China’s Low-Carbon Strategy: Could a Carbon Tax Play a Role?

As reflected in the emphasis on “green development” of the recently-released 13th Five Year Plan, China’s leaders recognize the need to shift to a more sustainable, climate-friendly model of development. They have signaled that they believe market pricing is a key element of the new model, and that carbon pricing is an important policy instrument for achieving this shift. While China’s carbon trading pilots and planned national trading system have received much attention, a carbon tax is also being seriously discussed. Government think tanks have proposed various options for the sectors to be covered, tax administration, and use of the revenue to complement existing policies.

Case for a Carbon Tax

Studies show new taxes—regardless of their particular target—are rolled out only if a number of key factors converge, among them an economic rationale, as well as robust political and institutional support.1

The economic case has been made for taxing carbon in China by research institutes affiliated with key agencies. Studies by think tanks serving the Ministry of Finance (MOF), the Ministry of Environmental Protection (MEP), the Ministry of Transport (MOT), the National Development and Reform Commission (NDRC, China’s economic planning agency) and the State Administration of Taxation (SAT) converge around the idea that a tax of 10-20 renminbi per ton of carbon dioxide would have a very limited dampening impact on economic growth. They predict that a tax on carbon at that level would generate billions of renminbi in revenue that could be distributed to promote energy conservation and emissions reductions, encouraging the development and deployment of new technology. Over time, moreover, they argue that this rate could be increased.2 The broad array of ministry-affiliated think tanks conducting research and analysis on taxing carbon also suggests a potential institutional constituency in China for a carbon tax. China’s National Plan for Addressing Climate Change (2014-2020), which explicitly calls for studying carbon tax policies, has only galvanized further research.

Two Options

Indeed, recent discussion among the MOF, MEP, MOT, SAT and the NDRC appears to center increasingly on how and not whether a carbon tax could be implemented. This past June, China released a draft of legislation for an environmental tax addressing air, water, solid waste and noise pollution. Carbon dioxide was not included in the tax; in informal discussions, however, Chinese officials suggested to us that incorporating carbon dioxide into the tax was a possibility. Some affiliated with the MOF and MEP appear to support including CO2 among the items taxed under the new environmental levy.3 Supporters of this option cite the administrative advantages of this approach4 and the propitious timing, given currently low coal and oil prices, which would ease the burden for companies.5

Researchers with the NDRC-affiliated Energy Research Institute (ERI) hold a different view. They have made a case for managing a carbon tax as a separate levy under the purview of the National Energy Administration (NEA), a body within the NDRC, arguing that this would be the simplest administrative solution as well as the better way to ensure such a tax is revenue-neutral.6 For example, ERI researcher Jiang Kejun has suggested that a carbon tax could be introduced to complement the cap-and-trade system (which is also overseen by NDRC), particularly in helping to control CO2 emissions from the transportation sector,7 a likely source of rising emissions in the coming years.8 Jiang Shuli, deputy director of NDRC’s climate change department, has said that a tax on carbon could be used in future as a way of tightening controls on emissions.9

However, recently China’s finance minister, Lou Jiwei, stated that China will likely incorporate a carbon tax into the environmental protection tax or resource tax, and that China will not introduce a standalone carbon tax.10

Industry Views

Opponents of a carbon tax in industry as well as the government argue that a carbon tax carries higher economic and social costs than carbon trading in the short and medium term, with less certainty about reductions in emissions.11 Voicing a common criticism from industry, for instance, a senior power sector official expressed concern about the added financial burden of a carbon tax atop existing command-and-control policies.12 The tax, however, could potentially replace these policies and cover different sectors or firms.

Not all industry leaders reject a tax on carbon out of hand. Gu Zongqin, associate secretary of the China Petroleum and Chemical Industry Association, has opined that a carbon tax set at a low level could help boost energy efficiency and reduce emissions. Other industry experts have expressed the view that a carbon tax would help galvanize enterprises to take measures to reduce emissions through valuable technological upgrades and product structure adjustments.13

Addressing Air Pollution and Climate Change

Public outcry over China’s deteriorating air quality has offered an additional source of potential political support for taxing carbon. Air pollution could be partially addressed in the immediate term with end-of pipe solutions, such as scrubbing technologies; however, taxing carbon could contribute to promoting energy efficiency and greening production, thus simultaneously reducing carbon while generating cleaner air.14 Notably, at this year’s Chinese People’s Political Consultative Conference, at which draft environmental tax legislation was proposed, one delegate—an economist from the State Grid’s Southwest Division— suggested implementing a carbon tax to promote clean energy to reduce haze from air pollution as well as carbon emissions.15

China’s Paris climate action plan (known as China’s “Nationally Determined Contribution”) promises to reach a peak in carbon emissions around 2030 and make best efforts to peak early, raise the non-fossil share of energy to around 20% by 2030, and reduce CO2 emissions per unit of GDP by 60%- 65% from 2005 levels by the same year.16 The plan includes explicit proposals to modify the tax system, among them reorganizing the resource tax and implementing an environmental tax that has among its goals promoting energy conservation and emissions reductions.17

All this makes clear that China is discussing a carbon tax as a complementary policy option in tackling rising emissions, useful in pricing carbon and perhaps capturing economic sectors not covered by cap-and-trade. Placing a tax on carbon could be an element of China’s broader strategy to transition toward a development model that integrates environmental protection and climate action.

1. See, for example, B. Guy Peters, “Determinants of Tax Policy”, Policy Studies Journal Volume 7, Issue 4. June 1979, 787-793.
2. Jin, Wei. “The Draft of Environmental Protection Tax Law Sent to the State Council while Carbon Tax Is Unlikely to Happen,” [环境保护税法草案报送国务院碳税暂难开征], Sina, November 5, 2014.
3. Tian, Yudong, and Lihua Wu. “SAT and MEP Researching a Carbon Tax Plan That May Come out Next Year,” [国税总局环保部调研 碳税方案或明年出台]. China Times, May 8, 2009.
4. See for example, Jin Dongsheng, “Discussion Paper on China’s Carbon Tax,” Journal of Chinese Tax and Policy, Vol. 2.2, 2012, 53.
5. Guan, Bo. “Low Oil Price Era: Using Carbon Management to Reduce Traditional Energy 低油价时代:用控‘碳’摆脱传统能源.” Caixin, December 12, 2014.
6. Li, Fengtao. “Is a Carbon Tax Coming?” [碳税来了?], 2013.; Wang, Bingning. “NDRC Staff Confirmed the Study of Carbon Tax Saying the Strongest Opposition Come from Energy-Intensive State-Owned Companies,” [发改委人士证实研究碳税 称高耗能国企是最大阻力公司华夏时报]. China Times, November 5, 2010.
8. Green, Fergus and Nicholas Stern. “China’s ‘new normal’: structural change, better growth, and peak emissions”, Grantham Research Institute on Climate Change and the Environment and the Centre for Climate Change Economics and Policy, Policy brief, June 2015.
9. Liu, Canbang. “A National Carbon Market Could Be Established as Early as the End of next Year with the Concete Industry Included 碳排放交易最快明年底全国推行 水泥等过剩行业入围.” National Business Dialy, August 26, 2015.
10. Xinhua. “Finance minister rules out separate carbon tax”. March 20, 2016.
11. Zheng Shuang and Xiao Dou. “Economic Tools to Address Climate Change: A Comparative Analysis of Carbon Tax and Trade 应对气候变化的经济手段:碳税与碳交易对比分析,” September 5, 2013.
12. Du, Junsong, and Yuewen Fu. “Wang Zhixuan: The Impact of Carbon Trade and Tax on the Power Sector,” [王志轩:电力行业的碳税&碳交易体系怎样才最科学?]. July 15, 2015.
13. Li, Wenzhi. “Collecting Carbon Tax Is a Future Trend in China 我国碳税征收仍是未来的大势所趋.” China Chemical Industry News, August 6, 2014.
14. See, for example, Coco Liu and Climate Wire, “China’s War on Air Pollution May Cause More Global Warming,” Scientific American, March 2, 2015,
15. People. “Wang Yuxiang: Establishing a Cap-Trade System to Promote the Development of Clean Energy 王抒祥:建立碳排放交易机制 促进清洁能源发展.” Energy, March 14, 2016.
16. Xinhua. “Enhanced Actions on Climate Change: China’s Intended Nationally Determined Contribution 强化应对气候变化行动——中国国家自主贡献,” June 30, 2015.
17. The State Council. “Energy Development Strategy Action Plan (2014-2020) 能源发展战略行动计划(2014-2020年).” Xinhua, November 19, 2014.

Author Information:
Dr. Carla Freeman, a ChinaFAQs expert, is Associate Research Professor of China Studies at the Paul H. Nitze School of Advanced International Studies (SAIS) of the Johns Hopkins University and the Director of the SAIS Foreign Policy Institute (FPI).
Bo Li is a Research Analyst in the Forest Program at WRI.

Photo Credit:
Yuxuan Wang via Flickr
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