Not for Quotation or Citation
June 14, 1998

Xuejun Wang

University of California, Berkeley

Since 1970’s, China has built its environmental and resource policy system. In this paper, the evolution and development of environmental and resource taxation system were analyzed and a preliminary suggestion on establishing a new environmental taxation policy system was proposed. Up to now, a number of taxes/charges have been levied (both in country and local levels), like pollution fee (wastewater, air pollution, solid waste, marine pollution, and noise), eco-environmental compensation fee, water-soil conservation fee, resource tax, and so on. In this taxation system, pollution fee levy has played an important role in industrial pollution prevention and control. More new taxes/charges are already under consideration of the Chinese government, like ecological tax. In addition, other taxation tools, like energy tax and product tax could play important environment roles, besides their general taxation roles. From both theoretical and practical point of view, the formulation of a new environmental and resource taxation system in China is essential for the realization of sustainable development goal.

Key words: Economic Instruments; Taxation; Environment; Resource; China

Principle 16 of the Rio Declaration stated that individual countries should endeavor to internalize their environmental costs through the use of economic instruments. The same principle also stated clearly that the polluter must pay for the damage which arises as a result of his activities. Agenda 21 stated, moreover, that it is essential to design economic and political reforms which promote effective planning and use of resources for sustainable development on the basis of sound economic and social policies, integration of social and environmental costs, and pricing of resources.

Economic instruments applied in environmental protection and resource conservation should encompass all tools that are designed to influence economic behavior. They usually includes funds for environmental cleaning or progressive investment, deposit schemes for containers, subsidies, emission charges, product charges, exemption fees, administrative fees to supervise environmental protection and resource conservation, non-compliance fees, and tradable emission quotas, etc.

Environmental taxation has been widely applied in a number of countries, such as consumer taxes, fees paid for direct resource use, waste disposal, and income taxes, etc. (Gaines and Westin 1991). Mining and real estate taxes are also widely applied, as well as subsidies to encourage specific resource exploitation, in order to regulate and better manage the extraction and utilization of mineral resources. The mining tax, for example, increases the unit cost of exploitation while other factors remain constant and thus help lowering overall level of resource exploitation and presumably preventing aggressive exploitation and damage to the environment. In European Union, a comprehensive ecological taxation system is being under formulation (EC, 1996).

China has the largest population in the world, one of the largest land area among all countries. It is within this context that China observers, both inside and outside the government, are looking for new ways to conserve, protect and preserve China’s threatened environmental and natural resources.

Since late seventies, a reform toward using more market power in economic activities has been undertaken in China. One of the major targets of the reform is using more economic incentive, including tax/levy instruments. The reform has also led to the using of more economic instruments in environmental and resource fields. Twenty years experience of reform has yet to yield results to the level of expectations. The utilization of economic incentives has of course, contributed substantially in environmental protection and resource conservation. As compared with the rapid economic growth and emerging environmental problems, the current policy and legal system are, however, not adequate to mitigate the complex problems for meeting the need of environmental targets.

Since 1979, China’s economy has grown at the rate of over 8 percent. The impressive development record has resulted in significant increases in living standards of the people. It is becoming increasingly evident, however, that the rapid economic growth puts sever pressures on the environment. The results demonstrate very high discharge levels into the air and river, in spite of an environmental policy infrastructure that is more advanced than the policy of most other developing countries (Lunde, et al., 1995). Most of the water courses running through urban areas have been polluted (State Statistical Bureau, 1996). At the regional level, especially in south China, acid rain caused mainly by the burning of fossil fuels has already decreased the level of yields of agricultural and fishery activities.

Global warming has been recognized as one of the most serious environmental problem in the world. Although a couple of uncertainties exist, the accumulation of green house gases in the atmosphere has the similar trend of increasing of temperature of the atmosphere. In the last several years, the energy consumption in China grew rapidly, despite significant improvement of energy utilization efficiency. China emits more than 10 percent of energy use related CO₂ of the world, and the level of emission is predicated to be increased significantly over the coming decades.

Since 1970’s, China has adopted a number of economic incentives and disincentives in environmental protection and resource conservation. The most important measure is the levy of pollution fee which was laid down in the Environmental Protection Act of China. Other measures widely used in China include grants and subsides, environmental permit, environmental investment and loan, environmental deposit and environmental labeling, etc. Most of the economic incentives have been formulated in relevant laws and regulations, such as "The Environmental Protection Law", "The Water Pollution Prevention and Control Law", "The Air Pollution Prevention and Control Law", "The Noise Pollution Prevention and Control Law", "The Solid Waste Pollution Prevention and Control Law", "the Marine Environmental Protection Law", etc. Many local environmental regulations and standards were drawn up in province, autonomous regions and municipalities.

Although a number of economic incentives have been stipulated in relevant laws and regulations, the major constraint is the enforcement of these instruments. The country has short of a perfect enforcement and monitoring system to support the implementation of these instruments. In fact, enforcement, in particular, has been identified as one of the key weaknesses in China’s environmental policy, as it is crucial to the success of any environmental policies. It is now the key priority area of action for national environmental authorities.

In recent years, progress in enforcement is being made. The Environmental and Resource Protection Committee (EPC) of the National People’s Congress (NPC) mandated to ensure that environmental legislation is properly implemented. They carried out an independent country-wide inspection of the enforcement of environmental laws.

Pollution levy system has been applied since late 1970’s. The impose of general pollution levy fee has generated 3.7 billion yuan in 1995. Of this, about 80 percent was earmarked for pollution abatement projects in the form of soft loans available to individual enterprises, and the rest are used for funding of local Environmental Protection Bureau (EPB) for research, monitoring and administrative cost. Due to the very low fee rate, however, the levying of pollution fee contributed only little percentage of the environmental investment. The pollution fee contributed only 6.1% to 8.2% of the total environmental investment during the period of 1986 to 1990 (Lu, et al., 1996). Citing the levy system for air pollution as an example, the annual cost for removing dust from coal-burned boilers was 11 Yuan RMB per ton, and the emission fee was charged only 3-5 Yuan RMB per ton (Lu, et al., 1996).

In 1993, an experimental SO₂ tax scheme was implemented in two provinces and 9 cities as pilot experimentation. This tax was introduced due to the serious acid rain in some parts of the south China caused mainly by the burning of high sulfur contained coal in power plants.

In 1984, the levying of resource tax was implemented in China. The taxed products include crude oil, natural gas, coal, metal ore and non-metal ore products. In a broad sense, the resource taxation system also include others like salt tax, land utilization tax, cultivated land utilization (for non-agricultural purpose) tax, etc. However, such tax/fees do not currently reflect the allied cost of ecological degradation caused by the utilization of resources.

There is no stipulations in current laws and regulations of China for levying ecological tax. However, one way of dealing with ecological degradation issue, and arguably a very effective way, has been the proposed eco-environmental compensation fee, which were designed for levying on China’s resource exploitation and construction activities which can cause ecological damage (NEPA, 1996). It is identified that although some areas in China have begun to collect tax on utilization of specific natural resources, which, however, does not currently reflect the cost of ecological degradation. To overcome this shortcoming, it has been proposed that a more comprehensive eco-environmental compensation fee (or analogue) is required to be levied on major resource users. NEPA is now investigating the feasibility of levying nationwide eco-environmental compensation fee.

There are also several other taxes which are not considered as environmental taxes in their own right, but provide environmental incentives, such as the urban construction and maintenance fee. This fee is levied locally and collected by the local taxation bureaus for using establishment of wastewater treatment plants and landfills purposes, as well as other purposes.

In some European countries, CO₂ tax has been recognized as an effective tool of decreasing the CO₂ emission. China has not taken concrete steps in levying CO₂ tax, but of course has been active in energy saving and improving the energy utilization efficiency.

Although a number of environmental taxes/levies have been adopted in China’s environmental protection and resource conservation, it is evident that the current system may not be perfect. For example, in local areas, a couple of fees with different names have been levied for resource exploitation activities. Although these fees have been identified to be helpful, there are substantial problems yet to be solved. More comprehensive and integrated administration under NEPA has been proposed. In ecological protection aspect, the consolidation and simplification of the various disparate fees have been strongly recommended in order to create one integrated eco-environmental compensation levy system for making explicit in levying and using the funds so collected more efficiently (NEPA 1996). It is clear that, with the progress in economic reform, more and more economic incentives will be adopted. A comprehensive environmental and ecological taxation system should be established within the next ten years.

In 1993, ten national level policies in the fields of environment and development were proposed, emphasizing the adoption of more economic means in environmental protection. The Environmental Protection Action Plan of China addressed that, remedial fees for using resources should be collected, based on the principle for payment for resources utilization. The governments would include natural resources and the environmental value in the national economic accounting system and ensure that market prices reflect the environmental cost of economic activities. Environmental standards for pollutant discharges from industries may also be formulated. The tax/fee rate ought to be increased gradually. Preferences on taxes, loans and prices may require to be given to projects with social and environmental benefits, such as those on pollutant treatment, waste reuse and nature conservation (NEPA, 1993).

This Plan also pointed out that the environmental taxation reform in 1990’s will encompass: (1) levying compensation tax/fee on discharge of pollutants. Agencies such as Environmental Protection Agency and financial departments would study the feasibility of applying and formulate such levy policy nationwide on the basis of pilot experiments; (2) granting environmental protection and resource conservation projects with necessary preferences in levy. Most of the environmental protection projects, such as pollution treatment projects, ecological restoration projects have not or only have minor economic benefits. It is necessary to grant these projects with a proper preference in levy, like the exemption from investment direction adjustment tax; (3) providing proper preferences in taxation for the production of environmental-friendly products and waste reuse/recycling products.

The adoption of new policy tools, however, is quite complicated and close linked with the economic, trade and social situations of a region, a country, and even the whole world. The policy would necessarily be made simple, pragmatic and operationally feasible for their success.

Taking green house gases reduction as an example, some attempts have been made to secure internationally agreed targets for emissions of pollutants. The 1988 Toronto Conference recommended that, as an initial step, global CO₂ emissions be reduced by 20% from 1988 level by the year 2005, with the brunt of this to be borne by the developed countries. In November 1988, the Hamburg Conference recommended the more stringent target of 30% reduction by developed countries by the year 2000. In 1997, the Kyoto Protocol calls for the industrialized nations to reduce their average national emissions over the period 2008-2012 to about 5 percent below 1990 levels. The United States pledge is 7 percent below the 1990 level, slightly less than the European Union’s pledge and slightly more than Japan’s. None of the developing countries is required to set any limits.

Both the anticipatory policy and reactive policy can be applied in reduction of green house gases. The policy tools for controlling CO₂ emission include command-and-control, energy tax, CO₂ tax and tradable permit, etc. Reactive policy would be mainly adoptive, attempting to minimize the adverse impacts of climate change ex post. Within some countries, emission standards have been established, implemented either by emission quantity/technology regulations, or by the use of tradable emission permit or pollution tax systems.

Another policy tool which might be used in CO₂ emission control is tradable emission permit. The emission permit of each country could be traded in the market. Therefore, the difference of marginal costs in CO₂ cutting among countries will stimulate such trade and effectively achieve the reduction of CO₂ emission among the countries.

Although both CO₂ tax and tradable emission permit could reduce the cost of CO₂ emission cutting, a major problem in tradable emission permit is how to determine the original allocation of the permit for each country. This is a tough issue. Especially, it is possible that the price might be controlled by a few rich countries.

It should be emphasized that the new taxation system should not only encompass the traditional environmental taxes, but also other taxes, like product tax, income tax, etc., which should be modified and play their roles in a more environment-friendly way. Such tax system could be applied in the protection of natural resources and the environment by taxing on pollution, energy consumption, environment-damaging products, raw materials use and construction activities. In European Union, a similar comprehensive taxation system was called "ecological taxation" (European Commission, 1996) and has been demonstrated an effective way of balancing economic and environmental targets. Such a taxation system entails a shift from factors of production such as labor and capital towards natural resources and pollution. It should be noted, however, that since the introduction of environmental taxes tends to decrease non-environmental-related taxes, it is needed to maintain an equal burden of taxation.

With these targets, it is necessary to reform China’s current taxation system. At first, the taxation system should encourage "tax-payer" to act in a more environment friendly way by influencing their decisions, such as investing in energy-saving way, producing and consuming environment-friendly products; secondly, adoption of more pollution taxes and ecological taxes, especially for SO₂ tax, CO₂ tax and ecological tax. The CO₂ tax could be taken into consideration in combination with energy tax; thirdly, designing products and service taxes reconsidering the environmental aspect. For example, the utilization of products that lead to pollution and ecological degradation should be taxed, or taxed on a higher rate compared to environmental friendly products and services; fourthly, imposing higher tax in order to generate enough incentives; fifthly, providing incentives as exemption/reduction as important tools for stimulating the investments in pollution control equipment, waste reuse/recycle facilities, etc. ; at last, although some of the taxes have been designed to produce incentives, it is clear that the central role of most taxes are producing the revenues, especially non-environment-targeted taxes. The tax revenues provided by environment-targeted tax should be spent in environmental protection purposes. Nevertheless, this is by no means that the revenue should be directly linked to the activities taxed. The major objectives of environmental taxes/charges are to:

• urge the ecological damager to act in environmental-friendly way

• provide funds for protection and conservation

• raise money to compensate the victims

• provide subsidies for internalizing external economies

• provide funds for environmental management, monitoring and other related work

In summary, the new environmental taxation system should include the followings:

(1) Environment-targeted tax/levy (have direct relations with environmental targets)

• Pollution fee (water, air, solid waste, hazardous waste, soil and sediment, noise)

• User fee (for the utilization of environmental facilities)

• Ecological tax

• CO₂ tax and SO₂ tax

(2) Environmental-related tax/levy (have indirect relations with environmental targets)

• Resource tax

• Energy tax

• Personal income tax, corporate income tax, etc.

• Consumption good tax, etc.

(3) Tax deduction, exemption, etc.

Taxation instruments used in environmental field could result in economic, social and environmental consequences. At first, we should use less money for achieving a certain environmental goal. The impacts on economic growth should be less; secondly, the use of taxation tools must be effective in environmental protection; thirdly, fairness, social welfare, sustainability should be considered in the design of the taxation policy system.

Taxation in environmental protection and resource conservation were widely accepted in a number of countries. Taxation on industrial goods which cause environmental and ecological problems can provide financial support on environmental protection projects. In Netherlands, for example, apart from being an important source of finance for water purification plants, the water pollution charge has a rather strong incentive effect. In the 20 years of its existence, both the quality of waste water and the number of treatment plants have risen considerably (Kiss, et al, 1993). The application of economic tools also has a strong incentive in stimulating the application of new techniques in industry. Usually, with the increase of pollution tax, the polluter must pay more attention on adopting new techniques to decrease the pollutant discharge.

In addition, compared with direct management measures, the application of economic instruments usually results in a relatively low economic risk, but sometimes it could cause high environmental risk, especially when it is used in the field of toxic waste management. One of the risk of the application of environmental taxation has been the increased cost of products and services, and thus raise the price of such products and services. More importantly, the impacts of environmental taxation on price and income distribution are extremely complicated. In many cases, the tax payer might not cover the real tax burden. The tax burden could be shifted forward or backward to other producers or consumers.

Furthermore, in a more globalized economy system, levying of environmental tax in a country will no doubt affect the competition abilities of the relevant products in the world market, as well as the transferring of investment among regions and countries. Dean (1992) argued that the strict environmental regulation will lead to the loss of competition ability. Another study also demonstrated that environmental taxation could affect the competition ability significantly (OECD, 1996).

In fact, even the same environmental taxation policy can play different roles in different countries. For example, compared with developed countries, the impact of CO₂ tax on economic growth is relatively larger for China (Manne, et al.,1992; Burniaux, 1992). It will be a hard work for China to cut its CO₂ emission and maintain its high speed economic growth. Especially, it seems unreasonable for China to follow the developed countries in CO₂ emission reduction with its low emission burden per capita. A global CGE model (called GREEN) developed by OECD (1992) shows that the distribution of the costs of greenhouse gas abatement vary substantially across regions. Carbon taxes and welfare losses by region under a Toronto-type agreement calculated by GREEN were given in Table 1. It shows clearly that significant differences in real income changes exist among regions.

Source: OECD (1992)

The environmental, economic and social effects of taxation might vary significantly with the targeted environmental problems. In comparison, noise pollution is highly "localized" while the CO₂ emission is more "globalized". Therefore, the taxation on the former is more easy to be accepted by the local residents, especially in the period of economic difficulties.

In fact, many countries have taken a variety of steps in reducing the impacts on competition ability caused by the application of economic instruments like CO₂ tax. Table 2 shows the CO₂ tax and related policies in selective OECD countries (EC, 1996). It shows clearly that, after taking certain measures like tax reduction, the actual tax rates have been reduced significantly.

Table 2 The scenario of CO₂ taxation in selective OECD countries

(Source: European Commission, 1996)

Environmental tax will affect the social welfare and fairness within current generation as well as the future generations. Clean water and energy, for example, are closely linked to environmental tax but are essential to low income people. The tax burden on poor people thus might be higher than on rich people. A reasonable taxation system could reduce such impacts through feasible ways, like tax deduction, reimbursement, etc. (Leder, 1996).

The notions of sustainable development and Pareto sustainability have been widely accepted. They call for the fairness among generations. Although environmental tax could decrease the social discount rate, and thus is favorable for the protection of the environment, it is necessary to balance the need of the current generation and the future generations, especially for the developing countries, where the poverty and the development are the major concerns.

It has been pointed out that economic incentives have been widely exaggerated and misused for their ability of solving environmental problems (Westlund, 1994). It is essential to keep from using too much economic instruments instead of direct environmental management measures.

Like all forms of measures, taxation should be studied in evaluating their consequences in environmental protection and resource conservation, like the social and economic impacts, the bureaucracy they might bring about and the cost of the adoption of the measures. In China, it can be expected that the use of taxation instrument will be strengthened in the future, and the expenditure on environmental protection will keep increasing with a demand of better environmental quality. However, during the transition period toward market economy, the high unemployment rate, difficulties in industrial structural adjustment and social crisis have brought China with more problems than other countries. Considering the risk of exaggerating the effects of economic tools, as well as the shortage of dialogues between economists, environmental managers, lawyers and the public, the pace of taking taxation measures in environmental protection and resource conservation should be cautious.

The author would like to thank Drs. Emery Roe and Uday Shankar Saha for comments, review and advice, and Professor Yasuyuki Nishigaki, Mr. Gao Peng and Mr. Zhuang Guotai for their help and assistance.