Environmental taxes mean healthier China David DollarChina Daily Updated: 2005-10-15 06:57
During its 25 years of reform, China has made impressive progress in the
transition to a market economy. Much of the production and distribution in China
is managed through the market, and the efficiency of this mechanism is evident
in the country's sustained rapid growth.
While the market is good at many things, however, it is not good at
everything.
One place in particular where the market breaks down concerns the use of
natural resources and the environment, particularly where some important
resource is freely available. While China's record of production and gross
domestic product (GDP) growth is fantastic, its record of environmental
protection is not so good.
Air and road space are good examples of free resources that the market will
tend to over-exploit unless the government takes some corrective measures. A
number of different approaches to protecting precious resources can be taken,
but one of the most effective ones is the use of environmental taxes and prices
for natural resources.
The prices of coal and oil in China are, to some extent, market prices in
that they reflect the cost of extracting or acquiring these resources. However,
coal and oil are different from many other goods in that the burning of fossil
fuels has negative consequences on the environment. While the prices of oil and
coal in China cover the cost of acquiring them, they do not take into account
this environmental damage.
The heavy air pollution in China has serious health consequences and economic
costs. The World Bank estimates that air and water pollution together cost China
each year about 8-12 per cent of the GDP.
Because the users of energy do not pay these costs themselves, they tend to
overuse energy resources.
This is exactly the reason why many countries have imposed energy taxes.
China has a tax on petroleum products, but it is very low compared with the
United State or Europe.
Taxes on oil and gas are very effective at getting households and firms to
use less energy. In China, heating the typical apartment takes twice as much
energy as the same apartment in Japan or Europe.
Regarding traffic congestion, putting a higher environmental tax on energy,
as discussed above, would help with congestion - especially if some of the money
collected is used to finance public transportation, including metros and
dedicated bus lanes.
But traffic congestion is not likely to be solved only through higher energy
prices. Roads in the city are a scarce resource, and yet it is freely available
to everyone.
London recently took an innovative approach to congestion: It introduced a
steep fee for any private car that drives into the inner city on a work day.
This basically takes a scarce resource - road surface in the inner city - and
puts a price on it for users. The result was immediate: Private car use in the
inner city dropped sharply; people made more use of buses, metro, taxis,
walking, and riding bikes - and consequently, there was much less congestion and
a nicer environment for everyone.
Pricing is also effective in tackling the water issue.
China does not have a lot of water available per person. Moreover, the water
is not distributed evenly.
Water prices have some similarity to energy prices in China. They are "market
prices" in the sense that they cover the cost of getting water from rivers and
reservoirs to farms, households, and firms, but the prices generally treat the
original water as a free product. As a result, the price of water in China tends
to be very low compared to other countries.
Because water is inexpensive, there is not much incentive to recycle it. So,
70 per cent of industrially used water is discharged untreated back into rivers.
As a result, all the major river systems in China are seriously polluted.
One measure that would help is to price water more realistically at the
source - the river or reservoir - recognizing that it is a scarce resource. This
would result in users making more effort to conserve water and to recycle it.
Charging higher taxes and prices for environmental goods that are being
over-exploited is an obvious idea that would make China's development more
resource-efficient. It is natural then to ask who opposes this idea and who
loses from it?
China as a whole should only gain because higher environmental taxes can be
offset by lower taxes elsewhere. Unlike a decade ago, China's overall government
revenues are now adequate, and there is no urgent need to raise more taxes. So
higher environmental taxes could mean lower taxes on, for instance, labour,
which would help reduce unemployment.
Poorer regions in China may well gain from higher resource taxation.
In China, the revenues of resource taxes go to the province, and many of the
poorer provinces are rich in natural resources. Higher resource taxes would mean
that these provinces could generate more revenues, which they could spend on
putting more children in school and building better infrastructure.
All of the current owners of cars would be hurt by a tax on petrol that leads
to higher prices. But they would also get some benefit if revenue from the taxes
is used to improve public transportation and reduce traffic congestion.
In the case of urban water prices, a common concern is that higher prices
will hurt the poor. But most of the subsidy from low water prices does not go to
the poor. The best way to help the poor is through direct income support so that
the poor can buy all of their basic needs.
A final point about opposition to environmental taxes and prices: It is often
more popular to introduce price increases gradually.
This can be good policy, but it is smart to announce changes well in advance,
even if they are implemented gradually. If the government announces that petrol
prices will go up 10 per cent per year for the next five years, people and firms
will start planning ahead and buying homes, appliances, machinery, and cars that
use less energy.
This is exactly what the government wants.
The author is the World Bank's country director for China.
(China Daily 10/15/2005 page4)
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