For China, benefits of carbon tax far outweigh the costs
Frederic Neumann and Wai-Shin Chan say a carbon tax would not only be good for China's environment, but would bring the economy the benefits of efficiency and extra revenue
That China needs to give its growth engine a tune-up is hardly in doubt. With the economy slowing for the past several years, all eyes are on the third plenum of the Communist Party. Hopes are that the leadership will unveil structural reforms aimed at putting the economy on a sustainable trajectory. Interest rate liberalisation, privatisation and deregulation are high on the wish list of investors and reformers alike.
But there is an equally important, if less talked about, potential initiative: a carbon tax. With China recently topping the US as the world's biggest contributor to greenhouse gases, and its cities periodically gripped by crippling smog, a levy on carbon emissions would be among the most consequential reforms officials could adopt. The Ministry of Finance has already proposed its introduction. It now needs the explicit backing of the leadership to see the light of day.
Raising the cost of energy would force rationalisation in many pockets of Chinese industry
China has made vast strides in environmental protection in recent years. But a lot more needs to be done to curb harmful emissions. Various schemes are being tried. A cap-and-trade system is already up and running in Shenzhen and is slated to start in six other pilot regions.
But arguably easier to implement in China, and thus among the most promising, is a fixed charge per tonne of carbon emitted by industrial polluters. This would rise over time, progressively strengthening incentives for the adoption of cleaner technology.
With production becoming less carbon-intensive, the environmental benefits are obvious. Cao Jing, an economist at Tsinghua University in Beijing, estimates that even a gradual introduction of a carbon tax would cut emissions by a whopping 19 per cent by 2020. This would go a long way towards meeting China's pledge of reducing the carbon emitted per unit of gross domestic product - though not the absolute level of emissions - by 40-45 per cent from 2005 levels by the end of the decade.
Less well understood, but of equal importance, are the economic benefits.
First, a carbon tax would encourage gains in overall efficiency by spurring the adoption of more advanced technology. With productivity growth slowing, raising the cost of energy would force broader rationalisation in many pockets of Chinese industry, including steel and cement where highly inefficient producers continue to operate.