Green Tax Policies for China

China’s environmental record has been very mixed since initiating market reforms three decades ago. Moreover, there is relentless pressure or urban air quality from rapid industrialization. What are the potential impacts, and practicality, of various energy taxes that might be implemented to reduce the country’s leading sources of air pollution?

The rapid economic growth in China and the parallel degradation of the environment is now well known. Headlines in 2007 announced a recent estimate by the World Bank that the excess deaths from pollution in China may be up to 750,000 annually. That China is the major contributor to projected greenhouse gas (GHG) emissions is also part of the news from the recent United Nations climate conference in Copenhagen. The interest by the rest of the world in China’s GHG emissions is obvious. But also of concern should be what some consider “local” pollution—sulfur dioxide and mercury emissions often reach far beyond borders.

What may be less well known to non-China experts is the thinking of Chinese officials—how do they view the tradeoff between economic growth and environmental protection, and what environmental policies are now being considered?

Environmental Trends

Before discussing policies, let’s review the recent history for some perspective. Air pollution levels in China are indeed high. In 2004, the average concentration of total suspended particulates (TSP) in the cold northern cities was 321 micrograms per cubic meter (mg/m3). For comparison, on the eve of the U.S. Clean Air Act of 1970, the average TSP concentration in the United States was 70 mg/m3. But, high levels comparable to those in China have been observed in the earlier stages of economic development in other countries, and even in certain areas of the United States despite the much lower national average. To quote Thomas Rawski of the University of Pittsburgh: “Chinese averages never reach the peak Pittsburgh level recorded in the 1920s, rest consistently below the 1968 Tokyo peak … and are now approaching the levels recorded in Seoul during the late 1980s.” As late as the 1940s, TSP levels above 300 mg/m3 were recorded in Pittsburgh.

Since 1978, when China began to open up and privatize markets, the priorities of economic growth and poverty reduction have meant poor enforcement of pollution regulations, giving rise to such high levels of pollution. As recently as the 2001–2005 period, covered by China’s 10th Five-Year Plan, only half of the 14 major environmental targets set by the government were met. For example, the sulfur dioxide (SO2) limit was exceeded by more than 40 percent, and particulate emissions from industry were exceeded by more than 10 percent. There are successes, however—the target of 50 percent of major cities meeting a more stringent air quality standard was exceeded, as was the target for limits on industrial solid waste. Much of the discussions in the popular press have obscured this progress; a paper from the Center for International Climate and Environmental Research in Oslo noted “local water quality is improving and local air quality is kept in check … China’s development with respect to environmental concerns is mainly following the pattern previously seen in more industrialized countries.” (As an aside, a country may have rising emissions but improving air quality due to changes in the location of emissions.)

To summarize, the deterioration of the environment is common, high levels of pollution are not unique to China, and the choices made by the government are similar to the earlier history of other countries. However, there are some distinct characteristics, chief of which is the unusual dominance of manufacturing in China, which is associated with the very high rate of investment, at such a low level of per-capita income. Secondly, the rate of urbanization is very low. In 2007, only 45 percent of Chinese people resided in urban areas (the U.S. share in 1970 was 74 percent). So, we can expect a sustained increase in urbanization bringing hundreds of millions more people into polluted cities.

Policies and Options

The policies in the current, 11th Five-Year Plan aim to reduce SO2 emissions by 10 percent over the 2006-2010 period despite the projected 8 percent GDP growth. They aim to do so by requiring flue-gas desulfurization equipment on electric power plants and shutting down small, inefficient plants. This has been quite successful. However, many analysts have noted the success of market-oriented policies, such as the U.S. SO2 trading program, in place of such command-and-control policies and have urged the Chinese government to consider them in order to more efficiently address China’s enormous environmental problems. To this end, with colleagues, I have analyzed how a system of national “green taxes”—which would require producers and consumers to internalize the environmental damages of their choices of inputs and technologies—might work for China.

Mun S. Ho

For instance, what is the harm done in the production of a ton of cement? Here we focused only on damages to human health due to air pollution. The main source of premature mortality and morbidity from air pollution is tiny particulate matter (PM). Cement production produces primary PM when coal is burned, and contributes to secondary PM with the SO2 from the coal. The process also uses electricity and the generation of electricity produces large PM emissions. But the link between the emissions from a particular smokestack and a higher rate of mortality some distance away is complicated. One has to take into account the stack height, wind conditions, atmospheric chemistry, population densities, and how mortality rates respond to pollution concentration. On top of this is the difficult issue of translating the health benefits into dollar measures to compare with policy costs.

We wrestled with these issues with a team of environmental engineers, epidemiologists, and economists from Harvard University and Tsinghua University, and estimated the damages from an extra unit of output from each of 33 sectors of the Chinese economy. (For valuation, we used a value of statistical life measurement equal to 50 times per-capita GDP.) We found that a system of green taxes on output based on these damages would tax more heavily electricity, cement, transportation, and metal smelting. This tax would lead to a shift in the economy, away from highly polluting activities toward cleaner ones. Such a broad-based tax would lead to substantial new green revenues and have a minor negative impact on GDP. It would only lead to a small reduction in health damages, however, as there would be no direct incentive to reduce particulate matter or SO2.

We next considered a green tax on fossil fuels—taxes on coal, oil, and gas proportional to the damage done by using an extra unit of these fuels. These would also not directly tax PM or SO2 but would encourage the substitution of capital for energy and cleaner energy for dirtier options. We found that this narrowly based tax would not raise much revenue but would substantially reduce damages. The negative impact on GDP is small in relation to the lower health damages—a reduction of 0.02 percent in GDP compared to the value of health benefits of about 0.15 percent of GDP. I should note that such a tax would be quite similar to a carbon tax—heavy for coal and lighter for gas.

Ideally, PM or SO2 could be taxed directly. We know how to monitor SO2 relatively cheaply, but not PM, considering the large number of cement plants (not the mention the millions of vehicles and cooking stoves). The challenge is thus there for the imaginative reader to devise green taxes that are practical and provide incentives to reduce emissions of sulfur dioxide, nitrogen oxides, primary fine particles, and mercury from the multitude of sources. The simple fuel tax that is discussed here should be relatively easy to implement for China, and a system to compensate the losers should be relatively easier to implement in a country where the state still plays a large role.

Mun S. Ho is a Senior Economist at Dale Jorgenson Associates and is a Visiting Scholar at Resources for the Future. His research is focused on economic growth, productivity, taxation and environmental economics. 

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