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It is time to introduce environmental taxes
In 2007, Pan Yue, then deputy director of the State Environmental Protection Administration, introduced seven environmental and economic policies aimed at shaping China's future sustainability efforts. Since then, initiatives such as green credit, green insurance, and green securities have gradually taken root. However, a clear timeline for the official implementation of an environmental tax remains uncertain. In recent years, calls for the introduction of an environmental tax have grown louder, becoming a prominent topic during this year’s Two Sessions. Members of the Chinese People's Political Consultative Conference (CPPCC), along with experts from the National Institute of Fiscal Science under the Ministry of Finance, have jointly proposed that China should quickly develop and implement an environmental tax to address the urgent environmental challenges and meet energy-saving and emission-reduction targets.
The "Eleventh Five-Year Plan" set a goal of reducing total emissions of major pollutants by 10% by 2010, which equates to a 2% annual reduction. However, the target for 2006 was not met, and while the first half of 2007 saw a slight decline, the overall environmental situation in China remains severe, with pollutant emissions still far exceeding environmental capacity.
According to CPPCC members, after thorough research, it has become evident that China lacks a specific tax mechanism—environmental taxes—that directly targets pollution and environmental damage. The absence of such a tax limits the ability of taxation to regulate harmful environmental behaviors and hinders the creation of a dedicated revenue stream for environmental protection.
Members also pointed out that the current pricing mechanism in China does not adequately support environmental protection. Prices often reflect only production costs, without accounting for external costs like resource depletion and environmental degradation. This leads to distorted economic growth metrics and fails to encourage responsible behavior among producers and consumers. With strong domestic demand, prices continue to rise, fueling the expansion of high-polluting industries such as chlor-alkali, calcium carbide, and coke production.
Moreover, existing environmental tax incentives are limited to tax cuts and exemptions, which do not effectively reduce pollution and instead place additional burdens on taxpayers. The current sewage charging system is also plagued by issues such as lack of enforcement, difficulty in collection, and local protectionism, further undermining its effectiveness.
Jia Kang, a member of the CPPCC and director of the Ministry of Finance's Institute of Fiscal Science, emphasized that China's long-term environmental management has relied heavily on command-and-control approaches. However, with the development of a market economy and the diversification of economic entities, more market-based tools like taxes and charges are needed to address environmental challenges effectively.
At the Two Sessions, many CPPCC members expressed that the time is ripe for introducing an environmental tax. They noted that the existing sewage charging system has laid a technical foundation, with established collection mechanisms and management systems. Provinces like Hubei have already implemented reforms to collect sewage charges through taxation models, providing a blueprint for expanding these efforts into a broader environmental tax framework.
Jia Kang added that with the improvement of China’s market economy and the development of its tax system over the past three decades, the conditions for implementing an environmental tax are now largely in place. Additionally, the ongoing adjustment of China’s tax policy offers an opportunity to introduce such a tax, as income tax reforms and value-added tax transformations have reduced the tax burden on enterprises, increasing public acceptance of new environmental measures.
Experience from developed countries also provides valuable lessons. Many have successfully implemented environmental taxes on pollutants like sulfur dioxide, carbon dioxide, and nitrogen oxides, which not only help control pollution but also generate funds for environmental protection. These examples offer a useful reference for China as it moves toward a more sustainable and environmentally conscious tax policy.