China’s Environment Targets: Another Cost Increase on the Horizon

by Julie Walton

How prepared is your company to pay taxes in China on the energy it uses and the pollution it creates? Despite the media discussion about rising costs in China—such as land, labor, capital, or raw materials costs—China-based executives seldom discuss the costs associated with cleaner energy and environmental protection. Rather quietly and quickly, however, PRC energy and environment policy has developed to the point that energy consumption, carbon emissions, and pollution control are set to become the newest cost considerations for companies in China.

A central feature of China’s macroeconomic strategy through 2015 is to create cleaner industrial processes, while simultaneously addressing the significant environmental problems plaguing China’s soil, air, and water. While the government has talked publically about these tasks for some time, some of the most detailed action plans to date emerged in 2011, making it clear the central government will put substantive effort behind its rhetoric in the near future.

So what’s on the horizon?

• Energy consumption targets  In September 2011, the State Council released the 12th Five-Year Plan for Energy Conservation and Emissions Reduction (FYP, 2011-15), which guides provinces to reduce energy consumption and emissions. The FYP also assigns specific responsibilities to individual agencies. For example, the National Development and Reform Commission (NDRC) will guide and coordinate emissions reduction policies, and the Ministry of Environmental Protection (MEP) will oversee pollution control policies. While setting provincial targets is nothing new, having them written into a national plan that seeks to establish an integrated system to monitor and control energy usage throughout the country is. By 2015, for example, Guangdong, Jiangsu, and Shanghai, must reduce by 18 percent their energy consumption per unit of GDP, while Anhui, Chongqing, and Fujian must reduce by 16 percent. The National Energy Administration has announced its goal to establish a nationwide total energy consumption limit and allocate and manage consumption by province. Such a consumption limit will drive up energy costs and may lead to the development of energy consumption trading platforms among provinces.

• Carbon trading  Four cities—Beijing, Shanghai, Tianjin, and Chongqing—along with two provinces—Guangdong and Hebei—received approval to launch carbon trading pilot projects within their jurisdiction. Each city or province must draft a plan detailing the pilot project’s implementation in its jurisdiction and submit that plan to NDRC for final approval. In general, each pilot area will be required to set caps on greenhouse gas emissions, establish a local carbon trading registration and administration system, set quota allocations, build a trading platform, and establish a special fund to implement a trading system. The pilot projects will run throughout 2012, and the central government aims to have a nationwide carbon trading system fully in place by 2015. In addition, the State Council’s December 2011 notice on the Work Program for Controlling Greenhouse Gas Emissions During the 12th FYP assigns for the first time specific greenhouse gas emissions reduction targets for each province. Guangdong, for example, must reduce emissions by 19.5 percent per unit of GDP from 2010 levels. Shanghai and Jiangsu each have a target of 19 percent, while interior provinces such as Jiangxi and Henan each have a target of 17 percent.

• Resource taxes  In support of carbon trading, Chinese energy and tax experts are working on plans to tax carbon dioxide emissions, in addition to reforming the tax system on other emissions such as nitrogen oxide and sulfur dioxide. Current thinking within the Ministry of Finance is that taxes on carbon dioxide would initially be set around 10 RMB ($1.58) per ton of CO2 emitted, although MEP officials are advocating for a starting rate of 20 RMB ($3.17) per ton. Regardless of the starting price, the rate would gradually increase over time. To streamline tax collection, the tax would be assessed on producers and wholesalers of fossil-fuel based energy, who could then pass the increased cost along to their customers. Analysts expect the taxes to be launched by 2013.

• Reforming environmental law  China’s current Environmental Protection Law dates back to 1989, and officials admit it is not suitable for managing China’s current environmental challenges. The law is under active revision, however, and may possibly include changes that would make it easier to bring lawsuits against polluters and place greater liability on polluters, including possibly extending liability for pollution much further up the supply chain. A draft of a revised Environmental Protection Law is likely to come up for review by China’s National People’s Congress in 2012.

It might not happen in 2012, but central government goals will lead to companies paying more for the cost of their energy and the pollution it causes by 2015. Companies that do not factor those costs into their China business decisions will likely wake up one day to a very costly operating environment.

[author] Julie Walton ([email protected]) is the US-China Business Council’s chief representative in Shanghai. [/author]