Hazy future for pollution tax

Being the world's factory also means being a major major source of pollution. This I have been worried about since my trip to Shenzhen in 2002 where skyscrapers were being built to fill the entire horizon. If China were to poise itself to be a world leader, I reckon truly leading the way by keeping our skies clean and blue would win her more genuine supporters (albeit green ones, I'm sure that wouldn't hurt) - also see earlier post on how Beijing dealt with polluting cars, by scrapping about 350,000 of them in Beijing alone. Maybe it was just for the Olympics. Hmm.

No need for further public diplomacy or any charm offensive needed. Just show and pave the way for true nobility as of the great Chinese thinkers of old. The advantage China has is the ability to introduce sweeping reforms with little in the way, let's hope money-making doesn't cloud that ideal, as it already has in so many aspects.

Also, do note the last paragraph. the source asserts China's hit a low of 6.1% growth in the first quarter of 2009. Looks like the Chinese machine is still churning out the goods whilst the rest of the world backslides. The phoenix has indeed re-risen. Let's hope it learns to set a good example, a la Confucius!

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Cyclists passed through thick pollution from a factory in Yutian, 100 kilometers east of Beijing in North China’s Hebei Province. Photo: ImagineChina

Hazy future for pollution tax
By Sun Zhe
Source - the Global Times June 18 2009

A man was caught spitting on the sidewalk and fined 50 yuan ($14.64). The guy took a 100-yuan note out of his pocket, handed it to the cop and said, “Keep the change. I want to do it again.”

The joke mirrors the doubt that the environment taxation issue has triggered. Would it really ease pollution, or it is just a government money maker?

A two-year history

Vice Finance Minister Wang Jun said on June 11 that the Ministry of Finance was considering the environmental taxation issue.

In saying that Wang was echoing his counterpart in the Ministry of Environmental Protection (MEP), Zhang Lijun, who said on June 5 that eco-taxation has been put on the schedule of “significant issues,” and was being pondered by Ministry of Finance, the State Administration of Taxation (SAT) and the MEP.

It’s not the first time that heads of the state environment bureau has brought up the issue.

It was noted in an emissions reduction schedule released as early as June 2007, when the National Development and Reform Commission stated that China was going to tax polluters. The MEP – then the State Environmental Protection Administration, which was upgraded to ministry level in March 2008 to highlight the government’s eco-consciousness – had declared at the time that an environment tax was being discussed.

However, in June Zhang and Wang, like their predecessors, did not give a timetable for any eco-tax.

Environment destruction has accompanied China’s GDP rush for years. Heavy air pollution chokes in one third of the country’s cities, more than one fourth of its rivers and lakes are contaminated by industrial waste, and 90 percent of its rivers crossing urban areas are heavily polluted, according to a February working session of the MEP in Shanghai.

“The government would always weigh whether the employment and the GDP that one industry created was really worth the harm, or pollution, it causes,” said Fan Yong, dean of the taxation department with the Central University of Finance and Economics in Beijing, “That is one reason pollution tax is being brought forward now.”

But pollution has not been “free” for years since China adopted the pay-as-you-pollute policy in 1982 when the State Council approved the emission fee proposal.

“It is typical in China that before the government launches a new tax, it first makes it a fee,” Wang Surong, a taxation expert with Beijing-based University of International Business and Economics, told the Global Times.

“It’s like a test run,” said Wang, “just to get people warmed up for the payment.”

It’s customary within China’s taxation system to transform fees into taxes, according to Fan.

“A tax is more transparent and compulsory than a fee,” said Fan, “because it has the taxation law to back it up.”

The government has adopted tax policies, such as subsidies or kickbacks on value-added taxes and income taxes, to award environmentally friendly manufacturers, said Fan.

Actually there is already an environment-related tax in China, only it’s called the natural resource tax, launched in 1993. According to the latest figure released by the SAT, the natural resource tax amounted to only 0.5 percent of the country’s annual taxation revenue of 4944.93 billion yuan ($723 billion), while the GDP of 2007 was 24952.99 billion yuan ($3,652 billion).

In 2006 and 2005, the natural resource tax revenue was respectively 0.45 percent and 0.55 percent of the country’s total annual tax revenue.

“It’s not likely that the new tax would be called an ‘environment tax,’” Fan said, “But more likely an emission tax. It’s a transformation of the emission fees (or pollution fees). It applies to solid, liquid and gas wastes like the emission fee does.”

And emissions are likely to be taxed according to their elements, such as sulfur dioxide, nitrogen oxide and carbon dioxide, as is done in western European countries.

A higher production cost would be added to the product price and the consumers would pay for price hike, according to Wang.

The new tax would not be a silver bullet to slay pollution because those who can’t afford increased costs will likely turn to cheaper, higher polluting alternatives, while the affluent buyers probably won’t care too much about the price.

“It’s like when the golf tax came into effect,” said Wang, “Nobody chose to hang up their clubs, because golfers are rich enough not to worry too much about the price.”

However, Fan said that if consumers abandoned one product because of a costly pollution tax, it would spur the manufacturer to develop a cheaper, environmentally friendly substitute.

Difficulties ahead

Sun Gang, a researcher with the Research Institute for Fiscal Science under Ministry of Finance, told the Shanghai Securities Daily in January 2008 that departmental conflicts would make it difficult to apply the tax.

“It will involve cooperation between the taxation department and the environmental department of the government,” said Sun. “The interest of different departments would make the issue complicated.”

The environmental bureau has always collected the emission fees, and the same bureau would be responsible for compiling standards and measures for any emission tax, said Sun.

Other difficulties lie in the distribution of the tax revenue, said Fan.

“For example, when a factory pollutes a river running through several cities,” said Fan, “the city where the factory is would pocket the tax, but the other cities also suffer from the pollution, so there should be a way to distribute the tax income to all of them.”

The emission should be taxed according to the production output of the manufacturers’, as it is too hard to measure the emission amount through the outlet, which have made emission fee collection hard, suggested Wang.

Now not the time

The timing of the tax also remains a significant question. But all agree that rolling it out during the current financial crisis wouldn’t be wise.

“It would be good to launch the tax when the global financial downturn is over,” said Wang. “When the economy starts to recover, the consumers would not be as sensitive to price hikes as they would be now.”

China’s record-low quarterly growth of 6.1 percent during the first quarter of 2009 also made the birth of pollution tax extremely unlikely, because worry over any new tax could undermine the country’s stimulus recovery schedule.