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China Floats Carbon Tax Plan as a Means to Curb Emissions

The Chinese government is considering imposing a pro rata carbon tax on coal and fossil fuels such as gasoline, jet fuel, and natural gas, Finance Ministry official Su Ming has told the country’s state-run media.

For the past year, 20 experts from seven different government agencies have been investigating the development and implementation of a carbon tax, which has emerged as a preferred mechanism for curbing emissions in China’s energy intensive sectors.

Though the research findings are due out this summer, no details on the size of a tax or date for when it would take effect have been released.

Earlier this year, the government organizations responsible for the study – the China Environmental Culture Promotion Association and the China Institute of Development Strategy Studies – proposed rolling out the carbon tax in select provinces first as a “barometer” for monitoring the carbon intensity of economic activity.

Proponents of the plan favor an incentive structure that would reward producers for investing in cleaner technologies. Under the current market conditions, coal-fired power plant owners reap more profits by using cheaper, lower quality coal, which contributes greater emissions because it’s a less efficient fuel source.

Critics, however, point out that unless the tax rate is set appropriately high, firms would choose to pollute and pay the fee, instead of take steps to curb emissions.

China’s existing Environmental Protection Law, last amended in 1989, sets a maximum penalty of 100,000 yuan ($15,600) on companies that violate regulations, a fee often below the cost of corrective action.

China is not the only battleground for the debate on a carbon tax. Expert opinions on whether a cap-and-trade or carbon tax mechanism is the most effective way to reduce carbon diverge widely. While a cap-and-trade policy is effective at limiting the quantity of emissions allowed, a carbon tax is comparatively easier to enforce.

In China, that may not be the case, however.

Qi Ye, professor of Environmental Policy and Management, and Director of the Public Policy Institute at Tsinghua University favors a cap-and-trade system, which he believes is an “effective market instrument to control pollutant emissions.”

Other experts have stated more explicitly why a market mechanism might work better in China. One, who preferred not to give his name, wrote that

a carbon tax “depends on command-and-control regulation,” which, given often weak monitoring capacity in China, would invite polluters “to rig data about carbon emissions when it comes to fee and tax collections.”

Among carbon tax advocates, there is little consensus on the optimal tax rate or the price on carbon that can balance the cost of mitigation with the benefits from reducing climate-damaging CO2 emissions.

The 2007 UK-published Stern Review, the most comprehensive effort to assign climate change an economic cost, called for a harmonized carbon tax of $350 per ton of carbon (which is equal to $95 per ton of carbon dioxide) in 2015. Many economists have taken issue with this rate, suggesting that one-tenth of that – $35 per ton of carbon or $9.50 per ton of carbon dioxide – is a more appropriate rate. That would translate to roughly $1 tax on each gallon of gas versus 10 cents a gallon.

Already China has taken steps to curb emissions through tax excise, raising the gasoline tax from roughly 3 cents a gallon to nearly 16 cents a gallon on January 1. A highly contentious issue for policy makers concerned with surrounding economic conditions, the tax has had little impact on gas consumption, as an almost simultaneous deregulation of gas prices lowered pump prices by approximately the amount per gallon of the new tax.

Though officials have not stated what the carbon tax rate would be, or how revenues would be spent, WWF Director of Global Climate Change Solutions Yang Fuqiang estimates companies will face a carbon tax of at least 44 yuan ($6.50) per short ton of carbon dioxide emitted.

While less than the minimum $12 per ton of carbon dioxide that economists generally concur is needed to curb emissions, the rate is not an altogether paltry sum.

As a point of comparison, the final clearing price for the more than 30 million permits auctioned in last month’s Northeastern states’ Regional Greenhouse Gas Initiative was $3.51 per short ton of CO2 emissions. The latest auction price is up 13 cents from last December’s auction and 44 cents from the first auction in September 2008.

Dan Rosenblum, co-founder of Carbon Tax Center, a U.S.-based non-profit organization that promotes carbon tax, said that while a higher tax rate harmonized across countries would be preferable, the proposed rate is a workable framework for curbing emissions.

Whether the money raised “is put to productive use,” and goes towards emissions reduction activities, is ultimately more important than how high the rate is, says Rosenblum. He adds that while the tax rate “will have to be ramped up” eventually, there are presently “legitimate issues with regard to what we can expect a developing country to commit to.”

So, while a globally harmonized price of carbon will be important in the years to come, by enacting a carbon tax that surpasses the prevailing, market-determined U.S. price of carbon, China would be taking a critical first step to encourage emissions mitigation.

 

Author

Elizabeth Balkan

Elizabeth Balkan is a China-focused consultant who has studied, worked and lived in the region for twelve years. Now based in New York, Balkan advises private and public stakeholders on energy and climate policy, and cleantech investment strategies in China. She is the founder of New Energy and Environment Digest (needigest.com). Balkan earned a B.S. in Foreign Service from Georgetown University School of Foreign Service (SFS) and an M.A. in International Economic Policy from Columbia University School for International and Public Affairs (SIPA), and is fluent in written and spoken Mandarin.

Areas of Focus:
Trade Policy; Environment; Energy

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