China’s proposed carbon tax

In February 2013 China’s Ministry Finance announced a series of new environmental tax policies. The proposed carbon tax and the other associated fiscal measures appear to form a radical and positive step to reducing the country’s high energy and carbon intensity. But many obstacles stand in the way of effective implementation. China accounts for more than 20% of the world’s emissions of carbon dioxide generated by energy use, ahead of the USA at 18%. Its carbon intensity (quantity of carbon dioxide emission per unit of GDP in purchasing power parity) is more than double that of both the USA and India, and 80% higher than that of South Korea. This high carbon intensity arises from a combination of the structure of the economy with its continued reliance on heavy industry, the predominance of coal in the fuel mix (70% of primary energy consumption), and the inefficient nature of much of the industrial plant. Nevertheless, it must be recognised that some 30% of the country’s carbon emissions derives from the manufacture of goods which are exported.   China’s government has pledged to reduce carbon emissions intensity by 40-45% between 2005 and 2020. This will require an equivalent reduction in energy intensity. Between 2005 and 2010 the government achieved considerable success in reducing energy intensity by 19% against a target of 20%. This was accomplished principally through the application of traditional administrative policy instruments on heavy industries such as steel, cement and chemicals. The “Top 1000 enterprises programme” was typical of this approach. In this way, the government was able to produce rapid reductions in energy and carbon intensity with minimal effort.   But what works for a limited number of energy-intensive enterprises is unlikely to be effective across the whole economy, not least because of the sheer number of enterprises many of which are privately-owned. The government sees it as necessary to introduce economic instruments to act alongside the regulatory instruments. The Draft Law on Addressing Climate Change, published in May 2012 includes mention of both cap-and-trade schemes and a carbon tax. Voluntary carbon emissions trading schemes that have been operating in a few cities since 2008 have been largely symbolic. Guangdong Province launched a more substantial scheme in September 2012.  February 2013 saw the central government provide more details on the proposed carbon tax.   The announcement published by Xinhua Press in February included a number of different fiscal mechanisms:   ·       A tax on carbon dioxide emissions from energy use; ·       An environmental protection tax to replace pollutant discharge fees; ·       Taxes on energy-intensive products such as batteries; ·       A tax of luxury goods such as aircraft which are not used for public transport; ·       A tax of coal production based on sales value not sales volume.   Although no details were provided on any of these proposed measures, the Xinhua report did refer to an earlier suggestion of the Ministry of Finance that the carbon tax should be set at 10 Yuan (US$ 1.6) per tonne of carbon dioxide rising to 50 Yuan (US$ 8.0) per tonne by 2020. These are well below the US$80 per tonne proposed by the Stern Review, but form a more realistic starting point.   The emphasis on taxation in all these proposals reveals the direct involvement of the Ministry of Finance. The conversion of pollutant discharge fees into an environmental protection tax takes revenue away from local governments and passes it to the Ministry. A carbon tax would appear to stand in opposition to the National Development and Reform Commission’s proposed emissions trading scheme, for running the both a tax and a trading scheme together for the same emitters would introduce unnecessary complexity.   The proposed change in the taxation of coal production from volume- to value-based is a long-overdue step which would bring China in line with most of the rest of the world. Such a change was applied to oil and gas in 2011.   The principal aim of this raft of proposed carbon and environmental taxes is to raise the cost of using energy and thus to provide actors with incentives to use less energy and emit less carbon. If fully implemented and if the carbon tax was gradually increased, most costs would rise. The costs for enterprises which produce, transform and consume energy would rise, at least over the next few years, either because they were paying the taxes or because they were investing in new cleaner or more efficient technologies. These costs would then be passed on to the end–users of energy and to the consumers of products and services, either in China or overseas. Assuming that a majority of energy- and carbon-intensive enterprises chose the investment option, then the pace of decline of both energy- and carbon intensity should accelerate. However, the absolute level of carbon-emissions will still depend on the rate of economic growth. In addition, many enterprises would go bankrupt or be taken over, and some industries could see an absolute decline in output as activity moves offshore. The Ministry of Finance would receive tax payments from those enterprises which fail to take the necessary measures.   In practice the outcome may be rather different for a number of reasons: 1.     The Climate Change Law is only in draft form. Years could pass before the National People’s Congress approves it. The draft Energy Law has been under consideration for at least 6 years. That being said, the State Council could decide to implement certain measures by decree. 2.      Most of the major energy- and carbon-intensive enterprises are owned, at least in part, by the state, at either central or local levels. As a consequence these enterprises face soft budgetary constraints, despite corporatisation and commercialisation, and are not open to hostile take-overs or bankruptcy without government approval. 3.     The task of measurement, reporting and verification continues to be major challenge in all areas of environmental governance in china. 4.     Local governments are likely to find ways to undermine central government initiatives, for example by compensating local enterprises for large environmental or carbon tax payments.   Given that the new government has only just been installed, there is likely to be a period of deliberation on climate change strategy which may be prolonged, not least because many other matters will be more urgent. At present, it is unclear whether the government will prefer a carbon tax or an emissions trading system. If either requires the passing of the Climate Change Law, rather than State Council decree, then deliberations could last a number of years.

Print Friendly, PDF & Email