Is production or consumption to blame for pollution in China? Evidence from visibility,
1982-2006
Zhigang Li (HKU)
Frank Song (HKU)
Shangjin Wei (Columbia)

Observatories in China

National average of air visibility
1982 1986 1990 1994 year
1998 2002 2006

Air visibility versus GDP
2 4 6 ln(GDP)
8 10

Consumption versus production
• Unlike production, consumption can not be easily reallocated to other economies to reduce pollution (Copeland and Taylor, 1995).
• The pollution intensity of production and consumption may differ dramatically
– Optimal taxation (Hatzipanayotou, Lahiri, and
Michael, 2007, 2008)

Methodology
• Regress annual pollution on consumption-production structure
• Use daily pollution to estimate its response to weekends
• Use weekly pollution to estimate its relationship with extreme weather conditions (the air-conditioning effect)

Approach 1
• t is of annual frequency
• Vit: Visibility at site i at time t
• Yit: Aggregate production level
• Cit: Aggregate consumption level
• nit: Aerosols generated by nature
• wit: Other weather conditions, such as humidity, temperature, wind speed

Approach 2 (weekend effect)
• t is of daily frequency
• -Dln(Vit): Daily growth of air pollution
• Wt: Weekend indicator

Approach 3 (Temperature effect)
• Heating hypothesis: g’<0
– Pollution decreases when it is warmer in cold season.
• Cooling hypothesis: g’>0
– Pollution increases when it is hotter in hot season.
• t is of weekly frequency

Relative pollution intensity
Intercept ln( Y)
1984-90 2003-06 1984-90 2003-06
-2.99** -2.84**
(.517) (.517)
.163** .113*
(.034) (.058)
.106
.162**
(.034)
.731** .123
.083
(.106)
1.21** (C/Y)
β2
(1/Y)
β2
(.896)
Year dummies no
Site dummies
Num. of Obs.
R-squared
(.112)
1.91* no
1,808
.33
(.159)
-2.29
(2.70) no no
944
.40
(.113)
1.83*
(.900) yes no
1,808
.33
(.273)
-2.45
(3.35) yes no
944
.40

Weekend effect
(Dependent variable is the log of visibility)
Saturday
Sunday
Monday
Sat.*(C/Y)
1980-85 1986-95 1996-07 1984-90 2003-06
Dependent variable is the daily growth rate of visibility
.369** .044
(.185) (.095)
.426**
(.097)
.290
(.929)
2.56*
(1.34)
1.10** .259** .094
(.166) (.093) (.092)
-.227
(.164)
-.156*
(.094)
.081
(.093)
1.35*
(.759)
-.264
(.789)
.841
(1.96)
-.704
-.219
(.974)
-.720
(1.09)
-3.99*
(2.16)
-.842
Sun.*(C/Y)
Mon.*(C/Y)
(1.73)
.894
(1.72)
Num. of Obs.
10,045 27,612 25,021 2,814
R-squared .07
.07
.08
.11
(1.74)
-.245
(1.75)
1,316
.15

The air-conditioning effect
• Heating hypothesis is supported
– When temperature is 20F (-6.7C), decreasing temperature by 1 additional degree would increase pollution by around
1.5 percent.
• Cooling hypothesis is not supported until the recent decades (and only during the weekend)
– Maybe due to shortage of electricity in hot weather, which reduced production-generated pollution more than the increased pollution for cooling.

Visibility-temperature gradients
0 20 40 60 80
Temperature in the previous week (Fahrenheit)
Weekday, 1982-96
Weekday, 1997-06
Weekend, 1982-96
Weekend, 1997-06
100

Linkages between visibility and temperature, humidity, and wind speed
0 20 40 lagtemp
60 80 100 0 20 40 lagtemp
60 80 100
0 20 40 lagtemp
60 80 100 0 20 40 lagtemp
60 80 100

Conclusion and policy implications
(tentative)
• Production is the major source of pollution in China.
• Consumption-generated pollution might be negligible in the 1980s but have become more significant recently.
• Implications for taxation policy
– Current electricity prices may be too low for industrial usage