Government Imposes Carbon Tax to Curb Emissions

China now burns almost as much coal as the rest of the world combined. As the world saw vividly this year, the effects are deadly. Many in the U.S. and elsewhere have long blamed China for not cooperating with global efforts to limit greenhouse gas emissions, but a recent move by the Ministry of Finance to impose a carbon tax has changed the conversation. From Xinhua:

The government will collect the environmental protection tax instead of pollutant discharge fees, as well as levy a tax on carbon dioxide emissions, Jia Chen, head of the ministry’s tax policy division, wrote in an article published on the MOF’s website.

It will be the local taxation authority, rather than the environmental protection department, that will collect the taxes.

The government is also looking into the possibility of taxing energy-intensive products such as batteries, as well as luxury goods such as aircraft that are not used for public transportation, according to Jia.

To conserve natural resources, the government will push forward resource tax reforms by taxing coal based on prices instead of sales volume, as well as raising coal taxes. A resource tax will also be levied on water.

The Responding to Climate Change website looks at how this new effort will work with the current trial cap-and -trade program that China announced early this year:

Joanna Lewis, assistant professor at Georgetown University and an expert in Chinese energy policy told RTCC it is unclear how the two would work together.

“The government has been discussing the implementation of a carbon tax for several years so it will be interesting to see if it happens this year,” she said.

It is also not yet clear whether the tax would apply to the same facilities covered under the pilot cap and trade programs for CO2, and if so how the two programs would interact.”

“Further regulation of CO2 could help to address current air pollution challenges if the environmental protection tax includes a range of pollutants, or if facilities curbing emissions through means that end up reducing other pollutants as well.

At the Atlantic, James Fallows summarizes several of the main points worth considering when discussing the carbon tax:

Here are your talking points for the next time this topic comes up at a dinner party:
Environmental carnage of all sorts is a truly major emergency in China, both in the short term and as a potential limit on the country’s development;

Chinese emissions are a problem not just for its own people but also for the world. It has now overtaken the U.S. as the biggest carbon emitter; most of the coal that is burned anywhere on Earth is burned in China.

Contrary to what you might think, China’s economy is relatively less efficient, and more polluting, than those of rich countries. It takes more energy to heat and cool the standard Chinese building than one in Europe or the US; Chinese farmers use more water, fertilizer, and pesticide per unit of output than is typical even with mechanized farming in the US; Chinese factories put out more air and water pollution per dollar of production than rich-country counterparts. On a per capita basis, the Chinese economy uses less energy than America’s. On a per dollar (or per RMB) basis, it uses more. Simplest way to remember this point: China’s economy is nowhere near as large as America’s now, but it puts out more emissions.

In a blog post, Ella Chou raises several questions that come up with the announcement:

The point of a carbon tax, be in China or elsewhere, is to set the price signal straight. We tax income; we tax property; we tax goods and services — all the things we want more of, so wouldn’t it be logic to actually tax the thing we want less of: pollution?

My environmental law professor Jody Freeman, who served as Counselor for Energy and Climate Change in the Obama White House before coming back to Harvard, told us that she used to say two words to almost everyone she met at the White House – “carbon tax”, and they would look at her as if she was crazy. This needs to be changed. If the giant climate rally in DC this past Sunday is any indication, that is we need a sensible policy to address the reality and challenges of climate change now. And in the case of China, I think starting with adjusting the distorted price signals, while giving due consideration to the widening income gaps and social injustices, is essential.

[…] As previously stated, this environmental tax is mainly converted from pollution discharge fees. Previously, pollution discharge was inspected by and the fee was charged by environmental protection bureaus. The environmental tax, however, is collected by the tax bureau according to the amount of pollution discharged by factories, and that amount is corroborated by the environmental protection bureau. That is to say, the environmental protection bureau becomes an agency that collects statistics for tax purposes.

Chou also points out the proposed tax itself would be “puny” (10 yuan [US $1.5] per ton of carbon dioxide in 2012, with gradual increase to 50 yuan [$7.9] per ton by 2020). For Forbes, Tim Worstall writes that even though it is small, the tax could still be effective:

But there’s two things which should be pointed out about even this lower number.

The first is that there’s a reasonable assumption that if the Chinese Government starts taxing fossil fuels then it will also, at the same time, stop subsidising them. And it does indeed subsidise the use of fossil fuels in a very large way. So the effect would be much larger than just the tax itself: it would also include the removal of the subsidies. And do note that the International Energy Authority has stated that simply removing those fossil fuel subsidies (not just in China, but in Russia, Iran, Saudi and so on as well, the places which cumulatively spend hundreds of billions a year on such subsidies. And no, we, the advanced or industrialised nations, we really don’t offer such subsidies, not in any great amount at least and all entirely dwarfed by the taxes we impose on such fuels.) would take us one third to one half of the way to controlling climate change all on its own.

So that’s good news, even given the low level of the tax. And it is a low level: lower than Tol or William Nordhaus would suggest for example. And yet it is obeying another basic rule which both would advocate. That a tax should start small and then grow. The reason being that this allows industry to adjust along with the capital cycle.

A post on the Washington Post blog points out that the economic impact of the tax will likely reach beyond’s China’s borders:

Much of the cost of China’s carbon tax would be borne by other countries. Last year, John Lee of the Center for International Security Studies argued that any carbon tax in China would mostly fall on the country’s exporters, who would in turn pass the cost on to consumers in the United States and Europe. “Beijing has consistently argued that the end-consumer country, and not the producer country, should bear the burden of paying for carbon emissions,” Lee notes.

Now, that’s still a significant step. Export manufacturing is responsible for anywhere from 20 percent to 50 percent of China’s greenhouse-gas emissions, after all. But it does help explain why Chinese officials are relatively sympathetic to this idea.

But, as the post also points out, China’s proposal is larger than anything under consideration by the U.S. Congress.


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