China’s Carbon Tax Plan
Xinhua reported recently that China will introduce a carbon tax. The actual announcement by Jia Chen from the Ministry of Finance buried the mention of the new carbon tax within a broader set of tax reform goals. Other reforms mentioned included the use of taxes to promote innovation and the development of small- and medium-sized businesses. This is not China’s first signal that it may introduce market-based mechanisms to control its carbon intensity. For months now, it has developed pilot programs testing localized emissions trading systems.
A carbon tax in China is a great idea, for three reasons.
First, a carbon tax will decrease carbon dioxide emissions. China is the world’s top emitter of greenhouse gases; its emissions are also growing at a breathtaking rate. So a carbon tax in China would be wonderful news for climate change.
Second, a carbon tax will help with air and water pollution, two major problems in China. This is because the activities which are most carbon-intensive, like coal burning and heavy industry, are also very polluting. Forcing industry to consider the cost of their carbon emissions will also have the effect of shifting them away from emitting other noxious products generated along with carbon.
Finally, a carbon tax is the lowest cost way to accomplish carbon reductions. Given the pressing need for China to continue its economic development, a carbon tax is the best instrument that can be deployed.
The announcement and subsequent reporting on the announcement are short on details. One concrete detail is that the carbon tax will be collected by the local taxation authority, rather than the central Ministry of Environmental Protection. In theory, this is a good idea: local authorities have more information about polluters and can better enforce environmental law. In practice, though, Chinese local authorities have used environmental enforcement (or lack thereof) as a way of attracting businesses to their areas. So it’s possible that allowing local taxation authorities to collect this tax could end up being a really bad idea.
Apart from this, what I’ve seen is a bit vague about how exactly the tax will be implemented. These details are crucial. Among the most important issues in conversation in the research community are:
- Who will be taxed? Will a broad set of industries be taxed or will the tax be limited to a narrow, unlucky set of companies?
- Where will the tax be collected? Upstream at coal mines or downstream at households? This has important implications for what kinds of behavioral reactions we can expect from the tax.
- Where will the tax revenue go? This is particularly important. Using the revenue to cut other taxes, or to substitute for tax hikes, would have positive effects on China’s economic growth.