Wharton's Eric Orts, MIT's Valerie Karplus and Duke's Jackson Ewing discuss a new study about environmental regulation compliance in China.

A new paper published earlier this month by the National Academy of Sciences has found a patchy and troubling record for coal-fired power plants in China in their compliance with the country’s anti-pollution laws. It found inconsistencies between pollution data recorded by plant-level continuous emissions monitoring systems, or CEMS, and remote sensing data captured by satellites of the National Aeronautics and Space Administration (NASA). Those mismatches occurred in areas with relatively higher pollution levels, where regulatory standards may have been difficult to meet, potentially prompting falsification or misreporting of data.

One big takeaway from the research is that environmental regulation ought to factor in the development path and economic reforms of a country, so that it is not overly heavy-handed so as to encourage unethical conduct, according to experts at Wharton and elsewhere. The other takeaway is that remote sensing data could be more widely used to monitor compliance with environmental regulations — not just in China, but also the U.S.

“The stakes are really high in China, because China is the world’s largest energy user, and nearly 80% of its electricity production comes from coal,” said Valerie Karplus, professor of global economics and management at MIT’s Sloan School of Management and a co-author of the paper. Also, many people in China live in close proximity to those power plants, she added. Remote sensing data could be used to inform policy-making and to enhance the understanding of how firms respond to pollution-control regulations, she noted.

Titled “Quantifying Coal Power Plant Responses to Tighter SO2 Emissions Standards in China,” the paper’s other co-authors are Shuang Zhang, professor of economics at the University of Colorado, Boulder; and Douglas Almond, professor of economics and international and public affairs at Columbia University. They tracked sulfur dioxide emissions between July 2014 and July 2016 at 256 coal-fired power plants in China.

Data Disconnects

The study found that the monitoring systems at the 256 plants reported a 13.9% fall in sulfur dioxide emissions. However, data captured by NASA’s satellites found higher pollution levels than what the monitors logged at 113 plants in so-called “key regions,” or places with higher high populations and pollution levels than “non-key regions.”

“A potential explanation for the discrepancy in the two data sources in key regions is that plants overstated or falsified reductions,” the paper stated. “The stricter new standards and greater pressure to comply may have generated incentives for plant managers to falsify or selectively omit concentration data.”

“The stakes are really high in China, because China is the world’s largest energy user, and nearly 80% of its electricity production comes from coal.”–Valerie Karplus

Remote-sensing data helps understand “responses on the ground, especially in developing countries, where there is, at least in the past, a widespread idea that maybe the rule of law is weak or that there are challenges in governance and actually in implementing standards at plants,” said Karplus. It would help policy makers also understand how firms respond to environmental policy against the backdrop of “ongoing economic reforms and development trajectory of the country,” she said. “It’s important to realize that environmental policy doesn’t exist in a vacuum and that lots of supporting rules and institutions can have an impact on how businesses manage their environmental footprint.”

Shaping Environmental Regulations

The research findings could bring lessons in how stringent environmental regulations ought to be in order to be successful, according to Eric Orts, Wharton professor of legal studies and business ethics who is also faculty director of the school’s Initiative for Global Environmental Leadership. “This is speculative, but one conclusion from this research is that in the key areas where the Chinese government wanted to regulate heavily, they were not able to do it,” he said.

Those key regions include Beijing, Shanghai and other cities in the greater Beijing–Tianjin–Hebei area, the Pearl River Delta and the Yangtze River Delta. “One hypothesis would be they just gave up and [tried to] figure out some way to not get in trouble [for non-compliance],” Orts said as a possible explanation for misreporting or falsification of data.

Under China’s anti-pollution regulations, sulfur dioxide emissions were set at 50 milligrams per cubic meter in the key regions and at 200 milligrams in non-key regions that were relatively less polluted. The new regulations required 14,140 firms to post hourly data on emissions on publicly available online platforms from 2014. “Where it was a little bit of a more moderate target, it seems that the satellite data confirms the on-the-ground reporting that there was success [in reducing emissions],” Orts noted.

“Regulating heavily does create some perverse disincentives for action and actually runs counter to your own environmental regulatory goals,” said Jackson Ewing, a senior fellow at Duke University’s Nicholas Institute of Environmental Policy Solutions and an adjunct professor at the university’s Sanford School of Public Policy. “Some of China’s regulations in the past couple of years have taken fairly onerous approaches to quickly reducing the number of heavy air pollution days, particularly in major metropolitan areas.”

Those approaches have had “unintended consequences,” including temporary shutdowns at factories and even the shutdown of heating in cold months “when households really need that heat … with some obvious human impacts there,” Ewing pointed out. “So while China’s climate-change, domestic environmental goals and stricter regulation are certainly laudable, you do see second- and third-order effects that include potentially not putting forward numbers that we can believe in, and some consequences for human development and economic growth … that we would like to see rolled back.”

Karplus, Orts and Ewing discussed the paper’s findings on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Why Measurement Is Important

“From the U.N.-led efforts on climate change to China’s own domestic goals, measurement [of pollution] has never been more important,” said Ewing. “We essentially have created a system in which we’re just calling upon countries to, in good faith, report what they are doing on greenhouse gas mitigation and to come forward to their international peers on a regular basis using similar methodologies for measuring and showing the results of their efforts. It’s through that measuring and reporting that we will have the fundamental starting point for negotiations and discussions about how targets, goals and efforts can be scaled up, how resources can be shared and how cooperation can take hold.”

“If the core reporting is problematic or inaccurate, then the entire system rests on a house of cards.” –Jackson Ewing

Any shortcomings in such environmental reporting could of course frustrate the goals. “If that core reporting is problematic or inaccurate, then the entire system rests on a house of cards,” said Ewing. In that context, satellite monitoring would be useful in the second- and third-party reviews of the actions declared by countries, he added.

Karplus said one innovation in their paper is the ability to use satellite data for real-time monitoring of emissions. “The effects of air pollution on human health depend on the timing of emissions,” she explained. “Being able to resolve emissions on an hourly basis is incredibly important to thinking about when, where and how these plants are cleaning up.” Putting in place independent verification measures is important because many of the mechanisms are subject to human oversight, she added.

Need to Strengthen Compliance

According to Orts, NASA satellite data verification could be used in the U.S. as well to influence adherence to environmental standards. “There’s some concern that [Scott Pruitt], the secretary of the Environmental Protection Agency, might not be so keen on enforcing the basic environmental laws in the country,” he said.

NASA’s satellites are orbiting the earth constantly and pick up changes in air pollution as well as a range of other substances, said Karplus. The ozone-monitoring instrument that captures such data has improved over time to provide accurate and real-time measurements, she added.

Many countries have installed CEMS at their power plants, but their adoption has to be significantly expanded, including in China, to generate real-time data, Karplus said. In the U.S., CEMS are being used both for greenhouse gases as well as for local air pollutants, “and this signals the state of the art,” she added. China does not yet cover carbon dioxide emissions as part of its monitoring systems at coal-fired power plants, she noted, pointing to areas for improvement.

Towards Global Environmental Governance

The research study also holds pointers for “global environmental governance” mechanisms, as they are made possible with remote sensing capabilities, said Orts. With independently verified plant-level data, “you are able to then focus your policy development better, because you have research driving that,” he added.

“What you don’t want is a situation where you’re a business and you are complying with the local regulatory scheme, but you’re losing out to someone who is cheating and gaming the situation.”–Eric Orts

Businesses will also find comfort in the regulatory consistency and trustworthiness of data it could bring about, said Orts. “What you don’t want is a situation where you’re a business and you are complying with the local regulatory scheme, but you’re losing out to someone who is cheating and gaming the situation or paying off a government official or whatever.”

Challenges in China

China has worked resolutely to address its environmental challenges in recent years, according to Karplus. She pointed to, for example, its efforts to set up an emissions/carbon trading system, and to do third and fourth-party verification checks on all plant reported data. “It’s important that we acknowledge how far China has come in making data more available and more transparent both to a domestic and international scholarly audience, [although] there’s always a long way to go,” she added.

“If we are able to effectively monitor the impact of particular policies, we will have a better chance of measuring and understanding what’s working, what’s working well and what’s working poorly and adjusting our policies in turn as we go forward,” said Ewing. “China’s a fascinating laboratory for that,” he added. “They have command-and-control measures to curtail emissions from industries, transportation, everyday activities and housing, while they also have market mechanisms such as feed-in tariffs, the emissions trading scheme, etc.”

According to Ewing, China has been “reticent to put forward targets that they think they’ll have an enormous difficulty reaching.” It declares its goals only after vetting its own capabilities, he said. While it incorporates its environmental goals into its five-year plans, many of the challenges come up in the shorter term, such as with quarterly reporting requirements on municipalities, he said. “That’s where you’re going to see a lot of pressure to report outputs that are consistent with the targets and regulations that have been placed upon you.” It is in such situations that officials may try to circumvent rules to save face and to retain their own career prospects, he added.