SUMMARY RECORD

　　I. INTRODUCTION

　　1. The China Council for International Cooperation on Environment and Development ("the Council") was established by the State Council of the Chinese Government in April 1992 to facilitate cooperation between China and the international community in the fields of environment and development.

　　2. The Council is a high-level advisory body that puts forth recommendations for the Chinese Government's consideration on the integration of environment and development. It has so far held five annual meetings in the First Phase, five annual meetings in the Second Phase and two meetings in the Third Phase. The Council supports the development of an integrated, coherent approach to environment and development and encourages close cooperation between China and other countries.

　　3. The Council is a non-governmental body but with strong government involvement. At present the Council comprises 25 Chinese Members and 21 International Members, all chosen for their expert knowledge and their experience.

　　4. The Members of the Council attended the 2nd Meeting of the 3rd Phase at the invitation of Zeng Peiyan, Vice-Premier of China's State Council.

　　5. The host institution was the State Environmental Protection Administration (SEPA). SEPA has been made responsible for inter-ministerial coordination and for supporting the activities of the

　　Council. It has established a Secretariat Head Office to maintain and develop international and domestic contacts and to ensure follow-up within China to the recommendations made by the Council, as well as to deal with the routine work of the Council when not in session. The Secretariat is assisted by the Secretariat Canadian Office which is directed by Professor Earl Drake. It is located at Simon Fraser University in Vancouver and is funded by the Canadian International Development Agency (CIDA).

　　6. This Summary Record of the 2nd Meeting of the 3rd Phase of the Council was prepared for the Secretariat Canadian Office by Ms Lucie McNeill on the basis of more detailed notes recorded during the Meeting. The Summary Record represents the Secretariat Canadian Office's interpretation of the discussions and not necessarily the views of all participants. To ensure frank and direct exchanges it has been agreed that the Summary Record of the Meeting should present an overview of the discussions without attribution to individual speakers.

　　II. AGENDA ITEMS

　　ITEM 1. ADOPTION OF THE AGENDA

　　7. On behalf of Chair Zeng Peiyan, Vice-Chair Xie Zhenhua presented the theme of the Meeting – the Creation of a Well-Off Society and Sustainable Industrialization. The agenda for the 2nd Meeting of the 3rd Phase was adopted as presented.

　　ITEM 2. APPROVAL OF NEW COUNCIL MEMBERS AND TASK FORCES

　　8. Paul Thibault, recently appointed as president of CIDA, replaces Len Good as Vice-Chair of the Council. A number of new Chinese and international Council members, as well as new Task Force (TF) Co-Chairs were announced. Zhu Guangyao, Vice-minister of SEPA, becomes the new Secretary General of the Council. Members approved the changes by acclamation.

　　ITEM 3. OPENING CEREMONY

　　9. With Vice-Chair Xie Zhenhua presiding on behalf of Chair Zeng Peiyan, the following participants addressed Council members to open the Meeting:

　　1) Vice-Chair Xie Zhenhua, Minister of SEPA

　　2) Vice-Chair Paul Thibault, President of CIDA

　　3) Vice-Chair Liu Jiang, Vice Chair of the National Development and Planning Commission (NDRC)

　　4) Vice-Chair Qu Geping, Former Chairman of National People's Congress (NPC) Environmental and Resources Protection Committee

　　5) Vice-Chair Måns Lönnroth, Former State Secretary, Ministry of the Environment; Managing Director of the Foundation for Strategic Environmental Research, Sweden.

　　10. In the course of these remarks, the following points were made:

　　11. The government and the people of China were faced with a major challenge over the past year: Severe Acute Respiratory Syndrome (SARS). While the disease had an impact on economic activity initially, the country has resumed its rapid growth path. The fight against SARS taught the government of China (GOC) how to respond to a public health threat where coordination is key; in addition, the GOC has realized there needs to be increased investment in health and environmental protection – more specifically the disposal of medical and dangerous waste. The GOC has also enacted the Cleaner Production Law, the Environmental Impact Assessment Law and the Law on the Prevention of Radioactive Pollution. The government has paid attention to waste management in major projects such as the Three Gorges Dam in order to ensure adequate water quality in the reservoir. The provinces of Hainan, Fujian, Jilin, Heilongjiang, Anhui, Shandong and Zhejiang are experimenting with sustainable development as a guiding principle, promoting the "Eco-province" and "Circular Economy" concepts. These approaches have also been adopted by selected municipalities and counties.

　　12. The realization of a well-off society (xiaokang, in Chinese) and of sustainable industrialization will require complex economic, environmental and social interactions. For China to quadruple its Gross Domestic Product (GDP) by 2020, it will not be possible to pursue classic extensive economic growth models involving high pollution and unsustainable resource use. China needs a paradigm that results in sustainable development.

　　13. Recognized experts agree that China is now entering a critical stage of its development. Incorrect growth strategies adopted or adhered to now, could cause irretrievable damage to the environment. There is a debate in China over the extent to which industrial growth should at this time be influenced by environmental considerations. Fortunately the GOC, with the support of SEPA, is aware of the environmental challenges facing China. Already, encouraging results have been achieved in the area of sustainable industrialization – as will be illustrated during this Meeting by presentations made by Anshan Iron and Steel Group and the province of Zhejiang.

　　14. The Council congratulates Minister Xie Zhenhua on winning this year's United Nations Environment Programme (UNEP) Sasakawa Prize – a well deserved recognition of his work, including his leadership of the Council over the past decade.

　　15. The GOC has been paying close attention to the Council's recommendations since its inception. Suggestions to strengthen the organization and coordination of "ecological construction" projects have been adopted; investments have been increased in the areas of reforestation, soil conservation, rangeland restoration and combating desertification. The annual plans and key projects are now better coordinated among responsible authorities. Some of the Council recommendations relative to the fees charged industry for sewage and waste treatment have been adopted. The National Development and Reform Commission (NDRC) is using Council work in the area of financing for municipal environmental projects such as water treatment plants. The Council's work contributed to the design of China's Program of Action for Sustainable Development in the Early 21st Century. GOC representatives attend Council meetings not as guests but as partners voicing needs and seeking cooperation.

　　16. Sustainable development is a strategy that is appropriate for China, with its large population, low per capita resources and fragile environment. The participation of the government, the private sector and the public is required to put this in action; integrated decision-making, market mechanisms and public participation are needed to ensure the three key partners each play their role. Progress needs to be made on several fronts: The Law on Environmental Impact Assessment (EIA) needs to be rigourously enforced and government agencies at all levels should fulfil their obligations to carry out EIAs prior to project approval; economic incentives based on market mechanisms need to be put in place to encourage the private sector to adhere to pollution control and resource conservation; the public needs to become more informed and a mechanism needs to be established to encourage involvement of the media and of civil society to strengthen environmental supervision.

　　17. The quadrupling of China's economy by 2020 has serious implications. New York City's Goldman Sachs Bank estimates that China will overtake the economy of Germany by 2010 and of Japan by 2015. Even with much lower growth rates, western countries are not on a sustainable development path. This kind of rapid growth for China and other Asian countries is bound to put great pressure on all countries to develop in a more sustainable fashion. The pace of growth makes it hard for China to control the process or for the GOC to have much time to think. It implies each sector develops in its own way – further stressing the need for integration and coordination so China can avoid getting locked into unsustainable growth options. Further, there needs to be sustainable regional planning in order to ensure that regions do not choose unsustainable paths that could affect negatively the rest of China.

　　18. A Core Funding Mechanism has been initiated by the Council. It is putting the Council on a firm financial footing, ensuring that Task Forces (TF) can be funded and their efforts better coordinated.

　　ITEM 4. KEYNOTE SPEECHES AND PRESENTATION OF ISSUES PAPER

　　19. Council Vice-Chair Xie Zhenhua presided over a keynote speech by Mr Borge Brende, Chair of the UN Council for Sustainable Development (UNCSD). During his presentation, Mr Brende made the following points:

　　1) One year following the World Summit on Sustainable Development (WSSD), several challenges are emerging. Commitments have been made to achieve measurable progress on "time bomb" problems, but implementation still lags behind. At the WSSD, then Premier Zhu Rongji stated he was aware of the responsibility on China's shoulders; if China succeeds, this will help the world achieve sustainable development.

　　2) The UNCSD is selecting key commitments on water, sanitation and human settlement to achieve over the coming three years; monitoring will be conducted and a score board kept. For example, by 2005 there should be integrated water management plans ensuring sustainable water use. For less developed countries (LDC), this need not be an expensive process but it involves more optimal, efficient use of existing water resources.

　　3) Developed countries bear the responsibility to assist LDCs in leapfrogging technologies and adopting the more sustainable solutions. To eradicate poverty, it is essential to de-couple economic growth and environmental damage. The former Eastern Europe has learned that charging real costs for resources is key in promoting efficiency, productivity and competitiveness, while reducing environmental damage. Pursuing this strategy also opens new business opportunities in recycling industries, waste management and others. Perverse subsidies are paid out of public coffers; these funds are better used in poverty reduction. Similarly, it should be cheaper everywhere to use the least harmful options (such as unleaded gas). Patterns that China chooses will show the world the future face of development; this is why the world is hoping China will provide a "best practices" example.

　　11. Council Vice-Chair Xie Zhenhua presented keynote speaker Mr Bayin Chaolu, Vice-Governor of Zhejiang province speaking on behalf of the Secretary of Zhejiang's Committee of the Communist Party of China Xi Jinping. The following issues were emphasized during the speech:

　　1) Zhejiang is a populated and industrialized province on the south-east coast of China. It has achieved rapid growth averaging 13% over the past 20 years; it also plans to quadruple its 2000 economy by 2020. Pollution, waste and resource depletion risk cramping this growth and perhaps reverse it. This has prompted Zhejiang to explore the concept of becoming an "Eco-province".

　　2) The main tasks involved in achieving "Eco-province" status are: adopting new forms of production and consumption that embody the principles of the Circular Economy and of resource conservation; providing the legal and regulatory enabling environment to promote optimal resource utilization; strict enforcement of pollution control and the protection of bio-diversity; enforcing the national Family Planning Policy; acceleration of the development of science and technology to support the "Eco-province" model.

　　3) The provincial authorities have established a Leading Group to supervise the implementation of the "Eco-province" project and promote the concept of "green GDP", ensuring local plans, projects and budgets meet certain criteria. Zhejiang is also considering the adoption of a "green accounting system". Cleaner production and concepts of a Circular Economy are being promoted; more environmentally friendly and high-tech industries are actively supported; market-based approaches have been adopted to support the development of the "Eco-province" project. Model or demonstration zones are established in order to experiment and promote successful approaches. The participation of civil society is encouraged.

　　11. Vice-Chair Xie Zhenhua invited Lead Experts (LE) Arthur Hanson and Sun Honglie to present the Issues Paper on Sustainable Industrialization and a Well-Off Society (xiaokang) prepared for this Meeting of the Council. The following points were highlighted during the presentation:

　　1) The future of China lies not with retrofitting the kind of development that has taken place elsewhere in the world, but rather with genuine experimentation on new forms of growth. Xiaokang and the levels of growth needed to achieve it will be difficult to obtain, especially considering the broad material and social meaning given to xiaokang by the GOC. The drivers of this process will be industrialization, production, trade patterns and domestic consumption. These will lead to growth in employment, efficiency, equity, inclusiveness and sustainability.

　　2) Following conventional growth models would lead to an accumulated environmental debt and would lock China in costly choices of development and infrastructure. For example, promoting private car ownership in order to develop the auto industry as an engine of growth will have severe consequences: arable land will be lost to roads, air pollution will increase, there will be greater dependency on imported energy, the population's health and safety will be compromised and consumption will be unsustainable.

　　3) Ten issues have been identified in order to achieve xiaokang and sustainable industrialization:

　　1. Limits of industrial contribution to a well-off society in China: there is a need to examine the extent to which enterprises can contribute to xiaokang, allowing enterprises to be profitable but while also reducing China's environmental debt;

　　2. Interdependence of China's sustainable development strategies: there is a need to improve the inter-sectoral cooperation and communication on sustainable development in order to realize the full potential of sustainable industrialization;

　　3. Fiscal and financial sector reforms: these are needed not only for sustainable development but also for the achievement of sustainable industrialization;

　　4. Scale of individual enterprise development: there is a need to consider whether or not China should restructure its industrial base towards larger-scale operations which are more capable of addressing sustainable industrialization; it is also advisable to consider the sectors where it would be key to foster small and medium enterprises (SME);

　　5. Industrialization laws: the tendency is to have a proliferation of laws, but it is necessary to consider the critical gaps existing in the area of implementation and enforcement;

　　6. Access to environment and sustainable development technologies: it is necessary to determine how this sector can be stimulated so it supports the needs of sustainable industrialization and actually promotes leapfrogging to improved technologies; yet there is a danger to put too much hope in technical innovation;

　　7. Need for good measures of progress: it is key to monitor and measure the process of sustainable industrialization, in terms of its own performance and for the contribution it is making to xiaokang; the choice of indicators is critical and the information must be reliable;

　　8. Capacity-building within industry, the financial sector and government: the critical capacity gaps must be identified and action taken to close these gaps during the existing and coming Five Year Plans;

　　9. Sustainable consumption: it is important to determine how sustainable patterns of consumption could be adopted through legislation and education;

　　10. International decisions and their consequences for China: China needs to reduce its vulnerability to potentially damaging events and to perceptions that may affect its international markets.

　　11. With Vice-Chair Liu Jiang presiding, the Executive Director of UNEP Mr Klaus Töpfer addressed the Council and emphasized the following issues:

　　1) Vice-Chair Xie Zhenhua told the UNEP governing council this February, "If we follow the conventional production and consumption patterns, the Earth we live on will not be able to bear with us and the environment we rely on will face much greater threat. We must change the unsustainable production and consumption pattern and develop the recycling economy, building up a recycling society and thus achieving sustainable development, relying on scientific and technological advances, and on the saving and efficient use of energy resources." This is also the leitmotiv for the China Council.

　　2) China has achieved great economic growth, thereby achieving the first Millennium Development Goals (MDG) of reducing extreme poverty by 50% by 2015. The ecosystem approach endorsed at the WSSD demonstrates how important environmental capital is. Wetlands are not only bird habitats but also key to water storage, flood protection and the stabilization of aquifers. There is an economic value to the services performed by ecosystems.

　　3) The first MDG – poverty reduction – and the seventh MDG – sustainable development – must be achieved. But the old Club of Rome motto "Limits to Growth" is not an option; we must ensure there can be "growth of the limits". Where we lose environmental stability, we lose economic potential. Nature is the wealth of the poor – they live interdependently with it. The concept of xiaokang where the economic, social and environmental spheres are integrated, is pivotal. Poverty is the most toxic of all pollutions. And while we cannot have zero growth, we can achieve zero emissions.

　　4) Human capital is the most infinite resource we have. UNEP is involved in education and awareness raising for young people in China; a strategic partnership has been developed with China's business sector to bring this about. UNEP is also working with China on cleaner production (CP); as China grows and invests in new capital, and if the investment is in CP technologies, windfall profits can be reaped in the future. The clean development mechanism (CDM) under the Kyoto Protocol will also support the vital cooperation and technology transfer that China needs. UNEP is assisting China in developing a national bio-safety framework with Global Environment Facility (GEF) funding.

　　11. Vice-Chair Liu Jiang introduced special guest Mr Zhu Qingsheng, Vice-Minister of the Public Health Ministry. During his speech, he underlined the following issues:

　　1) China has put in place an up-to-date system to deal with public health emergencies; this system has been devised as a result of the experiences gained during the SARS crisis. SARS affected people in 24 provinces, 266 cities and counties; over 5,000 people were infected and 349 died. China has learned that with globalization, public health crises spread beyond national borders.

　　2) The lessons learned from SARS are: the need for coordinated and decisive action on the part of the central government; the involvement of all personnel dealing with health care and disease prevention; an enabling legal and scientific environment to support the fight; openness and transparency; international cooperation and exchange.

　　3) The public health emergency mechanism now established encompasses a variety of quick response mechanisms, solid public health administrative measures and a public mobilization mechanism. Protocols for responding to public health emergencies have been drawn up; a system of prevention and control of infectious diseases has been set up; emergency medial treatment centres have been designated for every municipality; medical emergency response teams have been named; and international exchange and cooperation on these issues is deepening.

　　11. With Mr Liu Jiang acting as Chair, special guest Dietmar Nissen, president of the East Asia Regional Headquarters of BASF, made the following points before Council:

　　1) BASF is demonstrating sustainable industrial practices in China; the company's focal point is in the Yangtze River delta, in Nanjing and Shanghai. BASF is part of the Global Compact initiative, a founding member of the World Business Council for Sustainable Development and is listed in the Dow Jones Sustainability World Index. It subscribes to the voluntary Responsible Care Commitment of the chemical industry, aiming to achieve improvement in environment and human health. BASF is convinced that only by adhering to sustainable development can it be financially successful in the long run.

　　2) In 2002, BASF averaged 6.3 kg of emissions for every metric ton of product sold; this represents a 27% reduction from 1996. A few months ago, new long term safety goals in water and air emissions, on occupational safety and in product stewardship were announced. A further 10% cut in greenhouse gas emissions is set for 2012; further targets are planned for other waste products.

　　3) BASF plants in China are equipped with state-of-the-art technology and easily meet the local environmental and safety standards. BASF has pioneered a new styrofoam process which reduces waste water by 30% and organic waste content in effluent by 80-90%; this styrofoam process has been introduced in the Nanjing plant. This material will be used as insulation in China's building industry, thereby contributing to energy conservation.

　　4) BASF is increasingly being recognized for its environmental, as well as worker health and safety record; it is setting standards for corporate citizenship in China. It supports educational projects for children as well as grants for students and research.

　　11. With Vice-Chair Paul Thibault presiding, Mr Tang Fuping of the Anshan Iron and Steel Group (Angang) in Liaoning Province addressed the Council on behalf of President Liu Jie. During the course of his presentation, Mr Tang made the following points:

　　1) Anshan has become China's second "Clean City", just behind Dalian; this title was awarded to the Group in recognition of its efforts to clean up the Angang industrial processes and support environmental improvements in the city itself. All of Angang's steel products now meet ISO 14000 certification. In order to achieve these results, Angang took the following steps.

　　2) Angang updated its production processes and its equipment, thereby adopting CP mechanisms. Major capital investment was committed during the 9th Five-year Plan (FYP) in order to achieve substantial energy and productivity savings. This process of investment leading to increased productivity, lower energy consumption and cleaner processes continued during the 10th FYP with the installation of a new blast furnace, coke ovens and power plant boilers.

　　3) The Group's major wastes are being re-used. Waste water is now recovered, treated and recycled. Secondary resources are being used more efficiently and air pollution has been reduced. Solid wastes such as steel slag and slag powder are being recycled in products such as cement and aggregate.

　　4) Angang has also invested heavily in restoring the environment; its open-pit mines have been reclaimed and the areas replanted extensively. The plant itself has been beautified with gardens and trees. Angang is now implementing a plan to become a Circular Economy enterprise by 2010.

　　ITEM 5. GENERAL DEBATE ON THE ESTABLISHMENT OF A WELL-OFF SOCIETY AND SUSTAINABLE INDUSTRIALIZATION

　　11. Vice-Chair Paul Thibault presided over the Council debate on the AGM's theme. During the discussion, the following points were put forward by Members:

　　12. The Council should not avoid controversy; a major one is the restructuring of energy and industry in China. Small coal-fired power plants were to be decommissioned, but reports in the international press indicate that many of the closures have not been implemented – putting in doubt some of the official statistics on energy consumption issued. Is it possible to believe that economic growth and coal consumption can be de-coupled? Rapid growth affords China the advantage of phasing out inefficient firms while encouraging others to adopt technologies that allow for greater energy efficiency. China is not making full use of these options. One idea omitted in the presentations before Council is the idea of an energy tax, the proceeds of which could be used to promote cleaner technologies and energy efficiency.

　　13. Public awareness has been brought up during the presentations. There is the European Union (EU) and UN Aarhus Convention which enshrines the public's right to information on the environment, as well as the public's right to participation, access to a complaints mechanism and to legal review. While some aspects of this Convention may not be appropriate to China, others could be implemented.

　　14. The ten issues flagged by the Lead Experts (LE) in the Issues Paper are all key to ensuring China develops along a sustainable path, but identification of these issues must be followed by a discussion of practical measures necessary to tackle them, many of which can be drawn from international practice. The financial mechanisms issue identified is key to ensuring China adopts a sound growth pattern. In the long run, economic development will not be sustainable if financial instruments do not provide incentives for environmental protection. A reform of the financial sector is necessary, with identification of main actors and taking into account the specific conditions of the country and its institutions. It will be important to establish a system to protect investors and a social safety net; these are not in contradiction with a market system.

　　15. While many of the problems raised and the solutions outlined are similar to what the Council has heard before, the mood now is more radical. Action is needed urgently. The root of the problem has to do with economic approaches. Markets readily determine prices but cannot recognize costs. In China as elsewhere, there is little agreement on how to determine true costs. Our economies are rife with perverse subsidies and price fixing for short-term goals. In China, there is the potential for the government to put the public first – and for this, it will be crucial to correctly identify costs and "internalize the externalities". Economic growth must be redefined in terms of national well-being.

　　16. The Issues Paper underlines the need for improved inter-sectoral coordination and communication in order to realize sustainable industrialization. Most cities in China already face water shortages; the shortage affects the growth prospect of industries; pricing is key to conservation and future growth. The TF on Environmental Economics last year recommended that the price of water and waste water treatment be increased; Vice Minister Liu Jiang indicated that China had adopted this recommendation. It would be interesting for the Council to be informed in greater detail on the issue of water price increases and their impacts on consumption. It would also be useful to understand what are the employment impacts of the adoption of sustainable industrialization options in key industries studied. China has generated more jobs in the service sector than in industry over the past decade; most of this employment growth occurred in the SME sector. The Council must weigh the repercussions on employment of its recommendations carefully.

　　17. At the WSSD, the EU was insistent on the need to work on sustainable production and consumption. But a key issue is how to achieve this. One contribution of the EU to China is to ensure studies and findings are shared for common learning. Stakeholder involvement is key in ensuring policies and programs are enforced. The "reduce, recycle, re-use" concepts are good, but one forgets waste management; waste is a necessary by-product, no matter how clean the process. It is missing from much of the discussion so far. Channelling theoretical concepts in the discussion by focusing on a sector such as water would bring forward needed consideration of practicalities.

　　18. A few suggestions based on the Netherlands' experience with the integration of environmental considerations in the economy are of relevance to the Council. In developing a sustainable growth policy, it is key to take a "whole-of-government" approach – Holland did not task the Environment Ministry with this, but rather made it a cross-cutting issue for all ministries. This results in a strategy that is perhaps less ambitious, but one that is better supported by all. Use of appropriate language is also important; economic wording and arguments are powerful. It is key to project 30 years ahead, taking the whole life of capital stock into account. On financial incentives, action on a broad front is needed: economic incentives, technology policy, pricing and investment. Capacity building is key if government wants industry to adopt certain measures; energy programs in Holland only took off when government provided technical advice to individual companies. Finally, without enforcement, most measures will not be implemented.

　　19. Fast economic growth presents opportunities and challenges – but it would be unrealistic to expect the development of an economy with zero emissions and full recycling. Most decisions involve trade-offs – by solving one problem for air quality say, others are exacerbated. In order to make wise choices, solid information is key; there can be good collaboration between Chinese and international scientists. The plans to reduce coal use and CO2 emissions are ambitious, particularly considering the discrepancy between official and actual emissions statistics.

　　20. The goal of the 16th CPC Congress of achieving xiaokang for the whole society is inspiring; this would lead to domestic improvements and imply that China can make a greater global contribution. However, environmentalists are concerned that following the Congress, the official discourse has focused mostly on the target of quadrupling GDP by 2020. Some local governments are now setting this target for 2016. As for other components of the xiaokang goal, not all local authorities are monitoring relevant indicators and yet they claim to be achieving these already. The environment is getting lost in this debate. There is a need to link directly the achievement of xiaokang with the adoption of sustainable industrialization measures. In addition, the definition of sustainable industrialization found in the deliberations of the 16th CPC Congress is comprehensive and should be used in the Issues Paper.

　　21. The Issues Paper presents desirable results for China to achieve; this has been known in China for some time, therefore the discussion should focus on the "how to". The Council is now focusing on underlying policies which will allow China to achieve xiaokang; these are financial reform, environmental industries and the coordination and processing of policies. Two other issues deserve focused attention: the first is a strategy for the development of science and technology, the second is education in order to have trained and proficient people in areas critical to sustainable development, and in order to raise public awareness and promote public participation. In addition, the consequences of China's rapid growth needs to be more closely examined by the Council; these consequences encompass impacts on international resource flows including labour, on trade and on the value of the currency. It is critical to recognize that China faces practical problems and pressures to deliver on employment and growth, which may trump the environment.

　　22. It is important to focus on practical measures that will force behavioural change and thus support sustainable industrialization. There are companies such as BASF and Angang which are fast adapters but they are in the minority. More common are laggards who resist change. Without regulations and enforcement, there is no level playing field and this has a corrosive effect on all companies' performance. For companies in the middle of the pack, green taxation is too blunt an instrument; emissions caps and emissions trading are powerful measures. Transparent benchmarking and performance reporting can be strong incentives for companies not wanting to end up in the bottom quartile. Finally, on the issue of scale, economic and employment growth in China will require the development of innovative SMEs; ensuring this sector adheres to sustainable development guidelines and rules is key; incentives can be provided to smaller suppliers by larger firms through contracting and procurement.

　　23. The Issues Paper identifies the complex interlinkages that must be taken into consideration as the Council moves towards policy recommendations. It also reveals a tension between the urge of experts to deal fully with fundamental and urgent issues on the one hand, and on the other hand with the need to distill a set of priorities with a plausible and realistic timetable for senior policy makers. It would be of value if Council recommendations could be more specific about an action program based on near-term, medium and long-term priorities. There are policy interventions that support economic growth and broader environmental objectives while being consistent with poverty reduction. Higher quality information to the public and a transparent policy making process are key, and so is the clarification needed of the various administrative levels of authority – center, province and municipality or county.

　　24. There is a need for greater rigour in public expenditure choices and the basis on which they are being made. The analysis leans heavily on a financial, accounting approach. This leads to an underfunding of public investments that have high public good value or positive externalities – such as rural health and education – and overfund those that have negative externalities – such as loss-making and environmentally unsustainable state owned enterprises (SOE). Our recommendations ought to point to these broader issues. It is key that we find a message and a language to speak to a broader group of public policy officials – not just those who are already converted to environmental issues, but also the indifferent and the hostile.

　　25. Sustainable industrialization should be cross-cutting for all industries in China. In the past decade, there has been a focus on certain industries when it comes to pollution control; there has been little coordinated, integrated or systematic action. In future, there is a need to include in our efforts all industries and stakeholders; this would lead to improved implementation of Council recommendations. It is key for China to learn the methodologies that are powerful in other countries – the ones that provide incentives for business, that support greater coordination and integration, the ones that produce consumer behaviour change.

　　26. Xiaokang is a comprehensive concept and needs to be understood fully. It incorporates improvements in education, in democracy, in science and technology, in the environment and in the economy. The Council AGM must focus on the environmental aspects of xiaokang; this involves a consideration of ecosystems and diminishing natural resources. Understanding the implications of this for xiaokang will enable the Council to make more productive contributions to its achievement. Sustainable industrialization must also be understood in context. This is now an inevitable option for China due to the diminishing returns of trying to develop industry according to traditional models. Sustainable industrialization means understanding the constraints imposed by limited resources.

　　ITEM 6. REPORT ON THE WORK AND FINANCES OF THE SECRETARIAT

　　27. With Vice-Chair Paul Thibault acting as chair, CCICED Secretary General Zhu Guangyao presented to Council the report on the work of the Secretariat, Head Office and Canadian Office. During his report, the following points were emphasized:

　　28. The Secretariat has received feedback on the 2002 Council recommendations from 20 concerned departments under the State Council, as well as six provinces and municipalities. This included reports on legislation which is now being implemented, namely the Cleaner Production Promotion Law, the Environmental Impact Assessment Law, and other regulations and statutes. CCICED recommendations were also incorporated in China's new Programme of Implementation of Sustainable Development in the Early 21st Century. Some green taxation measures have also been adopted.

　　29. Aside from announced changes to the membership of the Bureau and of the Council, there have also been changes with Secretariat staff. SEPA's Directors General of International Cooperation and of Policies and Regulations will become Deputy Secretaries General.

　　30. Themes for the Council AGMs of the coming three years have been chosen. For the 2004 AGM, the theme will be Agriculture and Rural Development; in 2005, the theme will be Urbanization/Development and the Eleventh Five Year Plan; and in 2006, the theme chosen is Social Progress and Xiaokang. Thus in 2005, Council recommendations will be submitted in time for the finalization of the 11th FYP. It has also been decided that future Council AGMs would not produce general policy recommendations, but rather that relevant Task Forces would present their reports directly to the State Council; these reports would now include a 3-page précis of relevant recommendations.

　　31. The Bureau has approved the formation of the following Task Forces: Integrated River Basin Management; Non-point Agriculture Pollution Prevention; World Trade Organization (WTO) and Environment; Environmental and Natural Resources Pricing and Taxation; Sustainable Transportation; Protected Areas; and Agricultural and Rural Development Policies. Further TFs are being considered in order to report to the Council at the AGMs of 2005 and 2006.

　　32. Over the past year, the Secretariat focused on working with the TF Co-Chairs and staff, compiling feedback from relevant government bodies, preparing for the 2003 AGM, implementing capacity building activities with staff and updating the CCICED website.

　　33. Efforts have also been made to put in place and formalize the Core Funding Mechanism to ensure Council stability and timely work through multi-donor, multi-year, untied funding commitments. Donors contributing to the Mechanism are China, Canada, Sweden, Norway, Germany and Shell Company. The total core fund now stands at US$ 10.67 million; 80% of the fund is dedicated to TF operations. Financial statements for the CCICED have been provided by the Secretariat Canadian Office.

　　ITEM 7. REPORT ON THE TF CO-CHAIRS' COORDINATION MEETING

　　34. With Vice Chair Paul Thibault presiding, Lead Experts Dr Art Hanson and Professor Sun Honglie briefed Council on the TF Co-Chairs' Meeting held the previous day. They outlined the following issues during their presentation:

　　35. There is some tension surrounding the review and suggestions provided by the LE to each TF; some TF Co-Chairs felt the LE were adding to complications and confusion. The LE are trying to ensure there is synergy among the groups that will be reporting to Council, in order to improve the consistency, coherence, scientific rigour and impact of the recommendations put forth to the GOC. Ideally, the LE would be provided with TF recommendations some six months prior to an AGM, allowing for a more measured pace for this review work to take place. This year, there will be a meeting of all TF Co-Chairs who will be reporting to Council in 2004 in order to start this coordination and integration process as soon as possible.

　　36. Despite SARS and the disruptions it caused for various TF operations, all five groups were able to complete their work this year and provide the Council with their reports. Continued communication among TFs is needed and some of this will be done through the TF on Environmental and Natural Resource Pricing and Taxation (ENRPT); it is also necessary to ensure that all groups take into account economic and poverty dimensions of their work. The ENRPT TF will devote a proportion of its budged to working with other groups.

　　37. The LE would like to develop an assessment process whereby the Bureau and the Council could judge the quality and results achieved by funded TFs. This matter is complex but important. On the other hand, it is also important for TF participants, once their work is completed, to find out the extent to which their input has been taken into account by Chinese authorities.

　　ITEM 8. REPORTS BY THE TASK FORCES

　　38. Vice-Chairs Paul Thibault, Qu Geping and Chair Zeng Peiyan presided over the presentation of the Task Force reports and ensuing Council discussions.

　　a) Task Force on Enterprise Development and Environment

　　39. Task Force Co-Chair Björn Stigson and Emeritus Co-Chair Professor Pan Chenglie presented the group's findings to the Council and underlined the following points:

　　40. The TF members were involved in desk and field study work, including a study tour to Europe. The work focused on four sectors – cement, oil refining, sugar and pulp and paper – and assessed the situation in China as well as international best practice; lessons were then drawn based on comparative analysis. The study tour went to Finland, Denmark, the Netherlands and Switzerland. Chinese participants were surprised at the extent to which international businesses had integrated environmental protection in their operations; they were also surprised at the positive interaction between government and business. It was useful to have prominent members of the Chinese business community exposed to these realities through the study tour. This underscores the need to include a greater number of Chinese business leaders as members of Council.

　　41. Five overarching themes were identified: the need to rationalize business scale because Chinese companies operate on a smaller scale than equivalent international firms; the need for capacity building in both knowledge and implementation skills for the general areas of management, environment and law; the need for strengthening governance frameworks, more specifically the enforcement of safety, health and environment regulations; the need for special SME programs; and the need for the development and use of performance indicators.

　　42. The World Business Council for Sustainable Development started its Sustainable Cement Initiative three years ago; it encompasses the ten largest cement producers globally, providing the group with good knowledge on the industry. Chinese cement plants are smaller in size; many use outdated and polluting technology; their efficiency levels are lower. Plant dust emissions in China vastly exceed standards; limestone quarrying practices are damaging and there is virtually no reclamation done; product quality is below international standard; the size of plants is insufficient to support investment in pollution control equipment. Power consumption is substantially higher in China; labour productivity is much lower as well.

　　43. In the cement sector in China, there needs to be continued closure of small vertical shaft kiln plants; there is a need to consolidate plants in units large enough to justify pollution control investments; personnel protective equipment and clothing needs to become compulsory and widespread; key performance industry standards need to be developed in order to monitor individual plants (energy use, dust emissions, safety). Clean plants, safe plants are also efficient plants.

　　44. In the pulp and paper sector, China's production is characterized by small mills using agricultural waste as primary feedstock; internationally, the primary feedstock is wood fibre and the plants are large. In China, equipment is outdated, few sustainable forest management tools are used, there is no infrastructure to recycle paper and the technology is not designed to use such feedstock. Similar to the cement industry, the TF finds the pulp and paper sector in China to be characterized by low energy efficiency, higher pollution, lower overall product quality due to the feedstock, and lower labour productivity.

　　45. For pulp and paper plants, it is recommended that China continue the closure of smaller plants, consolidate production in larger units enabling an investment in improved technology, and adopt the use of performance indicators adapted to the sector. Foreign direct investment (FDI) would be a channel for bringing in improved approaches for all the sectors studied.

　　46. Oil refining was found to be different because of the presence of foreign firms – although there are many small and inefficient facilities to be found.

　　47. Recommendations relate to the five overarching themes. Increase manufacturing facility size for each sector, restructuring to a scale that allows adoption of sound business, environmental and quality practices. Make industry structural changes that encourage and promote stronger environmental performance. Develop a strategy, tactics and institutional capacity for improving performance of SMEs. Strengthen governance frameworks. Develop key performance indicators for specific industries and for China's key social, environmental and economic goals. Speed up capacity building within a broad spectrum of business, management, legal systems and social institutions.

　　48. There is not sufficient SME support for pollution control; simple administrative means are not effective in dealing with the problem and often lead to reductions in production. A better approach might involve providing management expertise support to SMEs in order to help them meet efficiency and quality objectives. More competitive SMEs could then survive and others could be eliminated through competition. Merger and acquisition strategies could also assist in the process of increasing SME efficiency and the scale of industry. Administrative measures are not effective in controlling undesirable SMEs; regional protectionism undermines central directives in some cases because of local concerns over fiscal revenue and employment.

　　Discussion

　　49. In the past, SEPA resorted to administrative means to shut down polluting enterprises; as five were shut down, four re-opened. If administrative means were combined with market-based mechanisms, the results would be more satisfactory. In Jiangsu the pulp and paper sector is composed mostly of SMEs; thousands were shut down but they have re-emerged. The government determined to encourage the growth of larger scale, clean and profitable paper mills; this has led to the bankruptcy of smaller, less efficient and polluting SMEs, or their relocation to western China. There needs to be better inter-provincial coordinating mechanism to deal with larger firms operating in several areas and flouting the laws; making business news more transparent will also put greater pressure on the management of larger firms in order to avoid a sellout of shares on the markets.

　　50. Business and government need to develop real partnerships. Successful examples are: the development of eco-business parks where one company's waste is another's resource, and where wastes are treated collectively; in Guangdong, polluting SMEs are subsidized by government to stop production but also to develop a new business line. Comments have been made on the reliability of statistics in China; but Members should be assured that published, official statistics are accurate because to do otherwise leads to another set of problems the government wants to avoid. However, the data provided by less developed areas could be questionable.

　　51. It is crucial for energy and capital-intensive industries to restructure. It involves massive investment and this needs to be encouraged; it is also important to shut down plants that do not meet standards and exceed limits. If this happened more rigourously, there would be more investment and a more rapid pace of change. Pan-industry benchmarking for key indicators, and the requirement that certain benchmarks be achieved as a condition for licensing, are also powerful tools for change.

　　52. The leverage that SOEs can put on the performance of SMEs by adjusting their procurement practices can be enormous; SOEs and other large buyers can have significant impacts on their supply chain in terms of environment as well as health and safety conditions. This is the single most powerful measure to take in order to improve SMEs. Similarly, assessing and rewarding managers not only for their economic performance but for their performance on environment and human resources management can also lead to substantial behavioural changes.

　　53. Based on Danish experience, there are changes that could be made to the recommendations dealing with capacity building and governance. Denmark was the first country to compel businesses to keep "green accounts" – ecological statements that can be audited as financial reports are. Industry was initially opposed to this measure but are now in favour; they have realized savings as a result and public benchmarking became a powerful tool for management and shareholders. While management training is an important component of capacity building, employee training should not be neglected. Worker participation and education is key to improving company performance; it is surprising that in this context, trade unions are not mentioned in this TF report. As for restructuring for scale in China, one key barrier is the human and social costs of workers losing their jobs and local authorities losing their tax base. The imposition of an energy tax contributing to a restructuring fund could ease the process.

　　54. Japan's experience with SMEs is relevant. In the early 1960s prior to entry into the Organization for Economic Co-operation and Development (OECD), Japan enacted its SME Law. SMEs were lagging behind and needed to be modernized; after 30 years, the change is radical. SMEs are now a source of dynamism and job creation in the Japanese economy.

　　55. Experience dealing with firms that want to invest in ethical businesses or funds is instructive. Such investments often occur without direct field investigation, but surveys are done by assessment companies hired by potential ethical investors. Such monitoring and assessment in China could be useful; advice on how to comply to ethical or environmental standards is given in the process and can lead to improved performance for companies, their subsidiaries or suppliers. Were Chinese firms to be subject to such independent reviews, this would encourage investment as well as environmental performance. This would check the tendency to "green-wash", to fudge information given to environmentally-concerned investors.

　　56. The report raises issues that the Council should consider at later AGMs. In Sweden, the most significant environmental improvements occurred from the mid-70s to the mid-80s due to enforcement of environmental regulations and to an economic recession. These factors forced old inefficient companies out of business; local authorities had no say on the survival of these firms. Were local authorities to be more shielded from the health of local enterprises, it would be preferable; depending on personal income tax as opposed to corporate tax helps. The enforcement of environmental legislation should be removed as far as possible from local authorities.

　　57. It is important to make the business case for the environmental efficiency of companies – that profitability can go hand in hand with environmental efficiency and with improved social practices. Key indicators should be used to demonstrate this. Performance of industry should encompass the downstream impacts of the production chain. In the case of cement, the impacts of the industry on housing quality and heating efficiency or other factors should be included. To promote enforcement of regulations, it is key to have a predictable system; objectives must be set medium and long-term, and inform business of these upcoming changes. A study of the system of enforcement that is best adapted to the Chinese situation is perhaps advisable.

　　58. The first recommendation advocates the closure of SMEs. But if there is a demand for the product at a price that people like, this may not be realistic. Standards and their enforcement are needed to effect the changes we want; capacity building and financial incentives can also help firms bring their personnel and capital up to date; performance commitment contracts signed between companies and government can also be useful.

　　59. The report finds there are good practices being followed even by SMEs in China, but it does not explain what lies behind such good practices. Large size does not always improve environmental performance or corporate responsibility or energy efficiency. In fisheries, traditional fishers use 90% of the catch while industrial fishing operations generate by-catches of 30-40% that are thrown overboard. In forestry, large monoculture reforestation practices did not lead to ecological forests. The report focuses on production processes and output, but does not look at supply chains and inputs. Economies such as Germany are based on SMEs which are both economically profitable and in some cases are at the cutting edge of environmental technology.

　　60. Capacity building of SMEs works best when it is direct and site-specific. It is no good imposing regulations from above – SMEs must be shown in situ how to do things better. This requires personnel, technical know-how and budgets. Improvements done with one SME can lead to demand from neighbouring SMEs, leading to a positive cycle. When discussing benchmarking, information and transparency, it is important to be selective in the kinds of indicators one requests – information overload can lead to unproductive monitoring to no avail. The information provided needs to be usable and should allow the reader to compare one company's performance to another. More work is needed on the development of such indicators.

　　61. In heavy industry or in industry that requires large scale processing, investments are such that small scale firms cannot be players – scaling down the technology does not work. The nature of the industry determines whether or not small scale operations that are environmentally friendly are possible. For China, it is useful to approach this on a sector-wide basis. There should be consideration of setting up sectoral funds to assist with upgrading and with re-adjustment of some firms. There is a trade-off and jobs will be lost in the process – these decisions are for the GOC to make.

　　62. China's specific conditions must be considered when discussing the shutdown of SMEs. The closures were based on a set of well-defined criteria – they were not based on size only. Profitability in some cases was based on pollution so they had to be shut down – the market alone would not have effected this result in such cases. In fact, legal, economic and administrative means must be used together to produce the desired results.

　　b) Task Force on Energy Strategies and Technologies

　　63. The Task Force report was presented by Co-Chairs Thomas Johansson and Professor Ni Weidou. The report is the fruit of one year's work and is entitled Transforming Coal for Sustainability – A Strategy for China. The Co-Chairs underlined the following points during the presentation:

　　64. This report builds on previous work done by the former Working Group; findings are to be also published in several issues of the journal Energy for Sustainable Development. The starting point of the work is China's "3 E's Strategy": Economy, namely the quadrupling of the GDP by 2020; energy security, namely trying to avoid an over-dependence on imported oil; and environmental protection, encompassing public health, ecosystem protection and combating climate change.

　　65. Projected oil consumption in China goes from 200 million tonnes per year to 400 million tonnes per year by 2020. Domestic oil production is stable, therefore a considerable increase in oil imports is projected. Similarly, the projected coal power plant capacity will go from some 200 gigawatts to over 500 gigawatts; most of the capacity projected for the year 2020 has yet to be built – representing an opportunity for environmentally sound investments.

　　66. The strategy for the modernization of the coal sector in China advocated by the TF includes the use of coal gasification technologies to produce synthetic gas for power and clean fuels for transportation, cooking and heating both in domestic and industrial applications. The result foreseen is the replacement of coal combustion and oil imports with energy carriers derived from gasification of coal.

　　67. Coal is an inherently dirty fuel while gasification allows for effective and relatively inexpensive cleaning of the coal. It also allows the use of gas turbines in combined cycles to produce greater efficiency in power generation. Synthetic gas (syngas) is also the starting point for high quality fuels – methanol, dimethyl ether (DME) or other energy carriers and a number of other chemicals. By using oxygen-blown gasification and separation techniques, one can obtain exhaust gases that are nearly free of greenhouse gases, if the CO2 co-product of hydrogen manufacture is stored underground at low marginal cost. Power production and fuel synthesis can be economically combined in a poly-generation plant with a "once through" cycle. In the end, the process produces liquid fuels and electricity for export to the power grid. The cumulative world-wide capacity and growth of coal gasification has now reached 60 gigawatts – and 9 gigawatts of this is now produced in China, mostly in the fertilizer and chemical sectors. China has the expertise and the necessary industries to pursue this option.

　　68. Using the Markal model on China's situation, the TF examined whether or not the technologies presently in use could be combined in such a way as to alleviate the concerns over energy sufficiency – for economic growth, for energy security and for pollution control. The model generated two main scenarios: a base case scenario where coal is used in direct combustion technologies, and an advanced technologies scenario where poly-generation technologies for coal and biomass, high efficiency industrial processes, advanced renewable energy technologies, urban residential demand technologies, hybrid electric and fuel cell vehicles, and carbon sequestering options. Constraints have been imposed on the models: a four-fold growth in the economy, sulphur emissions are constrained and reduced by 2050, oil imports are kept at below 30% any given year, and a carbon constraint is imposed to reflect global commitments in greenhouse gas emissions controls.

　　69. The two resulting scenarios reveal that the base case situation cannot satisfy the requirements of China as reflected in the imposed constraints. Energy would not be available for the desired economic growth of China. However, the advanced technologies scenario does provide China with the energy it needs while satisfying the key constraints – and at a lower cost for both energy and CO2 emission reduction than the "business as usual" approach. This scenario shows traditional coal combustion starting to decline in 2010, while coal gasification increases exponentially from 2005 to 2050. There are also appreciable energy streams provided by renewables and efficiency gains, while the proportion of energy obtained through oil imports starts declining after 2025. To realize this advanced technologies strategy, coal use must shift from combustion to gasification to produce clean fuels.

　　70. Modernization of coal is necessary for realizing China's "3 E's Strategy". Coal will continue to provide more than 50% of China's energy needs to 2050. The technologies required are known and proven in China. They offer the opportunity to meet near-term environmental and energy security goals, at lower cost than "business as usual" approaches. And they provide a path to limiting carbon dioxide emissions.

　　71. Selecting these energy options is urgently needed in China because investment plans for satisfying capacity needs over the next decades are now being made. Coal power will increase by a scale of 30 Three Gorges projects; if wrong decisions are made, coal power plants have a useful life of 30 years – not investing in new technologies now will make these options prohibitively expensive in the future. China's need for liquid fuels and for independence from imported oil add to the appeal of the options presented by the advanced technologies case.

　　72. The TF therefore recommends the following: a detailed plan should be prepared under the guidance of the central government; the feasibility study of two demonstration plants in two distinct areas (east and west) should be conducted; based on results obtained from the demonstrations, the GOC would define the capacity and proportion of coal gasification to total coal consumption to be implemented to 2050; the implementation of a poly-generation system should be started, with close cooperation with the power sector; in the near term, there should be widespread utilization of 15% methanol blended gasoline in motor vehicles and in the medium term steps should be taken to promote the use of DME as an alternative to diesel fuel; promote the close cooperation of Chinese and international research teams to do more research and development (R&D) on poly-generation systems. The GOC should consider financial and tax incentives to support these efforts.

　　Discussion

　　73. It is correct to advocate the modernization of coal technologies for China. Modern coal gasification if a proven technology and has demonstrated clear advantages; Shell is involved in 8 such projects in China at present – in fact were the naphta-based fertilizer plants of China converted to modern coal gasification, this would help the country cut CO2 emissions by 10 million tonnes per year. The production of liquid fuels from coal gasification comprises methanol, DME and Fischer-Tropsch (F-T) liquids – but it is key to understand their characteristics. DME and methanol have cost disadvantages due to their toxicity which have impaired their global development and utilization to date. F-T liquids replicate much cleaner fuels that can be used in today's infrastructure and engines; they represent a more promising option. Poly-generation – the generation of power as liquid fuels are being produced – has good potential; but it should not overshadow the need to push ahead with natural gas based generation as the first and more economic step to take along this road.

　　74. The work conducted by this TF should continue because it is critical to urban transportation and power in the context of the urban theme that will be examined at a future AGM.

　　75. Renewable energy technologies should be more strongly emphasized. Wind energy has already been found to be highly feasible for the Inner Mongolia Autonomous Region. There are questions about the efficiency of coal gasification – best cases in some countries is 52% efficiency in coal utilization, and if heat and power are co-generated the efficiency increases to 95%. The TF should provide more information on CO2 sequestration and on the possible impacts of China's high sulphur content coal on the use of gasification technologies. The TF should also discuss the impact that the power sector liberalization planned for 2005 would have on the options advocated.

　　76. There appears to be some discrepancy between the facts presented in the report and the recommendations put forward by the TF. While the report states the strategy proposed is built on 4 pillars, only coal modernization is outlined; the energy efficiency, natural gas and renewable energy pillars are not discussed. Coal gasification is a complex issue, with plants costing twice as much as conventional power plants; the price of coal would have to be much lower for gasification to be feasible. It is therefore necessary to advocate other options as well.

　　77. When advocating options that involve disposing of CO2, it is important to be realistic about the magnitude of this problem. There have been numerous studies on the methodologies to accomplish this but none is likely to be feasible in the short term. It is then necessary to consider options such as smokestack capture or combining it with other chemicals – however these options could themselves create other undesirable effects. The TF needs to be conservative in stating its conclusions and recommendations.

　　78. There should be more focus on the demand side of the energy equation. Energy efficiency needs to be considered more carefully since there are significant gains to be realized there. In addition, as disposable incomes rise in China, people will buy more cars; this is already happening. It is therefore difficult to consider seriously a scenario where carbon dioxide emissions peak and then fall. One conclusion to underline in this report is the fact that carbon-based energy carriers should be minimized.

　　79. The guest speaker from BASF showed the energy savings to be realized from properly insulating buildings; there has been a long debate in western countries on the savings to be realized through energy efficiency. The scale of China's economic growth leads one to question whether or not China can adopt radically different options, but the TF should put more effort on working on demand-side savings through energy efficiency.

　　80. The report provides ample food for thought for the GOC. More specific work is called for on coal utilization, on given scenarios and on policies and their effects. Once this additional work is done, recommended options can be put forward to the State Council. The China Council may be asked to do additional work in this area.

　　81. The TF discusses the co-generation of power in plants that are located near coal mines but far from the cities where the power would be consumed. Yet there is significant power leakage along transmission lines. Carbon sequestration is at present very expensive, although the technology is improving. The advanced scenario proposed in the TF report advocates locking China to using coal as 50% of its energy source. By 2050, China may have targets to meet under the Climate Change Convention, and cheap options to reduce CO2 may have been exhausted. Has the TF considered the wisdom of wedding China to a 50% coal use scenario?

　　82. There are cost and climate change implications to the carbon sequestration option proposed. The report does not make it clear whether or not this is feasible in the near term. In addition, the TF report is strong on technological issues, but weaker on economic analysis. This aspect needs to be strengthened.

　　83. The TF is delighted to hear more work would be required from the GOC on these issues and feels there is a good base from which to start. China can look more closely at DME as a liquid fuel, which burns cleanly in diesel engines, while producing no soot or particulates – the fuel is used in daily life in aerosol cans, is non toxic and efficient. The coal strategy proposed for China by the TF is not built on coal, but on a combination of coal, modernized coal, energy efficiency and renewables – all these components will require the proper enabling policy environment. The other pillars of the strategy proposed have been examined in earlier Working Group reports. Coal sequestration is an important issue on which much important work is now conducted in China; many options are now under consideration and this work should help bring down the costs.

　　84. In looking at comparative costs of various options, it is important to "internalize the externalities" in the cost structure; often technologies are deemed expensive only because the environmental and health costs of the status quo have not been factored in. The TF recognizes that the liberalization of the Chinese power sector will pose a challenge for new technologies; temporary support would be needed to enable start-up and market entry as well as capacity building; subsidies could eventually be replaced by market-based instruments. The issue of toxicity of liquid fuels and of length of transmission for power generated are not as serious as implied during the discussion. On the final point of economic feasibility, the price of coal in China is already down in many areas, making gasification a sustainable option.

　　c) Task Force on the Development of the Environmental Protection Industry

　　85. With Vice-Chair Qu Geping presiding, Task Force Co-Chairs Wang Yangzu and Professor Rudi Kurz presented the report from the Task Force on the Development of the Environmental Protection Industry (EPI) to Council. The Co-Chairs drew the following issues to the attention of Members:

　　86. The TF's work started in April 2002 in Beijing; three workshops were held dealing with China's policies on EPI, and on the EU's legal framework and the development of its EPI. Participants included EPI representatives from several Chinese provinces as well as experts from Japan, Germany and the Republic of Korea. TF meetings were also held to deal with the report and draft recommendations; the draft recommendations were distributed to members of the China Association of EPI for comments. Further plans include holding an international EPI Trade Fair combined with an international symposium.

　　87. The TF report identifies the most important factors to support the development of a thriving EPI in China: stricter regulations and enforcement; more intensive monitoring and accounting; correcting the price system by applying eco-taxes and subsidies; raising the technological level of the industry; promoting free market entry and competition among EPI, as well as eliminating local protectionism; emphasizing the service sector of EPI; and enhancing people's awareness of environmental problems and their solutions.

　　88. EPI is defined by the OECD as the industry which produces goods and services to measure, prevent, limit, minimize or correct environmental damage to water, air and soil, as well as problems related to waste, noise and ecosystems. This definition includes end-of-pipe solutions as well as integrated solutions such as cleaner processes and products. This implies a heterogenous, cross-cutting industry with numerous market segments and niches – and therefore an industry for which it is difficult to compile statistics. In developed countries, EPI has a 3% share of GDP and of employment; in China EPI accounts for less than 2%. Closing the gap could increase employment from the present 3 million to 4.5 million EPI jobs. EPI can be an engine of the economy's modernization by promoting innovation and know-how, although these effects are harder to measure. The structure of the EPI in China is concentrated in the areas of equipment manufacturing, especially for the reduction of air and water pollution, and on waste management services.

　　89. The TF analyzed how best to foster the development of EPI in China. A market-based framework was adopted to identify the factors that are relevant to this development. The three major factor groups are: demand, supply and market organization; each identified factor can become a bottleneck in EPI growth. This analysis led to key recommendations which are predicated upon China's need to develop a coordinated strategy addressing the three factor groups, namely supply, demand and market organization.

　　90. A fast growing demand is the single most important driver for EPI growth in China; the challenge is to transform huge potential demand into actual demand. In order to increase private demand, it is necessary to make polluting options more expensive; government has to change relative prices by eliminating perverse subsidies – for instance making energy and resource efficient household appliances more attractive. Eco-labels for green products can help create and increase consumer demand, and hence contribute to the growth of EPI. However, government has to avoid overburdening the poor during the transition period when perverse subsidies are being removed.

　　91. In order to stimulate demand from industry and investors, the TF recommends tighter enforcement of environmental regulations as well as the implementation of market-based instruments such as the polluter pay principle and a reduction of perverse subsidies; in government procurement, preference should be shown to suppliers who are certified under the ISO system.

　　92. In the area of public demand stimulus, government should take the lead by purchasing green products even if they are marginally more costly; this would support EPIs by providing them with critically needed time to learn, adjust and become more competitive. Transparent and fair bidding procedures should be ensured. In addition, the imposition of eco-taxes would provide funds to finance government spending on environmental projects such as public transport, repairs to public sewer systems, as well as the organization of waste collection and recycling systems.

　　93. In order to stimulate foreign demand for China's EPI, the GOC could help Chinese firms participate in foreign trade fairs in order to overcome barriers of entry; direct product subsidies should be avoided since they contravene the WTO.

　　94. On supply side issues, it is key to improve competitiveness by improving the quality of all inputs: labour, machinery, capital and technology. China's EPI sector has both very large firms and SMEs; they require different approaches. More skilled engineers and eco-educated managers, familiar with international practice and able to adapt these to the Chinese situation are needed. This requires more investment in high-level training. Incentives for investment such as favourable depreciation periods and rates, for R&D, for innovation and access to capital markets are needed as well. Conditions for FDI need to be improved, international property rights need to be respected and protocols developed for know-how transfer from universities to companies. Government is not in a position to specify an industrial strategy for the EPI sector, but highly visible demonstration projects could increase information and awareness, and could publicize new solutions throughout certain sectors while improving the reputation of Chinese EPIs.

　　95. On market organization, market entry should be absolutely free, although the specification of certain standards is necessary. Private organizations such as the EPI Association could assist with certification and monitoring. Exploitation of economies of scale will only be possible if China becomes a large single market; local protectionism must be overcome and this could be accomplished through firm enforcement of the Competition Law. Eco-labeling would also improve market transparency.

　　96. EPI is the product of a society willing to deal with pollution and where people show their preference for options that are environmentally friendly; it is generally fostered by increasing incomes and wealth. However, government can play a role in supporting the EPI development process; it can embrace the vision of sustainable development and it can develop and implement concrete programs to bring this about. A national strategy should be formulated, with indicators and time targets specified so the expectations of investors and consumers can change, thereby further accelerating the necessary structural change.

　　97. There is a need for new institutions that can push for the new priorities and consolidate the reform efforts; these institutions can be at the forefront of strengthening environmental protection, including research, monitoring, reporting, investigation, planning and enforcement. The institutions need to be independent bodies with clearly defined competencies, and answering only to parliament and the courts. Existing institutions such as SEPA should be granted more responsibility and independence. Motivating and integrating private initiatives for environmental protection is vital; non-governmental organizations (NGO) can also play a role in increasing consumer awareness of problems but they need access to information and involvement in public hearings and consultations. There needs to be an intensive public debate on the concept of xiaokang, examining implications in terms of lifestyle choices for people; education is essential if China is to avoid unsustainable choices. It is the belief of the TF that achieving the xiaokang objective will not be possible without an effective and competitive EPI.

　　Discussion

　　98. Early EPIs were involved with "end-of-pipe" technologies; these were considered necessary evils by industry, and were driven largely by legislation and enforcement. But another type of investment involves finding production efficiencies, representing an opportunity for industry to reduce costs. Companies that are efficient and don't pollute are the ones that generate greater profit; pollution is a sign of poor and inefficient management. There is a need to look at environmental protection investment in an integrated way. China should consider the efficiencies gained by investing in new, clean and efficient coal gasification plants rather than investing in end-of-pipe desulphurization treatment for conventional thermal power plants.

　　99. Much is expected of green consumerism. When surveyed, people say they are willing to pay more for green products, but when faced with real choices the majority picks the cheapest alternative. The demand-side push that was to be created by green consumerism is not happening in western countries. The starting point must still be effective legislation and enforcement.

　　100. China is poised to make significant investments in the near future and this represents a real opportunity to choose the environmentally sound technologies; it is much cheaper to do so at the outset rather than to retrofit polluting technology after the fact. The experience in Europe is that a requirement must be imposed to choose best available technology in new investments; this is advantageous to the EPI sector and to the environment.

　　101. Chinese EPI development will require a massive transfer of know-how and technology from developed countries. If projects are of a sufficient scale and if the bidding is open to international firms, the GOC could stipulate that joint ventures be formed in order to assist with the technology transfer and capacity building process.

　　102. It is important to understand the kind of demand that has been a driver for EPI. The TF provides examples in the case studies which are tightly focused on technology issues. Know-how, particularly in terms of ecosystem management, is an important aspect of EPI; this is the kind of service provided in ecosystem restoration work that happened for the Rhine and Thames rivers in Europe and that is now being considered on a large scale in China. Wetlands need to be restored so they can fulfil their ecological and economic functions (including flood control); large dams will need to be decommissioned and reservoirs need to be properly managed. The TF should take a broader view of EPI encompassing such services.

　　103. An earlier TF of Council worked on related issues; it came to similar conclusions on the key role EPI can play in ensuring China can grow in a sustainable manner. This importance of this work was acknowledged by the GOC in that EPI was included in the 10th FYP; the Plan stated that government was to provide the enabling environment for EPI rather than direct its development. At present, there are inconsistent EPI standards, products and product quality across China; the GOC could harmonize this. The GOC could also help improve the information flows about best available technology across the country; it could help support the development of SMEs in this sector – since in many cases large scale enterprises are not feasible.

　　104. The demand side driver of EPI development in Europe is clearly the strong enforcement of existing laws and regulations. It is therefore important for China to understand that it needs to invest in independent regulatory authorities which have very clear terms of reference; the TF should provide China with a list of countries and institutions that best demonstrate this. The TF should also be careful in recommending that government select green procurement options even if they are more costly; concrete examples would be helpful to China.

　　105. China needs to examine what will happen if its population adopts western lifestyles that could have environmentally disastrous impacts. International media reports indicate that in a few decades, every Chinese family will own a private car – with severe consequences for the world's climate. This theme is critical for China to debate in terms of the development of the economy and its place in the international community.

　　106. The EU and the US have introduced eco-friendly products that are certified and labelled as such; these products include fish and timber. Often there is a lag between supply and demand – for instance, consumers demand a product before industry can supply it, and vice-versa; the initial introduction period for such products is critical. Although it is tempting to say legislation should precede market creation, in fact the existence of a market is necessary to allow government to make legislation palatable to industry and fine tune eventual regulations. Awareness building is critical to consumer adoption of eco-products; this is why environmental education through the school system is so important in China. The World Wide Fund for Nature (WWF) has initiated a project on the development of an environmental curriculum with the Ministry of Education.

　　107. Broadening the EPI definition to include ecosystem management services will also require the development of instruments; depending on the structure of each EPI sector – its scale, number of competitors and nature of its market – it might be possible to determine if the appropriate instruments to promote this EPI sector should be demand or supply-driven. It is necessary for the TF to go beyond generalities in order to be of assistance to Chinese policy makers. Depending on the nature of the market, and if there is a small number of actors, demand can play a big role in determining the adoption of more environmentally friendly technologies and fostering EPI growth. This is how progress happened in the lumber sector. Public-private partnerships (PPP) should be considered in cases where public funds help private companies apply new technologies.

　　108. In the 1970s, Japan saw investment in environmental protection reach 20% of total investment; market organization is key to fuelling this investment. The TF does not seem eager to advocate incentives such as preferential depreciation rates for this kind of investment, although there is mention of soft loans. In fact, depreciation policy could well be one of the more effective tools, given China's present situation. Over the past five years, there has been considerable investment in waste water treatment facilities in urban areas; this should provide the TF with ample material to delve deeper into the kind of policies necessary to foster the growth of the EPI sector.

　　109. There seems to be a negative consensus emerging, that one can trust neither government nor the consumer. In fact, consumers have been a powerful force in the growth of EPI in Europe – demand for organic milk has risen from 0% to 40% of the market despite the fact it is more expensive; similar demand was generated for green lumber. In addition, public procurement can be a powerful tool, as has been demonstrated in Europe; this allows green products a foothold in the market.

　　110. The TF found that in China, the EPI players are mostly end-of-pipe products; management and consulting services are a very small part of this industry as yet. With China presently engaged in an intensive investment phase, it is timely to push for eco-efficiency, which will then foster greater demand for EPI goods and services. The growth of EPI in China is something the GOC favours; it also projects exporting EPI goods and services.

　　d) Task Force on Financial Mechanisms for Environmental Protection

　　111. With Vice-Chair Qu Geping presiding, Co-Chairs Zhang Kun and Professor Hidefumi Imura briefed the Council on the results of their work. They underlined the following issues during their presentation:

　　112. Insufficient investment is one of the bottlenecks still affecting environmental protection in China despite significant increases in recent years; in addition, investments tend not to be productive. Recent changes enshrined during the 16th CPC Congress have laid the groundwork for improvements in this area. The objectives of the TF were to identify key problems affecting environmental investment, develop innovative approaches to help government set priorities for investment, and draw up strategic recommendations for the GOC. The TF combined theoretical analysis and case studies, with consideration of both the domestic situation and international experience.

　　113. Starting in 1991, China has been increasing its total investment in environmental protection, but this lags behind the increase in overall investment. During the 9th FYP, there was a shortfall of 90 billion yuan in planned investment; during the 10th FYP, the planned investment is to reach 700 billion yuan; but in the water pollution control area alone, the investment shortfall is expected to reach 40 billion yuan. Such shortfalls are expected to continue.

　　114. Environmental investment is especially inadequate for urban environmental infrastructure (UEI) projects and for pollution control in the SME sector. UEI investment lags behind the pace of urbanization; 37% of China's population is now living in cities and this is expected to grow to 46% in 2010 and 55% in 2020. UEI investment is not keeping pace with the resulting increasing demand for sewage and waste treatment; at present, only one fifth of the cities' solid and liquid wastes is treated. In order to reach the targets set in the 10th FYP, China would have to invest 150 billion yuan.

　　115. The focus of the TF was the absence of commercial financing mechanisms and of financiers other than government in this area; public funds account for 70% of total environmental spending in China – in countries with developed market economies, this percentage is closer to 40%. The other focus was the special barriers faced by SMEs (99% of China's firms, accounting for over 50% of GDP); SMEs are estimated to generate 55% of total industrial pollution in China, yet they are dispersed and find it difficult to get financing for any investment, let alone in pollution control.

　　116. Public investments in environmental protection is inefficient due to leakages in construction, operation and management of urban waste facilities. Marketization of the UEI area would mean breaking up government monopoly in the financing, construction and operation of waste treatment plants. In industrial pollution control, enterprises are generally responsible for treating their own waste or contract to specific firms to perform this service.

　　117. In designing financial mechanisms for environmental protection, the TF recommends that China stick to its polluter-pays and user-pays principles; efficiency of financial investments should be given priority; and equity issues and risk mitigation should also be taken into account. The roles of various actors in the financial sector should be clearly defined – and government has a lead role to play. But investors other than government and the polluters themselves should also be encouraged to take part in these opportunities – therefore commercial financial mechanisms must be improved.

　　118. The government's role would be to consolidate and enforce environmental laws and regulations in order to increase investment demand; it has to increase environmental investments and finance them from its fiscal budget; it can raise funds on the markets through instruments such as trust funds, municipal bonds and even an environmental protection lottery.

　　119. The TF puts forth key recommendations on financial mechanisms. The first one deals with commercial banking; measures put forward include policy changes to open to environmental projects all financing avenues (bonds, investment funds, loans, etc.), changes to collateral rules, methodologies for risk management and others. The second recommendation deals with municipal bonds; these are widely used instruments to finance UEIs in developed countries and China's financial system could now better support such a market; however, the GOC will need to study the feasibility of this option, amend relevant laws and regulations, and test the concept in selected pilot projects.

　　120. A series of recommendations focuses on SME support by government including the establishment of an SME Development Fund to provide loans for pollution control investments; organizations should be established to assist SMEs with both pollution control technical assistance and financing issues; and innovative approaches to utilize commercial bank credit should be developed. Support structures for SMEs also need to be tested in pilot projects and could be the subject of future Council work.

　　Discussion

　　121. Issuing municipal bonds is complicated in China, due to the legal statutes that apply; there is a decree that only the central government can issue bonds. This is due to concerns around the possibility of "overheating" of the economy and the tendency of local authorities to get into "bubble projects"– projects for which there is no real need or demand – or to divert funds to other uses. China has to first solve the problem of control over infrastructure planning and budgeting in the regions; only then can the central government delegate to local governments the authority to issue bonds.

　　122. The TF focused mostly on waste and waste water; in future it might be advisable to look into investments needed for prevention and shifts to cleaner production processes. When looking at non-point pollution control, it is not clear whether or not the TF advocates disincentives such as green taxes on fertilizers and pesticides. When the TF proposes favourable tax treatment for the pollution control sector, similar treatment should be extended to companies that use environmentally friendly technologies.

　　123. When examining water sanitation and waste, the TF proposes a form of PPP through build-own-transfer frameworks; it is important to pay attention to the terms of reference of such contracts. In order to foster a sustainable development approach that goes beyond environmental considerations, it would be necessary to look into the pricing of the services produced, keeping in mind equity considerations arising from the accessibility of the service for the poor. While it is possible to find ways to get funds for the desired investments, at the same time it is important to impose conditions in order to ensure the desired service will be provided under acceptable terms. In discussing risk management for such financing mechanisms, it is important to define responsibilities; insurance schemes can be useful to internalize the cost of risk.

　　124. It is advisable for China to start with a fairly simple model. Government can play a lead role in infrastructure construction, but there could be market-based approaches for the operation and the maintenance of those facilities. If municipal bonds are not feasible in China for policy considerations, perhaps other financing vehicles are possible. International financial institutions and international donors could play a role; Germany has offered concessionary loans to twenty Chinese cities for waste treatment and drinking water plants. PPPs could be supplemented by overseas development assistance. There is a need for more information in China on the modalities of PPP.

　　125. Caution is needed when advocating grants be offered to SMEs for pollution control investments. These programs tend to be complex to administer and they do not lead to a change in the behaviour of polluting enterprises; indeed, enterprises can become grant-dependent. Support for SMEs should take the form of capacity building efforts focusing on regulation awareness and compliance, implementation of ISO 14000 and eco-efficiency. Long-term change would be better served by raising the bar on government and major SOE procurement so higher prices can be paid to SME bidders who satisfy certain environmental quality criteria.

　　126. Financing environmental protection under the conditions of a transition economy is complex. There are two different cases. If cost recovery can be imposed, then the environmental service can be privatized. If this is not the case, because the fee charged then would be prohibitive and would lead to inequities, financing through public budgets becomes necessary. Public revenue is generally raised through taxes; but this leads to government debt issues which may burden the public purse in ways that are not sustainable. Changes to income tax systems allowing for income streams flowing to local authorities and municipalities may be advisable.

　　e) Task Force on the Circular Economy and Cleaner Production

　　127. With Vice-Premier Zeng Peiyan presiding as Chair, TF Co-Chairs Professors Qian Yi and Tsugio Ide presented their report to Council. They outlined the following issues during their talk:

　　128. The TF has been working for the past 18 months, conducting surveys in three provinces and visiting Japan twice on study tour; in addition, five workshops were held, corresponding with field visits to Jiangsu and Guizhou. The TF believes that in order for China to achieve xiaokang, it is imperative to adopt the principles and modalities of a Circular Economy. Xiaokang is seen as an ambitious and popular project by Chinese people. However, natural resources per capita are severely limited, there are already shortages emerging and yet for many industries in China, the slogan is "Growth comes first!". China's priority must be sustainable development – it must focus on reducing environmental impact per unit of GDP – and therefore government must promote drastic increases in efficiency.

　　129. The TF has studied the experience of Guiyang (capital of Guizhou province) and of Jiangsu province. Continuing on present growth paths, Guiyang and Jiangsu would both see their economies grow rapidly until 2020, at the expense of rapid increases in resource use. This conventional growth path is not sustainable. What is needed is a change in patterns of production and consumption. Whereas the conventional economy is linear – with inputs leading to outputs and waste – the Circular Economy (CE) is a closed loop wherein the waste, by-product, output or used product of an industry can be used as the input for another. CE encompasses three key principles, the 3-Rs: reduce resource use, recycle waste and re-use products; of these three, the first is a priority.

　　130. CE needs to be implemented at the micro level of the factory or shop floor, then at the industrial or group level, and finally with consumers. China already has a Cleaner Production Law and it should be implemented – this is an important first step.

　　131. The experience of Germany was studied by the TF; this demonstrates the need to enact strong legislation which can then motivate the general public and set economic development on a different footing. Since the 1990s, Japan has been promoting CE; there are now eco-cities and towns which function according to CE principles; there are laws dealing with packaging, appliances, construction materials, food and the recycling of cars. UNEP figures demonstrate that for both Germany and the US, while GDP growth is up, the consumption of natural resources is down; Chinese figures show a massive increase in resource use corresponding with GDP growth.

　　132. Several key measures have been adopted by some of China's municipalities and provincial governments. In Shanghai, the mayor himself chaired the Environmental Protection and Construction Committees to ensure improved coordination of development. In Liaoning, Anshan Iron and Steel Group is putting CE principles in practice by using waste as inputs for other products. Guiyang is to become an eco-city by implementing the 3-Rs.

　　133. The TF has put forward five key recommendations: CE principles should become a strategic goal for China and there should be an action plan for implementation; legislative means should be used to promote and support the adoption of CE; indicators and data monitoring systems need to be developed to track progress; green consumption should be promoted through green procurement; technical innovation that serves the development of CE should be supported by government.

　　134. CE is a new international movement; Germany and the EU are taking the lead. In Japan, the awareness that growth needed to be established along a new paradigm grew in the 1990s. The challenge for China is to take this on, while it is still at a relatively early stage of economic development; but given its ambitious growth plans and the shortages it faces in key resources, China has little choice. Taking the CE road requires the participation of a range of stakeholders. A major role is that of businesses that supply products and services to the market; they must consider the entire life-cycle of the product or service. Consumers who are themselves creating waste must make the right choices in the market and use products in a responsible way.

　　Discussion

　　135. The TF report is extremely relevant. But caution should be exercised in using the Kuznets curve in the analysis, since this methodology has been mostly discredited; it failed to take account of material flows of imports and exports that occur in trading economies. When considering sustainable development, it is key to account for both goods and waste that are exported, and of the importation of raw materials and products. There are growing concerns over economies that import unsustainably-produced timber from countries while claiming to have sustainable domestic forestry practices.

　　136. The Circular Economy paradigm fits very well with considerations of quality of growth, rather than simply quantity. Quadrupling China's GDP will be of little benefit if it leads to the destruction of ecosystems and resources, and to a decrease in the quality of life for the people. China has to tackle head on the issue of private car ownership; with higher per capita incomes, people will naturally choose to own automobiles.

　　137. One key enabling factor for the adoption of the CE paradigm is information. Here, the UN-EU Aarhus Convention can serve as a model for building public awareness; its three key pillars are access to information, public participation in environmental decision making and the right to legal recourse. The other key enabling factor for CE in China is the fact that the country is now rapidly increasing its investments in capital and new technologies. In order to ensure this process is optimal from a sustainable development point of view, it is imperative to ensure information on the best available technologies is widely dispersed and that companies are required to choose best options and best practices.

　　138. The right terminology must be used to promote certain concepts. Clearly, the term "cleaner production" is not one that is generating much enthusiasm; it is more easily associated with end-of-pipe techniques and higher production costs. It would be more potent to talk about production efficiencies – this implies savings and greater profits which are the best motivators for business.

　　139. A key condition for the promotion of CE is product design. For instance, if a government wants cars to be recycled, cars must be designed in such a way that they can be disassembled; this is not the case at present in China but it is being done in Japan and Germany. Similarly, due to the feedstock used in China paper cannot be recycled; this requires wood fibre instead of crop residues as an initial feedstock. In the case of electronics recycling which is now required by law in Europe and in Japan, products have to be designed so components can be taken apart to be recycled. Recycling can be increased without investing in new technologies necessarily, but it is necessary to change the products themselves and their design. But considering that a car fleet has a twenty-year life cycle, it is necessary to move promptly in order to initiate recycling in the automotive sector. There will be a necessary time-lag before China can truly say it has achieved CE.

　　140. The relevance of the time frame of decision processes, of investment and of product life-cycles becomes obvious in this discussion; there is perhaps an opportunity for additional work on this by the TF at a future date. It is imperative for decision makers to understand the timeliness of certain decisions and measures, in order to avoid being locked into unsustainable growth scenarios.

　　141. What captures the attention of decision makers in exporting economies such as China is the issue of market access. When the EU started to consider legislating CE, it became plain to exporters that they would be made responsible for the end of their products' life. Entry in the EU market is only available now to producers who can meet stringent CE requirements. CE therefore becomes vital to China if it wants to continue exporting to Europe and Japan. Regulators in the EU and Japan have not left this to the vagaries of the market, but rather have defined goals, targets, products and sectors. In Sweden, industry was initially reluctant to embark on CE programs, until the government enacted a waste disposal tax law stipulating standards for incineration and disposal as well as taxation rates for the activities.

　　142. The NDRC agrees fully with CE. As preparations are underway for the drafting of the 11th FYP, it would be useful for this and other Task Forces – particularly the ones dealing with coal modernization and financial mechanisms – to brief NDRC on their work and recommendations. The suggestions could prove very timely and have a wide impact.

　　143. The history of this earth is that of CE on a global scale. With six billion people and most of the land area occupied or modified by social and industrial activities, all natural cycles are out of balance. Among relevant examples are carbon which is being mobilized twenty times faster than natural cycles can dispose of. Similarly, logging is now banned on the upper reaches of the Yangtze river, but China's lumber imports are leading to deforestation in southeast Asia. We need a clearer understanding of the impact humans are having on ecosystems; we need solid, credible data to accomplish this. For information to be effective, it must be made public. In western countries, politicians tend to be lawyers and have an insufficient appreciation of the complexities of technical issues; snap judgement decisions can be very damaging. In China, the leadership is literate on scientific and technical issues; there is an opportunity for leadership here in thoughtful decision making.

　　144. In Germany, adopting CE principles was a complex undertaking. The public first had to be convinced of the differences between the conventional economy and CE. The approach taken was to stimulate a public debate on CE and the "3-Rs", and to combine this with pilot studies and demonstration projects. It was also important to make distinctions between CP and CE. CP is not of great interest to the public since it happens inside factories or plants; CE is a broader concept where the public has a clear role to play. People can be mobilized to take responsibility for cutting down on resource use, re-using products and recycling waste. The success is largely due to the efforts of the public and of NGOs, and thanks to the role played by key stakeholders such as industry and the media. For instance, the German paper industry made a voluntary commitment six years ago to increase its use of recyclable paper stock; recycled paper is now 65% of all paper sold in Germany.

　　145. CE can be thought of as a life-cycle for products, from the cradle to the grave; but companies will only adopt this view if they can be shown this is also good for profits. Legislation will only be effective if the business case has first been made with industry. The EU has just launched a major review of how best to achieve sustainable resource use and will be happy to share the resulting findings with China.

　　146. China will need to study CE further and pilot projects will need to be conducted before it can commit to this path. Some work on this has already been done over the past two years, including the adoption of CP concepts as opposed to end-of-pipe approaches to pollution control. CP is now proven to reduce resource use and increase profits through efficiency gains. China is also experimenting with eco-industrial parks in Guangxi, Inner Mongolia and Liaoning where one factory's waste becomes another's input. The results achieved during these pilot projects need to be widely disseminated.

　　ITEM 9. DISCUSSION OF THE RECOMMENDATIONS

　　147. Vice-Chair Måns Lönnroth presided over the presentation and discussion of the Council's recommendations to the State Council.

　　148. LE outlined for Council this year's drafting process. Due to disruptions caused by SARS, no initial draft could be circulated prior to the AGM; this was made available at the outset of the meeting. In addition, general recommendations could not be discussed in advance of the meeting with China's Premier Wen Jiabao due to scheduling problems. The second part of the recommendations is to be a distillation of the measures advocated by the five TFs reporting to Council this year; this will require additional work on the part of each TF. The process leading to finalization of the recommendations this year has yet to be approved by the Bureau.

　　149. During the discussion, members made the following points:

　　150. It is difficult for Members to comment on a document that has yet to be produced and it is not possible to produce a draft during the present session. In meeting with the Council, Premier Wen confirmed that "growth first, clean-up later" is not an option for China. There have been useful remarks made by Council members during TF report discussions that could be integrated in the final document, namely the need to use a full range of financial instruments to fund environmental protection projects, and that a company-by-company approach to capacity building is productive.

　　151. The recommendations need to highlight that China now needs to tackle the challenge of bringing environmental protection into the information technology age. This could be a powerful information diffusion, capacity building and monitoring tool. China has already laid the foundations for much of this; inter alia, there is a network of monitoring stations to deal with possible disasters. But this needs to be systematized and better integrated.

　　152. The document outlining the presentation to the Premier needs to be integrated with the draft general recommendations that members were given on the first day of the AGM. It would be desirable for Council members to have a draft of this merged document before the end of the proceedings.

　　153. The presentation to Premier Wen can serve as an introduction to a fuller discussion of recommended actions. It is also necessary to reflect the urgency that China faces at this moment in time. This seems to be very much the mood of China's leadership at present. It is therefore useful for the Council to send a message that the moment for making policy and infrastructure decisions is now. Wrong choices of development models could hobble China. The use of market instruments to promote behaviour change should be stressed.

　　154. Members want to ensure they will have input in the final document that will be produced; the present agenda does not seem to allow for this. Yet wording is often critical in putting forth recommendations – small changes can be significant.

　　155. Energy efficiency in China has been discussed at length – but it is largely absent from the two documents that are before the Council. One point to be emphasized would be that the high level of new investment that China will see in the coming years presents the opportunity of benchmarking and of stipulating "best available technology" investment requirements. When presenting recommendations on new coal technologies and access to the power grid, there is a need to advocate the use of prices that reflect true costs – otherwise new technologies will not be deemed competitive.

　　156. Discussions that have already taken place in the Council are not reflected in the documents presented to members for this session. The final document should be cast in a form that will be immediately recognizable by Chinese authorities and that can provide guides for action. The document also lacks a discussion on the measurement of wealth and well-being; true costs must be reflected and must be at the centre of the discussion. Perverse subsidies are rife throughout the economy and transparency is key to change.

　　157. The final recommendations should reflect the theme of the meeting: xiaokang and sustainable industrialization.

　　158. LE conclude that a more detailed version of the presentation to Premier Wen will form the introduction to the recommendations; TFs will re-cast their recommendations based on the theme of the meeting and the debate in Council. LE will then re-draft the document in Chinese; an English translation will be produced afterwards. This final draft will then be submitted to the Bureau for approval.

　　ITEM 10. CLOSING CEREMONY

　　159. With Chair Zeng Peiyan presiding, Vice-Chair Xie Zhenhua and Chair Zeng Peiyan addressed members of Council during the closing ceremony of the Second Meeting of the Third Phase. During their remarks, the following points were stressed:

　　160. The theme of the AGM, Xiaokang and Sustainable Industrialization, was discussed in depth and important recommendations have been made. Premier Wen Jiabao met with Council members, heard their views and recognized the role the Council plays. The GOC appreciates the efforts made by past and present Council members and experts. Vice-Premier Zeng has been responsible for much macro-economic work and his appointment as Chair of the Council heralds an era of greater influence.

　　161. The five TFs reporting this year have proposed feasible policy recommendations; these will be combined with comments made by members at the AGM, and passed on to the State Council. The Central Party Committee and the government have made the correct choice by setting the achievement of xiaokang as a goal for China; it incorporates concepts that have been discussed in Council, namely high technology, sound economics, low resource consumption, low pollution and best use of human resources. Other important policy areas where Council has made a contribution are the support of SMEs and a more strategic development of the energy sector – including coal gasification and poly-generation. The GOC is also noting the following: it is advisable to develop the EPI sector by ensuring a sound legal framework and helping to break down local protectionism; it is important to stick to the "polluter pays" principle, diversify financing mechanisms for environmental protection and look into instruments such as municipal bonds and risk mitigation funds; it is critical to ensure government coordinates policy across all relevant sectors and agencies. Government procurement should also reflect commitments to sustainable development.

　　162. The Council Bureau has met and agrees that the themes chosen for the AGMs should respond to China's priorities; these will be finalized with the Chair's approval. It is also imperative that all TF and LE members ensure the timely production of a document to submit to the central government as well as relevant provincial and local authorities. The AGM for 2004 will be held in Beijing in October; it is also suggested that the Meeting be followed by a field trip to different localities. Members will be notified by the Secretariat on logistics. The Secretariat staff is recognized for the efforts contributing to a successful AGM.

　　163. The GOC thanks all members and experts for their active participation, their interest and their support of China's efforts towards sustainable development. Three points need to be emphasized:

　　1) It is important to take a holistic approach to development; xiaokang embodies this in that it implies a social as well as an economic modernization. Growth and efficiency need to be optimized, but it is also imperative to improve democratic and legal processes, as well as people's education, health and ethics; resources must be used efficiently and economic growth must be done in harmony with the environment. The kind of growth that is needed for China's 1.3 billion people cannot follow conventional models. There is increasing awareness in China of the link between environment and development, the need to protect the environment and the need to adopt CE.

　　2) International cooperation is key to the achievement of China's goals. China has a large impact on the globe; as economic globalization accelerates, economies are increasingly interdependent. But the world community has to accept that some countries will adopt policies that suit their own conditions, while at the same time promoting global cooperation. The environmental status of developed countries is deteriorating; yet sustainable development entails the efforts of all countries. Developed countries should play a more active role on issues that are challenging LDCs. In order to improve the quality of growth taking place in LDCs, rich economies have a responsibility to eliminate barriers of trade in environmental protection technologies and LDC products. China is committed to improving matters on the domestic front, but is also willing to join international efforts so it can contribute to solving global environmental problems.

　　3) The CCICED should play a greater role. The Third Phase of the Council corresponds to China's adoption of xiaokang as a development goal; the timing is opportune. In order to fulfil its responsibilities, the Council's AGM debates should be more productive – the selection of a theme for each will help focus the discussion. The content of this discussion should be more substantial and the pace more dynamic. The Secretariat will need to improve the quality of the services it provides and the coordination of Council activities. The policy recommendations will need to be strengthened – an issue of crucial importance to the GOC.

　　11. The GOC respects the depth of expertise that members contribute to Council. The reports submitted by TFs are important for China's future development. The central government's ministries as well as local governments need to take note of their contents and absorb their lessons. The Council in the initial years of its Third Phase is already making a significant contribution.

　　III RECOMMENDATIONS OF THE COUNCIL TO PREMIER WEN JIABAO

　　12. Recommendations of the CCICED to the Government of China

　　(YICHUN – WHENEVER THIS IS FINALIZED, IT CAN BE INSERTED HERE… IF THIS IS NOT POSSIBLE, THEN YOU COULD JUST INSERT A NOTE HERE TO THE EFFECT THAT THE RECOMMENDATIONS ARE FORTHCOMING AND WILL BE CIRCULATED SEPARATELY…)

　　IV. MEETING WITH PREMIER WEN JIABAO

　　a) Council presentation:

　　13. During the meeting with Premier Wen Jiabao, two Members of Council addressed the Premier and emphasized the following issues:

　　14. The Council cares about the directions of China's growth and development. It is encouraged to see progress towards a good basic framework for sustainable development action – the Cleaner Production Law, practical applications of the Circular Economy in eco-provinces such as Zhejiang, and leadership of companies like Anshan Iron and Steel Group. With the goal of xiaokang China is taking the right approach by trying to include all citizens in a journey towards prosperity.

　　15. Many tools are in place but they need to be applied consistently, more fully and urgently. Action is required in the following areas: enforcement of environmental laws in all provinces; applying incentives to correct market failures; getting prices right; and above all, strong and consistent signals from the leadership for successful implementation at local levels.

　　16. The Council makes five recommendations on this year's theme of Xiaokang and Sustainable Industrialization:

　　1) Ensure SME participation in sustainable industrialization;

　　2) Use government procurement power to create demand for a Circular Economy;

　　3) Through financial sector reform, introduce sustainability criteria for bank loans and insurance guarantees;

　　4) Diversify the financial mechanisms to fund urban environmental infrastructure;

　　5) Develop an action plan for capacity building within enterprises and local government.

　　11. The biggest risk for China is to become locked into unsustainable development paths, with a permanent underclass of discontented citizens. Sustainable industrialization will enhance competitiveness and open new pathways for growth and employment. Conventional technologies and industrialization will not be enough. For example, conventional energy technology will increase China's dependence on imported fossil fuels. Through innovative coal gasification, China could meet its transportation and fuel needs in an environmentally sound way from domestic sources.

　　12. A coordinated approach in decision making is essential. Strengthening regional sustainable development is part of this. It will permit better approaches to land and water resource issues that constrain industrialization. Reliable statistics, with overall social, economic and environmental indicators, are needed so that China can determine whether it can manage the consequences of a four-fold economic growth. An educated informed public will be an outcome of xiaokang. Public participation will help keep the process of sustainable industrialization on track.

　　13. China has some unique advantages. One is the history of a strong state. Therefore it should be far easier than in some other countries to control unsustainable production and consumption. China can build for its future, not retrofit the past – the expensive route of already-industrialized countries. But it must do so urgently.

　　b) Premier Wen Jiabao's response

　　14. The CCICED is now twelve years old. The number of foreign countries and foreign guests who take part in its work, discussing China's environmental issues and devoting themselves to this cause shows they care about environment and development in China. The views, insights and recommendations of the Council are useful to the government.

　　15. SARS has taught China an important lesson which is also relevant to the environment: we have a new and deeper respect for the scientific approach. We have developed a new conception of development comprising of five areas where greater coordination and harmonization are needed. They are: the city and the countryside; the economy and society; the different regions of China; domestic and international areas; humanity and nature. We have titled this the Coordinated, Comprehensive and Sustainable Development Concept. Coordination is important because of existing imbalances – similar to a person who would attempt to walk on legs of different length.

　　16. You emphasize that during the industrialization of its economy, China should avoid the model of "growth first, clean up later". Indeed, you highlight the importance of natural resources conservation. China has a population of 1.3 billion people; its development depends on the conservation of resources such as energy, land and water. You also emphasize that China has to push capacity building in the area of environmental protection.

　　17. One relevant example has to do with the water quality in the Three Gorges Dam reservoir. By investing in waste water treatment facilities and investing 4 billion yuan in environmental protection measures, the water quality in the reservoir is rated second class – a good result.

　　18. Another point emphasized by Council has to do with ensuring the SME sector contributes to environmental protection. In China, the growth of SMEs is directly related to the growth in employment. But SMEs have poor capacity in terms of pollution control and waste management. This is causing serious problems. We recognize we need strict enforcement otherwise pollution problems will get out of hand.

　　19. It is difficult for China to close down smaller polluting enterprises; there is an immediate impact on employment and people bear the brunt of that. The government has shut down some 20,000 small coal mines, coke and steel mills – many are opening their doors again. There are two ways of resolving these issues: first, strengthen government regulations and tighten up market access; secondly, stop providing loans and credit lines for polluting enterprises.

　　20. The Council also emphasizes the importance of the rule of law. China has distinct advantages. In the fight against SARS, we used the rule of law and we won because of this weapon. However, China faces the challenge of efficient enforcement of laws and regulations. For instance, land use is regulated in order to prevent the loss of agricultural land and the random encroachment by developments of all kinds. But despite this, we have failed to halt the loss of farmland. Law enforcement needs to be tightened up.

　　21. China values the views of Council and takes them seriously. Council is welcome each year to visit, look around, find out more about China at first hand and reflect its views back to the government. This is a good way to improve environmental protection.

　　ABBREVIATIONS

　　AGM Annual General Meeting

　　CCICED China Council for International Cooperation on Environment and Development

　　CDM Clean Development Mechanism

　　CIDA Canadian International Development Agency

　　CO2 Carbon dioxide

　　CP Cleaner Production

　　CPC Communist Party of China

　　DME Di-Methyl Ether

　　EIA Environmental Impact Assessment

　　EPI Environmental Protection Industry

　　EU European Union

　　FDI Foreign Direct Investment

　　F-T Fischer-Tropsch (liquid fuels)

　　FYP Five-Year Plan

　　GDP Gross Domestic Product

　　GEF Global Environment Facility

　　GOC Government of China

　　ISO International Standards Organization

　　LDC Less Developed Country

　　LE Lead Expert

　　MDG Millennium Development Goals

　　NDRC National Development and Reform Commission

　　NPC National People's Congress

　　OECD Organization for Economic Co-operation and Development

　　PPP Public Private Partnership

　　R&D Research and Development

　　SARS Severe Acute Respiratory Syndrome

　　SEPA State Environmental Protection Administration

　　SME Small and Medium Enterprise

　　SOE State Owned Enterprise

　　TF Task Force

　　UEI Urban Environmental Infrastructure

　　UK United Kingdom

　　UNCSD United Nations Council for Sustainable Development

　　UNEP United Nations Environment Programme

　　US United States

　　WSSD World Summit on Sustainable Development

　　WTO World Trade Organization

　　WWF World Wide Fund for Nature