A new report from the World Bank is urging improved policies and strengthened governance in promoting the circular economy in China.

The country began implementing a law to promote a circular economy on Jan 1 as a new model for economic growth.

Under a circular economy, resources are used with greater efficiency and, when possible, reused and recycled to sustain economic growth.

China's law stipulates that governments at all levels should make plans to develop the circular economy, and establish systems to control energy use and pollution.

The law also requires governments to strengthen management of companies with high energy and water consumption, and adopt policies to divert capital to environmentally friendly industries.

Despite the ongoing initiatives, Xie Jian, a lead author of the report, said it will be difficult for China -- a country that based its rapid economic development on massive exploitation of natural resources during the past few decades -- to switch to the new model in a short time.

As a result of market and policy failures, China still faces inefficient use of resources, and the country still generates massive amounts of wastes, the World Bank report stated.

Energy use

For instance, China's energy consumption per unit output is still higher than almost all competing nations, the report stated, adding that low energy prices are partly to blame.

In addition to inefficient use of mineral resources and energy, water also is often used inefficiently despite the water scarcity in many parts of the country, according to the World Bank report.

Statistics from the World Bank report showed that China's water productivity, at $3.60 per sq m, is considerably lower than the average of middle-income countries ($4.80 per sq m) and far lower than that of high-income countries ($35.80 per sq m).

The report called for improving the effectiveness of circular economy policies through a balanced mix of policy instruments such as appropriate regulatory frameworks using both command-and-control administrative orders and market-based incentives. The report also called for more "getting the prices right" economic policies.

Resource pricing

In China, the inadequate pricing of resource values usually led to market failures for promoting a circular economy.

For instance, the low levels of water tariffs and sewage discharge fees in many parts of China have contributed to pervasive water scarcity and pollution problems, the report stated.

"When fees are set at too low a level, they provide an obvious incentive for enterprises to pay the fees rather than reduce pollution, ignoring the social cost imposed on the rest of society," Xie said. "A correct fee level should be such that many polluters have an incentive to reduce pollution, but not so high that firms are forced out of business."

The government should also carry out a thorough review of existing policies regarding resource utilization and the environment, the report stated.

Subsidies faulted

For example, energy subsidies to the fertilizer industry allow fertilizer to be sold at an artificially low price, contributing to their excessive use and leading to the degradation of soil productivity and rural pollution.

China's oil subsidies have not only led to low fuel efficiency and over-consumption of fossil fuels, but also impeded the adoption of fuel-saving technologies.

"Restructuring such policies would not only free up resources for sustainable development, but also reduce pollution," the report said.

The report also recommended that the production sector, local governments, community groups, industrial associations and professional networks, and non-government organizations be actively involved with establishing the circular economy.

An Extended Producer Responsibility (EPR) system should be adopted in the production sector as a major tool, the report recommended.

An EPR system requires producers to bear the responsibility for the collection and recycling of their products when the life cycle is ending .

The report warned that the unclear distribution of responsibilities and weak coordination among various government organizations are undermining the effective implementation of circular economy development strategies.

For instance, the responsibility for solid waste recycling and reuse is shared by seven government or quasi-government organs at the central government level, the report stated.

(China Daily 08/31/2009 page3)