วันพุธที่ 30 พฤศจิกายน พ.ศ. 2554

The Twin Bubbles : Housing and Oil (abridged from the New Golden Age written by Ravi Batra)

บทความโดย วรรณพงษ์ ดุรงคเวโรจน์

(Abridged from The New Golden Age written by Ravi Batra)
            The year 1973 is turning point in the economic and social annuals of the U.S. At that time, the real wage began decline for the majority of American workers despite raising its productivity. Also, it’s the year that an Arab Cartel (OPEC) imposed an oil embargo on the U.S. and the rest of the world. As a result, the oil price jumped fourfold and never to fall back to the previous level again. So, it started a severe period of “asset-market bubbles” because it causes the economic chaos. From 1930, bubbles disappeared under the onslaught of economic reform by Pres. Roosevelt in the New Deal. However, the bubbles returned in 1973, they have been hopping from financial bubbles to another. Prices of variety of goods have surged, sunk and surged again. Also, oil, stock, bonds, gold, silver, platinum, and housing all seem to have moved in a up-and-down rhyme that generate an uncertain and chaos in process. For when a bubble bursts, millions of people suffer. The bubbles burst open and then disappear for a while.
            The first balloon in Roaring Twenties is when stock market scaled to unprecedented height before crashing in 1929. The next crash did not arrive for 44 years (1973). However, there is something changed in the 1970s that appeared and reappeared. Economic or financial bubbles normally refer to sharply inflated price moving at the exceptional speeds. Most of them arise due to the irrationality among buyers of product (asset) but may arise because of the cartels.
            Occasionally, they arise in product market including productible goods such as oil, copper and in turn rise in price. In this case, investors treat the product as an asset, and seek to profit not from its expanding production but from its price appreciation. Bubbles primarily occur in asset market including land, stock, bonds that attracts from wealthy investors that they see the production is not important as price appreciation.
            All bubbles however burst in the end, balloon is recognizing not when it’s inflating but when it punctures. Most of bubbles relate to irrational but buyer but they may spring from the greedy action of suppliers as well. Oil price jump during the 1970s was not the result of consumer euphoria. In fact, demand for oil decline after 1972 but oil suppliers had been shrinking. So, oil price climbed throughout the 1970s, by 1981, the price had jumped to as much as $42 per barrel and about 1,600 percent higher than its base price $2.50 in the mid 1973.
            The oil balloon in 1973 resulted from the monopolistic action of OPEC. The surprise is that oil price could be raised sharply by trimming output. When the bubbles formed, it’s kept swelling. However, in the late nine years, 1982 the oil price began a precipitous fall. By 1986, a barrel of oil is less than 10$ in the U.S. market. It’s considered that this bubble generated by OPEC had “ruptured”
Demand versus Supply-side bubbles
Since prices are determined by the interplay of demand and supply, bubbles are formed in two ways. The first is price of asset keeps rising when its demand outpaces the supply and the latter is price of asset keeps rising when its supply falls short of the demand. In demand-side bubbles, asset demand exceeds its supply and in supply side bubbles, supply trials demand. First type stems from the obsession of buyers and the latter stems from market concentration or producer’s manipulation
Since price are determined by the dual action of the demand and supply, all bubbles burst in the end because price jumps invite a response from both buyers and sellers which in case of demand-side bubble, high price can be sustained only if demand stays ahead of supply and in case of supply-side bubbles, price maintenance requires that supply continues to lay behind demand. These are the condition necessary for price balloon to persist. The interaction of market makes sure that all balloons rupture in the end. So, all bubbles have a three-part life cycle including it forms swiftly and unprecedentedly, it expands fast over several years and it eventually bursts. 
So, the oil price hiked from the 1973 to 1982 is a good example. It started in the 1973 with the sudden jump in oil price, then it expanded when the price rose further over the next eight years and finally it exploded in 1982.
However, it’s unclear about the dual nature of balloon generation. It argues that the bubbles are formed primarily when an asset’s demand abruptly jumps and keeps jumping for a few years, so that the price continues to climb. This is only partially true. The other side of the picture is that supply must be slow to respond to price hikes. The oil bubbles of the 1970s and early 1980s was one balloon that inflated fast and sharp without the assistance of irrational buying from consumer. This was a supply-side bubble because it arose from the production cuts of oil exporters (though oil demand slowly sank, supply sank to even faster).
As described earlier, initially the bubble started as an oil embargo, which lasted only six months, from October 1973 to March 1974. It crates a huge shortage of petroleum products around the world.
However, most of price balloons are demand-side bubbles. They arise from the concerted action of buyers who expect further jumps in asset price. Such as share-price bubbles of 1920 and dot –com bubbles of 1990 (started after 1982). They were triggered by sharply rising profit. They started out rationally, others jumped into share market, as companies continued to earn ever-larger incomes. Finally, when stocks move upward for several years at a heightened pace, man and women in the street also came rushing to Wall Street hoping to make quick money and become a billionaires. Then, share market crashed reminding people that irrationality always exacts a hefty price.
The share market balloons were demand-side bubbles because the demand for stocks continually outran their supply. Company responds periodically by issuing more stock but not adequately stabilize the share price which eventually it’s collapsed. Other example is the stock, land, and housing bubbles in Japan from the 1975 to 1990 were demand-side bubbles, so were similar balloons in the economies of Asia Tiger during the 1990s. This most bubbles arise from buyer’s action rather than seller’s monopolistic control.
Other case, the last America share-price bubble which bursts toward the end of 2000. It started out with an outburst of activity at the NEW York Stock Exchange (NYSE) in 1982, as the Dow Jones Industrial Index registered large gains. The Dow has been depressed throughout the 1970s, mostly because of the oil bubble, and remained subdue in 1980 and 1981.
However, when oil bubble also began to rupture, few restraint remained on the markets. Share appreciate until the Black Monday (it’s fateful day in October 1987) when the Doe suffered that it’s the worst crash in history. However, it bursts again in 2000 and downward to the end of 2002.
Thus, since 1973, the character of world economy seems to have changed permanently with bubblers becoming more frequent than ever. Buyer’s irrationality or seller’s greed has affected real wages, economic growth, and the living standards around the world. Needless to say, a wide variety of imbalance has developed globally in the form of high government debt, trade deficit, consumer borrowing. It’s slow but contributes to economic chaos.
The Housing Bubble

When Black Monday struck in 1987, Alan Greenspan headed the Federal Reserve. He successfully restrained the aftereffects of that crash through swift action, which bring the interest rate down around the world. He made credit available to financial market and prevent the fiery crash. Nearly 14 years later, in January 2001, when share market would not respond to his soothing word, Greenspan swing into action again. He followed the same recipe for disaster control and began trimming the Federal Funds Rate(the interest fee that bank charge each other for overnight loans, then when this rate fall, other interest rate usually follow) However, unlike in 1987, this time the stock market crash led to a recession with falling in output and raising unemployment. So, Fed chairman trimmed Fed Funds Rate several times that rate fell from 6.5% to 1% in 2002. The share market crash of 2000 was similar to the crash of 1929, Greenspan do not want it repeat but his prescription proved to be overdose to the economy and produced the side-effect. All those cut in the interest rate eventually spawned a housing bubble, even since 2001, when George W. Bush took over presidency, home price have been rising at a dizzy pace. Price has started to outpace inflation as early as 1996 but picked up speed in the new millennium. Greenspan became award of the phenomenon but dismiss it as a little froth in this market.
So, Why do low interest rates spark a housing rally? Most homes are bought on credit, not for cash, and mortgage loans last anywhere from 15 to 30 years. The lower rates, the lower the monthly payment, and the greater demand for homes. When demand for something rises, its price goes up. So, interest rate cuts normally spur home value not just by stimulating home demand but also the buyers can afford to purchase expensive homes. The housing bubbles that starting in 2001 was an inevitably by product of Greenspan’s panic and rush to trim the Federal Funds Rate sharply.
Michael Bloomquist’s work offers a good deal of housing data and analysis of what has transpired in the housing market in recent years. Between 2001 to 2005, home values appreciated 53% nationally in a slow-growth economy but faster than the national wide figure. The report in 2005 shows that alone home price rise to 13.5% that is the fastest pace since 1979.
Housing market is largely regional in character, and in some states, cities the bubble is tremendous. The median home price in Los Angeles, San Francisco is roughly 9 times the median income. Dean Baker said every week, approximately 140,000 U.S. families buy a house, a majority of them at bubble-inflated price. However, some economists suggested that housing bubble is invulnerable to a meltdown because , unlike other assets, people buy residents not just for their value appreciation but also to live in them. With this logic, price will not collapse and there is no bubble. From this argument, in fact, home price have not fallen since the Great Depression but regionally they dropped sharply in the past. It began to rise faster from 1996 but after 2002 moves up at a torrid pace that is steeper line than the previous. In the 20 years 1975 – 1995, home price jumped 204% while the inflation is 183% - it’s not far from the inflation rate. Housing appreciation surpass the CPI inflation rate. Between 1995 – 2000, inflation adjusted rise in home prices was 3% per year but soar 9% per year for 2000 – 2005. Clearly, home values have substantially accelerated in the new millennium. So, this is bubble made, the pick up speed after they are formed, and keep expanding for a while, until they can expand more at the point that they burst. According to Dean Baker, real home prices has climbed 60% from 1998 – 2005, real home price is the same as the inflation adjusted price.
As started above, the current housing bubble is exceptional. In record numbers, people have been using their home appreciation as vehicles for maintain their lifestyle. They are refinanced their mortgage and taken equity out of their homes and used money to consume. Consequently, the nation is sinking in an ocean of debt. The use of housing for improved consumption is something new and is now the primary prop of economic growth. By some estimates, as much as half of increase GDP and job creation has come from construction industry that does not bode well for our economy.
Because sinking interest rate, home demand has expand smartly since 2001, residential output has grown accordingly (2004 – 2005 2 million housing units were built and similar 2006). However, the population increase can only support an increase of 1.5 million units. That means 500,000 is snapped up by “speculator”- who buys them not to live but to make money from speculation. This phenomenon shows the presence of bubble. The housing price and production book took place while a family income fell. Median household income shrank more than $1,500 in 2000 – 2005. Weak growth and sinking income add another distorted dimension to housing market that in turn fuels the perception that we are midst of an unprecedented bubble.
Bloomquist offers a palpable explanation of how people were able to buy expensive homes in spite of stagnant incomes: “In addition to the proliferation of exotic loans, lender have promoted, our government has allowed fraud to become commonplace in the lending industry. The most prevalent fraud is the little white lie that inflates annual income by 10% or more. In stead of providing income documentation, you just state how much you earn.” The bank and saving association have been making inflated loan to some borrower without asking for any income documentation or employment verification. They make a financial collapse. The secret of the housing bubble’s durability is now out: the mortgage loan industry’s outright fraud. Fraud is main reason why housing bubble persists though interest up in 2004. Another worrisome is foreign investor are involved hugely in our housing market. In the past, foreign investors bought U.S. government bond (safest of investment), but the purchase of trillions of dollars of mortgage-backed security (MBS) asset has exposed the foreign investor to an unprecedented level of risk. If the housing market collapse, even slow down, those investor could suffer unacceptable losses due to home buyer’s default. So, the entire global financial system could unravel in a hurry and foreign investors would stampede  out of U.S. asset market and trigger a worldwide meltdown.
The housing bubble, just like the earlier share market balloon, has a global dimension. The world economy is now colony of what may be called “The American Business Empire”. Therefore, a few phenomena or economic events remain localized today (especially, if they spring from the U.S.). Thus housing bubble has global proportions.
However, some economist worried. The worldwide rise in home price is the biggest bubble in history prepared for the economy pain when it pops. It will froth from America, Britain, Australia to France, Spain, and China. Believe it or not? Home property values in the advanced economies of Europe & North America has already climbed more than $30 trillion in the new millennium, property value surpassed GDPs of nation. Home price is very soared. From the Home Price Indexes in the Britain, Britain’s balloon is the largest – home value jump of 154% between the years 1997 – 2005, France is 87%, Netherland is 76% and U.S. is next with a jump of 73%. However, Germany and Japan are only exception to the properly euphoria, as the home price in these countries have actually declined. However, this exception did not prevent the emergence of history’s biggest bubble.
The oil bubble

This is the first time in history when the world history when the world is afflicted not by one but by two potentially hazardous bubbles at the same time. In additional to since housing, the global oil market is also bubbly. The international price of raw crude has been climbing since 2002, and so has the retail price of gasoline in the United States and around the world. The graph displays a big rise in prices since 2002. The question is Are we really facing another oil bubble?
 To answer the question, we need to examine the stages of bubble.
1. No one recognizes bubble when it’s first formed. History shows that financial balloons always appear abruptly, catching the people by surprise as an asset’s burst out. Once the price jump has persisted for some year. Then, the rational explanation appear denying the phenomenon as an artificial bubble. This is how the oil balloon was formed in 1973, this is also now the shared-price bubble started out in the 1970s and during the 1982-2000. Likewise the oil price jump caught the public napping in 2003, and gas price kept exploding. Many people and CNN, Fox news predict that drop in oil price. Clearly, the big price climb was totally unexpected.
2. Once a bubble has persisted, and appear durable, people think it’s permanent and will go on forever. It’s not a bubble at all. This is what happens in the shared price balloon during 1990a. However, raw crude is concerned and lead to $100 barrel in the year 2006.
3. Once the price is predicted to rise speculators move in and the phophecy become self-fulfilling. That is what hedge funds currently doing in market for oil future.
4. A time comes when experts expect no fall in price as far as eye can see. For oil, that time is here now. Billionaire investor T. Boone Pickens , for example, sees oil hitting ever new heights in the foreseeable future.
By 2006, the oil market has experienced all four of the initial stages
Oil : primarily a supply-side bubble
What kind of balloon is this? As in the 1970s, the current oil bubble is primarily a supply-side bubble. However, this time the monopolistic trigger has not come from OPEC but from our own oil companies such as Exxon-Mobil, Chevron, Shell and so on. So, soaring gas demand from China, India, along with the behavior of OPEC, is primarily responsible for the persistence of expensive oil. However, “FTC” (Federal Trade Commission) study oil market and its report absolves the company o all responsibility for rocketing fuel prices and puts the blame on OPEC and the rising world demand for gasoline:
“OPEC’s influence has been an important determinant of higher prices since 1973, but other factors also contribute. Significantly increased long-run demand from industrializing countries has exacerbated the price-increasing effects of OPEC’s production outbacks”
Because OPEC causes the oil bubble 1973-1982, so it’s easy to make it the culprit again. However, let’s closely examines the words of FTC reports.
1.The world price of crude oil is the most important factor in the price of gasoline.
2. In 2004, steep increase in world prices of crude oil caused steep increases in gasoline price.
3. Over the past two decades, the demand for oil crude has grown significantly. Overall, however, the long run trend is toward significantly increase demand for crude oil particularly China, India.
4. OPEC is still produce a large share of world crude oil to exert market power and strongly influence the price of crude oil.
5. Unexpected production difficulties reduced some producer’s crude output.
FTC argument is the U.S. gasoline price is chiefly linked to world price for crude oil, which is partly set by OPEC and partly set by global demand, supply conditions. The sudden jump in America gasoline in 2004 arose from a sharp increase in price of crude from the increase in crude demand from China, India as well as U.S. Hence, the conclusion : global demand pressures are largely responsible for recent steep increase in U.S. gasoline prices.
However, FTC say an contradiction of above that they say increased demand need not cause a rise in price if supply goes up at the same time. Te same think happens in 2005 as well, in spite of hurricane’s destruction of Mexico, the plenty of crude available around the world. Unlike 1970, there is no gasoline shortage but why gasoline and crude oil super expensive?
In FTC argument implies tat crude oil inventory must have declined in the U.S. from 2002 – 2005. If supply fall shorts the demand, then inventory must fall, However, in fact, oil inventories from 2003-2005 rise.
Another figure, display a rise in such stock.
In fact, the oil inventory has been rising, albeit very slowly, ever since 1990, as shown in figure 2.5
From 1990 to 2001, oil price was more or less constant. The per barrel price was $24.5 in 1990 and to $25.60 in 2001 but since 2002, dramatically rise.
Lord Browne (CEO of British Petroleum), concede “there has been no shortage and in fact inventories of crude oil and product has continued to rise” (end of 2005- $30 per barrel) So, there is no dearth of crude on earth. As yet there has been no decline in oil inventories around the world. In 1973, and then 1980 – 1982, it’s oil crude shortage that reflects in gas lines and shrinking oil inventories in OECD countries. So, why analysts and FTC blame oil price jump on the big increase in demand from India and China?
If there is no gas shortage, then why is oil so expensive? Let take a close look on what’s happen in oil industry and on Wall Street since early 1990s.
In May 2004, the General Accounting Office, a bipartisan government body, issued a scathing report, concluding 2,600 mergers have occurred in oil industry since the early 1990s. Many mergers generate monopolistic conditions in the oil market, which is now concerned by five major company, Exxon Mobile, Chevron – Texaco, British – Petroleum – Amoco-Arco, Royal Dutch shell and Conoco – Phillips. These are highly profitable firms. They are the bullies profiteering from the self-generated oil bubble. Another nonpartisan report issued by the General Accounting Office in September 2004 said that oil mergers has raised the pump price at least 10 cents a gallon , and the crude oil price as much as $10 per barrel.
This reports are more credible than FTC’s apologia for Big Oil. When competition decline and an industry becomes concentrated product usually rise to generate monopoly profits. OPEC is no longer what it used to be, it supplies only 38% of global output but Big Oil controls over 60% of gasoline production and distribution in the U.S. but Big Oil control only 21% of natural gas. During September and October, the Gulf of Mexico was hit by Hurricane Katrina and Rita, several refinery and natural gas platforms were battered.  Oil and gas production fall sharply and not surprisingly, energy prices soared, with gasoline to $3 million per gallon and natural gas to as much as $14 million cubic feet. And crude oil jumped to $70 per barrel. The post- Katrina, by March 2006, crude oil was down to $63 per barrel, gasoline averaged $2.30 per gallon and natural gas to $7. This is because demand fell due to a warmer-than-expected winter. Now the question is “why did natural gas prices sink more than 50% ($14-$7), while petroleum gas, especially crude oil, barely budge?”
Answer: the economic power in natural gas (60%) is not concentrated as petroleum production (21%). Therefore, when energy demand fell, natural gas prices fall much faster than petroleum prices. Where there is little competition or excessive concentration , as in oil industry, the law of demand and supply still work but very sluggishly.
The price fall shorts in response to sinking demand. In competitive environment, a rise in demand, when matched by rising in supply, generals no price hike. In monopoly milieu, by contrast, increase demand rice skyrocket, especially sell necessarily like gasoline with a few short- terms substitutes, because the producers have already scapegoat for price rise. Rising oil demand and supply during 1980s, 1990s generate few price hikes because global oil market was fare more competitive.
There is a figure shows gasoline plummet in 1998, 1999. In the new millennium, however, oil cost escalate even though supply jump with demand because by 2002 the oil industry has cornered the market, with “Five Bully controlling over 60% of refinery output”
So, when a monopolist finds an easy scapegoat and raise price substantially, without a similar rise in its cost, the phenomenon is known as price gouging
As a result, in 2005 September, Senate testimony of Tyson Slocum provided a wealth of interesting thing but shock the fact. In briefly, he said “recent merger in the domestic oil refining industry have consolidated control over gasoline, making it easier for a handful of companies to “price-gouging consumer”. That their profit is $298 billion. The uncompetitive practices by oil corporations are cause – not OPEC or environmental law – of high gasoline prices around the country.”
But why did crude hit $78 in July 2006 without a divesting hurricane? The answer comes from the monopolized oil industry along with another factor examined below.

Hedge Funds
            Big oil is not only reason for gargantuan energy price increase despite the absence of oil shortage.
            The other factor is “wall street and it’s overwhelming avaricious behavior”
-         During the stock market mania of 1990s, Wall Street banker and companies earned huge commissions, fees and bonuses. They developed a get rich-quick mentality then, cames the share market crash, hefty lasses and stagnant stock price. But “the quick-buck mentality did not die”
-         Ever since 2000 big money has targeted the oil market, which is concern but just a few corporation that can be ensure lofty crude, gas price.
-         Energy investment are now high on the list of hedge funds, which stayed up for so long that it’s now moving into the realm of superspeculation. This is another season oil is becoming a bubble.
-         Wherever a quick buck can be made, speculator appears like vultures to take advantages of the situation.
-          In fact, the they lone instability, they love fluctuation to allow then to play ups, downs, bug low (sell high)
Hedge Funds are now generating artificial demand for oil. They spend billions everyday to bug up oil futures, hoping the price will go up. Their purchases add to global demand for petroleum product and tend to inflate cost of energy slocum also described the activities of these funds; “contracts representing hundreds of millions of barrels of oil are treaded every day. London New York treading exchange OTC market grown in 2004 $245 trillion (31.8%) since 1990. NYMEX are required to disclose significant detail of their trades to fed regulation. But OTC exchange are not required to disclose such information allowing companies like “Goldman Satchs,Morgan standley, hedge funds to escape fed oversight and more easily engage in manipulation strategies

            Many of the financials brokers involved in the hedge funds are the same as those who cheated investor in the past and even paid fines for their illegal activities.
            Again, hedge funds are one reason n that crude oil is now so expensive even though there is no physical shortage of oil anywhere in the world.
             In the past, OPEC was major factor setting crude oil price. Now, which increase monopoly power in the market, gasoline price often sets the crude price and vice versa. Anytime gas becomes expensive, the crude oil price rises immediately. Those who control gas also control the crude. Big oil producer 48% crude oil and over 60% of refined product. The hedge funds manager can count on Five Bullies to keep gasoline expensive. They know if the pump price decline only sluggishly in spite of a major fall in energy demand, crude price will also decline slowly. This way they buy more gas future, crude oil futures, and ensure that these price stay high. This is why during the warmer-than-expected winter 05-06, natural gas price operating in a competitive market plummeted, but crude price, linked to gas prices opening in a monopolized market, fell only a little.
             If gasoline market was as a competitive as natural gas, the hedge funds world not be sure of the staying power of gasoline. They world dump their oil future contracts as fast as they dumped their natural gas contracts
             Then, both crude and gasoline price world have fallen proportionally to the price of natural gas. Also, associated Press wrote n early 2007, during the mild winter :
            “Many analyze say the quick rise in oil price at start of 2006 has little to do with change in S.D. but they point to 7% surge in NYMEX crude oil contracts open in two trading day as sight that hedge funds and other speculators continue to pour money into market”
            Oil companies themselves are speculating and manipulating the future market. This is “Bill O’Reilly reported” on his show ;
            “A few months ago, I received some critic for telling you that the big American’s oil companies are price gouging. You should have seen my mail. Well, I was right, and here’s the proof. The U.S. commodity futures Trading Commission just fined Shell oil $300,000 for manipulating crude oil market. So, now oil bullies have found another way to shift people through speculation.
            O’ Reilly’s guest is “Tyson Slocum” who said “ whether it’s Hurricane Katrine, whether it’s political unrest in Iran, Whether it’s suppose economic grant in China or India , I see it all as excuse by a fairly small group of enough traders who control determining what price of oil is”
            Thus, it’s clear that oil market is now bubble. All elements that make up a bubble-sudden jump on price, increasing bullishness, escalating speculation are present in the global oil industry.
             During 1970’s OPEC generated the oil balloon by withholding supplies. The oil behemoths are, now doing the same by restraining competition. The bubble displays a mixture of both supply-side and demand-side factors that make it novel and potentially hazardous!
            Anytime there is an asset bubble, there is a danger that it will rupture and slam the investor hard. But when they are ruin bubbles. A rare phenomenon, the rupture’s perils are magnified!! That is the crucial juncture where we stand today, and the resulting explosion could be brutal in the near future.

วันอาทิตย์ที่ 20 พฤศจิกายน พ.ศ. 2554

China 12th Five Year Plan : Aggressively address climate change

            As people known, China is the most populous nation and also one of the largest countries with the third biggest landmass, after Russia and Canada. The Chinese economy is the most rapidly growing economy on earth within 25 years. Yet China is also struggling to problem of the poverty. Even though China’s GDP was high but when divided by population (real per capita GDP), it’s less than Thailand and many countries in Asia. The World Bank however promoted China from the “lower income” to “lower middle income”. China’s remarkable growth over 25 years since 1978 came with the burden of environmental degradation and has come at a step cost to the environment. Environment degradation has imposed a serious cost on the Chinese economy and reduced the serenity in living in society. We can divide the environmental problem into two groups. The first group refers to pollution. It composes of air pollution, water pollution, shortage of fresh water, and hazardous waste. The latter is the sustainability of resource use. Economic activity results in an impairment of the natural system’s capacity to cure itself. There is soil erosion, loss of species, deforestation, flood, and also endanger in country’s rich biodiversity. Up to now, China is the largest emitter of greenhouse gas: carbon dioxide, Sulfur, Chlorofluorocarbons. They affect the global warming’s impacts including rise in sea level, drought, glacier retreat, endanger human health by the infectious disease such as cholera, and also the extreme weather. However, there are many attempts to concern about the environment since 1990 Montreal Protocol – the convention of international trade in endangered species and the Kyoto Protocol which will be terminated in 2055.
            For recent convention in China, in March 2011, an aggressively address climate change. It’s 12th Five Year Plan (FYP) that concern much about the attention to energy and climate change and also establish a new set of target and policies for 2011- 2015. The target of FYP is three dimensions including with 16% reduction in energy intensity, 11.4% increase in non-fossil energy of total energy use and also 17% reduction in carbon diversity. The relationship between energy and economic growth matter greatly. At China’s 11th FYP (2006- 2010) has a target to decrease overall energy intensity of 20% in country. The target was responded to increase in energy intensity experienced in 2002- 2005. Moreover, the FYP imposes about the energy policy to support clean energy industry and technology. The strategic and emerging industry such as nuclear, solar, wind and biomass energy, hybrid, and electric vehicles replaces the old issues such as coal and telecom.
            From the point of view, the environmental quality in China is global public goods which are goods whose impacts are indivisibly spread around the entire globe. Its cost of adaptation may be borne by the country who adapts it but the mitigation such as a better climate is collectively consumed. Global public goods are based on the characteristics of public goods to international level. Let me briefly explain about goods’ characteristics, the private goods is a commodity consumed by one person and no benefit for other else. It’s rival and excludable. Rival consumption means that if a good is used (consumed) by one person, it can not be used by other. For instance, if A drinks a bottle of apple juices, B can not drink that the same bottle of juice. Also, exclusion means that it’s possible to exclude any individual from benefit of goods. For instance, an ice- cream cone is excludable as you can prevent someone from eating an ice- cream cone (you just do not give him). By contrast, public good is non-rival that refers to the cases for which person’s consumption does not affect the other person’s consumption. It’s the commodity for which the cost of extending the services to an additional consumer is zero and for which it’s non-excludable that is it’s unfeasible or expensive to prevent or exclude an individual for enjoying goods. The classic example of non-rival consumption is national defense. If government creates a military establishment that protects the country from attack, all citizens are protected. When a new baby is born, it does not affect the elderly’ consumption of national defense (the elderly are still prevented). In this case, the environmental policy is non-rival because if there are more people, they all can get the clean air or pure atmosphere without reducing the benefit of people got it prevailed. And it’s non-excludable because similarly, it’s impossible to order anyone to take a breath with clean air, better climate and so on.
            Market do many thing well but they do not do everything well. Sometimes market fails to allocate resources efficiently that it does not lead market itself to reach the socially optimal output - underproduced and overproduced. The market failure stems from an externality that means market equilibrium is inefficient when the externality exist because buyer and seller neglect about the external effects on the third parties. As a result, equilibrium fails to maximize the total benefit in society. There are two kinds of externalities – positive and negative. In this case in China, the pollution emission from heavy industry such as coal combustion emits the carbon dioxide caused the environmental degradation, health problem and so on. Everyone has to bear this cost together but there is no workable mechanism for resolving these issues efficiently. For instance, if a terrible storm destroys an America’ corn farm, the reaction of price and farmer will help equilibrate needs and availability. But if the problem rises as global public goods such as global warming like this, there is no market or government mechanism that contains both political means and appreciate incentives to solve to led market to an optimal level. There are two ways to internalize these externalities. The first is private solutions such as moral code, social sanction and also the method of coase theorem but there are not often work because the transactions cost is very high because they are too many interested party to negotiate and the expense of lawyer required to draft. For the public solution, there are two way. Firstly, the market-based solution includes the Pigouvian Tax that China is also used. It does not work because it affects many incentives for work and investment. The latter is direct regulation including the standard regulation, pollution right and control and command policy. China use the direct regulation through policy more than market-based solution because China has to care much about the domestic investment and worry about the effect of distortion in the way of incentives to work in labor market.
            The good example of direct regulation is the 1963 Clean Air Act when it brings great benefit of reduced pollution. Also, the 1948 Water Pollution Control Act is the first environmental policy about water and lake. Well, the apparent convention about global public goods is 1990 Montreal Protocol in Canada that it’s the international convention about banning use of ozone- depleting chemicals- CFCs and 1992 the convention signed in Rio De ja Neiro about the global warming and the 1997 Kyoto Protocol that will be terminated in 2012. However, the result of environmental policy is noticeable. China becomes the top five cities with most effective pollution and control. World Bank said “ China was one of the few country in the world that have been rapidly increasing their forest cover”. It reduces air and water pollution. However, central government spent 40 billion yuan to protect of vegetation, farm subsidies and 345 billion yuan in 2009 to clean technology. In 2008, government use498 billion yuan to enhance sewage and rubbish treatment and also prevent water pollution. It aims to accelerate green belt and natural forest. In 2010, China eliminated the production (import) about pesticide. By 2015, China plans to establish POP (persistent organic pollutant) that is an organic compounds that are resistant to environmental degradation through chemical, biological, phytolytic process.
            In China’ city today, trend in air quality is popular. Air quality has been improved by industrial emission policy and the shift in household fuel use away from coal. However, the growth of industry and automobile transport cause an increase in pollutant nowadays. Well, a major source of improvement in air quality has been the reduction in household use of coal. 80% of urban population now has access to gas for cooking more that using coal like in 1988 that the burning coal, wood which in turn contribute to increase in sulfur, nitrogen oxide, carbon dioxide. The biggest negative impact on air quality stem from the dramatic increase in truck and automobiles. The total number of vehicles in China increase from 5.5 to 43 millions in 2005. Motor vehicle emits sulfur, carbon monoxide and nitrogen oxide. Well, with the largest global concentration of nitrogen oxide in the north China plain. Now, 90% of industrial waste water from regulated factor receives treatment. The program “grain for green” make farmer convert the grain farm to forest that contribute to 1.24 million hectare of forest increase. China has been being more fresh water availability and surely air in China is more fresh and clean.
            Precisely, there is an example of environmental response in China- The Sino – German environmental policy programme. It’s the cooperation between China and German for supporting China’ key government institutions in the development of economic policy for “energy saving, resources efficiency and environmental protection”. The organization within this program are The national development of reform commission (NDRC), the ministry of environment protection (MEW), and the China council for international cooperation on environment and development (CCICED) that they have ability to develop and impose and also enforce the effective environmental regulation and policy by cooperating with Deutsche Gesellschaft fur Internationale Zusammenarbeit (GIZ). Sino-German also cooperates with the german expert and institutions UN, EU – delegation, and also Green Business Initiations.
            I think the case of China is a good exemplar of the policy to cope with the environment because it shown that how effective the policies are. It’s interesting what will happen next year, decade or century. How best to improve the environment and how high to set the standard or regulation are likely to be questionable. The environment is critically important because it directly affects us. It’s no doubt that market alone won’t provide the socially optimal outcome because of the market failure due to the negative externalities. The method which government has tried to bring individuals and firms to act in efficient outcome is necessary to “adapt” followed the situation. Issuing the proper policy should be flexible. Finally, everyone should consider the impact not only on one who interact with but also the others for reducing the market failure in term of the external cost. Moreover, the voluntary contribution for provision of public good supplied by government is the good idea to help agencies finance for producing that goods that means we will lack the problem of free rider – the obstacle of development.