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It is time to introduce environmental taxes
In 2007, Pan Yue, then the 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 been implemented. However, the official introduction of an environmental tax remains pending, despite growing calls for its implementation. This year, the push for environmental taxation has become a major topic during the Two Sessions, with members of the Chinese People's Political Consultative Conference (CPPCC) and experts from the National Institute of Fiscal Science urging the government to introduce an environmental tax as soon as possible to address the country’s pressing environmental challenges and meet energy-saving and emission-reduction targets.
The "Eleventh Five-Year Plan" set a goal of reducing the total discharge of major pollutants by 10% by 2010, which equates to a 2% annual reduction. However, this target was not met in 2006, and even in the first three quarters of 2007, the national discharge of pollutants only showed a slight decline. Despite these improvements, the environmental situation in China remains serious, with pollutant emissions still far exceeding environmental capacity.
According to CPPCC members, China lacks a specific tax mechanism targeting pollution and environmental degradation. The absence of an environmental tax limits the ability to regulate harmful behaviors and hinders the creation of dedicated revenue streams for environmental protection. Existing pricing mechanisms also fail to account for external costs like resource depletion and environmental damage, leading to distorted market signals that encourage unsustainable production and consumption patterns.
Moreover, current environmental tax incentives are limited to tax cuts and exemptions, which do little to address broader issues and often place a heavier burden on taxpayers. The existing sewage charging system is plagued by inefficiencies, including weak enforcement, local protectionism, and mismanagement of funds. These problems highlight the urgent need for reform.
Jia Kang, a CPPCC member and director of the Ministry of Finance’s Institute of Fiscal Science, argues that command-and-control methods alone are insufficient in a market economy. Economic tools like taxes and charges are essential to drive sustainable development. He notes that the sewage charging system has laid the groundwork for an environmental tax, with provinces like Hubei already experimenting with tax-based models.
With the development of China’s market economy and tax system over the past three decades, the conditions for implementing an environmental tax are now more favorable. Tax policy adjustments, such as income tax reforms and value-added tax transformations, have created space for new environmental taxes. Lessons from developed countries, where taxes on pollutants like sulfur dioxide and carbon emissions help control pollution and fund environmental projects, further support this approach.
Jia Kang proposes that China should establish independent environmental taxes, focusing on water, air, and solid waste pollution, as well as carbon emissions. He suggests creating multiple tax categories under the environmental tax umbrella, allowing for flexibility and expansion as needed. This comprehensive approach could strengthen regulatory effectiveness and promote long-term environmental sustainability.