The East is Green: The Future of China’s Environmental Regime (Part 2)

June 3, 2014 Posted by China Briefing Reading Time: 4 minutes

SHANGHAI – In Part 1 of this article, we looked at China’s Revised Environmental Protection Law and its implications for foreign investment. In a further sign of the times for Chinese environmental policy, two new environmental taxes are currently under legislative consideration: an environmental tax and carbon tax. Plus, beginning with Shenzhen in 2013, China has become home to a growing number of cap-and-trade systems (or carbon markets). In the following, we take up these initiatives one by one, considering their likelihood of implementation and regulatory consequences.

Two New Environmental Taxes

Environmental Tax—Alongside the revised Environmental Protection Law, China’s legislature is currently reviewing a bill for the introduction of an Environmental Tax (ET), titled the Environmental Tax Law. Related measures have been discussed and repeatedly postponed since 2011 — indeed, ET was widely expected to have been included in the 12th Five-Year Plan announced in 2012. Debates have revolved around issues such as which government agency would be charged with collecting the tax and how tax revenue would be used.

Earlier this year, prior to the announced revision to the Environmental Protection Law, the Ministry of Finance announced that China would introduce a set of new taxation policies designed to protect the environment, replacing the “pollutant discharge fees” currently levied on enterprises. It was argued that the advantages of an environmental tax would include a clearer system of managing authorities, more uniform collection rates, and placing the burden of proof on the polluters themselves.

In its current draft, the EP Tax Law consists of 39 articles in 7 chapters and proposes five types of taxable items: air pollutants, water pollutants, solid waste, noise and carbon dioxide. The latter two items would be entirely new to taxation in China, whereas waste disposal charges are currently applied to the former three. At present, it is difficult to assess the influence the Revised Environmental Protection Law will have on deliberations to implement an environmental tax, as the two significantly overlap in their application. As recently as May 2014, the Environmental Tax Law was predicted to enter into effect by late 2015 or early 2016.

Carbon Tax—Adding further complication to China’s environmental regulatory system, as recently as 2013 plans were said to be in the works to introduce a carbon tax to be levied on corporate emissions. As the world’s biggest contributor of greenhouse gases, China faces considerable international pressure to bring down its CO2 emissions, especially in its steel and cement industries. Added pressure comes from meeting the country’s own publicized target of reducing per-unit-of-GDP carbon emissions by 40-45 percent from 2005 levels by 2020.

The introduction of a gradually increasing carbon tax would result in an estimated 19 percent reduction in emissions by 2020 according to some reports, and between RMB 90 and 460 billion in revenue. Critics, however, point to the potential resultant spike in unemployment (as companies scramble to cut costs against declining profits) and local infrastructure costs this would create. During a period of economic uncertainty, Beijing is wary of introducing two new taxes, both of which would target the same polluting enterprises. It now appears likely that ET will take priority over a carbon tax, as China’s attention shifts from combating global warming to dealing with its acute air pollution problem. Nevertheless, Tsinghua University Economist Cao Jing has predicted a carbon tax will be implemented by 2015 at the earliest.

Carbon Markets

While the carbon tax languishes in legislative limbo, cap-and-trade systems are being rolled out across China. In 2013, Shenzhen initiated the first such system (also known as a carbon market or emissions trading scheme), and this was quickly expanded to include six additional pilot regions. To date, the country’s carbon markets can hardly be characterized as booming; however,in May 2014 the China Beijing Environment Exchange recorded a record-high of around two to three trades in carbon allowances per day. This has been primarily attributed to a lack of transparency on how market prices are set and other critical factors for the establishment of true market conditions, such as an absolute carbon cap. As a result, allowance prices have fluctuated between RMB20 in Hubei to RMB130 in Shenzhen. An official closely connected to the development of carbon markets has cited a target of 2020 for the creation of a national carbon market. A review of this proposal is planned for 2015.

From the present standpoint, it is safe to assume that China will press on with an environmental tax, most likely to be announced before the end of 2014 and implemented in 2015. The carbon tax, on the other hand, appears likely to have been shelved for the moment, pending an upswing in the Chinese economy. Meanwhile, both central and local governments have demonstrated their careful endorsement of carbon markets. While China seems committed to the eventual adoption of a unified national market, until this happens, there are likely to be continuing problems based on the above-identified issues.

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