Around the world, governments are recognizing the need to address the threat posed by global climate change. One commonly used measure is carbon pricing, which includes carbon taxes and trading. China should include this policy into its long-term strategies for addressing climate change and promoting social economy. Moreover, carbon taxes are a crucial part of China’s green tax reform. Other pollutants, which are expected to fall to manageable levels in the next 10 years, can be addressed using short-term taxes, but reining in carbon emissions requires long-term planning.

However, methods should vary according to region. Pilot programs for carbon trading were included in the 12th Five-Year Plan (2011-2015), but the government had not yet fully formulated a plan for carbon taxation at that time. When designing a carbon tax, policymakers need to consider how it will work in conjunction with the existing carbon trading regime.

At present, it is not easy to levy carbon taxes on consumers because of the way the tax system is set up. The current tax system is mainly directed at enterprises of a certain size. If carbon taxes are included, this will cover more than 95 percent of enterprises. While carbon trading is aimed at large enterprises, carbon taxes can be applied to other enterprises and consumers, but the tax can only be levied directly on emissions. Small enterprises and individual consumers can be targeted using other methods, such as a fuel tax.
 

A paper released by the Tax Policy Center of the US Brookings Institution last year cited multiple studies that confirmed carbon taxes, when gradually increased over time, are capable of achieving significant reductions in emissions. According to the National Development and Reform Commission, in 2015, under a tax rate of 10 RMB per ton of carbon dioxide, China’s carbon emissions fell by 9.2 percent, or 190 million tons. By 2020, the tax rate will have been increased to 30 RMB per ton of carbon dioxide, and emissions are expected to drop by 19 percent, or 430 million tons.
 

Nevertheless, carbon taxes will exert negative effects on GDP growth, but such effects will be limited. Compared with the baseline scenario, there was a loss of 0.09 percent of GDP in 2015 when carbon taxes were implemented. It is predicted that in 2020, the GDP will decrease 0.08 percent. The main reason for this is that there may be a decrease in the output of the energy industry due to the rising energy prices, which will hamper the development of related sectors.
 

However, these statistics ignore the positive effects of reduced energy imports and of increased investment in emerging industries. When these factors are taken into consideration, the loss of GDP would be quite limited. Moreover, there has been almost no change in terms of the GDP growth rate. In addition, it should be noted that the lost GDP is produced at the cost of heavy pollution, while the green GDP would hardly decrease.

Many countries implement carbon taxes incrementally, allowing them to mitigate negative effects on economic growth and improve the environment in a cost-effective way.
 

Carbon taxes only play a supplemental role and should be integrated with other energy policies. Most countries include carbon taxes into the total tax revenues prior to the redistribution to ensure the fairness of taxation and optimize the tax structure.
 

In addition, a portion of carbon tax revenues can be used to improve energy efficiency and develop renewable energy sources. In China, other taxes, such as the value-added tax, can be correspondingly reduced when implementing carbon taxes, which can lessen the impact of carbon taxes on the price of commodities.

 

Jiang Kejun is from the Energy Research Institute at the National Development and Reform Commission.