“China must tax carbon”

Chinese officials are reportedly preparing to introduce a levy on greenhouse-gas emissions. Energy finance expert Jiang Kejun tells Meng Si it cannot come soon enough.

China ranks second in the Forbes 2009 Tax Misery & Reform Index, coming only behind France. But Jiang Kejun, senior researcher at the National Development Reform and Commission’s Energy Research Institute, tells chinadialogue that a carbon tax in China would be a blessing – it would not increase the overall tax burden, and would even boost GDP growth.

From 2008 to 2009, Jiang and colleagues focused their research on carbon taxes, in order to provide reference material for policymakers.

Meng Si: There is a view that China’s overall tax burden is already very high and that adding a carbon tax would meet public opposition.

Jiang Kejun: The overall tax burden is very high, but a carbon tax could be revenue-neutral. This means increases are offset by reductions elsewhere, so that total revenue doesn’t change. If we collect 100 billion yuan (US$15 billion) in carbon taxes, we cut 100 billion of other taxes – that’s easily done.

We have put forward a number of proposals, such as reducing value-added tax or business tax. We initially thought about cutting income tax, but found that, as the poorest people do not earn enough to pay taxes, we would instead need to raise subsidies for that group. So if a carbon tax is implemented, it would be in tandem with cuts in other types of tax, keeping revenue unchanged.

MS: Would a carbon tax increase the burden on consumers?

JK: The overall amount of tax collected by the state would not change – it’s just a change to the structure of taxation. If you want to scrutinise the way in which that tax income is then used [i.e. whether or not it benefits the consumer], that’s an issue for the treasury. How best to use tax revenue is a question arising from development, and will take time to solve.

MS: Once collected, how will the tax be used?

JK: Most likely at the moment is that it would be fed directly into the treasury and spent along with other tax income. This tells us something about the importance the government places on climate change. There are ring-fenced funds for poverty and earthquake relief, with dedicated offices within the Ministry of Finance to spend those – but not for climate change. So climate change is not being given the same status as poverty or disaster relief.

MS: On paper, revenue-neutrality is easy to achieve. But how about when it comes to actual implementation?

JK: A carbon tax is effectively an energy tax. Coal is the main worry, as oil and natural-gas use are easily and carefully measured, but there’s the possibility of tax evasion with coal – it’s hard to determine quantities produced, and some mines may under-report. But if you’re going to collect an energy tax, this sort of thing is inevitable, so you need to look at the overall system of tax enforcement. And things should improve as coal-mining companies merge and mines expand.

MS: You argue that a carbon tax would have minimal impact on GDP, or even a positive effect, and that reasonable tax collection and a good taxation system could cause prices overall to fall. But what do “reasonable” and “good” mean here?

JK: We think a carbon tax would have a positive impact on GDP. Existing calculations show a very small drop in GDP, but there’s a failing in the model – it doesn’t allow for the inevitable acceleration in the pace of technological advances that a carbon tax would bring about.

The State Administration of Taxation has already set out a roadmap for taxation reform, with a “green taxation system” as part of this. I think this would be a good system.

At the moment, there is little sign of any increase in government spending, while income is increasing too fast. As with the Beijing municipal government, they’ve got more money than they know how to spend. Treasuries should run at a deficit, yet China has a surplus. That’s not good, and so there is a lot of pressure on the government there.

Another possible direction for tax reform is reducing the burden – for example by cutting value-added tax and individual income tax. But if these aren’t reduced, then the tax income should be spent on sustainable development and the low-carbon economy. Beijing’s government is doing that already, for example with subsidies for public transport. Taxation reform and new taxes must move in tandem if we are to relieve public worries about how taxes are used.

MS: Many officials say a carbon tax would create an image of China as a country fulfilling its responsibility to humanity and would give us the upper hand in negotiations. Has China’s consideration of a carbon tax been influenced by international climate negotiations?

JK: I think that’s not at all important. China shouldn’t pay too much attention to the international talks as it responds to climate change. By 2030, China is going to be the leader of the world, whether it wants to be or not. By that point, China is sure to be ahead in technology as well as other areas. We need to make China a competitive nation and a carbon tax – or taxes that are targeted at adjusting the economic structure – are an effective route to doing that. We should implement them as soon as possible.

China has long talked of making changes to its economic structure, but to date things are actually getting worse. Why? The government has long been doing its best, but is finding that its methods are becoming less effective. The 11th Five Year Plan’s emission-reduction targets relied almost exclusively on administrative measures. We really hope to see changes in the 12th Five Year Plan. The government is not an expert on energy saving, yet it is setting all these policies on how to save energy. The best way to turn energy-saving into market behaviour – so that firms themselves decide how to do it – is through taxation.

MS: Some academics say collecting a carbon tax at home would mean that the United States would not enforce carbon tariffs on our exports.

JK: These are two completely different issues. The United States is talking about “border tax adjustments”. I’ve spoken about this with the US State Department. First of all, whether or not they collect that tax depends on what China does – if we aren’t seen to be doing our part, then that tax will be imposed. But another piece of our research shows that China is currently doing more on climate change than the United States or the European Union or anyone else. So there’s no reason to impose that tax on our products.

Second, they also admit that if China is collecting a carbon tax, then they won’t collect the border tariff. China is already imposing export tariffs on 56 types of energy-intensive products, at about 10%. That’s higher than the “border tax adjustment” would be. What we have done is to replace tax rebates for exports with export tariffs – that is effectively a “carbon tax” that China is already collecting.

Also, the United States isn’t talking about imposing a carbon tariff on all our products. And reduced export of some products, such as coke, wouldn’t really have a big impact on China anyway. It’s fine by us if the United States wants to tax our energy-intensive products – but usually the emissions of our products are lower than those of the US.

MS: But aren’t there cases where our products produce more carbon than in the United States?

JK: Definitely. China is doing a huge amount on energy saving and emissions reduction. Our power-generating efficiency is now higher on average than the United States. And concrete and steel manufacturing in the US uses more power than in China.

But if you look at the sources of electricity used to make those products, we can’t compete – they use natural gas, we use coal. This is just a question of the resources we have. If we’re not allowed to use coal, we have to buy natural gas and that forces prices up, and the United States doesn’t want that either. So they won’t put those barriers in place lightly, because they won’t do them any good.

MS: Is there a timetable for a carbon tax?

JK: There are reports that it will start in 2013, but there’s no word on how environmental taxes will be applied and so it’s still too early to tell. As environmental taxes are a new type of tax, the National People’s Congress [China’s highest organ of power] will need to approve them – and carbon taxes are one type of environmental tax. I personally would like to see a carbon tax put in place in 2012.

I think it will happen fairly early. In 2014, we will reach the five-year point after Copenhagen and I think by then we will have seen some major changes globally.


Meng Si is managing editor in chinadialogue’s Beijing office. 

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