding, “The economic logic of dumping a load of toxic waste in the lowest wage country is impeccable.” Summers later said he was just kidding. These days, the Chinese, who will host the 2008 Olympics, are getting tons of bad press about the environment and seem a lot less pleased with the poisonous garbage their economy is spewing into the world. China Daily reported recently that Shao Baojiang, chairman of China’s association of city planning, has publicly accused polluting companies of “killing people directly.”

Hardly a week goes by without government officials and the official China news agency, Xinhua, announcing some new crackdown on polluters, or some new program to increase energy efficiency and decrease the burning of coal for electricity. Air conditioners have been turned off or down in offices and government buildings in many of the country’s big cities to set an example. More significantly, the Chinese government will likely elevate SEPA from ministry level to a cabinet post and expand its meager staff. Xia Guang, director of the Policy Research Center for Environment and Economy, SEPA’s think tank, says the government should decide by March how to expand the state’s environmental watchdog. This decision would come, handily, a few months before the Olympics begin in July.

The government has announced it will shut down some factories and reduce operations at power plants in and around Beijing for nearly two months before and during the games. It also plans to sweep nearly 1 million of the city’s 3.3 million motor vehicles from the city’s streets while the athletes are in town. It has already begun moving operations at the notoriously polluting Shoujang steelworks out of the city.

But this attempt to create a temporary environmental Potemkin Village will have little long-term impact. The most recent pronouncements from Ma Kai, director of the National Development and Reform Commission (NDRC), China’s industry policy-making and planning agency, illustrates the problem. As he has in the past, in September, Ma threatened local and provincial officials with firing if they do not meet national clean-up goals. NDRC wants to cut major pollutants in the country by 10% and energy use by 20% by 2010. It has failed to meet the interim benchmarks that would make that happen. And Ma himself disclosed in August that a State Environmental Protection Administration survey of 126 industrial parks throughout the country found 110 of them violating environmental laws. In many of those, industrial installations of all kinds, including mini-steel mills, had been built without required permits.

This follows an earlier report from SEPA, which announced that only about 500 of the 70,000 violations of environmental regulations reported from 2003 through 2005 had been “dealt with” in any way. The agency attributed this abysmal record to the fact that local governments around the country still actively encourage enterprises to violate environmental regulations and then protect them from punishment when they do.

“The rate of pollution is accelerating,” says Barbara Finamore, China program director of the Natural Resources Defense Council and a China environmental expert for 17 years. “But so have the attempts to control it.” She is hopeful about new programs that attempt to “rate the job performance of provincial governments and heads of factories on how well they meet emissions goals. That is a major change.”

Finamore understands as well as anyone that China is a vast country, enforcement is spotty and factory officials too often “just don’t want to spend money on pollution controls.” Economy, of the U.S. Council on Foreign Relations, says compliance with environmental law in China is “about 10%,” and “roughly half of all money supposedly dedicated by Beijing for environmental protection throughout the whole country over the past five years was spent on other things.”

The Chinese government has proposed increasing pollution fines by a factor of 10. But even the World Bank says those fines are such a negligible factor in the cost of doing business that they would have to be increased by a factor of 50 to have any impact.

Economy says it will take a lot more than that. “Fundamentally … an authoritarian, decentralized, endemically corrupt political system has little hope of becoming a global environmental leader, much less getting its own environmental house in order. What is missing from China’s environmental protection effort to date is not access to environmental policy approaches or knowledge about environmental protection technologies, but rather a system of transparency, accountability and rule of law that rewards officials and businesspeople who do the right thing and punishes those that do not.”

What may push Chinese officials toward some kind of reform is social unrest. “The domestic media reported 50,000 environmental protests in 2005,” Economy says. “Such protests are usually small in scale, but some have engaged upwards of 30,000 to 40,000 people, some have been violent, and they are increasing in frequency.”

The problem is this unrest has another equally powerful side. Local-level officials also fear demonstrations and even riots should they, for instance, shut down a notoriously polluting local steel mini-mill.

“At least a quarter of Chinese steel capacity, 100 million tons worth, the most polluting and inefficient plants, should be shut down now,” says McMaster University professor emeritus and steel industry specialist Wei-Kao Lu. “The government says this. They talk about this, but they don’t really do anything because it is so unappealing locally. These jobs are contributing to the economy. They keep these plants open for honorable reasons.”


Nevertheless, industry and government officials continue to claim that one of the most important pollution and energy reduction measures will be an inevitable industry consolidation. In October, Zhang Xiaogang, chairman of China Iron and Steel Association, told the annual International Iron and Steel Institute meeting in Berlin, “By 2010, the iron and steel enterprises will be decreased greatly in number, and the production of the top 10 enterprise groups in the country will make up over 50% of gross crude steel production in China.”

Still, such a consolidation is not quite inevitable yet, says Nick Sowar, partner and global steel expert at New York-based Deloitte & Touche LLP. “The consolidation that is going on in the rest of the industry globally is just not available there,” he says. “Outsiders cannot buy a controlling interest in a China mill, and until they can, all I can see is small incremental changes. Those provincial officials just don’t want to lose the good jobs.”

Sowar points to one positive development that could encourage at least some consolidation. The Chinese government has said it will not give an iron ore import license to any mill producing less than 1 million tons a year. “That could help close some of those smaller mills,” he says. “But they have to enforce it, and a far higher limit would be a lot better.”

Finamore is hopeful that, aside from consolidation, a renewed interest in energy efficiency will be the most important factor in cleaning up China’s steel industry and the electric utilities, coal mines and other heavily polluting industries that feed it. A McKinsey report in May 2007 concluded that simply installing existing technologies could slice global energy demand growth by half or more in the next 15 years. That would cut total energy demand in that year, the report says, by up to 23%.

“I think if we are going to clean up these industries like steel and electricity, the most appealing way is going to be through increased efficiencies,” Finamore says. “Improved efficiencies have a real, recognizable economic payback. End of pipe controls are still perceived here as just costs.”