In its report, the OECD says national carbon pricing should form the cornerstone of the Chinese government’s efforts to reduce carbon intensity in the country, preferably through the introduction of a carbon tax.
The report notes that so far the experience in China has been mixed, with many schemes failing to achieve desired goals.
“In many cases failures can be linked to poor implementation, which has led to weak incentives to curb pollution,” the report states. “Pollution levies have sometimes been set too low and have been plagued by problems with collection and poor enforcement. Trading schemes have suffered from a weak institutional basis, inadequate scale and inappropriate government interventions.”
Pollution pricing, in particular carbon pricing, was mentioned in the China’s 12th Five-Year Plan in 2011.
State-owned news agency Xinhua last month reported that the government was considering introducing a tax on carbon dioxide emissions.
In 2010 the Ministry of Finance think tank suggested introducing a carbon tax in 2012 that would levy CNY10 ($1.60) per ton of carbon dioxide. The think tank also recommended increasing the tax to CNY50 per ton by 2020.
“The government will push forward the reforms in environment-related taxes, as well as levy a tax on carbon dioxide emissions. The policy makers are still thinking of introducing environmental tax to tackle all pollutants instead of only a carbon tax,” said Jean Li of KPMG.
The report also notes that a key challenge in introducing pollution pricing will be ensuring electricity prices reflect higher costs because of the introduction of carbon pricing.
Environmental regulation and enforcement efforts need to be increased, according to the OECD’s report. In 2008 the government established the Ministry of Environmental Protection with broad responsibilities for formulating environmental policies, thereby upgrading environmental matters to ministerial level.
However the report states: “Enforcement primarily remains the domain of local environmental protection bureaus controlled by local governments, which at times face conflicting incentives. Strong central government oversight has been essential for progress in key areas and a continued effort is needed going forward.”
While regulations governing gasoline and diesel prices have been changed so domestic prices reflect prevailing average international oil prices, the Chinese government still intervenes to smooth adjustment and cap prices if oil prices spike.
The report recommends excise duties on gasoline be raised and prices fully deregulated.
Natural gas and coal should also move to a system of market-based pricing, according to the OECD report. At the moment, suppliers are still required to sell some coal to power companies below market price. The government also holds down the price of domestically produced natural gas.
“At present, we have not seen any sign that China would implement the OECD's recommendations in short term,” said Li. “As the increasing price on these energy products will undoubtedly have significant impact on the cost of living of the Chinese residents, the Chinese government needs take into account the possible objection of the public opinion before making changes on the pricing of energy products.”
