By staff reporter Zhang Ruidan

While counting on extensive coal reserves to satisfy energy demand, China paid about 1.7 trillion yuan in “hidden” costs last year, an amount equal to 7.1 percent of the country’s 2007 GDP, according to a new environmental report.

These huge unseen costs, which the Greenpeace report said include the amount paid for human health and the environmental damage, have long been neglected by China’s cheap-coal price mechanism.

The report said reliance on coal not only increased environmental and health costs, but also hiked the country’s entire energy price tag through commodity price manipulation.

China is the world’s largest producer and consumer of coal, which provides 70 percent of its energy needs.

Greenpeace estimated that every ton of consumed coal causes 150 yuan worth of damage to the environment. For instance, water needed for coal extraction costs about 22 yuan per ton of coal.

Moreover, coal combustion may cost 45 yuan per ton in terms of health damage. Other hidden costs connected to coal burning involve air pollution and climate change.

The report linked hidden coal costs to the Chinese government’s pricing mechanism, which is designed to hold down consumer prices even while surging demand for electricity has strained coal supplies.

The report said when environmental damage and price distortions tied to regulations are factored into the cost of Chinese coal, the amount currently paid for the commodity reflects only 40 percent of the actual cost.

Mao Yushi, a report author and Chinese economist, said “the fundamental problem with China’s coal pricing system is the price distortion caused by market and policy failures.”

The report said coal price regulations underestimate resource value and land costs.

“It means that the amounts paid for coal are not enough,” said Mao.

Mao suggested that, to offset the negative impacts of coal consumption, China should take steps toward expanding coal market reform, improving the coal pricing system, imposing energy and environment taxes, and improving liability rules.

“We should be afraid of price distortion, rather than price increases,” he said.

Caijing has learned that the Chinese government is currently studying a plan to impose environmental and energy taxes.

If such taxes are implemented and raise coal prices to levels that reflect genuine costs, the report said, the nation’s GDP would fall only slightly, by about 0.1 percent.

Yang Fuqiang, who represents the U.S. Energy Fund, said “money collected through an energy tax could be applied in environmental protection that would have long-term benefits to the country’s economy.”

Considering the current energy market, Yang argued that China now has “a good opportunity to start levying an energy tax.”

1 yuan = 14 U.S. cents