Recently, state researchers have issued preliminary proposals for a carbon tax. A report from the National Development and Reform Commission recommends introducing a carbon tax in 2012. The tax rate is based on the amount of carbon-dioxide emission, so a fixed rate is required. The government can then use the tax revenue to provide subsidies for environmental industries and enterprises. The tax will be from 10 yuan/ton ($1.46/ton) to 70 yuan/ton ($10.25/ton). The local government takes 30 percent while the state gets 70 percent.

Theoretically, a tax would decrease pollution and subsequently benefit the environment; however, several problems related to the carbon tax need to be solved first.

Will a carbon tax reduce CO2 emission? Countries such as Holland, Denmark, Finland, Sweden, Germany, Britain and Norway have a carbon tax, but its effect seems limited at best. Since 1991, Norway has imposed a carbon tax, yet according to estimates its emission level dropped only 2 percent.

 

Let's discuss the cost of a carbon tax. It's enormous – in fact, it would mean the birth of a new bureaucracy. It requires a rigorous accounting system to track each company's emissions and apply charges. In addition, a legal framework must be established and a plethora of technical standards have to be set. If the government is serious about significant emissions reduction, then it can't expect the carbon tax to work in itself, but must incorporate the best new innovations and technology as well. The likely negative effects of a carbon tax on the economy must be carefully considered, because it will have a major impact on economic growth, as it will raise the price of China's exports, and potentially affect foreign investment. For these reasons, it's unrealistic to initiate a carbon tax in 2012.

Continuing with the carbon tax's effect on the economy, it will be cumbersome for Chinese enterprises. The current tax burden has been heavy, and even more taxes are being proposed. Businesses are right to resist more taxes that could stifle their growth.

A further complication is that consumers will end up paying more, as businesses raise prices to offset the new tax. State-owned enterprises have a monopoly on marketing and price, so any additional taxes they're forced to pay can be easily passed on to consumers. There's also a legitimate concern that a carbon tax could exacerbate the income gap by placing a further strain on low-income individuals.

Simply put, a carbon tax isn't the best way to reduce emissions. It's not aligned with China's climate change policy of voluntary emissions reduction, and although it's been used in Western nations, keep in mind that those governments have a relatively weak influence on their economies. In contrast, the Chinese government drives the economy, and a carbon tax fits poorly within this system. Therefore, the government must find a more practical solution that melds with the current economic and governmental structure. It may be that a carbon emissions trading system (cap and trade) combats climate change more effectively within China.

In order to protect both the economy and the environment, the government needs to conduct more substantial research and revise the 2012 schedule for a carbon tax. Better solutions do exist.

The author is a researcher with the Central Compilation & Translation Bureau.

(This post was originally published in Chinese and translated by Wang Mengru.)