China’s environment problem is getting serious with the aggressive economic development.

OECD (2006) reported that air quality in some Chinese cities remains among the worst in the world. Economic loss caused by environmental pollution in China is about USD 64 billion, which amounts to 3.05% of national GDP in 2004 according to China green national accounting study report in 2004. Addressing environment problem is urgent not only for its domestic concerns, but also for new leadership role in Asia.Fortunately, China is aware of environment problem, and also willing to take an environmental responsibility, saying that “China fully appreciates the importance and urgency of addressing climate change” by Chinese president Hu Jintao1. However, the problem is economic feasibility of the environment policy. However, the problem is economic feasibility of the environment policy. Although China has been keeping average annual GDP growth rate above 10%, but China still lags behind in terms of per capita GDP, especially western provinces in China still suffer from extreme poverty.

Chinese economy heavily relies upon coal-based industry which is the cheapest but most polluting source of energy, so it is not easy for China to give up main source of their revenues just only for environment.In this research, therefore, I would like to examine whether there is positive or negative economic impact so as to assess the need of strong environment policy in the stage of economic development in China.Literature ReviewA lot of work is theoretically done to define the role of environmental policy in encouraging or discouraging productivity growth. Conventional view about environmental regulations was that the impact of the regulations on market productivity is expected to be negative since the regulations are likely to induce firms to invest in environmental compliances and thus reduce the investment for market output.

However, recently some argues that environmental regulations can encourage productivity growth and ultimately higher profits. In addition, if the social benefits of regulation were fully taken into account as an additional output, then theoretical prediction would be complicated.Summary of Previous ResearchNegative relationship between environmental regulations and economic development- Firms might be reluctant to innovate if they believe regulators will respond by stepping up environmental standards even tighter. (McCain, 1978)- More regulated firms have significantly lower market productivity growth than less regulated firms in the US steel, oil and paper industries. (Gray and Shadbegian, 2003)Positive relationship between environmental regulations and economic development- Abatement pressures may stimulate innovative responses that reduce the actual cost of environmental compliances below the original estimates. (Downing and White, 1986)- Positive relationship was found between environmental compliance cost and patenting of new environmental technologies using the dataset of U.

S., Japan, and Germany. (Lanjouw and Mody, 1996)- Significant relationship between environmental compliance costs and the R;D expenditure in the US industry was found. (Jaffe and Palmer, 1997)Research question”Implementing strong environment policy in China would bring about the gain of productivity growth and technological process?”To assess economic impact of environmental regulations in China, I would like to exercise quantitative research on “the R&D expenditure and environmental compliance costs in China from 1990s”. Even though this similar approach adopted in the US, but US and China has different industry and political structure.

Thus I would like to experiment whether it would have same positive relationship despite different structures and behaviors between two countries. If positive relationship would be found in this research, it would be helpful for government to adopt environmental-friendly policies in Chinese on-going developing economy.Expecting Results- Positive relationship between the amount of R;D expenditure in China from 1990s and environmental compliance costs from 1990s- Successful environmental policies can contribute to efficiency improvements by encouraging technology innovation- Chinese green movement is right set for pursuing sustainable and powerful economy