China's Carbon Pricing: Status and Prospect - CAO Jing School of Economics and Management - Mercator ...
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China’s Carbon Pricing: Status and
Prospect
CAO Jing
School of Economics and Management
Tsinghua University
Presented at MCC “Closing the Carbon Price Gap:
Public Finance and Climate Policy”
May 22-23, Berlin
1
China’s Challenge
China’s current development model is “unbalanced, uncoordinated
and unsustainable”
– Chairman Xi Jinping, November 2013 (3rd Plenum, 18th
Central Committee)
China burns as much coal as the rest of
the world consumed (3.8 bil. ton in 2011):
• Resource tax on coal: too low (0.4$ per ton)
China is the biggest carbon emitter
• China (2.5 bil. tC) vs US (1.5 bil. tC) in 2011,
7 ton CO2 per capita (exceed world average)
China – Rising Death Toll Due to Local
Air Pollution
• World Bank (2007): 750,000 excess death per
year
• Chen et al. (PNAS, July 2013): long-term
exposure to air pollution contribute to
enormous loss of life expectancy (five year
less in northern China vs. southern)
2
Blueprint of Environmental Policy Reform under
the New Leadership
“establishing … the market’s decisive function in
resource allocation,”
“reform of the fiscal system and stabilization of tax
burdens,”
“improvement of tax revenue systems,”
“sustainable social security systems,”
“protection of ecology and the environment,”
“implementation of paid-for resource use systems,” and
“energy saving.”
------from the third Plenary Session of the 18th
Central Committee in November 2013
3
Why and how will China pursue Carbon Pricing?
We have a fiscal and economic imbalance problem: distorted
tax system, large local debt, not sustainable:
• Distorted price signals in the fiscal system: heavy capital and VAT tax, low
resource and energy tax, lead to low quality and imbalance economic growth
• Local fiscal system: Rely too much on land lease, not sustainable, housing
bubble, very big local government debt (about 31-42% of GDP, various estimates)
• Single Child Policy for more than 30 years, Aging Population require more social
security, current SS fund is in deficit (95.9 bil. In 2013 and 156.3 bil. In 2014,
fiscal support counts for about 3% of Total tax revenue)
• Rapid Urbanization: 240m people migrating to cities by 2025; Urban population
rising from around 50% today to around 70% by 2025
• Energy Security: China must curb its own carbon emissions, irrespective of what
other countries act
• China is vulnerable to the effects of climate change.
4
Why and how will China pursue Carbon Pricing?
Avoid “Lock-in” in Physical Capital and Infrastructure, Household
Consumption and Life-Style, as well as Fiscal and Governance
Structure; otherwise future reform gets harder
Carbon Pricing: part of the fiscal and imbalance solution
From Mandates to Market-based Instrument: less cost effective
(NOx removal in 12th FYP, much difficult thanSO2 removal in the 11th
FYP), urge shifting to market based instrument
China’s Trial Program on Cap-and-Trade: 5 cities, 2 provinces,
within city/province trading, May extend to National Trading if Pilots
are successful
China attempt to initiate new round of green fiscal reform (three
are relevant to carbon pricing):
Resource Tax Reform, Pollution Levy to Environmental Tax,
Gasoline Tax Reform, Carbon Tax
5
6
China’s Pilot Trading
(Five Cities, 2 Provinces, 1 bil. CO2 emissions, about 7-10% of total)
Qingdao
(voluntary)
Beijing
Tianjing
Shanghai
Hubei
Guangdong
Chongqing Shenzhen
7China’s Pilot Trading (Comparison)
Covered Number
Share of Coverage Historical
CO2 of
Region total Threshold Emission Covered Sectors
Emissions Covered
Emissions (tCO2/year) Period
(Mt) Entities
17 Manufacturing Sectors,
Beijing 58 50% 490 >10,000 2009-2012 Commercial Building, financial,
hotel, education, etc.
>20,000 for
inudstry, Manufacturing Sectors, Oil and
Tianjin 112 45% 197 2010-2011
>10,000 for Gas Exploration, Buildings
other
Manufacturing Sectors, Textiles,
Commercial Buildings, fianncial,
Shanghai 90 60% 191 >20,000 2009-2012
hotel, airlines, harbors, airports,
railway, etc.
Manufacturing Sectors,
Hubei 117 33% 107 >120,000 2010-2011
Automobile
Manufacturing Sectors,
Guangdong 209 42% 830 >20,000 2010-2012 Commercial buildings,
transporation and construction
Shenzhen 32 40% 635 >5000 2009-2011 26 Manufacutring Sectors
Chongqing N.A. N.A. N.A. >20,000 2008-2010 N.A.
Note: Heat and electricity, iron and steel, nonferrous metal, petrochemicals and chemical, pulp and paper, glass and
cement, these sectors are covered in all pilot systems.
Source: Zhang et. al (2014), http://www.tanpanfang.com 820000
120
RMB 18000
100 16000
14000
80
12000
Shenzhen
60 10000
8000
40 6000
4000
20
2000
0 0
20000
120
18000
RMB
100 16000
14000
80
12000
60 10000
Beijing 8000
40 6000
4000
20
2000
0 0
19.12.2013 19.01.2014 19.02.2014 19.03.2014 19.04.2014 19.05.2014
9
Traded Volume(tCO2) Price50000
120
RMB 45000
100 40000
35000
80
30000
Shanghai
60 25000
20000
40 15000
10000
20
5000
0 0
19.12.2013 19.01.2014 19.02.2014 19.03.2014 19.04.2014 19.05.2014
Traded Volume (tCO2) Price
20000
120
RMB 18000
100 16000
14000
80
12000
60 10000
8000
40 6000
4000
20
2000
Tianjing 0 0
Traded Volume (tCO2) Price
1050000
120
RMB 45000
100 40000
35000
80
30000
Guangzhou
60 25000
20000
40 15000
10000
20
5000
0 0
19.12.2013 19.01.2014 19.02.2014 19.03.2014 19.04.2014 19.05.2014
Traded Volume (tCO2) Price
120 600000
RMB 500000
100
80 400000
60 300000
40 200000
20 100000
0 0
02.04.2014
04.04.2014
06.04.2014
08.04.2014
10.04.2014
12.04.2014
14.04.2014
16.04.2014
18.04.2014
20.04.2014
22.04.2014
24.04.2014
26.04.2014
28.04.2014
30.04.2014
02.05.2014
04.05.2014
06.05.2014
08.05.2014
10.05.2014
12.05.2014
14.05.2014
16.05.2014
18.05.2014
20.05.2014
Tianjing
Traded Volume (tCO2) Price
11Average CO2 Price (euro/tCO2)
10,00
8,00
6,00
4,00
2,00
0,00
Beijing Guangzhou Shanghai Shenzhen Tianjing Hubei
12Average DailyTraded Volume (tCO2/day)
60.000
50.000
40.000
30.000
20.000
10.000
0
Beijing Guangzhou Shanghai Shenzhen Tianjing Hubei
13Summary on China’s Pilot Trading
• Pilot trading now covers about 1 billion tons of CO2, roughly
10% of China’s total emission
• Cover major energy-related sectors, buildings, some including
transportation
• Direct emissions + Indirect emissions from electricity (generated
within or imported from other regions)
• Coverage threshold varies from 5000 ton CO2/year (Shenzhen)
to 120,000 ton/year (Hubei)
• Initial allocation: virtually all are grandfather free allowances,
except Shenzhan has a small number of allowances auctioned.
– Historical Emissions are computed differently, Beijing and Shanghai
(2009-2012), Tianjing and Hubei (2010-2011), Shenzhen (2010-2012),
Chongqing (2008-2010)
– Allocation were distributed annually for Beijing, Tianjing, Hubei and
Guangdong, but Shanghai and Shenzhen issue allowances once at the
beginning of 2013-2015
14Prospect for National-wide Emission Trading
• The earliest Time Line: Nation-wide (likely to be launched during
13th Five Year Plan, 2016-2020)
• The success or failure of bottom-up designed pilot program will
to a large extent determine the fate of national emission trading
and design format
• Regulatory barriers:
• So far no clear national law specifies mandate for establishing an
ETS at the national level
• Enforcement regime is still too weak: fine is only 10,000 to
100,000yuan per enterprise (Shanghai), 20,000 – 30,000 yuan
(Chongqing), or 3 – 5 times of emission gap - compare with EU
ETS (200 euros per ton)
15Main Challenges
• The price signal is not fully effective, especially for
many SOEs, which get compensation or subsidy from
the government, SOEs’ price elasticity is smaller than
other firms (Karplus and Cao, 2013)
• Many end-use energy prices are fixed (such as
electricity)
• Similar challenges with the pilot sulfur trading which is
unsuccessful, need capacity building on defining
emission right, permit allocation, trading rules,
monitoring, enforcement and accountability.
• City level trading: high transaction cost, thin market,
few deals, carbon emission data is not public (2005
survey data is still not released), baseline is difficult to
evaluate 16Main Challenges
• With the small scale, thin market, less cost saving,
how to integrate future markets and extend to nation-
wide is also an concern
• The cap and allowance are basically set given the
companies reported, penalty for non-compliance is
still weak.
• When extending to nation-wide trading, observing the
importance of reporting historical emission and lack of
reliable emission data, firms may report higher
historical emissions for requesting higher free
allowance. MRV is still in early stages.
• Leakage issues during the pilot stage.
17Green Fiscal Reform – Plan and Time Table
Motivation Relevant Tax Time
Paid-for Resource Use Resource Tax (Coal, Oil Oil and Gas (5-10%,
and Gas) implemented now as 5%)
Coal (low unit tax): reform
to ad-valorem tax
Enhance Renewables Feed-in-Tariff on Wind Implemented
and Solar
Discourage Vehicle Gasoline Tax and Gasoline Tax (1 Yuan/Litre)
Emission and Congestion Fee Congestion fee(under
Congestion discussion)
Reducing local pollution Environmental Tax (Levy Forthcoming Soon
Fee to Tax Reform)
Reducing Carbon Emission Trading Pilot Stage (7 regions,
Emissions 10% emissions)
2016: May start National
Regime
Carbon Tax (may N.A.
combine with Resource 18
Tax)Harvard-Tsinghua
China Project:
Costs and Benefits
of Carbon Taxes
(and Sulfur
Mandates) in
China
MIT Press,
December 2013
19Assessment Framework
Analytical Effects of
Models Carbon Tax
Cost:
Economy
Indirect general
33-sector general equilibrium model
equilibrium effects
Electricity, Iron &
Steel, and Cement
Plant-by-plant databases
Emissions Benefit:
Bottom-up inventories Reduced CO2
Atmosphere
GEOS-Chem model
Benefit:
Avoided mortality
and morbidity
Effects on Effects on
Public Health Rice, Corn, Benefit:
PM2.5 & ozone Rise in grain yields
and Wheat
ozone
20Defining Future Carbon Tax Scenarios
Six prospective policies and a base case for 2013-2020:
Scenario Time Path of Carbon Tax Use of Revenues
F1 Tax of 30 yuan/ton of CO2 (in 2007 yuan) all Lump-sum to households
years 2013-2020
F2 Tax of 10 yuan/ton in 2013 rising to 50 Lump-sum to households
yuan/ton in 2020
F3 Tax of 10 yuan/ton in 2013 rising to 100 Lump-sum to households
yuan/ton in 2020
F4 Same as F2, 10 yuan/ton in 2013 rising to 50 Cut tax rates on enterprise
yuan/ton in 2020 income
F5 Same as F2, 10 yuan/ton in 2013 rising to 50 Output Updating Subsidies to
yuan/ton in 2020 EITE industries, rest to
households
Same as F2, assuming a global carbon
F6 tax is imposed, border tax adjustment Lump-sum to households
Base Absent any carbon tax policy, only existing
Case policies
21Translating Changes in PM2.5 and Ozone
Under Carbon Tax F2 into Avoided Health Damages
Scenario F2 in 2020: 10 Y/ton in 2013, 50 Y/ton in 2020
Lei (2013) 22Mapping Reduced Crop Damages
from Ozone Reductions: Wheat
Scenario F2 in 2020: 10 Y/ton in 2013, 50 Y/ton in 2020
23Comparison of Effects of Carbon Tax F2 and F3 in 2020:
50 ¥/ton vs. 100 ¥/ton
Variable Scenario F2: Scenario F3:
10Y rising to 10Y rising to
50Y/ton 100Y/ton
Percent change in 2020
GDP -0.14% -0.33%
Consumption 0.27% 0.39%
Investment 0.01% -0.04%
Coal Use -23.00% -37.20%
CO2 Emissions -18.90% -30.80%
PM10 Emissions -15.70% -25.30%
SO2 Emissions -21.40% -34.50%
NOX Emissions -16.60% -26.90%
Avoided Premature Deaths Cases in 2020
Lower Estimate (Acute PM2.5 Effect) 19,300 33,100
Upper Estimate (Chronic PM2.5 Effect) 88,700 148,900
Billion yuan in 2020
24
Increased Wheat, Rice, Maize Production 15.7 28.3Comparing Effects of Carbon Taxes F2 and F4 in 2020:
Lump Sum Rebate vs. Tax Cut
25Comparing Effects of Carbon Taxes F2 and F5 in 2020:
Lump Sum Rebate vs. Subsidies to Energy-Intensive Sectors
26Potential Revenue Spending (rarely studied)
• Special Environmental Fund on conventional pollution treatment
(PM2.5 and ozone)
• Recycling with Other taxes, such as VAT, Enterprise Income Tax
• Special funding support for feed-in-tariff and other low-carbon R&D
(potential research area on endogenous modeling
• Current Fiscal Support for Social Security Gap is 303.8 bil. RMB
this year, carbon tax revenue is about the same size (2.9% of total
tax revenue) ,
• Like resource tax, set at local tax, so the revenue can be used to
reduce local government debt, relieving pressure from land selling
27Summary: Impacts of Carbon Tax
• Carbon Tax: Not only cost effective, but also a potent multi-pollutant strategy
• Substantial Co-benefits.
• The carbon tax revenues will allow a cut in existing taxes, reducing the loss of
output, and helping with tax reform goals.
• Win-Win and double dividend may exist for Green Growth.
• More politically feasible policy (output updating subsidy for EITE and HH lump-sum
transfer) has slightly smaller environmental benefits, but boost both consumption
and investment
• Using Scenario F4 (fully compensate enterprises) to simulate national trading
market using Beijing’s design (50% emissions covered, 99% cap on electricity and
96% cap on other sectors), roughly 19yuan/tCO2 to achieve the cap (compared
with our 21 yuan/tCO2 as carbon tax scearnio F4 in 2015)
• In practice, may become high resource tax on coal (another potential reason for
double dividend) for currently inefficient light taxation on coal (eg.big coal rents,
Shenhua group in China; by different definition – Post tax energy subsidy (Parry,
2013 IMF report), top 2nd in the world, 279 billion US dollars, 3.23% GDP in 2011 ).
28Other Comments
• Carbon Tax may partly mitigate tax evasion in China
– Carbon tax, if used to reduce pre-existing labor tax, may broaden the tax base,
reduce the welfare cost (Bento, Jacobsen and Liu, 2012; Markandya et. al,
2013)
– According to a report from State Council, China suffered tax evasion worth an
estimated one trillion yuan (US$157 billion) in 2011.
– “Countries with high levels of tax evasion (China and India), might benefit by
shifting tax base to taxes (like carbon tax) that are difficult to evade.” (Liu, 2012
RFF paper).
• Tax Incidence:
– Gasoline Tax: Progressive in China (Cao, 2011, in Sterner (ed.) Do Fuel Taxes
Hurt the Poor? )
• Rich People: Very high Gasoline Price Elasticity (-0.74) (Cao, Ho and Liang, 2014
working paper)
• Poor People: No Car, only indirect consumption (public transport)
• Suits Index (0.35 with direct, 0.20 with both direct and indirect, 2007)
– Carbon Tax: Regressive but can be Progressive with Cuts and Transfer
Program (Cao 2013, in Man (ed.) China’s Environmental Policy and Urban
Development )
• How to combine with national emission trading?
– Sector coverage? Double counting issues?
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