Chinese power sector regulation: key lessons for developing nations

Deborah Seligsohn

In 2003 the Chinese government began a long process of increasing its regulation of large stationary polluters - the heavy-industry facilities that burn enormous quantities of fossil fuel, which in China is mainly coal. These are the largest sources of air pollution in China. Power generation is one of the top two polluters in almost every country, except in a few like Brazil that rely heavily on hydropower. Moreover, because of the quantity of pollution produced at a single location, the urgency to protect air quality is great, as is the opportunity to find economies of scale in both abatement technologies and enforcement modalities. As a result, many developing countries would benefit from examining the Chinese experience in air pollution abatement and discover potential applications to their own efforts to control air pollution. The focus here is on traditional air pollutants, the components of smog and haze, rather than the greenhouse gases that contribute to climate change. However, better regulation will also help governments that seek to control greenhouse gases.

In this chapter I will discuss how the Chinese experience can be usefully considered as other large developing countries, such as India, increase their regulation of heavy industry. This chapter is based on a study of the Chinese power sector, and the lessons drawn from the study are particularly useful to that sector, but many of the general concerns, such as methods for monitoring and enforcement, also can be applied to other stationary sources. Power generation is the single largest user of coal in both China and India, as well as in a number of other developing countries. Because coal is the dirtiest of fossil fuels, pollution abatement in the coal-fired power sector is the lowest hanging fruit in terms of least cost abatement of traditional air pollutants.

For many years Chinese cities regularly dominated lists of the world’s most polluted urban areas, but in recent years a number of the top ten slots have been replaced by Indian cities (IQAir n.d.). This to a significant degree reflects China’s success in controlling air pollution, with its pollution peaking in 2011 and slowly declining, while India has continued to see increases (Krotkov et al. 2016). Over the course of the past decade, the Indian press and civil society have begun to note the Chinese example and in a number of cases have begun to consider the Chinese model as a potentially useful approach to air pollution control.

Indians and Chinese alike are quick to point out their many differences, both political (i.e., that China is an authoritarian system while India is democratic and federal) and cultural (i.e., that India is a multicultural, multilingual state, whereas the vast majority of Chinese are Mandarin-speaking Han). However, the technology China has used was developed in the West, and much of their monitoring and enforcement system has been informed by close cooperation over decades with the US Environmental Protection Agency (“EPA Collaboration with China” n.d.). As this chapter hopes to illustrate, it is fruitful to examine both technical and systems approaches across different regime types and social contexts.

Public outcry over air pollution actually began earlier in India than it did in China, as evidenced by a number of legal cases that date back to the 1980s (Cas- sels 1989). These lawsuits had considerable influence, but they tended to be city specific; they did not encompass the entire nation or even a complete airshed (the area within which air circulates and pollutants mix). While experts in both countries were engaged on the issue in its early stages, the first major Chinese public discussion emerged when the instant messaging platform Weibo came into wide use. Weibo is essentially the Chinese form of Twitter, though from the beginning it allowed for longer posts than did Twitter (Wang et al. 2015). By 2010 there was considerable public discussion on Weibo. In the winter of 2012-13 the Western press coined the term “airpocalypse” to describe the extreme air pollution events that mark urban areas in both countries (Ferreri et al. 2018). These occur when a temperature inversion or other atmospheric events trap air within a city for a number of days, leading to extremely high air pollution measurements, often above the standard 500 (or hazardous) measurement on the air quality index. Although these types of events were first noted in the West, beginning with Donora, Pennsylvania, in 1948 (Ciocco & Thompson 1961) and the more widely known London Smog of 1952 (Bell et al. 2004), they have become a regular part of life in large, congested Asian cities. Some scientists have suggested they are getting worse not only because of the pollutants discharged but also because climate change is increasing their frequency. By 2015, when New Delhi experienced one of these events during the Paris Climate Change negotiations, the term airpocalypse had been adopted by the Indian press. And in recent years the Chinese experience has received regular media attention in India. Some such references are to actual conditions, while others pertain to monitoring and enforcement. The Centre for Science and Society, in particular, has done considerable work to disseminate high-quality information on the Chinese system.

In 2015 the Government of India adopted tougher pollution abatement standards for the power sector. These standards represent a significant improvement over previous measures. The newest plants have pollution control equipment as modern as that found in the US, Europe, and Japan, although it is less effective at pollution control than at some plants in China today, particularly coal-fired operations. Older power plants continue to operate under regulations comparable to ones that the Chinese promulgated between 2003 and 2010. India’s regulations initially were scheduled to take effect by 2017, but the implementation date has been postponed to 2022.

China and India share a number of characteristics, including large and dense populations near major sources of air pollution and overall high levels of emissions. Both factors make it worthwhile to study the Chinese experience when considering India’s regulatory future. There are also considerable differences between the two countries’ situations, some of which (particularly the variety of sources of air pollution in India) will make pollution abatement in India even more difficult than in China. However, by adopting its new power sector regulations in 2015, the Indian government recognized a truth that Chinese policymakers had come to a decade earlier: while there are many sources of air pollution, the sheer size and the concentration of industrial sources make them particularly worthwhile as a first target of attack.

The Chinese experience has been iterative on multiple dimensions. The Chinese government first adopted tough power sector standards in 2003 with a two- stage phase-in, then raised them in 2011 and added the ultra-low-emissions (ULE) requirements in 2016, by far the strictest in the world. Thus, the standards themselves have toughened over time. But there has also been a considerable learning process in terms of enforcement. Chinese regulators have made changes in goal setting, monitoring, penalties, and rate structures. There are lessons to be learned in regard to all of these areas and choices to be made for other developing countries in terms of the costs of continuing to use coal versus choosing to move more rapidly to cleaner sources. China has found that producing relatively clean coal-fired power in a densely populated and industrialized country requires heavy investments in the power plants themselves, the technology and workforce to enforce the standards, and the means to dispose of the waste from the emissions abatement processes.

In what follows, I review the Chinese experience with an eye towards what might be useful for India and other developing countries. In some sense other countries do not face quite the regulatory hurdles of China, which has approximately ten times as many coal-fired power plants as India does. However, China’s progress both in building up the enforcement bureaucracy and in reforming the structure of these energy sectors is worth considering in the context of other countries’ energy and enforcement planning.

Standard setting

China faced long-standing air quality issues that had been increasing in severity for decades when it began to implement tougher standards in the early 2000s. As early as the 1990s the leaders of China’s environmental establishment argued for a more aggressive approach to air quality regulation (Qu 1992), but it took a leadership change in the early 2000s and structural reform of the power sector for regulators to see an opening for tougher regulations (Seligsohn 2018). Prior to 2003, there was little effective regulation of SO, from coal-fired power, none for NOs, and only limited particulate control. At the time, China was heading towards the peak sulfur levels that the US had seen in the early 1970s.

Coal-fired power plants were the obvious place to initiate a new regulator)' regime. China relies heavily on coal for the largest part of its energy supply. Because coal-fired power plants are a stationary source, they are relatively easy to mandate and inspect. They use approximately half of all coal consumed in China (International Energy' Agency 2018), making them the single largest source of air pollution. Moreover, the solution to another significant part of China’s coal problem, perhaps affecting half of the remaining half, would be (paradoxically) to use more electricity rather than less. If the percentage of coal used in Chinese power-generation seems low (it is much greater than half in both India and the US), it is because of the widespread use of coal directly by both small industries and households. For households, most of the clean-up solution involves fuel switching to liquefied petroleum gas (LPG) and natural gas, but for industry and to some extent for home heating and cooling, the solution is to increase reliance on the power sector both by using more electricity and by using steam from combined heat and power facilities. Large central coal-fired power stations can be fitted with pollution abatement equipment, which would be difficult if not impossible for smaller industrial and household units. Thus, part of the solution to cleaning up China’s cities has involved building more power plants. It was thus critical that these plants be clean and efficient.

Prior to 2003, Chinese standards applied only to particulate emissions. Very' little attention was paid to the role that both SO, and NOs play as PM,; precursor chemicals, and despite much discussion of acid rain since the 1990s, there was no actual regulation of these primary sources of acid rain. The 2003 standard (see Table 3.1) reduces the allowable particulate level considerably and brings in both SO, and NOs standards, although the NO, standard was so lenient that it did not actually require the power plants to use de-NO, equipment. The SO, standard, on the other hand, was sufficiently strict as to require the installation of flue-gas desulfurization (FGD) equipment on almost all plants in China.

With the standards in the 200-600 mg/in’ range (depending on the age and location of the plant), most power plants installed FGDs that removed approximately 90% of SO, emissions from the flue gas. What this meant was that most power plants were closed for a two- to three-month period while they added FGDs and additional particulate capture machinery. In some cases, the process required moving other buildings on the power plant grounds in order to make room for the new equipment.

It is worth noting that while pollution standards were being raised, the Chinese government was also systematically closing small coal-fired power plants. Over the period since 2005, the Chinese government has replaced smaller units, starting with quite small ones (under about 10 MW) and then steadily increasing the size of the units required to shut down. By now, most plants under 50 MW have been

TABLE 3.1 Comparison of Indian and Chinese power plant air quality standards

PM (mg/m')

SO, (mg/m')

NOx (mg/m1)



December 2015 Pre-2003 units





2003-2015 units



2016 onward units




China Pre-2003 1996 Standard





China 2003 Standard

200-600 (2005)




50-200 (2010)



China 2011 Standard





China Ultra-Low Emissions 2015





Sources: Ministry of Environment, Forests and Climate Change Notification, SO3305(E), December 7, 2015, GB13223—1996, 2003 and 2011 Standards, МЕР announcement: jlaiffiffi

жтчш&Ш!'ЯШ" 2015.

closed, as have many that are between 50 and 150 MW as well. For that reason they did not need to address the complex challenges of installing new equipment at the smallest sites. The other major difference is that Chinese standards do not really incorporate the concept of “grandfathering” to protect older facilities from new requirements, as is common in the US and many other countries, including India. While there was some variation in the 2003 regulations, the majority of the variation was regional rather than by date of plant, and in subsequent regulation there has been no grandfathering of any kind.

The 2003 standards proved to be insufficient even after the Chinese resolved the initial noncompliance issues that had meant little progress occurred until after 2006. The standards were incorporated as targets in the 11th Five-Year Plan (2006- 10), signaling that compliance was required. Most FGDs were installed between 2007 and 2009, and policymakers were then able to evaluate their effectiveness. The result is that SO, emissions peaked in China in 2007 and have declined ever since, even as total coal-fired electricity output has more than doubled.

But even as SO, emissions declined, overall pollution levels rose. Both SO, and NOs are major contributors to PM,., the most serious health concern, as are power-plant particulate emissions themselves. China has a regular standards-review timetable, which in theory requires a regular review every five years, although in practice the timing appears to vary. In any case, the Chinese government through its standard-setting bodies was ready to review the 2003 standard in 2009. The standards bodies (affiliated both with the then Ministry of Environmental Protection |МЕР] and the industry itself) recommended the standards be raised to world-class levels. They overcame industry objections and were able to obtain government approval. New standards were adopted in 2011, this time with targets integrated into the 12th Five-Year Plan, which began in the same year.

These new standards required a doubling of FGD capacity at most power plants, all-new NO, control, and additional particulate abatement equipment. These changes obviously entailed significant expense, as well as downtime for the plants and the need to find space for these facilities. With FGD, for example, plants had the option of adding a second column or doubling the column height of their existing facility. Obviously, adding a second column would be less expensive, but not all plants had sufficient room to add another separate FGD.

These modifications were completed by 2013, but industry, seeing the likelihood of future restrictions on new coal-fired plant building, advocated for a still stricter standard, which became the ULE standard. The ULE standard again required significant plant downtime as additional particulate removal, FGD, and NO, removal equipment was installed. Some power stations had to once again undergo the redesign of their physical plant and the relocation of buildings. In many cases, at least some existing equipment had to be replaced.

Lessons to be learned

There is a certain appeal to the kind of gradual iterative approach the Chinese practiced with standards gradually being raised over a number of years, but it is worth thinking about what actually happens at the plant level. Each time the standards have been raised, plants have had to redesign their facilities, invest in new equipment, and close for considerable spans of time while the equipment is installed. Raising the standards all at once would have avoided much of this downtime and in many cases reduced the total investment involved. As plants needed to rearrange facilities to fit more equipment within their footprint, they often had to tear down and rebuild items like their original FGD.

The Chinese have also realized over the years that even the modest amount of grandfathering of old facilities found in the 2003 regulation would not enable them to meet their air quality targets.

All of this implies that standards are best set with total carrying capacity in mind. It is less expensive to set a maximal standard and have one installation period for a power plant. It is also worth setting current standards with future electricity production, not current production, in mind. Most developing countries can expect future electricity demand to be greater than current demand and thus to carry even more environmental costs.

Monitoring and enforcement

As seen by the lag between the adoption of new SO, standards in 2003 and actual measurable reductions in SO, emissions in 2007, effective implementation of standards requires enforcement. China has undergone an important shift in its monitoring from a system that involved periodic on-site spot checks by environmental personnel to one that relies very heavily on continuous emissions monitoring systems (CEMS), with the same personnel continuing to do regular spot checks focused on ensuring technical integrity (Schreifels et al. 2012). At the same time there has been a shift from a system of fines to a much more developed program of integrated pricing and serious penalties, such as plant closures for gross violations.

CEMS is critical to the success of the Chinese system, as it has been to the US system. In fact, officials from the US Environmental Protection Agency (EPA) were involved in helping the Chinese МЕР train up in how to operate a supervisory system dependent on electronic monitoring. CEMS alone has not been sufficient, however. In multiple visits to power plants in China, I have been shown how the system is kept under lock and key and subject to surprise inspections by the local Environmental Protection Bureau (EPB). These inspections are regular, occurring in most places on approximately a quarterly basis, but of course the CEMS is also connected directly to local, provincial, regional, and national environmental offices. If these see a discrepancy, they can send out an inspector. I have been told that there were issues with tampering at the beginning, which resulted in the institution of more rigorous observation and inspection.

The Chinese system, again similar to that of the US, relies on a large and robust enforcement workforce, especially at the local level. Even a medium-sized city, such as Yantai in Shandong province, has over 1,000 inspectors. Although it is difficult to find complete numbers, the total environmental enforcement workforce is well into the millions. It appears to be as large as the US EPA’s workforce of 15 million. Moreover, it is layered and deep. At the national level the ministry itself is small, but it has several thousand personnel in research institutes that report directly to the ministry, conduct research, and develop policies and standards. Then there are EPBs at every level of government: provincial, county, city, and city district. Moreover, starting around 2005, the ministry began to establish regional offices modeled on the US EPA’s regions. The specific purpose of these was to have a mechanism for inspecting and enforcing provincial compliance. The previous challenge for the environmental bureaucracy, as for most bureaucracies within the Chinese system, is that they not only answered to the ministry but also to the local head (governor, mayor, etc.). Creating a layer without any general bureaucratic equivalent increased ministerial control. This level of supervision is critical: both the ability of the ministry to monitor provincial and local behavior and also the wealth of personnel at the very local level that can inspect specific facilities and ensure that their CEMS and abatement equipment are operating effectively.

Monitoring is, of course, critical, but it is unlikely to have had such an impact without an increasingly sophisticated enforcement system. Prior to the 2006 11th Five-Year Plan, the main enforcement mechanism involved issuing fines, which were widely viewed as too low to incentivize compliance. Instead they became a minor cost of doing business. After the imposition of “hard targets” in the 11th Five-Year Plan (in other words, targets that were enforceable, as opposed to “soft” suggested targets), enforcement became more serious and the tools at the government’s disposal were more varied. Some of these tools, like shutting down facilities, are extreme. Although shutdown can be used as a threat, it may prove too difficult for government officials to use, because the public and businesses depend on power, after all. The real shift for the power sector came in the form of a clever payment system that made the use of pollution abatement equipment self-enforcing.

Prices paid to power plants are set by the national and provincial development reform commissions. Once FGD became required, the payments came in the form of a base rate and an environmental subsidy or surcharge. These costs were borne by the grid company when it purchased the electricity. The payments were set such that the profit for the plant was built into the environmental surcharge rather than into the base rate. The OEMS were connected not just to the environmental bureaucracy but also to the grid company. As a result, the grid company had an incentive to monitor power plants’ emissions closely. If emissions rose, they didn’t have to pay the environmental surcharge. Similarly, the plants had an incentive to keep the FGD running effectively. Without it, as one electricity expert explains, “there is no profit.” Figure 3.1 shows the self-enforcing structure put in place with CEMS.

At the same time, fines were also increased, and local EPBs began to impose them on an hourly basis rather than as one-time charges. The result was that failing to comply with emissions standards has become increasingly costly to the power sector. By 2015, sources told me power that sector executives who failed to run their emissions equipment effectively were losing their jobs - not at the government’s behest, but because they were costing their companies money.

This system has become more complex as the standards have tightened. In the 11th Five-Year Plan, the environmental subsidy was just for FGD. Once the 2011 standard and 12th Five-Year Plan goals were set, an additional surcharge was added

The self-enforcement payment feedback system for NO, control

FIGURE 3.1 The self-enforcement payment feedback system for NO, control. In the early years, power companies complained that the surcharge payment was not high enough, but over time fees were adjusted and the risks of both fines and shutdowns became greater. As a result, compliance in the power sector has continued to improve.

Lessons to be learned

There are a number of critical lessons to be learned from the Chinese experience with CEMS. First, it only works as part of a comprehensive system of both monitoring and enforcement. CEMS alone will not change behavior, and absent effective inspections and monitoring of the machinery itself, it will simply be tampered with. The Chinese did face tampering issues early in their use of CEMS, but by ensuring sufficient spot inspections along with direct access to the data in real time at every level of government, they appear to have been able to reduce this problem significantly. The key elements of this system are personnel on the ground to conduct inspections and data access throughout the system. Without robust staffing, the Chinese record of pollution reduction would have been unlikely. There have been suggestions that CEMS can act as a substitute for staff, but that has not been the Chinese (nor in fact the US) experience. CEMS is a tool that environmental personnel can use for more effective enforcement.

The second important lesson is the need, as with any other aspect of behavioral change, for effective and timely penalties. The Chinese system of integrating payment with enforcement is particularly effective because it incentivizes the grid company to act as the direct enforcement agency. For any locale with fixed prices for power producers, whether through power purchase agreements or through a regulator, this system of a dual pricing - base price and environmental surcharge - is ideal, making enforcement more effective and less costly. It is not surprising that the Chinese power sector cleaned up a number of years before other heavy- industry sectors, in which progress did not really begin until 2012-15. This pricing model only works where there is a fixed price paid by the buyer, but in these cases it is quite useful.

Regardless of whether the pricing model itself is utilizable, it is essential that noncompliance be costly. A key shift in China was to charge fines on a per-hour basis rather than as a one-off for each incident. That forced plants either to resolve technical difficulties quickly or to power down until abatement equipment could be repaired. The shift thus also incentivizes good proactive maintenance. If firms have a profit motive, costly fines should be effective. Plant closures are obviously the ultimate threat, but their effectiveness depends on whether they can actually be implemented. In earlier years, when electricity was short in China, the threat seemed unlikely to be carried out. At this point, in light of systematic overcapacity, it is less costly for the government to impose closures. The more effective middle route is, in addition to imposing fines, to take environmental performance into account in dispatch rules. If the best performing plants are put on line first, they obviously benefit.


An often overlooked part of the Chinese system is that state-owned firms compete with each other intensely. As I have shown in previous research (Seligsohn 2018), both standards and enforcement improved as the Chinese electricity sector became more competitive after the single power company was broken into five in 2002. Companies compete with each other for profits, but given the amount of permitting involved in building new power plants, they also compete for government approval. If the government is committed to improving environmental outcomes, competing as the green alternative can be an attractive option for some companies. The result is to raise the standards for the entire sector.

Fuel choice

While this chapter focuses on pollution abatement in the coal power sector, and it is critical to implement eifective pollution abatement, no other country in the world has more coal-fired power plants than China does. In expanding power production, it is worth considering whether one way to keep pollution abatement costs down is to choose other sources for generating electricity.

Here, the case of India is instructive. Despite its relatively modest coal-fired power plant capacity in comparison to China, coal is still India’s top energy source, accounting for 54% of energy demand (Tiewsoh et al. 2017). Moreover, while India considers itself a relatively coal-rich country, coal dependence has not led to energy independence. India already imports 18% of its coal, and as Ahluwalia, Gupta, and Stern (an illustrious group including a former deputy chairman of the Indian Planning Commission and the UK’s Sir Nicholas Stern) outlined in 2016, in a business-as-usual scenario, this dependence would increase to more than 57% by 2047 as coal demand would more than quadruple. By contrast, these authors suggest, if India adopted a more low-carbon strategy (a mix of efficiency and renewables), it could maintain its current coal import level as supply would at most double.

Choosing a more diverse set of fuel options, and especially moving away from fossil fuel dependence in the power sector, would reduce the amount of pollution abatement equipment required. It would also reduce the need to manage the waste products of this abatement. While we want to take the pollution out of the air, it has to go somewhere, and pollution abatement creates a significant solid waste management challenge. Specifically, particulate removal results in ash, and FGD can process sulfur in a variety of ways, but the most common is to produce calcium sulfite (CaSO,), which can be further processed to produce gypsum. Ash management can be a large problem, especially in a country like India, where the available coal contains very high ash content. That residue can be used, but it is often simply a waste that has to be disposed of. Similarly, the gypsum produced by FGD potentially also can be used as a building material, but here too we find challenges. For a time, such gypsum was being imported into the US as a building material, but that trade was subsequently halted after a series of scandals involving contamination

(Michon n.d.). Coal has a number of impurities that can include sulfur, mercury, arsenic, and fluorine. When these and other impurities are captured along with the FGD waste, they result in a product that cannot be used in building construction. While the Chinese still use gypsum from the power sector domestically, interviews in the steel industry revealed that the gypsum produced in that sector is viewed as too contaminated for any subsequent purpose. As a result, heavy reliance on coal-fired power leads to a massive increase in landfill use - a major challenge in densely populated countries. Increasing the emphasis on efficiency and renewables produces a major co-benefit of reducing additional demand for solid waste disposal.


As India and other countries raise their regulatory standards for stationary sources, there is a great deal to be learned from the Chinese example. The major lessons that can be drawn from the Chinese experience include the following.

  • • Incremental raising of standards increases the total cost. Adopting maximally strict standards to begin with avoids repeated plant closures and redesigns.
  • • Enforcement personnel are critical, even when plants have CEMS installed. Inspections keep CEMS from being tampered with.
  • • Setting up a pricing system where the purchaser can act as an enforcement agent promotes compliance.
  • • Non-compliance demands sure and costly punishment.
  • • Competition promotes company good behavior.
  • • Coal is not the only solution. Pollution abatement is costly; an excellent alternative is to increase the use of alternative sources of energy', which also promotes efficiency.

Coal continues to be a major source of energy. It is also a major pollutant. As long as coal is in the mix, countries ought to use best practices to control that pollution. However, they should realize that other alternatives will be cleaner, especially by reducing carbon pollution, which avoids the costs not just of installing and operating expensive pollution abatement equipment but also of disposing of the large quantities of solid waste produced from that captured pollution.


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