China issues draft on environmental taxes to combat pollution

China has just published a long-awaited draft law on environmental taxes aimed at cutting down on water, soil and air pollution in key industries. 

This week China’s State Council released a draft law that proposes levies on pollutants in water and air, as well as solid waste and noise, following years of deliberation on how to make companies more responsible for protecting the environment.    

The draft, which has been opened to public consultation, comes two years after a proposal was first submitted to the State Council, which is China’s cabinet.

Taxes and levies would replace a system of pollution fees instituted in 1982 that have long been deemed as unfit for purpose.  

Current pollution fees are not compulsory, remain uncollected on a wide scale, and where proceeds are allocated remains unclear, say critics, who point out the current system has clearly failed to prevent or slow China’s pollution crisis.

Jia Kang, a member of the Chinese People’s Political Consultative Conference (CPPCC) and head of the Ministry of Finance’s Research Institute for Fiscal Science, told chinadialogue that environmental taxes are an essential lever for investment in cleaner technologies.
“Purely relying on traditional administrative interventions is clearly no longer adequate to deal with the current problems,” Jia said.
China’s burning of coal and oil products are major contributors to an air quality crisis in many cities, while use of chemicals in industry and agriculture has tainted much of the country’s arable land and water supplies.   
At the annual gatherings of the CPPCC and the National People’s Congress in March, Jia put forward a proposal that would speed up the implementation of an environmental tax following years of obstruction and lobbying by heavy industries.
An environmental tax would have the biggest impact on heavily polluting industries such as steel, concrete, non-ferrous metals, coal and chemicals, with increased costs estimated at between 2% and 5%.
But for these industries, which face slowing demand, overcapacity and lower profit margins – as well as other laws aimed at curbing pollution –  the carrot as well as the stick should be used through the taxation system, said one expert.  
The draft published this week proposes the following rates: 1.4 yuan per 4kg of suspended solids for water pollutants, a range of 5-30 yuan per tonne for solid waste and 1.2 yuan per unit for air pollutants.
Wang Canfa, a professor at the China University of Politics and Law, told chinadialogue: “China often increases taxation, but does not reduce it, and businesses already bear a high burden. If we add an environmental tax, what other taxes should we reduce?”
A further challenge is that some environmental protection officials in poorer areas are paid for out of a budget that is raised mainly through the 30-year-old system of pollution fees that would be replaced by a new framework of environmental taxes. These may flow to central as well as local government, raising the question of who will pay the civil servants under a new system. 
Several other major issues will have to be resolved before the environmental tax can take shape, said Lu Dongsen of the National Development and Reform Commission’s Environment and Resources Department.
A major problem is where money raised by new taxation income should be directed, and whether it will be adequately ringfenced and spent on environmental protection and cleaning up China’s toxic legacy.
But unlike local taxes designed to generate income, an environmental tax is designed to change the behaviour of businesses.
So should the income go to local or central government coffers? Lu recommends that the income flows to both, but with central government taking the larger part, then transferring it to local authorities in order to prevent provisional officials using the tax as another source of income.
“Otherwise polluting companies will be fostered by local government, rather than targeted,” Lu added.
Jia favours the income going mainly to local government, with provincial officials also bearing overall responsibility and being held to account through tougher enforcement and scrutiny.
In the past year, China has introduced several new or revised laws aimed at making industries more accountable for their pollution, deploying measures such as higher fines for polluters, stronger powers for courts, and encouragement for large NGOs to file lawsuits.
The country’s ten-point water plan targets several industries as being the most responsible for pollution of rivers, lakes and groundwater. 
The government has also attempted to remove much of the responsibility for environmental assessments from local officials in a bid to stop polluting factories being approved by corrupt officials.  
"Iron hand"
At this year’s NPC, Chinese President Xi Jinping said the government would punish polluters with an “iron hand”, amid growing public anger over pollution and an increase in public awareness following the online broadcast of Chai Jing’s documentary, ‘Under the Dome’.
For environmental taxes to complement these new policies, officials will need to decide the level of the tax. Some fear that setting rates set too high would leave some companies unable to comply, slowing economic growth at both the national and local level, and resulting in large-scale job losses in some areas.
This is a major consideration at local level despite the central government’s desire for slower, greener growth.
On the other hand, a tax set too low fails to provide incentives to reduce pollution.  
How the tax will be collected is another question for policymakers. Jia suggests different tax rates for particulate emissions depending on whether they conform or are in breach of limits.
Taxes would also need to be collected at those rates in accordance with the quantity of output, rather than amount of pollution released, he adds.
This means different rates can be imposed on companies according to how they pollute, and the taxation system will be less complicated and easier to manage, experts say.
In addition, a solution will need  to be found whether the money levied, estimated at 30 billion yuan (US$4.83 billion), is anywhere enough to discourage and clean up pollution.
Huge amounts of private sector funding, much of it in the form of green bonds, will be needed to help foot the bill in making safe China’s long-polluted natural resources.
Fixing China’s pollution problem will cost about US$460 billion annually from 2015 to 2020, or about US$2.8 trillion from now to 2020, according to a report released earlier this year from the Development Research Center of the State Council.