Pollution crisis is choking the Chinese economy

The Asian colossus is losing 6.5 percent of GDP to pollution-rated costs.

For Ting Li, life in Beijing means navigating through sticky gray smog. To avoid harmful pollution particles, she must carry a mask and check the air quality every day. The thick, heavy air has been so bad that Li sent her son — who suffers from the infamous Beijing cough, caused by breathing harmful pollutants — to live outside Beijing, where air quality is better.

"Even with air purifiers in homes, pollution exceeds the norm," said Li, who is a chief representative for the Rocky Mountain Institute in China. "It's severe and really scary. We can't go outside much."

"It's too early to tell if the war on pollution is working." -Elizabeth Economy, director for Asia studies, Council on Foreign Relations

Beijing isn't alone, though. It's one of nearly 300 cities in China that badly failed air-quality standard measurements in 2015, according to data collected by Greenpeace. And the effects are devastating: More than 1.6 million people per year die in China from breathing toxic air. To fight back, China's leaders have been waging a tough war on pollution by rolling out new technologies, capping coal use and using more renewable energy, such as solar and wind.

"It's too early to tell if the war on pollution is working," said Elizabeth Economy, director for Asia studies at the Council on Foreign Relations. "But the intention is there. Top leadership has made a commitment to address the problem for the first time in decades." She estimates that visible results won't be seen for three to five years.

Air pollution is clearly very costly, though, to its $11-trillion-plus economy. It dings China's GDP about 6.5 percent annually, according to RAND Corp. estimates. Those costs are mainly driven by lost productivity, since factories are shut down on bad air days to avoid the dangerous health effects of breathing the dense, toxic air.

"Sick days and hospital visits all take a toll on the urban economy," said Anders Hove, associate director of research at the Paulson Institute. High levels of pollution are linked to serious chronic illnesses, like heart disease and lung cancer, which are costly to treat. And air pollution also affects tourism and outdoor recreation, he added.

China's crops are damaged, too, said Hove. Some 20 percent of China's soil is contaminated. And the country's largest rice-growing province, Hunan, has soil that's laced with heavy metals from factories. This pollution taints the country's food supply, according to reports.

There are lots of bright spots among the gray, though. And China has committed to improving air quality 10 percent by 2017. Strict new laws crack down on polluters. And 2,500 small polluting firms will be shuttered this year in Beijing alone. Other violators are getting stiff penalties. Coal use is being capped and cut for heating and heavy industry, said Hove.

China's air quality is being strictly monitored by the government as well, and the country is even launching carbon-tracking satellites to help track and reduce carbon emissions. And though Beijing issued its highest red pollution alert last December, its air in 2015 was cleaner than it has been for several years, according to Paulson Institute studies.

"Even fireworks have been controlled for their contribution to air quality," Hove said. But, he added, even burning crop waste can affect air quality, which makes cleaning up pollution complex.

Innovative solutions

China is also trying all types of innovations to clean up its air. Some big, polluted cities, like Guigang, are using mist cannons, which shoot into the air a spray that disperses smog particles. And China has launched a $7.6 billion fund to combat air pollution.

IBM has been testing a system called Green Horizons, which uses artificial intelligence that can predict how bad pollution will be in Beijing 10 days in advance. It crunches large amounts of varied data based on pollution drivers, like traffic, weather, industrial production and the like.

"This way, the government can take actions to reduce potential risk," said Dr. Meng Zhang, a research scientist at IBM Research-China. "Weather patterns can be leveraged."

Experts say that long term, China will be shifting toward a service-based economy that produces lower emissions, anyway. "It's producing high-value goods with minimum amounts of energy," said Jon Creyts, founding director of Rocky Mountain Institute's China program. "And it's happening quickly. The service economy is growing faster than steel making."

Experts like Creyts don't think it's too late to save China's air. Los Angeles and London have also had similar pollution problems, which they solved, said Creyts. "And China will push the world forward," he said. "There's an eager interest to learn."

Megacities, which are popping up worldwide, will take more aggressive plans, he added.

Even Li sees blue skies in her future. "Every day, there's something new happening," she said.

— By Constance Gustke, special to CNBC.com