The hidden costs of China's coal industry amount to 1.7 trillion yuan (US$250bn) per year, or 7.1percent of China's gross domestic product (GDP), according to a report commissioned by Greenpeace, the Energy Foundation and the World Wildlife Fund.

The True Cost of Coal adds the costs of air pollution, water pollution, ecosystem degradation, damage to infrastructure, human injuries and loss of life to the current market price of coal in China. The calculation also takes into account price distortions caused by government regulation of the energy market.

"From extraction to combustion, every step in the process of using coal damages the environment," the report says. The authors estimate that each ton of coal produced in China causes 150 yuan (US$21.94) of environmental damage. And this figure excludes the impact of climate change which the authors say is too difficult to estimate given current knowledge.

The report recommends imposing an environment tax and an energy tax on coal production, and deepening market reform by removing government price controls in the energy sector.

The authors estimate that adopting their recommendations would result in a 23 percent increase in the price of coal and a fall in domestic coal production of nearly 12 percent. But they say these adjustments would have little impact on China's economic growth.

"Recognizing the true cost of coal would create incentives to developing cleaner, sustainable energy sources. The government should introduce an effective price signal for coal, which would ensure a massive improvement in energy efficiency and large-scale implementation of renewable energy. This would reduce China's environmental pollution and show its leadership in fighting climate change", said Ms. Yang Ailun, Climate and Energy Campaign Manager of Greenpeace China.

Although most of the report's policy recommendations are intended to increase the price of coal, some would tend to lower it.

In a section that may raise eyebrows among some supporters of Greenpeace, the report calls for government restrictions on coal mining startups to be lifted. At present anyone wanting to open a mine has to obtain six government certificates relating, for example, to the technical and safety qualifications of the head of the mine. The report complains that these rules "add to the costs of entry for coal mining enterprises" and calls for them to be scrapped. Despite making this recommendation, the authors acknowledge that small private mines have much worse records on both safety and pollution than large state-owned mines.

Another potentially controversial recommendation is that state owned coal mines scrap spending on housing, health care and education for miners and their families. The report says that "cutting the social burdens" of mines would improve efficiency and reduce the price of coal. The report makes no mention of how these services will be provided in the future.

Asked if they had calculated the impact of the market reforms on household electricity prices, and therefore on the standard of living of ordinary Chinese families, the authors did not give a precise answer but said prices would have to rise. Yang Ailun said that this would undoubtedly have an impact on low income families but added that "looking on the bright side" higher electricity prices would raise the environmental awareness of China's new urban middle class.

The report's main author is Mao Yushi, Chairman of the Unirule Institute of Economics, a not-for-profit research institute committed to the principle of economic liberalism.

(China.org.cn by John Sexton October 28, 2008)