Environmental Tax: Persuading the Polluters to Pay
China has launched a new environmental tax law, but its impact may be limited
This year will see a spate of new l aws taking effect, but one of the most watched is sure to be the new Environmental Tax Law, which took effect on January 1, 2018.
In recent years, environmental pollution, such as toxic smog in major cities, has become a major source of public grievance. In recent months, the Chinese government has taken drastic measures to deal with the issue. In late 2017, China launched a massive project to replace coal-fired heating systems with those using gas or renewable energy in 28 northern cities. And from January 1, 2018, China banned the imports of 24 categories of solid waste.
According to Wang Jianfan, Director of the Department of Taxation of the Ministry of Finance, the new environmental tax law is one of the government's major measures to fight pollution. He said the law will tackle the issue of ineffective enforcement in levying pollution discharge fees and interference by local governments
Since 1979, China has collected a “pollutant discharge fee” to regulate pollution. According to official data, China collected 17.3 billion yuan (US$2.65B) from some 280,000 businesses. Under the new law, the fee will be replaced by a new environmental tax.
Some analysts believe the new law will offer a more comprehensive and long-term solution for China to combat environmental pollution by reshaping businesses' behavior.
Song Guojun, professor of environmental economics at the School of Environment and Natural Resources at the Renmin University of China told Newschina that China's previous system of levying a pollutant discharge fee was full of loopholes. Song said that because the fee was poorly enshrined in law, it was routinely subject to either abuse or ne-
glect at the local level.
“In some places, local governments charge a fixed fee from businesses, regardless of their actual emission of pollutants, while in others, local governments exempted businesses from the fee to attract investment,” Song said.
Previously, the pollution discharge fee was collected by local environmental protection agencies, but under the new law, the environmental tax will be collected and regulated by taxation authorities using standardized administrative procedures. Song said that local governments will be forced to conduct more cohesive, transparent and effective regulation.
Flexible Rates
But under the new environmental tax law, governments at the provincial level still have the power to determine the specific tax rate within the range outlined in the new law, which can vary by a factor of 10.
The new environmental tax law covers four categories of pollutants – air pollutants, water pollutants, solid waste and noise, and only businesses and public institutions will be subject to the tax. For each pollutant, the law outlines a range of tax rates that can be levied by provincial governments.
For example, polluters will pay taxes ranging from 350 yuan to 11,200 yuan (US$541,1715) per month for noise, and five to 1,000 yuan (US$1-153) for each ton of solid waste. A tax of 1.2 yuan to 12 yuan ($0.181.83) for emissions of 0.95 kilograms of sulfur dioxide, and 1.4 to 14 yuan (US$0.212.14) for one kilogram of chemical oxygen demand (COD) will be levied. Carbon dioxide (CO2) is not included in the list. Provincial and municipal governments can make their own decisions on how much to tax within the range.
“The rationale behind the arrangement is that the social cost of environmental pollution varies greatly across different regions,” Lan Hong, a professor of environmental finance at the Renmin University of China told Newschina. “By allowing flexibility at the provincial level, different regions can their balance their need for economic devel- opment and environment protection based on their own situations,” Lan said.
Many provinces and municipalities have already released their own environmental tax rates. It is no surprise that Beijing, Tianjin, and the provinces of Hebei and Shandong in northern China, where air and water pollution is most acute and has long been a major source of public complaint, adopted the highest possible tax rate under the new law. By contrast, provinces and regions in the western and northeastern parts of China, such as Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang, Liaoning and Jilin, where the local economy has been far less prosperous than the eastern coastal region, adopted the lowest possible tax rate, only one-tenth of that in Beijing.
Many analysts believe that the disparity of tax rates may lead to the relocation of many heavily polluting industries from regions with a high environmental tax to the western inland regions.
Toothless?
Under the new law, all environmental taxes will go to the coffers of provincial-level governments, instead of the national government. The arrangement is believed to serve the dual purpose of encouraging local authorities to actively and effectively implement the law and increase their revenue sources, as in theory, the implementation of the new law could lead to a surge in taxes collected.
According to research conducted by the Central University of Finance and Economics, given the existing pollution levels and already adopted environmental tax rates, the total volume of collections in 2018 could reach 50 billion yuan (US$7.6B), almost triple the pollutant discharge fee of 17.3 billion yuan (US$2.65B) collected in 2017.
Yet most provincial governments appear to lack enthusiasm for the new tax. Since the launch of the new law, many provincial governments have released their estimates of environmental taxes they can levy in 2018. As if to assure local businesses there would not be a major change in their tax burden, most estimates are not much higher than the pol- lutant discharge fee in previous years.
Tianjin municipal government, for example, projects that the environmental tax in the first half of 2018 will be 298 million yuan (US$45.6M). This is slightly lower than the pollution fees of 302 million yuan (US$46.2M) it collected in the first half of 2017.
The estimate appears counter-intuitive, especially considering Tianjin is one of several regions that have adopted the highest possible rate.
In an interview with the Economic Daily on December 26, 2017, citing concerns over China's ongoing economic slowdown, Taxation Director Wang Jianfan said that the tax rates outlined in the new environmental law are purposely designed to keep the environmental tax on a par with the previous pollutant discharge fee.
Wang said that to encourage businesses to lower pollution without drastically increasing costs for polluters, the new tax includes additional categories of tax relief for businesses, as they can receive 50-percent off if they lower their atmospheric or water pollution by half of the national and provincial standards, and they receive a 75 percent reduction on their payable tax if they lower their pollution levels by 70 percent.
However, since the cost of pollution essentially remains unchanged, the new tax relief is not much of an incentive for enterprises to change their behavior.
Liu Shangxi, Director of the Research Institute for Fiscal Science at the Ministry of Finance, told Newschina that a major problem with China's environmental protection is that the relatively low cost of pollution has nurtured a “polluter pays” corporate culture. The cost of lowering pollution far exceeds the punishment, whether fees or taxes.
Liu said he hoped the launch of the new environmental tax is just a “starting point” for more serious efforts in the future to combat China's environment problems. But to give the environmental tax some real teeth, the Chinese government should increase the minimum tax level in the following years.