China eyes a carbon tax

With the idea of a carbon tax starting to get more attention in Washington, word now comes from Beijing that the Chinese government is thinking seriously about putting the idea into practice.

A senior official from China’s Ministry of Finance recently described  plans for a national carbon tax as part of a new package of environmental protection taxes. The new package, which would replace existing pollution discharge fees, would also include taxes to encourage conservation of coal and water.

The level of the carbon tax has not yet been set, but recent proposals suggest a modest range of 10 Yuan ($1.50) per metric ton of carbon dioxide, rising to around 50 Yuan ($7.90) per metric ton by 2020. In comparison, Australia implemented a carbon price of $23 AUD ($23.73) per metric ton in July 2012, while prices in California’s cap-and-trade program were between $10 and $15 in last month’s allowance auction.

However modest, any sign that China is stepping up efforts to reduce its greenhouse gas emissions is encouraging. Despite establishing itself as a global leader in the manufacture and deployment of solar and wind power, China continues to invest heavily in coal-fired power generation. China’s carbon emissions, already the world’s highest, are projected to increase another 75 percent by 2035 under current policies.

Most economists agree a market-based approach (such as cap and trade or a tax) is the most efficient way to reduce greenhouse gas emissions. These tools use price signals to reduce emissions at a lower cost than traditional command-and-control regulations.

With cap and trade, the government sets a cap on emissions (guaranteeing a reduction) and then issues a finite number of tradable emission allowances. This allowance trading creates a market price, which promotes economic efficiency. A carbon tax sets a price per ton of emissions, to be paid by emitters. While it does not set a hard cap, a tax set at an appropriate level can achieve a similar result in emissions reductions. (For more on the economic rationale of putting a price on carbon, see our new brief, Options and Considerations for a Federal Carbon Tax.)

If China indeed implements a carbon tax, it won’t be the country’s first use of market-based approaches. Since the mid-1990’s, under a policy called total emission control (TEC), China experimented with pilot cap and trade programs to reduce emissions like sulfur oxides (SOx). Also, the country is experimenting with carbon dioxide cap and trade to reduce 2010 carbon intensity levels by 17 percent, a target of the 12th Five-Year Plan. Programs are being established in seven pilot areas (two provinces and five cities) and will extend to additional regions from 2016-2020. Lessons from these pilots will inform design of a national program, to be implemented sometime after 2020.

Even if the initial carbon tax is low, establishing the necessary reporting and monitoring system will improve information and transparency – providing structure for future emission reduction programs. Data collection is a major barrier for China, which has not released official greenhouse gas emissions estimates for any year since 2005.

Despite such impediments, centralized decision-making could deliver a national market-based climate policy ahead of the United States, where divided government and anti-tax sentiment, among other factors, continue to stall movement on comprehensive climate policy.