Is China's carbon tax proposal merely "political theatre"?

Published by MAC on 2012-02-07
Source: Climate Spectator

China's carbon tax is very real

By Alivn Lin & Yang Fuqiang

Climate Spectator

2 February 2012

The news that China may very soon introduce a carbon tax has caused a stir. Of the many articles to address the topic, John Lee's Wall Street Journal commentary "China's Fake Carbon Tax", published earlier this month, is particularly striking. In this confusing diatribe, Lee puts forward his personal theories about China's motives. But these have no foundation in reality.

Why is China preparing to introduce a carbon tax? Taxing carbon is an effective market-based method for cutting carbon-dioxide emissions and tackling climate change. Many countries, both developed and developing, are considering a carbon tax, while some have already introduced one. The details of the tax differ from place to place, but the essential aim is the same: reducing carbon emissions; speeding up economic transition; promoting energy conservation and renewable-energy development; and mobilising industry enthusiasm for green measures.

At the same time as tackling climate change, carbon taxes can bring wider benefits to society. For example, measures to cut carbon emissions may also limit the release of other pollutants, while carbon funds can be used to help poor families buy energy-saving domestic appliances.

China's approach to developing a carbon tax has been earnest and serious. We are honoured to have participated in the Chinese government's research programme. In mid-2007, the Ministry of Finance formally listed a carbon tax in its revenue research plan. The government, bringing together top-level research units and the brightest minds, has since undertaken years of research on the topic. Key participating organisations have included the Institute of Fiscal Science, the Institute of Environmental Planning, the Energy Development and Reform Commission and Tsinghua University, among others.

Any carbon tax scheme introduced in China must properly account for the country's phase of development, the impacts on different industries and consumers and the need to minimise negative impacts. The government must also choose the most favourable time for implementation. Certainly, China's carbon tax will have its own characteristics and will not follow the same model used in developed countries.

However, Lee argues that the timing of recent announcements about the introduction of a carbon tax in China is suspicious. Since the economic crisis has meant a slowing in China's economic growth, he concludes that the Chinese government must have hidden motives to introduce the tax. "Don't be fooled by China's actions," he writes. "Beijing's proposal is little more than clever political theatre, mixed with passing the economic buck." From this starting point he launches an attack on China's low-carbon plans.

China and other developing countries have made suitable Nationally Appropriate Mitigation Actions, setting out their commitments to reducing greenhouse-gas emissions. Where is the theatre in that? Compare this to the agreement reached at the 2009 summit in Copenhagen, when many western countries undertook to provide US$100 billion by 2020 to help developing countries deal with climate change. It is critical that developed countries step up to the plate in the post-2012 period and find ways to mobilise the money they have committed to provide to developing countries.

Compared to many developed countries, developing-world nations tend to be very bad at public relations. According to international climate-change agreements, every country must report its emission-reduction actions and achievements. Between 2005 and 2010, during the 11th Five-Year Plan period, China's efforts led to a carbon-emissions saving of about 1.5 billion tonnes - the world's single biggest national emissions reduction. But even then, China didn't make a political song and dance about it. Perhaps that is why when China announces a new emissions-reduction measure, Lee labels it: "political theatre" and "a pre-emptive strike against international pressure, not a commitment against climate change".

The Chinese government recently announced the launch of carbon-trading pilot projects in five cities in two provinces. Perhaps the government has done too little to publicise the scheme, or maybe Lee is simply ill-informed, but he arbitrarily claims that choosing to levy a carbon tax rather than adopting a cap-and-trade scheme "revealed the government's true intent" - that there would be no "strict limit on the total amount of carbon emitted". The truth is that China announced back in 2011 that it was gearing up to launch pilot carbon-trading platforms. In other words, China's work on carbon trading pre-dates its action on carbon tax.

Introducing a carbon tax can actually help to promote and improve a carbon-trading system. A carbon tax and a carbon market can co-exist. And, if the price of carbon in the carbon market turns out to be a better signal of market information, it's possible that the carbon tax won't be needed any more. How these sorts of calls are made will depend on how things play out on the ground, but Lee wants to drag the discussion into the realm of conspiracy theory.

Green, low-carbon development is the road the Chinese economy must follow. In meeting the challenge of climate change, developing economies can't take the high-emissions route, but must instead work to reduce their carbon footprint. This is different from the "pollute first, clean up later" path taken by developed countries.

When China, in advance of many developed countries, proposes a carbon tax and prepares to implement it during the 12th Five-Year Plan, it's hardly surprising that some in the west, recognising that a carbon tax carries certain economic costs, wonder why. Lee, without doing any serious research, believes he has the answer: China wants to increase its "wiggle room" in international climate-change negotiations, "giving it the political cover to emit even more".

But a carbon tax would invigorate emissions reduction efforts and reduce the quantity of emissions. In the early stages, it would increase costs, but the long-term positive effects and economic gains would be greater.

Clearly, China's carbon tax plan should include a grace period for the businesses that will be most seriously affected to allow them to make the necessary changes and protect their competitiveness. During this grace period, a proportion of carbon tax revenue could be used to encourage such firms to complete the transition. But it is definitely not the case, as Lee writes, that "the government will ensure that these companies can easily bear the burden of reducing emissions."

Lee's crack at China's energy-supply management is also off kilter. During the 11th Five-Year Plan, China closed down small thermal power plants with a total generating capacity of 20 million kilowatts, and new plants are all high-efficiency and large-scale. With one leap, China's coal-fired power stations have made the transition to advanced international level, and their achievement in emissions reduction is outstanding. And yet Lee, citing data from an unknown source, says: "China's coal consumption has been increasing by around 17 per cent each year." No matter how quickly coal-use is rising, an academic like Lee should not be trying to frighten people with figures plucked out of the air.

The key principles underpinning international climate-change negotiations must be adhered to. The Durban platform sets out a roadmap for reaching a new, legally binding convention on climate change action by 2015. Whether or not this agreement can maintain the principles of "common but differentiated responsibilities", "respective capabilities", "fairness" and "environmental integrity" is a critical issue for both developed and developing nations.

Lee disregards these principles: let's look at two examples he uses to justify his argument. First is the Chinese government's opposition to European Union moves to bring aviation into its Emissions Trading Scheme (ETS). The EU-ETS is generally a good thing for emissions reduction, but there is a design flaw: the system doesn't differentiate between the aviation industries of developed and developing countries and for this reason it has failed to win unanimous support. Implementing it will be difficult. The system will put more pressure on, and cause more losses to, the aviation industries of developing countries than developed countries. Hopefully, before April 30, when the collection of fees formally starts, this key problem can be resolved through negotiation.

Second, is the burden of a Chinese carbon tax on exported products. Carbon-dioxide emissions from exported products account for 30 to 35 per cent of China's total emissions. A carbon tax, naturally, would target the companies with the highest emissions. In China's 11th Five-Year Plan list of 1,000 high energy-consuming companies and 12th Five-Year Plan list of 10,000 high energy-consuming companies, there are few foreign firms but, as Lee points out, "foreign investors dominate China's export industry". In other words, foreign companies account for a large part of China's export profits and will shoulder a tax burden. This is only fair. If, in implementation, points of unfairness do emerge, then they can be addressed through other measures.

But not everything Lee says in his article is wrong. In fact, we like two of his sentences so much, we will use them to conclude this article. The first is this: "Environmentalists will argue that plans for a carbon tax by the largest emitter of greenhouse gases are a sign of Beijing's genuine commitment to do its part."

The second? "The carbon tax is of a piece with the fact that the current Five-Year Plan is the first to explicitly commit to market mechanisms to reduce the country's carbon emissions as part of the plan's ‘green, low-carbon development concept'."

Lee should stick to the facts.

Alvin Lin is climate and energy policy director for China at the Natural Resources Defense Council (NRDC). Yang Fuqiang is NRDC's senior advisor on energy, environment and climate change.

This article was originally published on chinadialogue as part of its Green Growth project, a collaboration between chinadialogue and the Energy Foundation - www.chinadialogue.net.