Energy taxes won’t hurt the economy

Oil prices are soaring around the world, yet Chinese demand for fuel continues to increase. Jiang Kejun, from China’s Energy Research Institute, says it is time for Beijing to consider tax policies.

China's energy use has soared in recent years; 2.65 billion tonnes of coal equivalent were burned in 2007. This has placed pressures on the country’s power supply, infrastructure and environment. It has also brought the issue of energy security firmly into view. Growth in demand is affecting the economy and a clearer energy strategy is needed, with policies designed to reduce energy consumption.

The Chinese economy has already started moving toward market mechanisms. Reforms in the energy sector have been relatively slow, but general economic trends provide the environment necessary for the application of reform in the energy field. This has been successfully trialled internationally. Current trends show that adopting an energy tax would be extremely effective and would promote sustainable economic growth to a large degree.

Research shows a fuel tax would have a clear effect on future demand for energy. A tax of 50 yuan (US$7.24) per tonne of coal equivalent would lower demand by 6.3% and save the equivalent of 126 million tonnes of coal every year. At 120 yuan per tonne, demand would drop by 16.2% or 400 million tonnes of coal. There would also be a limited negative impact on GDP. An energy tax of 50 yuan per tonne, if implemented in 2010, would cause GDP to fall by 0.4%, as the higher cost of energy would hurt some sectors and lower production in the energy sector itself. However, this does not take into account the effect of reducing imports or transferring investment from the energy sector into new industries. Taking these factors into account, GDP might only see a tiny drop, or even an increase. Moreover, any GDP “loss” does not take pollution costs into account. If a “green GDP” measure were used [which takes into account externalities, such as health damages from air pollution], losses would be greatly reduced.

If the social costs of the rapid growth of the energy sector are accounted for – costs associated with energy security, expanding international markets and the environment – then an energy tax becomes even more effective. Recent debates about vehicle fuel taxes provide an ideal opportunity to look further at this possibility. China should give this idea serious consideration. A direct energy tax, however, would be much easier to collect than a tax on the consumer, which is also being discussed.

A fuel tax on petrol would also have a significant impact on demand. A tax of 2.4 yuan per litre of petrol in 2010 would reduce demand by 10.3%, or 1.62 million tonnes of oil. By 2030 a tax of 4.6 yuan per litre would reduce demand by 20%, 90 million tons of oil. Fuel taxes are common outside China; there are many models to refer to. A fuel tax would have a positive impact on the rapidly increasing demand for fuel for transportation. Appropriate policies would guide public transportation choices and promote development of more modern transportation technology. A fuel tax is one of those policies.

In the long term, a carbon tax – possibly in conjunction with an energy tax – is a feasible option for China. A carbon tax would cut carbon dioxide emissions and only have a limited effect on the economy. International experience shows that carbon taxes would encourage new clean technology industries, such as carbon sequestration, new energy sources, nuclear power and energy-saving technology. Over the coming decades, these sectors will advance China's energy and industrial technology, promoting sustainable economic development in the process. By 2020, China would be a competitive economic superpower, able to play an active role in environmental issues. This is a further impetus for the implementation of a carbon tax.

China is only starting to look at these tax policies now. There are still problems to address, but as we become more familiar with them and see the taxes put into practice, we can start to tackle the problems better. Questions about how to collect a fuel tax and how to provide rebates or subsidies exist in other countries, too. We can carry out research and implement our chosen solutions, bearing in mind that there will still be some failings. The positive effects to be gained mean that the sooner we take action, the better. Rising oil prices provide a further reason to impose a fuel tax, in order to stop enormous amounts of money leaving the country. It is crucial to send out clear policy signals as early as possible in order to influence societal choices involving urban zoning, public transport and infrastructure. These choices have a long-term “locking” effect, and it is important to exert influence as soon as possible. Gradual increases in energy taxes can be used to ensure there is no sudden impact on society. This will be a process of learning.

Energy tax income will only account for a small proportion of total government revenues. According to the tax policies studied by our researchers, we estimate a tax could bring in 500 billion yuan in 2030, an estimated 5% of total income at that time. As in developed nations, the energy sector will become an important part of economic growth and tax revenues should be used to guide energy use: for example, to encourage energy saving, new sources of energy, renewable energy and related technology. The energy industry and energy technology will become important sectors of our economy. The appropriate use of these funds will promote economic growth, improve competitiveness and provide a basis for the country's long-term sustainable development.


Jiang Kejuan is a researcher at the Energy Research Institute at the National Development and Reform Commission


Hu Xiulian, Zhu Songli and Liu Qiang, researchers at the Energy Research Institute, also contributed to this article

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