Earlier this year, striking pictures of major Chinese cities shrouded in thick haze alerted the world to a worrying by-product of the country’s economic growth: toxic air.

The haze, which engulfed streets and buildings from Beijing to Sichuan Province, was caused by a number of factors. Rising energy consumption, coal-fired plants, vehicle emissions, urban construction and weather conditions all played a part.

China’s coal-dominated energy sector is seen as one of the main culprits. In 2002, coal accounted for 63.9% of primary energy consumption. In 2011, the figure rose to 69.1%. Meanwhile, heavy industry rose from 60.9% of total industry output in 2002, to 71.9% in 2011. Even with successful reduction efforts, it is estimated that coal consumption in the primary energy sector cannot be reduced to 60% by 2020.

Vehicles are another major factor. In Hangzhou, cars, buses and trucks contributed to 33% of fine particle pollution, which can cause respiratory problems. In Shanghai and Beijing, the figures were 25% and 22%, respectively.

There is growing public dissatisfaction with the low-quality gasoline on offer in China. Beijing shifted to cleaner diesel and gasoline in May 2012. It’s the only city in China that uses fuel at the highest standard, National 5, which is equivalent to the Euro V specification in Europe. But cleaner fuel is more expensive. Many cities such as Shanghai, Guangzhou and Jiangsu Province use the lower National 4 grade. Others are still lower, at National 3 or lower.

China aims to adopt National 5 specifications across the country by 2018 to reduce emissions. Who will pay for the upgrade? Some estimate that more than 50 billion RMB will need to be invested to move from National 3 to National 5. This raises several other crucial questions. Can the cost be transferred to the consumer? Is it actually necessary to apply National 5 across China? Would it be better to balance fuel quality against environmental conditions and affordability in each region? Should we compare the costs of different emission-cutting measures to pick the best measure for any given investment?

China’s haze-covered cities triggered a public outcry and will hopefully force energy policy reforms. It’s time to analyse government mechanisms that deal with environmental standards and find the best policy mix. Innovative policies worth exploring include resource tax reform, energy pricing reform and energy consumption control.

China is now the world’s largest developing economy. Other developing countries, such as India, face similar problems. If China manages to address its own environmental problems, others can learn from its experience. There is also plenty of room for cooperation with developed economies in areas such as environmental management and clean technology development. With so much at stake, the effects of China’s fight against pollution will be felt around the world.

Author: Lin Boqiang is the Director of the China Center for Energy Economics Research at Xiamen University. He is a member of the World Economic Forum’s Global Agenda Council on Energy Security.

Image: A woman wearing a mask walks outside the Forbidden City in Beijing REUTERS/Jason Lee