China s Carbon Pricing: Status and Prospect CAO Jing School of Economics and Management Tsinghua University Presented at MCC Closing the Carbon Price Gap: Public Finance and Climate Policy May 22-23, Berlin 1
China s Challenge China s current development model is unbalanced, uncoordinated and unsustainable Chairman Xi Jinping, November 2013 (3 rd Plenum, 18 th Central Committee) China burns as much coal as the rest of the world consumed (3.8 bil. ton in 2011): Resource tax on coal: too low (0.4$ per ton) China is the biggest carbon emitter China (2.5 bil. tc) vs US (1.5 bil. tc) in 2011, 7 ton CO2 per capita (exceed world average) China Rising Death Toll Due to Local Air Pollution World Bank (2007): 750,000 excess death per year Chen et al. (PNAS, July 2013): long-term exposure to air pollution contribute to enormous loss of life expectancy (five year less in northern China vs. southern) 2
Blueprint of Environmental Policy Reform under the New Leadership establishing the market s decisive function in resource allocation, reform of the fiscal system and stabilization of tax burdens, improvement of tax revenue systems, sustainable social security systems, protection of ecology and the environment, implementation of paid-for resource use systems, and energy saving. ------from the third Plenary Session of the 18th Central Committee in November 2013 3
Why and how will China pursue Carbon Pricing? We have a fiscal and economic imbalance problem: distorted tax system, large local debt, not sustainable: Distorted price signals in the fiscal system: heavy capital and VAT tax, low resource and energy tax, lead to low quality and imbalance economic growth Local fiscal system: Rely too much on land lease, not sustainable, housing bubble, very big local government debt (about 31-42% of GDP, various estimates) Single Child Policy for more than 30 years, Aging Population require more social security, current SS fund is in deficit (95.9 bil. In 2013 and 156.3 bil. In 2014, fiscal support counts for about 3% of Total tax revenue) Rapid Urbanization: 240m people migrating to cities by 2025; Urban population rising from around 50% today to around 70% by 2025 Energy Security: China must curb its own carbon emissions, irrespective of what other countries act China is vulnerable to the effects of climate change. 4
Why and how will China pursue Carbon Pricing? Avoid Lock-in in Physical Capital and Infrastructure, Household Consumption and Life-Style, as well as Fiscal and Governance Structure; otherwise future reform gets harder Carbon Pricing: part of the fiscal and imbalance solution From Mandates to Market-based Instrument: less cost effective (NOx removal in 12 th FYP, much difficult thanso2 removal in the 11 th FYP), urge shifting to market based instrument China s Trial Program on Cap-and-Trade: 5 cities, 2 provinces, within city/province trading, May extend to National Trading if Pilots are successful China attempt to initiate new round of green fiscal reform (three are relevant to carbon pricing): Resource Tax Reform, Pollution Levy to Environmental Tax, Gasoline Tax Reform, Carbon Tax 5
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China s Pilot Trading (Five Cities, 2 Provinces, 1 bil. CO2 emissions, about 7-10% of total) Beijing Tianjing Qingdao (voluntary) Shanghai Hubei Guangdong Chongqing Shenzhen 7
Region China s Pilot Trading (Comparison) Covered CO2 Emissions (Mt) Number Share of Coverage of total Threshold Covered Emissions (tco2/year) Entities Historical Emission Period Beijing 58 50% 490 >10,000 2009-2012 Tianjin 112 45% 197 >20,000 for inudstry, >10,000 for other 2010-2011 Shanghai 90 60% 191 >20,000 2009-2012 Hubei 117 33% 107 >120,000 2010-2011 Guangdong 209 42% 830 >20,000 2010-2012 Covered Sectors 17 Manufacturing Sectors, Commercial Building, financial, hotel, education, etc. Manufacturing Sectors, Oil and Gas Exploration, Buildings Manufacturing Sectors, Textiles, Commercial Buildings, fianncial, hotel, airlines, harbors, airports, railway, etc. Manufacturing Sectors, Automobile Manufacturing Sectors, Commercial buildings, transporation and construction Shenzhen 32 40% 635 >5000 2009-2011 26 Manufacutring Sectors Chongqing N.A. N.A. N.A. >20,000 2008-2010 N.A. Note: Heat and electricity, iron and steel, nonferrous metal, petrochemicals and chemical, pulp and paper, glass and cement, these sectors are covered in all pilot systems. Source: Zhang et. al (2014), http://www.tanpanfang.com 8
RMB Shenzhen 120 100 80 60 40 20 0 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 RMB Beijing 120 20000 18000 100 16000 14000 80 12000 60 10000 8000 40 6000 20 4000 2000 0 0 19.12.2013 19.01.2014 19.02.2014 19.03.2014 19.04.2014 19.05.2014 Traded Volume(tCO2) Price 9
RMB Shanghai 120 50000 45000 100 40000 80 35000 30000 60 25000 20000 40 15000 20 10000 5000 0 0 19.12.2013 19.01.2014 19.02.2014 19.03.2014 19.04.2014 19.05.2014 Traded Volume (tco2) Price RMB Tianjing 120 100 80 60 40 20 0 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 Traded Volume (tco2) Price 10
02.04.2014 04.04.2014 06.04.2014 08.04.2014 10.04.2014 12.04.2014 14.04.2014 16.04.2014 18.04.2014 20.04.2014 22.04.2014 24.04.2014 26.04.2014 28.04.2014 30.04.2014 02.05.2014 04.05.2014 06.05.2014 08.05.2014 10.05.2014 12.05.2014 14.05.2014 16.05.2014 18.05.2014 20.05.2014 RMB Guangzhou 120 50000 45000 100 40000 80 35000 30000 60 25000 20000 40 15000 20 10000 5000 0 0 19.12.2013 19.01.2014 19.02.2014 19.03.2014 19.04.2014 19.05.2014 Traded Volume (tco2) Price RMB 120 100 80 60 40 20 0 600000 500000 400000 300000 200000 100000 0 Tianjing Traded Volume (tco2) Price 11
10,00 Average CO2 Price (euro/tco2) 8,00 6,00 4,00 2,00 0,00 Beijing Guangzhou Shanghai Shenzhen Tianjing Hubei 12
60.000 Average DailyTraded Volume (tco2/day) 50.000 40.000 30.000 20.000 10.000 0 Beijing Guangzhou Shanghai Shenzhen Tianjing Hubei 13
Summary on China s Pilot Trading Pilot trading now covers about 1 billion tons of CO2, roughly 10% of China s total emission Cover major energy-related sectors, buildings, some including transportation Direct emissions + Indirect emissions from electricity (generated within or imported from other regions) Coverage threshold varies from 5000 ton CO2/year (Shenzhen) to 120,000 ton/year (Hubei) Initial allocation: virtually all are grandfather free allowances, except Shenzhan has a small number of allowances auctioned. Historical Emissions are computed differently, Beijing and Shanghai (2009-2012), Tianjing and Hubei (2010-2011), Shenzhen (2010-2012), Chongqing (2008-2010) Allocation were distributed annually for Beijing, Tianjing, Hubei and Guangdong, but Shanghai and Shenzhen issue allowances once at the beginning of 2013-2015 14
Prospect for National-wide Emission Trading The earliest Time Line: Nation-wide (likely to be launched during 13 th Five Year Plan, 2016-2020) The success or failure of bottom-up designed pilot program will to a large extent determine the fate of national emission trading and design format Regulatory barriers: So far no clear national law specifies mandate for establishing an ETS at the national level Enforcement regime is still too weak: fine is only 10,000 to 100,000yuan per enterprise (Shanghai), 20,000 30,000 yuan (Chongqing), or 3 5 times of emission gap - compare with EU ETS (200 euros per ton) 15
Main Challenges The price signal is not fully effective, especially for many SOEs, which get compensation or subsidy from the government, SOEs price elasticity is smaller than other firms (Karplus and Cao, 2013) Many end-use energy prices are fixed (such as electricity) Similar challenges with the pilot sulfur trading which is unsuccessful, need capacity building on defining emission right, permit allocation, trading rules, monitoring, enforcement and accountability. City level trading: high transaction cost, thin market, few deals, carbon emission data is not public (2005 survey data is still not released), baseline is difficult to evaluate 16
Main Challenges With the small scale, thin market, less cost saving, how to integrate future markets and extend to nationwide is also an concern The cap and allowance are basically set given the companies reported, penalty for non-compliance is still weak. When extending to nation-wide trading, observing the importance of reporting historical emission and lack of reliable emission data, firms may report higher historical emissions for requesting higher free allowance. MRV is still in early stages. Leakage issues during the pilot stage. 17
Green Fiscal Reform Plan and Time Table Motivation Relevant Tax Time Paid-for Resource Use Enhance Renewables Discourage Vehicle Emission and Congestion Resource Tax (Coal, Oil and Gas) Feed-in-Tariff on Wind and Solar Gasoline Tax and Congestion Fee Reducing local pollution Environmental Tax (Levy Fee to Tax Reform) Reducing Carbon Emissions Emission Trading Carbon Tax (may combine with Resource Tax) Oil and Gas (5-10%, implemented now as 5%) Coal (low unit tax): reform to ad-valorem tax Implemented Gasoline Tax (1 Yuan/Litre) Congestion fee(under discussion) Forthcoming Soon Pilot Stage (7 regions, 10% emissions) 2016: May start National Regime N.A. 18
Harvard-Tsinghua China Project: Costs and Benefits of Carbon Taxes (and Sulfur Mandates) in China MIT Press, December 2013 19
Assessment Framework Analytical Models Effects of Carbon Tax Economy 33-sector general equilibrium model Cost: Indirect general equilibrium effects Electricity, Iron & Steel, and Cement Plant-by-plant databases Emissions Bottom-up inventories Benefit: Reduced CO 2 Atmosphere GEOS-Chem model Effects on Public Health PM 2.5 & ozone Effects on Rice, Corn, and Wheat ozone Benefit: Avoided mortality and morbidity Benefit: Rise in grain yields 20
Defining Future Carbon Tax Scenarios Six prospective policies and a base case for 2013-2020: Scenario Time Path of Carbon Tax Use of Revenues F1 Tax of 30 yuan/ton of CO2 (in 2007 yuan) all years 2013-2020 Lump-sum to households F2 Tax of 10 yuan/ton in 2013 rising to 50 yuan/ton in 2020 F3 Tax of 10 yuan/ton in 2013 rising to 100 yuan/ton in 2020 F4 Same as F2, 10 yuan/ton in 2013 rising to 50 yuan/ton in 2020 F5 Same as F2, 10 yuan/ton in 2013 rising to 50 yuan/ton in 2020 Lump-sum to households Lump-sum to households Cut tax rates on enterprise income Output Updating Subsidies to EITE industries, rest to households F6 Same as F2, assuming a global carbon tax is imposed, border tax adjustment Lump-sum to households Base Case Absent any carbon tax policy, only existing policies 21
Translating Changes in PM 2.5 and Ozone Under Carbon Tax F2 into Avoided Health Damages Scenario F2 in 2020: 10 Y/ton in 2013, 50 Y/ton in 2020 Lei (2013) 22
Mapping Reduced Crop Damages from Ozone Reductions: Wheat Scenario F2 in 2020: 10 Y/ton in 2013, 50 Y/ton in 2020 23
Comparison of Effects of Carbon Tax F2 and F3 in 2020: 50 /ton vs. 100 /ton Variable Scenario F2: Scenario F3: 10Y rising to 10Y rising to 50Y/ton 100Y/ton Percent change in 2020 GDP -0.14% -0.33% Consumption 0.27% 0.39% Investment 0.01% -0.04% Coal Use -23.00% -37.20% CO 2 Emissions -18.90% -30.80% PM 10 Emissions -15.70% -25.30% SO 2 Emissions -21.40% -34.50% NO X Emissions -16.60% -26.90% Avoided Premature Deaths Cases in 2020 Lower Estimate (Acute PM 2.5 Effect) 19,300 33,100 Upper Estimate (Chronic PM 2.5 Effect) 88,700 148,900 Billion yuan in 2020 Increased Wheat, Rice, Maize Production 15.7 28.3 24
Comparing Effects of Carbon Taxes F2 and F4 in 2020: Lump Sum Rebate vs. Tax Cut 25
Comparing Effects of Carbon Taxes F2 and F5 in 2020: Lump Sum Rebate vs. Subsidies to Energy-Intensive Sectors 26
Potential Revenue Spending (rarely studied) Special Environmental Fund on conventional pollution treatment (PM2.5 and ozone) Recycling with Other taxes, such as VAT, Enterprise Income Tax Special funding support for feed-in-tariff and other low-carbon R&D (potential research area on endogenous modeling Current Fiscal Support for Social Security Gap is 303.8 bil. RMB this year, carbon tax revenue is about the same size (2.9% of total tax revenue), Like resource tax, set at local tax, so the revenue can be used to reduce local government debt, relieving pressure from land selling 27
Summary: Impacts of Carbon Tax Carbon Tax: Not only cost effective, but also a potent multi-pollutant strategy Substantial Co-benefits. The carbon tax revenues will allow a cut in existing taxes, reducing the loss of output, and helping with tax reform goals. Win-Win and double dividend may exist for Green Growth. More politically feasible policy (output updating subsidy for EITE and HH lump-sum transfer) has slightly smaller environmental benefits, but boost both consumption and investment Using Scenario F4 (fully compensate enterprises) to simulate national trading market using Beijing s design (50% emissions covered, 99% cap on electricity and 96% cap on other sectors), roughly 19yuan/tCO2 to achieve the cap (compared with our 21 yuan/tco2 as carbon tax scearnio F4 in 2015) In practice, may become high resource tax on coal (another potential reason for double dividend) for currently inefficient light taxation on coal (eg.big coal rents, Shenhua group in China; by different definition Post tax energy subsidy (Parry, 2013 IMF report), top 2 nd in the world, 279 billion US dollars, 3.23% GDP in 2011 ). 28
Other Comments Carbon Tax may partly mitigate tax evasion in China Carbon tax, if used to reduce pre-existing labor tax, may broaden the tax base, reduce the welfare cost (Bento, Jacobsen and Liu, 2012; Markandya et. al, 2013) According to a report from State Council, China suffered tax evasion worth an estimated one trillion yuan (US$157 billion) in 2011. Countries with high levels of tax evasion (China and India), might benefit by shifting tax base to taxes (like carbon tax) that are difficult to evade. (Liu, 2012 RFF paper). Tax Incidence: Gasoline Tax: Progressive in China (Cao, 2011, in Sterner (ed.) Do Fuel Taxes Hurt the Poor? ) Rich People: Very high Gasoline Price Elasticity (-0.74) (Cao, Ho and Liang, 2014 working paper) Poor People: No Car, only indirect consumption (public transport) Suits Index (0.35 with direct, 0.20 with both direct and indirect, 2007) Carbon Tax: Regressive but can be Progressive with Cuts and Transfer Program (Cao 2013, in Man (ed.) China s Environmental Policy and Urban Development ) How to combine with national emission trading? Sector coverage? Double counting issues? 29