No timetable for carbon tax say Chinese officials

The murmurings over China’s carbon tax plans continue as finance official hints that the introduction of a tax is being discussed

Speculation over whether China will introduce a carbon tax is continuing as officials refuse to confirm their plans.

Back in February an unnamed senior official at the Ministry of Finance told a Xinhua reporter that China would proactively introduce a new set of taxation policies, including a carbon tax, to preserve the environment.

However, expectations for the introduction of a carbon tax were dampened a month later, as Bloomberg reported Jia Kang, head of research at the Ministry of Finance, saying a carbon tax was “still in internal discussions” as there were "obvious oppositions".

The hints from policymakers resurfaced earlier this month when a State Council source acknowledged that China had finished a design for a carbon tax scheme and was likely to launch it during the 12th Five-Year Plan period.

This was followed soon after by further quotes attributed to the Chinese finance minister Lou Jiwei at the fifth round of the China-US Strategic Economic Dialogue.

“The Chinese government has paid great attention to climate change … and will introduce a series of fiscal and taxation reforms to proactively promote emission reduction and new energy,” said Lou Jiwei, who added that a “carbon tax was one of the environmental protection taxes that has been considered for introduction at an appropriate time.”

Good time for a carbon tax?

While officials are reluctant to give a specific timetable for the introduction of a carbon tax, some observers believe the time is right.

“The authorities are now increasingly committed to promoting energy conservation and sustainable development, which provides a healthy environment for carbon tax policy,” said Wang Yao from the Central University of Finance and Economics. “The public’s environmental protection awareness is also growing, suggesting a strengthening of public support.”

Xing Li, from the Research Institute for Fiscal Science (RIFS), added that the structural tax reduction programme implemented since the beginning of the recession had also paved the way for the introduction of a new environmental protection tax.

The benefit of using a carbon tax to fulfill China’s commitment from the UN climate summit in Copenhagen should also not be overlooked, say observers.

China, the current largest carbon emitter, has committed to reducing its emissions per unit of GDP by between 40% and 45% from 2005 levels by 2020, as well as using non-fossil fuels for about 15% of its energy by 2020.

However, an analysis by the National Development and Reform Commission (NDRC) admitted that China is unlikely to meet the much more moderate 2013 annual target. “Under the growing pressure of an economic downturn, some local governments pay more attention to maintaining growth and thus weaken their ability to cut emissions and conserve energy,” the NDRC analysis read.

Wang Yao describes the introduction of a carbon tax as an "emission-cutting tool based on market mechanisms. By imposing a carbon tax on companies that rely heavily on energy consumption and produce heavy pollution, we are using high costs to force them to restructure and hence cut their energy consumption.” A carbon tax, he added, would also encourage resources to flow into low-carbon development.

Fears of energy price rises

While the arguments in favour of a carbon tax have been growing stronger, there are still concerns about the impact such a tax could have on the wider economy.

Liu Huan, a senior fiscal study expert and councilor to the State Council, told delegates at the International Forum on China’s Green Industry and Green Investment earlier this month that had it not been for concerns about inflation the government would have introduced a carbon tax in 2010.

More than 70% of China’s electricity is generated from coal-fired power plants. There are concerns that taxing carbon would almost inevitably lead to increases in energy price, hitting low-income households.

“Since energy costs make up bigger proportions of expenses in the low-income households, introducing a carbon tax would potentially worsen income redistribution,” a commentary on the Southern Metropolis Daily cautioned.

Wang Yao says the concerns could easily be negated. “The government could use subsidies or other methods of tax revenue distribution to mitigate the impacts on people’s daily life.”

Industry may prove harder to win over than the general public. A recent article by researchers at the RIFS claimed that: “Introducing a carbon tax would have great impacts on industries that either rely heavily on energy or have big energy bills, and these industries may well be the regional pillar industries. Therefore, the introduction of a carbon tax could encounter opposition from these industries or even local governments”.

While industry may worry in the short-term, Wang Yao says China must think of the long-term benefits of a carbon tax. “The competitive edges of the industries would be hindered in the short term … but introducing a carbon tax would help to optimise the allocation of resources and thus benefit our economical structural reform and sustainable development.”