China may soon get a carbon tax. But how effective will it be?

February 21, 2013

China may soon get its very own tax on carbon emissions. That's the latest scuttlebutt from state-owned news service Xinhua, which noted that the levy would be part of a broader effort to improve the country's environment.


Carbon tax, you say?

It's easy to see why this move is attracting so much attention. China is the world's largest emitter of greenhouse gases. Yet the country has earned a reputation for bogging down international efforts to tackle climate change. A carbon tax looks like a big about-face. And it's more than anything Congress is proposing right now.

Still, the details matter a lot here. Some experts think China's carbon tax may be too small and loophole-ridden to make much difference on emissions, at least in the beginning. On the other hand, a carbon tax also isn't the only thing China is doing to try to rein in its pollution. So here are a few things to consider:

1) China's carbon tax is likely to be small at first. Chinese officials have offered hints about the size of the tax. Back in 2011, its Finance Ministry proposed a levy that would start at 10 yuan ($1.60) per ton of carbon and rise to 50 yuan ($8) per ton by 2020. (The Environment Ministry has pushed for a tax worth about twice that.)

To put that in perspective, the proposal would initially add less than $1 to the price of a ton of coal, rising to about $4.40 by 2020. Coal in China currently trades for around $86.50 a ton. So it's a modest first step.

2) Any carbon-tax regime in China would probably have loopholes. Ella Chou of Brookings has a great post thinking through how a carbon tax in China would actually work. Right now, China's provinces levy a "fee" on various industries to pay for environmental damages. In practice, this fee often just gets waived. So the government in Beijing is proposing to replace the fee with a "tax" that's harder to evade.

But in practice, Chou notes, the provincial governments could still find loopholes to blunt the pain for local industries. "Local governments would continue to come up with ways to give industries tax rebates and subsidies to attract them to their own jurisdictions," she writes, "so the effect of the environmental tax or the carbon tax on the industries would be negligible."

3) Much of the cost of China's carbon tax would be borne by other countries. Last year, John Lee of the Center for International Security Studies argued that any carbon tax in China would mostly fall on the country's exporters, who would in turn pass the cost on to consumers in the United States and Europe. "Beijing has consistently argued that the end-consumer country, and not the producer country, should bear the burden of paying for carbon emissions," Lee notes.

Now, that's still a significant step. Export manufacturing is responsible for anywhere from 20 percent to 50 percent of China's greenhouse-gas emissions, after all. But it does help explain why Chinese officials are relatively sympathetic to this idea.

4) China's carbon tax is still larger than anything Congress is considering. Although U.S. carbon emissions are falling at the moment, many analysts think we'll ultimately need a price on carbon to ensure the trend continues. Last week, Sens. Barbara Boxer (D-Calif.) and Bernie Sanders (I-Vt.) unveiled a bill that would impose a carbon tax in the United States starting at $20 per ton. Most observers think this won't pass anytime soon.

5) In theory, a bigger, well-designed carbon tax could curb China's emissions significantly. Okay, let's set the worries about loopholes aside. Could a well-designed carbon tax make a difference to China's emissions? In theory, at least? Perhaps.

A recent study (pdf) from the Chinese Academy for Environmental Planning found that a bigger carbon tax, starting at 50 yuan ($8) per ton of carbon today and rising to 75 yuan ($12) per ton in 2020, could actually have a significant impact. China's greenhouse-gas emissions would grow at a much slower rate than projected:

Again, though, this is all in theory, without worrying about poor enforcement and loopholes and the like.

6) China is announcing other actions besides the carbon tax to curb its pollution. But, again, the details are a big question mark. David Roberts had a good rundown of the Chinese government's recent proposal to cap the country's coal consumption at 4 billion tons. That would still mean China consumes as much coal as the rest of the world combined. But at least its appetite would no longer be expanding endlessly:

On top of that, China recently announced plans to impose new air-pollution limits on coal, steel, cement, metal and petrochemical industries in 47 major cities. The move came after smog in Beijing rose to record levels in January.

So the government is proposing more than just a carbon tax. But, again, the big question is implementation. For the past decade, China's central government has often proposed bold environmental initiatives that get thwarted by the provinces  — the latter tend to put a higher priority on economic growth. I wrote about that dynamic at length a few years back, and it's one reason to be at least mildly skeptical anytime China makes a big environmental announcement.

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