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Green tax policy – slow but steady

China has made some progress recently regarding resource tax, consumption tax and an emission trading scheme. It may be only time before this more holistic approach culminates in an environment tax or green tax. Jean Ngan Li, Sunny Leung and Jessica Xie of KPMG China consider what progress may be made in China’s tax policies on environmental protection.

To achieve the objective of sustainable growth, the Chinese government aims to achieve the national objectives in energy conservation/environmental protection shown in Table 1 by the end of the 12th Five-Year Plan (FYP).

As part of the efforts to meet these targets, a carbon trading market in China has been launched. The government has also introduced new rules in the regulations on resource tax and consumption tax to discourage excessive energy use and pollution.

Table 1


2015 target

Reduction in energy use

16% reduction per unit GDP

Reduction in carbon dioxide emissions

17% reduction per unit GDP

Power industry investment

RMB5.3 trillion ($870 billion) investment

Use of non-fossil fuels as a percentage of total energy use

11.4% of total energy use

Emission trading scheme

China launched its first pilot emission trading scheme (ETS) in June 2013. Seven municipalities/provinces have been selected to participate in the pilot scheme. This development could be a major milestone in China's efforts to reduce greenhouse gas (GHG) emissions.

An ETS was first incorporated into the national Clean Development Mechanism (CDM) plan in 2004 and has subsequently been amended twice. However, the establishment of such a system was never implemented.

In 2011, the National Development and Reform Commission (NDRC) announced that Beijing, Tianjin, Shanghai, Chongqing, Hubei Province, Guangdong Province and Shenzhen (participating regions) would initiate the carbon trade pilot programme. The NDRC required the participating regions to:

  • design their own implementation measures and rules;

  • determine their local greenhouse gas emission targets and emission quota allocation methodology; and

  • establish local carbon trade exchanges.

The government expects the participating regions to commence regional carbon trade transactions by the end of 2013 and aims to establish a preliminary national carbon trade system by the end of 2015.

Since the announcement of the launch of the ETS, the participating regions have started studying the feasibility of establishing a carbon trade mechanism in their respective locations.

Some of the participating regions have specified their own carbon trade system development plan and timeline; some have already started carbon trading.


Shenzhen launched the first Chinese ETS. The Shenzhen Carbon Exchange, which involves 635 industrial companies from 26 industries, generating about 30 million tonnes of carbon dioxide emissions a year.

Eight transactions were completed on June 18 2013, the first trading date of the exchange. According to the exchange's management, by early August 2013, cumulative transaction volume yield was 12,000 tonnes and the cumulative transaction amount hit RMB473,000, standing for an average price of RMB40.75. By the end of August 2013, about 500 enterprises were under the carbon emission control and some individuals have created carbon exchange accounts.

Shenzhen has set an ambitious target for its ETS compared with existing national or local commitments. The 635 companies will be given about 100 million metric ton carbon dioxide emission allowances for free over the next three years. If the companies only emit their allotted amount, this would be equal to a 32% reduction in terms of GDP emission intensity. To put things into perspective, China is committed to reduce its emission intensity by 40% to 45% by 2020, and Shenzhen's carbon intensity reduction target during the 2011-2015 FYP is 21%. It is worth noting that the allowances are determined by emissions intensity rather than in absolute terms, meaning that the government will review companies' Industrial Added Value on an annual basis and increase or decrease the absolute emission allowance to maintain a fixed emissions-to-GDP ratio.

Guangdong Province

Guangdong Province plans to initiate carbon trading in the primary market in the second half of 2013.

The pilot programme will involve 827 enterprises from high energy consuming industries such as electricity generation, cement production, steel and ceramics production. The Guangdong authority plans to involve investment organisations, individuals and other legal persons in the carbon trading system gradually (see Table 2).

These other cities and provinces below follow a similar timeline as Guangdong Province, although the strength of enforcement may vary.

Table 2



Major tasks

Preparation period

2012 – June 2013

  • Design carbon emission quota management plan

  • Design carbon emission management and trading scheme

Implementation period

July 2013 – December 2014

  • Preliminary study for the commencement of carbon trade mechanism and allowance-based carbon trade

Intensification period


  • Initiation of provincial carbon trade


As of the end of August 2013, Beijing had set up its carbon trade exchange and transaction under the Beijing Environment Exchange and its carbon trade policies are already in place. But carbon emission transactions have not been initiated yet.

The Beijing carbon trade pilot programme involves 504 organisations, including 435 enterprises from thermal electricity generation, cement production and petrochemical industries.

Shanghai and Hubei Province

Shanghai and Hubei Province have released a draft of their regional carbon trade management ruling in 2013. The draft ruling sets out general guidelines regarding the methodology of the emission quota management and allocation, reporting and supervision of actual carbon emission, and trading methodology. However, the detailed rules are yet to be put in place.

Shanghai plans to include 197 enterprises from the steel, petrochemical, textile and fibre industries in the scheme. Hubei plans to include 153 enterprises from high energy consuming industries such as steel, petrochemical, cement, car manufacturing and electricity generation.


In February 2013, Tianjin announced its implementation rules for a carbon trade pilot programme. The issuance of the implementation rules signifies that the establishment of the carbon trade system has moved from the preparatory stage to the implementation stage.

Similar to Beijing, Tianjin has established its regional carbon trade exchange. However, no transactions have taken place yet.


Chongqing has established its regional carbon trade exchange, although no transactions have taken place yet.

As of September 2013, there has been no announcement of entities to participate in the carbon trade pilot programme. However, it is anticipated that the enterprises involved will mainly come from the electrolytic aluminium, ferroalloy, calcium carbide, caustic soda, cement and steel production industries.


Based on the progress of the pilot programme, the issues discussed below may adversely have an impact on the effectiveness of the mechanism.

Emission cut vs economic growth

The political will to reach the ambitious reduction target is yet to be tested. There are some concerns that cutting emissions will consequently slow down economic growth. Therefore, it is important that local governments' performance evaluation system for the, strikes the right balance between performance on economic growth and performance on environmental protection.

Determination of total emission quota

Different from the European mechanism, under which the emission quota was determined based on historical emission records, the emission quotas under the pilot programme are determined based on the emission reduction target.

The main problem with such a methodology is whether the emission quota is realistic and whether it serves the goal of emission reduction if no historical data is considered.

Allocation of emission quota

Under the pilot programme, most emission quotas are allocated to selected enterprises/organisations free of charge while a small portion are placed for auction.

The allocation of an emission quota could raise an issue on fairness. The major concern is to which industries and enterprises should the quota be allocated and how much should be allocated.

Even under a properly designed total emission quota, the pitfalls of misallocation among participating organisations are there. Specifically, over-allocation of the emission quota will not serve the objective of emission reduction and those with an excessive quota could benefit from carbon trading in a secondary market. Under-allocation, however, will increase an organisations' costs because they would need to purchase additional quotas from auctions/secondary markets and may potentially weaken their willingness to participate.

Data quality

Data quality is another frequently cited challenge. The government has not yet mandated a unified methodology to account and report GHG emissions. Although the ETS pilots are adopting internationally recognised GHG accounting and reporting frameworks, each ETS pilot is likely to develop similar, but slightly different methodologies, making it more difficult to make comparisons between pilots or scale them up to the national level. The ETS pilots are also generally hesitant to put in place stringent data-quality requirements out of fear that companies do not have enough capacity. The fact that caps are derived from intensity targets adds another layer of uncertainty, as economic data such as Industrial Value Added may also be subject to judgmental consideration.

Supporting mechanisms

Actual emissions should be monitored and over-emission penalised to complete the emission reduction objective. To make the carbon trade scheme effective, penalties for non-compliance with the new emissions programme must not be too low to pose a real threat. If profits outweigh the costs of flouting the law, companies have no incentive to reduce pollution.

However, based on the carbon emission and carbon trade systems of the participating regions, no concrete monitoring and enforcement systems are established yet. Without proper monitoring and enforcement mechanisms, the effectiveness of the emission reduction and carbon trade system may be impaired.

What to expect next

Recent discussions have arisen as to whether the carbon trade pilot programme should be expanded. Some argue that the pilot programme should be expanded to cover more regions while others believe that expansion should only be considered upon obtaining more information and experience from the participating regions.

The vice chairman of the NDRC expressed the view recently that the state government encourages voluntary, project-based emission trading; in 2015, the carbon trade pilot programme is expected to be expanded to explore the possibility of establishing a national carbon trade mechanism.

To ensure the effectiveness of the carbon trade mechanism, authorities in participating regions of the carbon trade pilot programme intend to develop a monitoring mechanism on enterprises' carbon emissions. Such a system is likely to involve third-party institutions that measure and investigate participating organisations' actual carbon emissions. Along with a penalty regime, the effectiveness and intensity of enforcement of the carbon trade mechanism will likely improve.

As well as the carbon trade mechanism, some regions have participated voluntarily in the pilot programme of the development of a low-carbon region. In August 2013, the NDRC approved Wuhan and Hainan's proposal for developing low-carbon municipality/province. The proposal consists of a development plan on environmental assessment factors such as the consumption of non-fossil fuels, forest coverage and carbon emissions.

The growth of tax as a green policy tool

KPMG's Green Tax Index ranks China as sixth with a green tax policy that is balanced between incentives and penalties and focused on resource efficiency (energy, water and matters) and green buildings.

Existing tax incentives

At the time of this article, China offered incentives in corporate income tax (CIT) and value added tax (VAT).

Corporate income tax

  • A reduced CIT rate of 15% is given for qualified advanced and new technology enterprises. Applicable fields include solar energy, wind energy, biomaterial energy and geothermal energy.

  • A CDM fund is exempt from CIT on certain qualified income.

  • A CIT incentive of a three-year exemption and a three-year 50% rate reduction is available on income derived from specified CDM projects or qualified environmental protection and energy or water conservation projects, starting from the year in which the relevant revenue is first generated.

  • Ten percent of the amount invested in qualified equipment is credited against CIT payable for the current year, with any utilised investment credit eligible to be carried forward for the next five tax years if such equipment is qualified as special equipment related to environmental protection, energy, or water conservation and production safety.

  • Only 90% of the revenue derived from a transaction is included in calculating taxable income for CIT purposes if such revenue is derived from the use of specific resources associated with synergistic use of resources as raw materials in the production of goods.

Value added tax

  • 50 percent refund of VAT is paid on the sale of wind power.

  • 100 percent refund of VAT is paid on the sale of biodiesel oil generated by the use of discarded animal fat and vegetable oil.

  • VAT paid on the sale of goods produced from recycled materials or waste residues is refundable.

  • VAT exemption on the sale of self-produced goods including recycled water, qualified powered rubber and certain construction materials made from waste residuals (a minimum 30%).

  • VAT exemption on sewage treatment, garbage disposal and sludge treatment services.

  • VAT refunds at rates ranging from 50% to 100% of the VAT payable on sales of self-produced goods by using the prescribed recycled materials, waste residues and agricultural residues.

Tax law changes to protect the environment

A recent report presented by Jia Chen, head of the tax division at China's Ministry of Finance (MoF) stated China will introduce a set of new taxation policies designed to preserve the environment: "The Chinese government will collect the environmental protection tax instead of pollutant discharge fees, as well as levy a tax on carbon dioxide emissions, and the local authorities will be responsible for the tax collection," Jia said in the report.

The potential targets of the environmental protection tax are sulphur dioxide, waste water, solid waste and carbon emission. The tax base will be the quantity of actual emission or effluence of pollutants.

There is no precise timeline on passing the environmental tax law in China. Draft environmental protection tax legislation has been submitted to the China State Council for review; however, at the time of drafting this article, the Standing Committee of the State Council has not specified any timeline to review and approve it.

Extend the resource tax reform to cover coal

Resource tax in China has a dual role of (i) raising revenue for local governments and (ii) encouraging resource conservation (through higher downstream prices if costs are passed on to end users). The new resource tax law became effective from November 1 2011. The amendment to the resource tax law mainly consists of a change of tax base from quantity to value to produce a fair distribution and allocation of the tax revenues of the areas where mineral resources are located and exploited and those of the areas where downstream operations are carried out and consumers are concentrated. As a result, crude oil and natural gas are now subject to resource tax at 5% of the sales revenue (see Table 3).

Table 3


Old tax policy

New tax policy

Crude oil

  • RMB8 to RMB30 per tonne

  • 5% tax on the sales price


  • RMB0.02 to RMB0.15 per cubic metre

  • 5% tax on the sales price

Rare earths

  • RMB0.5 to RMB3 per ton or cubic metre

  • Light rare earths: RMB60 per tonne

  • Heavier rare earths: RMB30 per tonne

In 2012, China raised the resource tax on six minerals – iron ore, tin, molybdenum, magnesium, talc and boron – in a bid to conserve resources.

As part of continuous efforts to enhance the efficiency of energy usage, the next step of the resource tax reform is to expand the tax to coal based on prices instead of sales volume. It is expected that the change will drive the coal industry to enhance technologies, curb overcapacity and protect the environment. Similar to the resource tax reform in 2011 and the VAT reform, the coming resource tax reform will probably start with a pilot programme in major coal production regions, with the objective of obtaining realistic data and a better assessment of the impact of the reform.

Apart from the resource tax, Chinese mining enterprises are also subject to the Mineral Resource Compensation Fee, which is based on a certain percentage of their sales revenue. The forthcoming resource tax reform will involve the merger of the Mineral Resource Compensation Fee to form a unified mining levy. However, there are likely to be obstacles in the path of such unification given that it will affect the revenues of different government bodies. Resource tax is collected by the tax authorities while the Mineral Resource Compensation Fee is levied by the agencies under the Ministry of Land and Resources.

Although the resource tax reform proposal has already been submitted to the State Council, there is no specific timeline for the roll-out of the resource tax reform yet. Nevertheless, the government has made the resource tax reform a high priority, thus it is expected that it should be implemented in the near future.

Consumption tax reform expected to debut soon

The government is planning to implement consumption tax reforms, which may include adjustments of the collection scope, tax rates and collection procedures. Consumption tax is levied on 14 consumer products, including alcohol, cosmetics, jewellery, and tobacco. The list may be expanded to cover high energy-consuming items (that is, goods that could cause severe environmental pollution and over-exploitation of resources).

A step forward

The launch of the Shenzhen carbon trading exchange proves that China is stepping up its efforts to tackle environmental issues. While there are still some obstacles to overcome, the ETS pilot programme does offer a strong starting point for a market-based approach to constrain emissions in China. If successful, these pilots can then be scaled up nationally and will help demonstrate that China is serious about tackling its emissions and addressing the growing threat of climate change.

The introduction of the environmental protection tax will be another significant step forward. The shift from a volume-based to a value-based resource tax on coals is the latest signal from the government that it is hoping to make the country less dependent on coal in the long run. While at the time of drafting this article, there is no timeline for the implementation of the environmental protection tax and the resource tax reform, it was expected that the tax reform timeline would be seriously considered in the third plenum of the 18th Communist Party of China Central Committee, which was held in November 2013. There are reasonable chances that both the environmental protection tax and the resource tax reform will be implemented in 2015.



Jean Ngan Li

Tax Partner

KPMG China

9th Floor, China Resources Building

Shenzhen 518001, China

Tel: +86 755 2547 1198

Fax: +86 755 8266 8930


Jean Ngan Li started in the tax profession in Australia in 1997, and was seconded from the KPMG Sydney office to the Beijing office in 2001.

In the last 11 years in China, Jean has acquired significant experience in advising multinational clients on taxation and business regulations for business activities in China and cross-border transactions.

She also has extensive experience in handling the anti-avoidance cases, including Circular 698 indirect transfer cases and transfer pricing audit defence cases. In addition, she assisted Danish clients to conclude bilateral advance pricing arrangements (APA) in 2010 and 2012, respectively, and also worked on the first APA case, which involved the Large Enterprise Division of the State Administration of Taxation in 2011.



Sunny Leung

Tax Partner

KPMG China

50th Floor, Plaza 66

1266 Nanjing West Road

Shanghai 200040, China

Tel: +86 21 2212 3488

Fax: +86 21 6288 1889


Sunny Leung started her career in New York in 1997. She joined KPMG's New York office, specifically the federal tax practice, in 2000 and provided US tax compliance and advisory services to various multinational companies.

Sunny joined KPMG China's Shanghai tax team in 2005. Since then, she has been providing China tax advisory and compliance services to multinational companies in the manufacturing and service industries. She has had extensive involvement in advising clients on setting up operations in China, M&A transactions and cross-border supply chain planning. She has also been providing tax due diligence and tax health check services in China.



Jessica Xie

Tax Partner

KPMG China

8th Floor, Tower E2, Oriental Plaza

1 East Chang An Avenue

Beijing 100738, China

Tel: +86 10 8508 7540

Fax: + 86 10 8518 5111


Jessica Xie specialises in advising clients on tax issues concerning the energy and natural resources industry as well as the manufacturing industry.

Jessica has also been active in assisting many foreign companies in designing their corporate and operational structures in China to meet their business objectives. She also focuses on providing M&A tax services to foreign companies and assists in tax due diligence, transaction structuring, post-acquisition structuring as well as setting up various forms of legal entities for acquisition or operational purposes.

Jessica also provides advice to multinational companies in the areas of company regulations, foreign exchange and customs issues.

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