China’s economy has been on an upward trajectory for years but at a steep cost. Its pollution problem—long seen as a byproduct of positive economic growth—has become increasingly unbearable in the past two years. Now Premier Li Keqiang and the National People’s Congress have declared war on the problem.

Earlier this year, the government passed aggressive legislation to bolster its environmental protection laws and combat the country’s rampant pollution problem. These laws may stem China’s pollution problem. They may also put a damper on China’s booming economy.

The High Cost of Rapid Growth

After years of double-digit growth, China’s economy grew less than eight percent in 2013, and the environment was a major factor. Environmental problems cost China about 9% of its gross national income in 2008, and examples of its impact on growth are everywhere.

Last December, the smog was so heavy that it grounded hundreds of flights at Shanghai’s Pudong International Airport. If planes can’t make it in and out of one of the busiest cargo airports in the world, China’s economy will feel the sting. But the smog problem isn’t just limiting transport and shipping.

According to the 2013 Hurun Report report by media firm GroupM, China’s smog problem is so severe that almost two-thirds of the country’s wealthy have left or are planning to leave the country because of the pollution—and they’re not alone. More than 170 countries told the American Chamber of Commerce in Beijing that the smog was discouraging senior executives from transferring to China. If its wealthiest citizens don’t want to stay and top business talent doesn’t want to come, China’s growth may stagnate.

China’s government seems to be taking its pollution problem very seriously. In November, it announced a raft of reforms designed to reduce pollution without impacting economic growth. Premier Li Keqiang underscored the importance of these reforms in March, calling pollution, “nature’s red-light warning against the model of inefficient and blind development.” The new anti-pollution laws will punish polluters and urge local governments to not sacrifice the environment in pursuit of growth. At the same time, Li Keqiang remains optimistic the reforms won’t impact the country’s ability to maintain its growth rate.

But some observers aren’t convinced. While few would disagree on the necessity of these reforms, it’s difficult to see how they can be implemented without slowing short-term growth. It will take years for China to implement and carry out the new reforms. Clean energy solutions and infrastructure updates won’t be completed overnight, and the cost of these reforms are sure to have an impact on manufacturers’ bottom line.
The Tipping Point

China isn’t the first nation that’s been forced to reckon with its pollution problem. In fact, the U.S. experienced the same growing pains over 40 years ago. America’s turning point came when the heavily polluted Cuyahoga River caught fire in 1969. The incident brought environmental issues to the forefront of the public consciousness and led to passage of new anti-pollution laws and the creation of the Environmental Protection Agency. Like China’s recent reforms, these changes were criticized for their impact on industry and economic growth. In the long run, however, these laws not only reduced pollution but enabled a healthier and more sustainable economy.

China’s smog problem may prove to be its environmental tipping point. The resulting reforms may cause growth to slow temporarily, but a healthier population, a cleaner environment, and a more sustainable economy have plenty of upside for the long term.

http://www.forbes.com/sites/hsbc/2014/07/29/how-will-chinas-new-environmental-reforms-affect-growth/