News, page 3, issue 461, March 22, 2010
Translated by Tang Xiangyang
Original article: [Chinese]

On March 16, the Ministry of Environmental Protection (MEP) submitted a report advocating the introduction of a new environmental tax to the State Council, the EO learned. Currently, the details of how to implement the tax are being discussed by the Ministry of Environmental Protection, the Ministry of Finance, the State Administration of Taxation and other related departments.

An official with the Ministry of Environmental Protection confirmed the above information with an EO reporter. However, he stated, "Presently it's not a matter of whether [the environmental tax] will be decided upon, but rather if it is possible to finish discussing the issue."

According to the Chief Engineer of the Chinese Academy of Environmental Planning, Wang Jinnan, many tax items, including a pollutant tax, environmental resource tax and environmental energy tax, may be included in the new environmental tax package. For each item, there are sub taxes; for example, the pollutant tax may contain a carbon tax, sulfur tax, noise tax, refuse tax and poisonous chemical tax.

"The Ministry of Environmental Protection hopes to include a tax on natural resources, energy resources, and carbon emissions in the environmental tax, in order to enhance the Ministry's authority and status. By increasing the scope of taxation, it can earn more revenue," a source close to the Ministry said. But it won't be an easy job. "Due to the deep interest of the Ministry of Finance in the implementation of carbon tax, the MEP is currently unable to specifically include a carbon and energy tax in its environmental tax proposal; contradictory to the definition of 'environment' and the integrity of the new tax," the source said.

Difficulties Implementing the Tax

The EO has learned that the Ministry of Finance has been researching the execution of a carbon tax for a long time. Last September, it introduced a report titled Research on the Question of Implementing China's Carbon Tax, which suggests implementing a carbon tax within the next five years.

Last year the Energy Research Institution of the National Development and Reform Commission also focused on a carbon tax as an independent topic of study. The Commission thinks that a fuel tax should be implemented first, followed by an energy tax, and finally a carbon tax.

"According to general understanding, an environmental tax should include both a carbon tax and an energy tax, but this inclusion can't be clearly stated because it involves the interests of different departments. The environmental tax is still merely reform of the administrative charging system. An unclear definition of the tax has caused confusion with the implementation," Wang Jinnan said.

"An energy tax is also based on the amount of carbon emitted when energy is used. So, based on the definition of environment, an environmental tax should include a carbon tax," researcher for the Policy Research Center under the MEP, Hu Tao stated.

"We want to make the environmental tax independent of the whole taxation system," Wang Jinnan said, "Carbon tax is only one element and can't represent the whole environmental tax. After the list of taxes are confirmed, the next step will be to set a tax base."

Difficulties Facing Tax Collection

“The selection of a tax base is very important. A wide tax base will raise significant tax income and have a major impact; a narrow tax base will have the reverse effect," an official with the Beijing State Administration of Taxation said, "The tax base will decide the value of the tax."

"If the tax base is determined by the amount of pollutants emitted, we have to find a 'carrier' to measure the amount of pollution. For example, 'water;' we can use water to measure a pollutant or we can base our measurements on the amount of pollutants inside a product, such as phosphates in washing powder and mercury in batteries. They all cause pollution."

But deciding how to tax the effect on the environment of an indefinite 'pollutant' is very difficult.

As early as 2005, Ministry of Finance officials said that the implementation of an environmental tax involves complex and sensitive issues such as China's current taxation system, an adjustment of current taxes on corporations, regional economic interests and the revising of existing financial systems.

The Ministry of Environmental Protection does not want to expand the scope of the environmental tax by much either. It only intends to change the current pollutant emission fee into a tax. The core of the problem is: "While the task of energy-saving is managed by the National Development and Reform Commission, the job of reducing pollution is regulated by the Ministry of Environmental Protection."

"Take the pollutant emission fee for example, if it were to be changed into a pollutant emission tax,  to be implemented through the cooperation of the Taxation Bureau and the Environmental Protection Bureau, the former would lack environmental protection professionals and monitoring equipment to analyze and calculate those pollutants, and thus have no access to reliable data to use as a basis for taxation,"  Hu Tao said.

"If we let the corporations declare their pollutants voluntarily, tax evasion will surely occur; at the same time, there is no way for us to prove tax evasion. So, we have to either change the taxation system and leave it to the Environmental Protection Bureau to actively inspect corporations while the Taxation Bureau actively collects the taxes, or do a proper job in early stage measurements and preparation, otherwise there will be huge problems."

"The matter of how to allocate the revenue of the environmental tax is still being discussed," a source close to the Ministry of Finance said, "There are two completely different proposals."

The Ministry of Finance wants to collect taxes the normal way - by having the tax collected by local taxation bureaus and then transferred to the national treasury; the local bureaus would keep 80% of the total revenue while the national treasury would take the remaining 20% and grant it to the Ministry of Environmental Protection through the central governmental budget.

But the Ministry of Environmental Protection holds a different view.  They prefer that, after being collected by the local taxation bureaus, the tax revenue be turned over to a fund similar to a social security fund, established by the Ministry of Environmental Protection. The MEP would then use this money to invest in projects related to environmental protection, pollution alleviation, etc.

"Many problems remain unsolved, thus the environmental tax will not be implemented anytime soon," an expert specializing in environmental protection policy said, "It's hard to say whether the issue will be settled this year."

Links and Sources

Economic Observer: China Considers Environmental Tax