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I. INTRODUCTION
The 1972 Stockholm United Nations Conference on the Human Environment was a rude awakening for the Chinese political leadership. They realized, for the first time, that the country was facing an environmental crisis that could no longer be ignored. Forced to confront this environmental crisis, the political leaders promulgated numerous environmental laws and regulations in the hope of Grafting a credible regulatory framework to halt further environmental degradation.
Over the years, China has developed a relatively comprehensive environmental protection apparatus which largely employs conventional command-and-control (CAC) policies.1 However, the regulatory effort has been fraught with many difficulties, particularly the lack of financial resources and agency independence on the part of the regulatory agencies. Having encountered considerable difficulties with CAC regulation, China has been keen to experiment with other types of regulatory policies. Economic incentive policies (EI policies) have been in the spotlight for many years, especially after the United States successfully employed market-based instruments such as environmental taxes and emissions trading. They have also been highly recommended by development banks and environmental think-tanks as being cost effective and environmentally efficient. Convinced that China would benefit from EI policies, the regulatory authorities implemented the first such policy, the pollution levy system, in 1982.2 In recent years, however, attention has focused on another market-based instrument, a national emissions trading scheme. Since 1999, China has been testing the feasibility of such a scheme, which the government hopes will be operational in the next few years.3
Amidst these exciting developments, this article will explore the extent to which EI policies such as emissions trading would benefit China, which is both a developing and transitional economy. I do not dispute that EI policies offer important theoretical advantages over CAC regulation. Further, certain domestic conditions, including bureaucratic corruption and relatively weak environmental protection agencies, make China a prime candidate for a market-based environmental regulatory approach. However, while advocating the increased use of EI policies to create a more cost effective and dynamic environmental protection apparatus in China, I caution against indiscriminate adoption of market-based instruments. As with CAC regulation, there exists a spectrum of EI policies, each requiring different conditions for successful implementation. While EI policies in general will better serve China's needs than CAC regulation, some policies...