Download The Design of Carbon Tax Framework in China

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The Design of Carbon Tax Framework in China
ZHONG Jinwen1,2, ZHANG Xiaoying3
1. Business School, Jiangxi Normal University, Nanchang, P.R.China, 330022
2. PM & VE Research Center, Jiangxi Normal University, Nanchang, P.R.China, 330022
3. Finance School, Jiangxi Normal University, Nanchang, P.R.China, 330022
Abstract: 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 CO2 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
CO2 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.
Keywords: Carbon tax, CO2 emissions reduction, Carbon emissions rights trading, Environmental
taxation system
1 Introduction
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 [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 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
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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 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].
2.3 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 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 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
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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.
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 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
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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 Annex is 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 CO2 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.
Ⅰ
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
Tax payer
(including legal and natural person).
Taxed object
The CO2 that directly emitted to the atmosphere in the production and consumption process field.
Tax rate
Set rate on the basis of the amount of CO2 emission.
Tax basis
Estimated emissions of CO2.
Tax process
Production process.
Tax deadline
Tax calculation period: 1 month; Declare tax within 10 days after the expiration date.
1. Free-levy on enterprises which adopt CO2 reduction technologies and recycling technologies
(such as CCS) and fulfill the standards.
Reduce and
2. Temporary free-levy on live coal and natural gas.
levy
3. Give certain relief on energy-intensive industries, depending on the different stages of economic
development.
Tax factor
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 CO2 emissions. Tax rate design should make taxpayers response positively and affect their
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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)
38.77
Raw coal
20908
19383.39
25.8
48.85
Cleaned coal
26344
24423.00
98.0
15.51
Other washed coal
8363
7753.17
60.28
Coke
28435
29.5
30142.05
60.72
Crude oil
41816
20.0
30358.42
104t
59.10
Gasoline
43070
18.9
29549.03
99.0
62.55
Diesel oil
42652
20.2
31275.01
64.06
Fuel oil
41816
21.1
32028.13
62.98
LPG
50179
17.2
31487.99
61.16
Refinery gas
46055
18.2
30580.37
99.5
43.46
Natural gas
38931
15.3
217310.90
108m3
15.87
Coke over gas
16726
79328.63
13.0
4.96
Other coal gas
5227
24790.79
Note 1MJ=106J, 1TJ=1012J.
Material source Arrangement based on “2006 IPCC Guidelines for National Greenhouse Gas Inventories”.
1
：
2
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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]
References
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Practice, 2010(7): 59-60.
[2]. Andrea Baranzini, José Goldemberg, 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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