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Learning from the Chinese approach to carbon taxation

25th November 2011

By: Saliem Fakir

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The Australian government recently just managed to squeeze through carbon tax legislation. The Australian system starts off with a fixed price, eventually moving to a trading scheme. India already has a carbon tax of about $1.03/t for coal produced internally or imported. China is to introduce one by 2013.

The Chinese approach is similar to South Africa’s. The first stage is to place a tax on the fossil fuel, and this will eventually lead to an emissions trading scheme (ETS) in six of the major economic regions of China. After a pilot phase, a blanket system over the whole country will be introduced. China will eventually end up with the largest ETS in the world.

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China is using this lever with a view to becoming a leading developer of green technologies. Its success with wind and solar photovoltaic – within a relatively short period – is testimony to China’s capacity to accomplish this feat. According to the Global Wind Energy Council, China installed 19 GW of wind power capacity last year alone.

Domestic change sets it up for global leadership in the clean technology field. This is already evident in the way China thinks about vehicles. It is intent on leapfrogging into electric vehicles and hybrids in the next decade.
The automotive industry in China is going through consolidation.

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China’s cluster of climate change interventions is aimed at stimulating green sector growth and helping consolidate its low-carbon trajectory, which is an instrumental part of its new five-year plan. This is even seen in the way China is hoarding strategic minerals like rare earths to increase its market advantage in green technologies.

With Europe now blanketed under a trading scheme which is being extended to the aviation industry, very few countries within the Organi- sation for Economic Cooperation and Devel- opment will want to be left out. The aviation ETS is already serving as a quasi-carbon border tax adjustment system. Its ramifications are already being felt by the major airlines.

The US will eventually adopt some sort of carbon system, if not tax, and go along this route once China settles into its system.

The US nearly passed the comprehensive climate legislation, the Waxman-Markey Bill, a few years ago but the Republicans blocked the Bill in Congress. The US will not want to be left out if the carbon footprint of goods is monetised in international trade through one or other measure by its competitors.

Once the dominant economies come on board, reluctant countries will be encouraged to follow suit. It ultimately favours the introduction of a carbon tax in South Africa as the threat of leakage, or compa- nies wanting to move to other countries – in response to such an intervention – where there is no carbon tax, will simply diminish.

The South African government will release a revised policy discussion paper at the end of November.

The effectiveness of a carbon tax will matter when major economies and trading partners come on board. The reality of a border tax adjustment will not be very far off as a result. The impacts on South African exports should not be taken lightly.

How are the Chinese dealing with their carbon tax? They propose to introduce a carbon tax at a very low base of about 20 yuan/t ($1.95/t) by 2012 rising to 50 yuan/t by 2020.

China’s carbon tax model is based on several interesting principles:
• It is centrally administered but revenues will be shared with local authorities by up to a third. Even with a low base, a carbon tax can generate close to 2% to 3% in taxes against total gross domestic product.
• While major emitters will be targeted, revenues generated will also be used to support these industries to become more efficient and make the changeover prag- matic over time.
• The central government will take responsibility for energy efficiency, deploying renewables against set targets and other interventions to bring about a low-carbon shift as articulated in the five-year plan.
• Tax reform will take place using a balanced approach by recon- ciling the carbon tax in relation to other taxes, such as resource taxes and existing levies so that the overall tax burden is not onerous.
• A balanced approach will also take into account China’s competitiveness and income impacts on the poor and business.
• The implementation of the carbon tax will take into consideration questions of timing; for instance, will it be best for China to implement the carbon tax when the economy is overheating or when it is slowing down?

We can use these principles in thinking through the implementation of our own carbon tax to soften the blow as much as possible but the implementation of the tax is unavoidable, given what is going on elsewhere.

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