China Eyes Carbon Tax

China's smog crisis may be clearing the way for new anti-pollution policies, although the pace of change remains clouded in doubt.

On Feb. 19, a senior Ministry of Finance official raised hopes for change in China's environmental rules with a promise that the government would "proactively introduce" new policies, including a tax on emissions of carbon dioxide (CO2), the main global warming gas.

The new carbon tax would be one of several steps taken to meet China's pledge of cutting 40 to 45 percent of CO2 per unit of gross domestic product by 2020 from 2005 levels, said Jia Chen, the ministry's tax policy chief, according to state news agency Xinhua.

An environmental protection tax would replace pollutant discharge fees, while taxes could also be assessed on energy-intensive products and luxury transport, Jia said. Coal taxes could also be raised and reformed.

New standards

Separately on Feb. 21, the Ministry of Environmental Protection issued a Five-Year Plan to overhaul hundreds of national pollution standards for water, air, soil, ecosystems, and sound, the official English-language China Daily reported.

On the same day, the National Development and Reform Commission (NDRC) said it has set 54 new energy efficiency standards and use limits for key industries since last year

Six of the heaviest-polluting industries in 47 cities were required to start "gradually" meeting international air pollution standards on March 1, China Daily reported.

The producers of thermal power, iron and steel, petrochemicals, cement, non-ferrous metals, and chemicals account for 70 percent of the country's total emissions, said Chai Fahe, vice president of the Chinese Research Academy of Environmental Sciences.

Winter smog cloud

The outpouring of promises is a response to long-standing problems, but it is also the result of a recent coincidence of events.

China's cities have been suffering since January under a great ceiling of soot, which is politely called smog, while the government prepares for the spotlight of its annual meetings with its transition of power in March.

The country's new leaders will be under pressure to show visible progress on pollution problems that their predecessors failed to fix

But conditions of China's coal-burning economy are working against them, even forcing cuts in the traditional fireworks of the Lantern Festival to keep more smoke out of the air

The government's new measures have drawn international notice with particular focus on the carbon tax, long considered the most effective way to make polluters pay for excess emissions.

Analysts have mixed praise for the initiative with concern for how effective it will be.

Carbon tax vs. emissions trading

Philip Andrews-Speed, principal fellow in the East Asia program at the National University of Singapore's Energy Studies Institute, said a carbon tax could offer advantages over an emissions trading scheme.

"A carbon tax makes more sense in China than emissions trading, as the administration of a tax is easier than a trading system," he said. Trading emissions credits can also be hard to track with state-owned enterprises, which may be subsidized.

"The key challenges are to decide at what level of carbon price the tax should be set and then to collect the tax. Neither of these will be easy," Andrews-Speed said.

Industry interests

Mikkal Herberg, energy security research director for the Seattle-based National Bureau of Asian Research, also cited the influence of China's industry lobby.

"This all will be one big battle with heavy industry vested interests," Herberg said. "But maybe the pollution debacle will give Beijing a stronger backbone.

How much of a tax?

Questions remain on the impact and cost.

On the issue of the tax level, the concern is that it may be set so low that it will have little effect in discouraging industries from burning more coal.

In 2010, finance ministry officials recommended a tax of 10 yuan (U.S. $1.60) per metric ton of CO2 starting in 2012 and rising to 50 yuan (U.S. $8.00) in 2020, Xinhua said.

"The tax on carbon would in fact be puny," wrote Ella Chou, a clean energy consultant and Brookings Institution senior research assistant in a blog posting cited by the Washington Post.

"The point of a carbon tax, be (it) in China or elsewhere, is to set the price signal straight," said Chou, who noted that current tax rates have helped make China's coal consumption greater than the rest of the world combined.

Local officials collecting amounts

Tax collection may also be problematic.

According to Jia, local tax officials rather than environmental protection departments would collect the amounts due.

That change is unlikely to keep local officials from promoting energy-intensive industries to boost economic growth, said Chou.

"Local governments would continue to come up (with) ways to give industries tax rebates and subsidies to attract them to their own jurisdictions, so the effect of the environmental tax or the carbon tax on the industries would be negligible," she said.

Another obvious shortcoming is that officials have yet to say when the carbon tax will be implemented.

The last major discussion of the carbon tax in China was in August 2009, when the nation's top environmental advisers urged implementation in a 900-page report issued four months before the U.N. climate change conference in Copenhagen.

The proposal went nowhere as Beijing argued that Western industrialized nations should take the lead in cutting emissions first.

That dynamic may be changing as the result of the smog crisis and pressure on the new government to do something about it, but without further details, the effect is unclear.