Chinese Carbon Tax: Hits and Misses

(Melissa Zhang)

Chinese news agency Xin Hua reported on February 19 that the Chinese Ministry of Finance will introduce a new set of environmental tax policies. A new pollution emissions tax will replace pollutant discharge fees and include a carbon tax. Now that the world’s emissions giant has made a move, what are some causes for doubt or optimism? What are the implications for carbon policy- or lack thereof- in the U.S.?

According to a Washington Post article by Brad Plumer, Chinese government experts proposed pricing carbon at 10 yuan ($1.60) per ton, to be raised to 50 yuan ($8) per ton by 2020 – in other words, far below the 500 yuan ($80) per ton price necessary to achieve “climate stability,” according to other experts.

While the initial price is modest, Tim Worstall of Forbes indicates that even a low, yet rising “Nordhaus” tax can eventually significantly reduce carbon emissions by helping make the next generation of power plants and capital low-emitting. The economist William Nordhaus has advocated for starting with a price of $5 per ton and raising it to $240 by 2040.

In addition, the effect of the carbon tax would be much larger than the tax itself, assuming that the Chinese Government stops subsidizing fossil fuels once it begins taxing them. The International Energy Authority supports this charge with a statement that removing fossil fuel subsidies could take us between a third and a half of the way towards controlling climate change, especially in China, Iran, Russia, and Saudi Arabia.

Interestingly, the exporters of Chinese goods will bear most of the cost of China’s carbon tax, so the prices of Chinese exports in Europe and the Americas may rise. Since manufacturing exports account for some 20-50% of China’s greenhouse gas emissions, the burden of this carbon tax could have a significant effect on consumer behavior in the long run.

Allowing provincial governments to collect the carbon tax may create loopholes that will offset the tax’s intended carbon-curbing effects.  Ella Chou from Brookings Institution notes that the governments might devise “industry tax rebates and subsidies to attract [new business]” which can generate much greater revenues than what the carbon tax will provide.

China has been criticized for failing to take environmental action because it was waiting on more “developed” countries, such as the U.S., to take the lead in implementing market mechanisms for addressing climate change. It appears that some of these countries still associate taxing pollution with limiting economic growth. However a Businessweek article published on Sunday observes that China’s carbon tax may encourage U.S. lawmakers to take climate change more seriously.

Last month, California Senator Barbara Boxer and Vermont Senator Bernie Sanders have announced legislation that would impose an initial $20 per ton fee on pollution emissions to fund investments in sustainable energy technology. The proposal also includes rebates to consumers and taxes on imported goods to ensure that “all countries play the same rules,” said the senators in a statement published on Sanders’ website. The U.S. is also considering a hybrid model similar to Australia’s, where a carbon tax converts to a trading scheme in future years, in reverse order to China’s approach.

Who will make the next move now that the ball is rolling?