Download Management & Engineering The Design of Carbon Tax Framework in China

Management & Engineering 02 (2011) 1838-5745
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Management & Engineering
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The Design of Carbon Tax Framework in China
Jinwen Zhong 1, 2*, Xiaoying Zhang 3
1. Business School, Jiangxi Normal University, Nanchang 330022, P.R.China
2. PM & VE Research Center, Jiangxi Normal University, Nanchang 330022, P.R.China
3. Finance School, Jiangxi Normal University, Nanchang 330022, P.R.China
KEYWORDS
ABSTRACT
Carbon tax,
CO2 emissions reduction,
Carbon emissions rights trading,
Environmental taxation system
Carbon tax is not only an important tool of environmental economic policy, but also an
important part of the environmental taxation system. The effects of carbon tax are to
change in energy consumption structure, to contribute to reducing CO 2 emissions, to
exacerbate unequal social distribution and to impact on economic growth. The theoretical
basis of carbon tax is to internalize externalities in order to avoid the tragedy of the
Commons in atmosphere. China has a huge pressure of CO 2 emissions reduction after
2012, therefore, I recommend that the government begins to levy a carbon tax in 2013 and
implement a low tax rate of 20yuan/tc which increases gradually in future.
© ST. PLUM-BLOSSOM PRESS PTY LTD
1 Introduction
Carbon tax is an environmental tax against fossil fuels (such as coal, natural gas), referring to the CO 2 that directly emitted to the
atmosphere in the production and consumption process due to consumption of fossil energy as the tax object, referring to the units
and individuals who directly emit CO2 to the atmosphere as the taxpayer, and referring to the actual emissions or estimated emissions
of CO2 (based on estimated carbon content of fossil fuels) as tax basis, which aims to reduce CO 2 emissions to avoid dangerous
climate change [1].
Carbon tax is considered as one of the most market efficient means to reduce carbon emissions [2], it gains increasing international
attention in the climate change background and is implemented in many countries currently; Moreover, the western academia and
government departments is currently brewing to levy customs duties in international trade, which will have an enormous impact on
Chinese politics and economy. Therefore, it is imperative to do deep research on Chinese carbon tax policy.
Carbon tax is not only an important tool of environmental economic policy, but also an important part of the environmental taxation
system.
Carbon taxes and carbon emissions rights trading are important environmental economic policy tools, both of which can effectively
achieve CO2 emission reduction. Compared with carbon emissions rights trading, cost of carbon tax administration is low, it is
effective to achieve emission reduction targets with minimize cost, moreover, it meets polluter’s paying principle; But because the
*
Corresponding author.
Email: [email protected]
English edition copyright © ST. PLUM-BLOSSOM PRESS PTY LTD
DOI:10.5503/J.ME.2011.02.002
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carbon tax is poorly regressive, it is politically difficult to accept with great implementation resistance. Therefore, carbon taxes and
carbon emissions trading are not a simple mutually substituted but complement relationship with each other to play a role on
reducing greenhouse gas emissions and protecting the environment.
Environmental tax system generally refers to all the tax items which are levied to carry out a certain environmental protection.
Currently, most developed countries commonly establish a special tax against the emission of pollutants (such as carbon tax, sulfur
tax etc), and it is the core of the environmental tax system and green tax system. In order to deepen the tax reform, improve the tax
structure and establish scientific developing taxation system, China should speed up the environmental tax system construction and
increase the greening degree of our tax system. Thus, it will enable all kinds of tax to mutually interact, coordinate and join efforts to
play a better role on energy conservation, emission reduction and human environment protection.
2 The Effects of Carbon Tax
The difference of the implementation effect of carbon tax is quite different in different countries and regions and different stages of
economic and social development. But in the long run, a carbon tax is an effective tool of economic policy environment; it can better
reduce CO2 emissions, decrease energy intensity, change energy structure, improve energy efficiency, guide the low-carbon
consumption patterns, and promote sustainable economic development.
2.1 To change in energy consumption structure
The carbon tax will reduce energy consumption, improve energy efficiency, reduce energy intensity, and promote changes in energy
consumption structure. A carbon tax would have a far-reaching impact on the country’s energy consumption structure. It increases the
price of fossil energy, so it not only enables companies to eliminate backward and high energy consumption technologies, promotes
enterprise to save energy, but also strengthens the competitiveness of wind, solar, geothermal and other renewable energy, and
promotes changes in energy consumption structure.
From the time perspective, When the tax rate is 5 $/tC, energy consumption will decline by 6.13% in short term (first year after tax),
it will decline by 2.27% in the long term (2020); when the rate is 10 $/tC, energy consumption will drop 11.38% in the short term and
4.32% [3] over the long term.
2.2 To contribute to reducing CO2 emissions
The purpose of levying on carbon tax is to reduce the emissions of CO 2 and other GHG, to prevent global warming, and to protect
human living environment. It is one of the main policies to response to climate change and an effective policy tool to establish a
harmonious relationship between man and nature. Therefore, the primary function of the carbon tax is protecting the environment.
Carbon taxes would greatly decrease the degree of CO 2 emissions. When the tax rate is 5 $/tC, CO 2 emissions will decline 7.58% in
short term (first year after tax), it will decline 2.12% in the long term (2020); when the rate is 10 $/tC, CO 2 emissions will drop
13.75% in the short term and 3.98% over the long term. It shows that the impact of a carbon tax on CO 2 emissions is considerable in
short-term, but in the long term it is much smaller [3].
2.3 To exacerbate unequal social distribution
The impact of carbon tax on different social groups is not the same. It can directly regulate the distribution of income like the
property tax and income tax to promote social equity; however, as the distribution regressiveness of carbon tax, it will incr ease the
income distribution gap of capital and labor and increase social inequality in income distribution.
In order to expand the economy, the government will usually use carbon tax revenue as capital accumulation; as a result the
proportion of capital gains will increase in the national income, while the proportion of remuneration will reduce. Meanwhile, the
carbon tax will ultimately raise wages costs, the demand of labor decreases, the unemployment rate rises and the real wage levels of
the whole society falls, so that the residents’ income level falls and they will suffer larger loss. Therefore, the carbon tax will
certainly expand the income gap of the capital owner and workers.
Therefore, while in the introduction of carbon tax, the Government must improve the tax system which is related to property tax and
income tax and fully play its role in regulating income distribution and promoting social equity to reduce the income gap between
capital and labor due to the carbon tax.
2.4 To impact on economic growth
According to the “double dividend” theory of David W. Pearce [4], one bonus of a carbon tax is to improve the quality of the
environment, another one is that the carbon tax revenues can be used to reduce other taxes, thus it could create employment, increase
investment, making the economy more efficient and achieving sustainable economic development.
Economic effects of a carbon tax have two sides: on the one hand, the carbon tax will reduce private investment initiative and restrain
the economic growth; On the other hand, a carbon tax can increase government revenue and government investment and play a
stimulating role in economic growth. From the time perspective, in the short term, the carbon tax would affect the price of related
products and suppress consumer demand, thus inhibiting economic growth, but in the long view, the carbon tax will promote research
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on related alternative products, reduce environmental governance cost, it is beneficial to economic healthy development.
Overall, carbon tax will make China’s economic growth rate decline in different degrees. When the tax rate is 5 $/tC, The GDP will
decline by 0.43% in the short term (the first year after tax), and it will decline by 0.10% over the long term (2020); When the tax rate
is 10 $/tC, The GDP will decline by 0.85% in the short-term, and it will decline by 0.07% in the long run [3]. So it is obvious that the
impact of a carbon tax on economy is considerable in short-term, but in the long term it will weaken gradually. Thus, in order to
mitigate the decline in GDP, we could reduce the personal income tax and VAT while the introduction of a carbon tax to make the
total tax burden remain unchanged.
3 Theoretical Basis of Carbon Tax
The whole atmosphere is the free wealth of mankind, it is a common resource, and it is due to the rivalry but non-excludability of
common resources that it may soon be excessively used, and then resulting in disastrous consequences, a “Tragedy of the Commons”.
How to avoid the modern version of the “tragedy of the commons” in atmosphere?
Welfare economics tells us that when a person is in a condition that he affects the welfare of others but neither pays or gets paid from
it, there comes externality. If the impact is adverse, it is “negative externality”, if favorable, it is “positive externalities”. Externality
could possibly appear in production field and consumption process. Negative externalities of production leads to social costs greater
than the private cost of producers, negative externalities of production leads to social costs less than the private cost of producers;
Negative externalities of consumption leads to social value less than the private value of consumer, negative externalities of
consumption leads to social value greater than the private value of consumer. Negative externalities of production and consumption
makes that the market’s sales volume is greater than that the community hopes; Positive externalities of production and consumption
makes that the market’s sales volume is less than that the community hopes. To solve this problem, the British economist Pigou
considers that the government can levy on items which have a negative externality and give subsidies to items which have positive
externalities to internalize the externalities, i.e. for the sector and investment in which the marginal private net value is greater than
the marginal social net, we could set at a higher price by tax approach to reduce their production and sales, so that resource is shifted
to another field which is more beneficial to the society and social welfare improves; on the other hand, for the sector and investment
in which the marginal private net value is less than the marginal social net, the Government should encourage and promote them by
means of subsidies. This tax, therefore, is also known as “Pigovian tax”.
No matter in production or consumption process, a person emits CO 2 and other GHG to the atmosphere and then it cause global
warming and ecological destruction, clearly it belongs to the negative externalities. Without any binding mechanism, for the producer
pursues self-interest maximization and the consumer pursues private value maximization, no one will burden the cost due to global
warming and ecological environmental damage. In order to restrict such behavior and make up for the difference of the social costs
and private costs or private value and social, as mentioned above, Government can impose carbon tax to make negative externality of
CO2 emissions to the atmosphere internalize. As shown in graph, a carbon tax is equal to the difference of marginal social cost and
marginal private cost or marginal private value and marginal social value, that is
T = MSC - MPC = MPV - MSV
Among it, T stands for the carbon tax, MSC the marginal social cost, MPC the marginal private cost, MPV the marginal private value,
MSV the marginal social value.
Obviously, the carbon tax is a kind of Pigovian tax, the theoretical basis of which is to internalize externalities in order to avoid the
Tragedy of the Commons in the atmosphere which is common resource. It emphasizes on efficiency principle, it makes the price of
related products more fully reflect the cost of global warming, environmental destruction and low energy efficiency. Conducted by
price, consumers initiatively choose more energy saving products and restrain demand of the high pollution and high energy
consumption products; it could optimize the allocation of resources, thus achieving Paretocriterion.
4 Framework of carbon tax
4.1 Design of carbon tax factors
According to the provisions of “Kyoto Protocol to the United Nations Framework Convention on Climate Change”[5], the first
commitment period for countries in AnnexⅠis 2008-2012. “Bali Plan of Action” [6] provides that after 2012 while the developed
countries undertake measurable, reportable and verifiable emission reduction obligations, the developing countries also need to
perform measurable, reportable and verifiable mitigation actions. Thus, it will form a new international climate change patterns after
2012, and China has huge pressure on CO 2 emissions reduction. On the end, I suggest that China start to introduce carbon tax from
2013. According to tax factors, the author designed the framework of China’s carbon tax, with the concept shown in Table 1.
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Table 1: The Concept of Specific content of Tax Factor in China’s Carbon Tax
Specific content
The person who directly emit CO2 to the atmosphere due to consumption of fossil energy (including legal
and natural person).
The CO2 that directly emitted to the atmosphere in the production and consumption process field.
Set rate on the basis of the amount of CO2 emission.
Estimated emissions of CO2.
Production process.
Tax calculation period: 1 month; Declare tax within 10 days after the expiration date.
1. Free-levy on enterprises which adopt CO 2 reduction technologies and recycling technologies (such as
CCS) and fulfill the standards.
2. Temporary free-levy on live coal and natural gas.
3. Give certain relief on energy-intensive industries, depending on the different stages of economic
development.
Tax factor
Tax payer
Taxed object
Tax rate
Tax basis
Tax process
Tax deadline
Reduce
levy
and
4.2 Further details
4.2.1 The determination of CO2 emissions estimates
According to the Baseline methodology provided by “2006 IPCC Guidelines for National Greenhouse Gas Inventories” [7],
due to fossil fuel consumption CO2 emissions is calculated as:
CO2 emissions estimates of unit fossil fuel
=Lower heating value × Carbon content × Oxidation factor × Carbon conversion factors
Among them, the lower heating value (net calorific value) is the heat what is left during complete combustion of fuel, apart
from the heat that is released from water vapor in flue gas to water. Carbon content is the carbon emission for unit heating
value of fossil fuel; Oxidation factor is the ratio that CO2 accounts for carbon emission; Carbon conversion factors is the
conversion factor of carbon to CO2. Results of emissions estimate of all kinds of fossil fuel all fossil fuel is shown in Table 2
Column 6.
4.2.2 The determination of carbon tax rate
It is difficult to determine the rate because there are various factors to consider. We should consider the impact on
macroeconomic and industrial competitiveness; meanwhile, it should reflect the max marginal cost of CO 2 emissions. Tax
rate design should make taxpayers response positively and affect their emission behavior effectively. Considering various
factors and following the progressive principle, I suggest that we implement low rate with 20yuan/tCO2 from 2013, after the
second commitment period (from 2013 to 2020), we increase the rate gradually. According to the CO2 emissions estimates of
all kinds of fossil fuel, the author has calculated the specific rates in Table 2 Column 7.
Table 2: CO2 Emissions Estimates of All Kinds of Fossil Fuel
3
4
5
6
7
Lower heating value Carbon content Oxidation factor CO2 emissions
Tax rate
Fuel type
Unit
(MJ/t, km3)
(tC/TJ)
(%)
(t)
(Yuan/t, km3)
Raw coal
20908
19383.39
38.77
Cleaned coal
26344
25.8
24423.00
48.85
98.0
Other washed coal
8363
7753.17
15.51
Coke
28435
29.5
30142.05
60.28
Crude oil
41816
20.0
30358.42
60.72
4
10 t
Gasoline
43070
18.9
29549.03
59.10
99.0
Diesel oil
42652
20.2
31275.01
62.55
Fuel oil
41816
21.1
32028.13
64.06
LPG
50179
17.2
31487.99
62.98
Refinery gas
46055
18.2
30580.37
61.16
Natural gas
38931
15.3
99.5
217310.90
43.46
Coke over gas
108m3
16726
79328.63
15.87
13.0
Other coal gas
5227
24790.79
4.96
Note: 1MJ=106J, 1TJ=1012J.
Material source: Arrangement based on “2006 IPCC Guidelines for National Greenhouse Gas Inventories”.
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Acknowledgment and author in brief:
Supported by Jiangxi Social Science “Eleventh Five-Year” Planning Foundation (08YJ113).
ZHONG Jinwen(1965-), male, professor, Dr., and master instructor, low-carbon economy and innovation management,
86-13576289758, [email protected]
ZHANG Xiaoying (1966-), female, associate professor, Dr., and master instructor, ecological economy and industry cluster,
86-13576297898, [email protected]
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References
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[2]. Andrea Baranzini, JoséGoldemberg, Stefan Speck. A future for carbon taxes. Ecological economics, 2000, 32 (3): 395-412.
[3]. Wei Taoyuan, etc. The impact of carbon tax on Chinese economy and greenhouse gas emissions. World Economics and Politics,
2002, (8): 47-49. (in Chinese)
[4]. David W. Pearce. The Role of Carbon Taxes in Adjusting to Global Warming. The Economic Journal, 1991, 101(407): 938-948.
[5]. United Nations. Kyoto Protocol to the United Nations Framework Convention on Climate Change. available at
http://unfccc.int/kyoto_protocol/items/2830.php. 1998.
[6]. United Nations Framework Convention on Climate Change. Bali Action Plan (Decision 1/CP.13). 2007.
[7]. Intergovernmental Panel on Climate Change (IPCC): IPCC Guidelines for National Greenhouse Gas Inventories, 2006, Japan
Institute for Global Environmental Strategies (IGES), 2006.
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