Download China’s Carbon Tax Gestation: Function, Theoretical Basis and Framework

China’s Carbon Tax Gestation: Function, Theoretical Basis and
Framework
ZHANG Xiaoying1, ZHONG Jinwen2,3
1. Finance School, Jiangxi Normal University, Nanchang, P.R. China, 330022
2. Business School, Jiangxi Normal University, Nanchang, P.R. China, 330022
3. PM & VE Research Center, Jiangxi Normal University, Nanchang, P.R.China, 330022
Abstract: Function of carbon taxes is that it would reduce CO2 emissions and increase energy efficiency,
but it would also impact on economic growth and exacerbate social injustice. Carbon tax is a Pigovian
tax and its theoretical basis is to internalize externalities. In the design of China’s carbon taxes, the
estimates of CO2 emissions of fossil fuel should be as tax basis, lower rate of 20CNY/tCO2 should be
implemented in the early introduction, and perfect the complete mechanism of relief and return should
be established.
Keywords: Carbon tax, Pigovian tax, Climate change
1.
Introduction
Carbon taxes have been frequently advocated as a cost-effective instrument for reducing emissions [1]. It
gains increasing international attention in the climate change background and is implemented in many
countries currently. Therefore, it is imperative to do deep research on Chinese carbon tax policy.
Carbon tax is an environmental tax against fossil fuels (such as coal, natural gas), referring to the CO2
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 CO2 emissions to avoid
dangerous climate change [2].
Carbon tax is not only an important part of the environmental tax system, but also an important tool of
environmental economic policy.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.
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 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.
2.
The Function of Carbon Taxes
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
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patterns, and promote sustainable economic development.
2.1 To reduce CO2 emissions
The purpose of levying on carbon tax is to reduce the emissions of CO2 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 CO2 emissions. When the tax rate is 5 $/tC, CO2
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, CO2 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 CO2 emissions is considerable in short-term, but
in the long term it is much smaller [3].
2.2 To increase energy efficiency
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.
2.3 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 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.
2.4 To exacerbate social injustice
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 increase 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
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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.
3.
The Theoretical Basis of Carbon Taxes
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 CO2 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.
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4.
The Framework of Carbon Taxes
4.1 The determination of CO2 emissions and tax rate
According to the Baseline methodology provided by “2006 IPCC Guidelines for National Greenhouse
Gas Inventories”, due to fossil fuel consumption CO2 emissions is calculated as:
Estimates of unit fossil fuel CO2 emissions
=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 1 Column .
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 CO2 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 20CNY/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 1 Column .
⑤
⑥
Fuel type
①
Table 1: CO2 Emissions Estimates of All Kinds of Fossil Fuel
Lower heating
Carbon
Oxidation
CO2 emissions
value
content
factor
(t)
3
(MJ/t, km )
(tC/MJ)
= × × ×11/3
②
④
③
⑤②③④
Tax rate
(CNY/t,
km3)
= ×20
⑥⑤
Raw coal (t)
20908
1.938339
Cleaned coal (t)
26344
2.442300
0.0000258
0.98
Other washed coal
8363
0.775317
(t)
Coke (t)
28435
0.0000295
3.014205
Crude oil (t)
41816
0.0000200
3.035842
Gasoline (t)
43070
0.0000189
2.954903
0.99
Diesel oil (t)
42652
0.0000202
3.127501
Fuel oil (t)
41816
0.0000211
3.202813
LPG (t)
50179
0.0000172
3.148799
Refinery gas (t)
46055
0.0000182
3.058037
Natural gas (km3)
38931
0.0000153
2.1731090
0.995
Coke over gas (km3)
16726
0.7932863
0.0000130
Other coal gas
5227
0.2479079
(km3)
Material source: Arrangement based on “2006 IPCC Guidelines for National Greenhouse Gas Inventories”.
38.77
48.85
15.51
60.28
60.72
59.10
62.55
64.06
62.98
61.16
43.46
15.87
4.96
4.2 The concept of carbon tax factors
According to the provisions of “Kyoto Protocol to the United Nations Framework Convention on
Climate Change”, the first commitment period for countries in Annex I is 2008-2012. “Bali Plan of
Action” 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 CO2 emissions reduction. On the end, I suggest that
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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 2.
Tax
factor
Specific
content
5.
Table 2: The Concept of Specific content of Tax Factor in China’s Carbon Tax
Tax
Tax
Tax payer
Taxed object
Tax rate
Tax basis
Relief and levy
process
deadline
The person
The CO2
Set rate
Estimated Production Tax
Free-levy on
who directly that
on the
emissions process.
calculation enterprises which
emit CO2
directly
basis of
of CO2.
period:
adopt CO2
emitted
the
1 month;
reduction
to the
to the
amount
Declare
technologies and
atmosphere
atmosphere
of CO2
tax within
recycling
due to
10 days
technologies
consumption in the
emission.
of fossil
production
after the
(such as CCS)
energy
and
expiration
and fulfill the
(including
consumption
date.
standards.
legal and
process
Temporary
natural
field.
free-levy on live
person).
coal and natural
gas.
Give certain
relief on
energy-intensive
industries,
depending on the
different stages
of economic
development.
Conclusion
Function of carbon taxes is that it would reduce CO2 emissions and increase energy efficiency, but it
would also impact on economic growth and exacerbate social injustice. Carbon tax is a Pigovian tax and
its theoretical basis is to internalize externalities. In the design of China’s carbon taxes, the estimates of
CO2 emissions of fossil fuel should be as tax basis, lower rate of 20CNY/tCO2 should be implemented
in the early introduction, and perfect the complete mechanism of relief and return should be established.
References
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[3]. Wei Taoyuan, S. Glomsord. 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]. Zhang Xiaoying, Zhong Jinwen. The Thoughts of Introduction of carbon tax in China. Economic
Review, 2010(8): 71-75. (in Chinese)
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