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June 2015

I have been spending some time in Hong Kong this June, visiting the Chinese University of Hong Kong. I have been regularly reading the local English language newspapers, and an article in the South China Morning Post draw my attention. The Chinese government has drafted legislation for environmental taxation, targeting a wide range of water and air pollutants. It is proposed that a Pigouvian tax (a tax per unit of pollutant emission) is levied at various marginal tax rates, dependent on the pollutant. This sounds similar to the Load Based Licensing (LBL) in NSW.

By all means, this new environmental law is an excellent development. It shows that the Chinese government is serious about addressing the growing concerns that Chinese people have about terrible air and water pollution problems that they have to live with. However, the similarity between the new Chinese law and the LBL in NSW points to the need to be only cautiously optimistic when it comes to the expected outcomes from environmental taxation. This is particularly linked to the magnitude of the marginal tax rates. As shown in some of our previous work (see a previous entry on this blog and this journal article), LBL in NSW has not resulted with marked reductions of air pollutants that can be attributed to the implementation of the environmental taxation policy. The main reason is that marginal tax rates were set too low to trigger major abatement activities by emitters. The same danger exists in China. It is very hard to say whether the proposed marginal tax rates are adequate by just looking at the numbers for some of the pollutants that were published in the media. Admittedly, some of the rates look pretty low, and consequently might not do too much in terms of cutting emissions. The Chinese government should seriously consider the environmental effectiveness of the proposed taxation laws, and should not shy away from increasing the marginal tax rates so as to achieve the desired outcomes.

Environmental taxation is needed in China. However, the government should not succumb to the well known mantra of political convenience: impose low and ineffective taxes, claim that you are doing something for the environment, and at the same time collect a nice revenue! The Chinese people are demanding better environmental quality. Simply imposing taxes is not going to deliver that, if the tax rates are not set right. The Chinese government should carefully consider where should those rates stand!