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Scorched Earth: Will Environmental Risks in China Overwhelm Its Opportunities?

Authors: Elizabeth C. Economy, C.V. Starr Senior Fellow and Director for Asia Studies, and Kenneth Lieberthal
June 2007
Harvard Business Review

Many multinationals think they understand, and have tried to mitigate, the serious risks posed by operating in China—intellectual-property–rights violations, corruption, lack of transparency, potential political instability. Yet one of the highest risks of all—China’s massive environmental degradation—is barely discussed in corporate boardrooms.

Consider the following: In December 2005, a chemical spill forced a four-day cutoff of water to a major northeastern city. There is serious concern about the potential impact of Beijing’s noxious air pollution on athletes during next year’s Summer Olympics. The International Energy Agency recently announced that China will surpass the United States as the leading contributor of the greenhouse gas carbon dioxide by 2009, more than a decade earlier than anticipated.

In fact, China’s environmental problems are reaching the point where they could constrain its GDP growth. China’s State Environmental Protection Administration (SEPA) concluded in June 2006 that environmental degradation and pollution cost the Chinese economy the equivalent of 10% of GDP annually. This figure is echoed in more specific costs reported in the Chinese press: up to $36 billion in lost industrial output from a lack of water to run factories, $13 billion from the degradation and health impact of acid rain, $6 billion from the spread of desert regions, and the list goes on.

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