A lady wears a mask walking on the street in Beijing amid smog. Air pollution control, particularly the fight against smog, is vital to advancing green development. Photo: FILE

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Air pollution control, particularly the fight against smog, is vital to advancing green development. Over the past five years, China has formulated and implemented a series of air pollution abatement measures, predominantly the “Ten Measures for Air Pollution Control” outlined by the State Council in 2013, achieving significant results in the battle against smog. The Beijing-Tianjin-Hebei Region, the Yangtze River Delta and the Pearl River Delta have all exceeded the goals specified in the Ten Measures.
 

However, the country still has a long way to go to reach the standard of environmental and air quality set by the World Health Organization. Meanwhile, as the space for the optimization of energy and industrial structures shrinks and enterprises’ potential for technology upgrade lowers, the costs for pollution reduction will continue to grow, bringing the fight against smog to a critical stage. Hence it is vital to explore and roll out more effective measures for air pollution control.

In early 2018, the Chinese government enacted an environmental tax policy. As an important economic measure, the environmental tax, or green tax, is better at balancing the effect and cost of pollution reduction than the pollutant discharge fee that had been enforced in the prior 40 years.

In June the same year, the State Council released a three-year action plan on how to make the skies blue again, also known as the “New Ten Measures,” stressing the importance of strictly observing the Environmental Protection Tax Law.

In theory, effective environmental tax standards should be no lower than the marginal costs of smog control. Otherwise enterprises will choose to continue production and pollutant discharge. Furthermore, since smog has prominent spatial correlation effects, the environmental tax system should encourage regional coordination.

Nonetheless, according to the tax plans unveiled so far, nearly half of the provinces, such as Zhejiang, Anhui and Fujian, are still implementing the state-stipulated minimum standards. Worse still, most of the regions, like the Yangtze River Delta, have failed to include synergistic pollution reduction in their environmental tax plans.

 

Marginal costs
City- and provincial-level estimates were made on the shadow prices of sulfur dioxide, nitrogen oxides, and smoke and dust, the three primary sources of smog from 2005 to 2015, to calculate the marginal costs of smog control. The calculation provided the following three observations.
First, the shadow prices of the three types of pollutants were evidently on the rise during the period. For example, the average shadow price of sulfur dioxide increased 3.85 times from 2010 to 2015. And in the past five years, that of nitrogen oxides was up 2.24 times.

This indicates that as China has intensified its efforts to improve the environment, green production efficiency has been substantially enhanced. In other words, while sustaining economic growth, pollutant emissions have continued to fall.

For example, from 2005 to 2015, the total amount of sulfur dioxide emissions dropped by as much as 27 percent, while the GDP nearly tripled during the period. The economic output per the same amount of pollutant discharge has become increasingly large, pushing up corresponding marginal costs for smog control.

In this sense, the bar for an environmental tax should be raised to force and encourage enterprises to cut atmospheric pollutant emissions even more effectively. Before the emission reduction goal can be attained, an appropriate periodic mechanism needs to be established to improve environmental tax standards.

Second, the shadow prices varied greatly among the pollutants. The shadow price of nitrogen oxides was much higher than those of sulfur dioxide and smoke and dust. However, according to the current environmental tax rates in various provinces and cities, the standard tax rate for nitrogen oxide was close to that of sulfur dioxide, and it was only one third that of smoke and dust.

If the marginal cost of emission reduction is counted, the tax standard for nitrogen oxides has been severely underestimated. Nitrogen oxides not only are pollutants themselves but also cause ozone pollution, which has been worsening in China in recent years, particularly over the Pearl River Delta, where ozone has overtaken PM2.5 as the major atmospheric pollutant.
In the new stage of smog reduction, it is urgent to increase efforts to cut emissions of nitrogen oxides. The New Ten Measures also emphasizes the control of ozone, ordering relevant authorities to bring the emissions of the pollutants down more than 15 percent from 2015 levels by 2020. The environmental tax standard for nitrogen oxides should be raised by a larger margin than the other two pollutants.

 

Regional disparities
Due to great regional differences, provinces and cities where the environmental tax standard is lower than the shadow prices of air pollutants should be the first to adjust environmental taxes. For example, the shadow price of sulfur dioxide is the highest in Shanghai. It is 350 times higher than that in Ningxia Hui Autonomous Region, the lowest in the nation. The vast difference is inseparable from the differences in economic structure and pollutant discharge of the two regions.

In terms of the GDP in 2015, Shanghai was 14 times higher than Ningxia, but the emissions of sulfur dioxide in the municipality were roughly half of the emissions in Ningxia. Furthermore, Shanghai’s sulfur dioxide emissions continued to fall from 2005 to 2015, while Ningxia saw a small rise.

In fact, the two regions are very different regarding production efficiency and environmental management, hence the disparity in marginal costs for sulfur dioxide emission reduction. Given significant regional differences, the convergence of environmental tax standards for air pollutants is unreasonable. It is essential to align current environmental tax standards with marginal costs. Low standards might influence the effectiveness of the Environmental Protection Tax Law on pollution abatement.

Comparison of environmental tax standards in Chinese provinces and cities with the composite shadow price of the three pollutants (the weighted average of the shadow prices) reveals that the standard environmental tax carried out in nine provinces, namely Hainan, Guangxi, Hunan, Jiangxi, Zhejiang, Gansu, Anhui, Yunnan and Fujian, was lower than the composite shadow price. Relatively speaking, the environmental tax plans of those nine provinces are likely to be less effective in pollution reduction. Therefore, they should moderately raise their environmental tax.

Furthermore, the shadow prices of pollutants also vary from city to city because of differences in production efficiency and environmental management, even among cities in the same province, such as Hangzhou and Taizhou in Zhejiang Province. So the environmental tax standard should be differentiated in light of varying marginal costs for emission reduction in different cities.

 

Coordinated smog control
Because smog pollution can spread to other regions, local governments should simultaneously consider the impacts of neighboring regions’ environmental taxes. Imbalanced regional economic development has also led to highly different marginal costs for smog abatement.
If less developed areas set high environmental tax standards for serious pollution, there will be greater impacts on their economic growth. To effectively incentivize local governments to beef up efforts in environmental management, tax transfer is a way to compensate less developed areas financially.

In regions featuring highly different degrees of pollution, control measures should be coordinated. At present, key areas that need coordinated smog control include such city clusters as those around Shijiazhuang, Hebei Province; Taiyuan, Shanxi Province; Guangzhou, Guangdong Province; Chengdu, Sichuan Province; Chongqing Municipality; Xi’an, Shaanxi Province; Changchun, Jilin Province; Harbin, Heilongjiang Province; Shenyang and Dalian, Liaoning Province; Zhengzhou, Henan Province; and Shanghai in the Yangtze River Delta.
 

Take adjacent city clusters in the Yangtze River Delta as an example. Cities in the region vary enormously regarding the shadow prices of pollutants and the degree of pollution, as well as in their environmental tax standards. For instance, the shadow prices of pollutants and the degree of pollution are both high in Hefei, Anhui Province, but the environmental tax standard is lower than that of one third of cities in Jiangsu Province. There is huge room for the optimization of Hefei’s environmental tax system.

To sum up, areas with high shadow prices, such as Hefei and Shanghai, should set high environmental tax standards, and so should severely polluted regions. However, if their shadow prices and economic development level are low, such as Jiaxing and Huzhou of Zhejiang Province, such areas can be given economic compensation by means of environmental tax transfer. As for regions with low shadow prices and a low degree of pollution, they can keep low environmental tax standards, such as Taizhou and Ningbo of Zhejiang. All in all, the optimization of the environmental tax entails adjustments not only to standards but also to the design and implementation of trans-regional environmental tax transfer and payment.

 

Chen Shiyi is a professor from the School of Economics at Fudan University.

(edited by CHEN MIRONG)