INTRODUCTION China is an emerging and leading world economy. The pace of economic change has been tremendously rapid since the beginning of economic reforms. Over the last quarter of a century, China’s economy has enjoyed average growth rates close to 9.5 percent (World Bank, 2001). Nationwide income has been doubling every eight years. This boost in output characterizes one of the most sustained and rapid economic transformations in the world economy in the past 50 years. However, as a result of China’s enormously rapid economic expansion, the size and significance of environmental problems is now of concern. As a result, a number of environmental problems such as increasing air pollution are threatening the sustainability of China’s growth. For example, the World Bank estimated that economic damage caused by pollution in China costs around $54 billion annually (World Bank, 1997). This is close to 8 percent of domestic GDP. Similarly, Economy (2004) quoted a report by the World Bank that China had 16 of the 20 most polluted cities in the world, and Bolt et al. (2001) concluded that China’s air pollution problem is the worst in the world. In response, China began implementing of a number of environmental policies in relation to air and water pollution and solid waste disposal. The number of these regulations has been steadily increasing since the late 1970s (Sinkule and Ortolano, 1995). The State Environmental Protection Administration (SEPA) has also declared control of industrial pollution to be a top priority for Chinese regulators. Responding to...
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