Background

The People’s Republic of China is the largest country in the world by population and the second largest by land area. It is located in East Asia and has a 14,500 km long coastline along the Pacific Ocean. Its landscape varies greatly, ranging from subtropical forests and forest steppes to deserts. China’s climate is diverse, and characterized mainly by dry seasons and wet monsoons.  Most of China’s arable land is used for agriculture and it is the world’s largest producer and consumer of agricultural products. Desertification, sandstorms and floods resulting from poor agricultural practices are some of the major environmental problems. Although almost half of China’s labor force works in agriculture, forestry and fishing, China’s most important sectors are industry and construction, which account for almost 50% of its GDP.

Overall Fiscal Profile

China has enjoyed phenomenal economic growth over the past two decades, and  is forecasted to grow by about 7.5%  in 2014. Since the global crisis, China has used a variety of financial reforms to weather the crisis: strong investments, credit, and fiscal stimulus have harnessed the countries capacity to thrive. While inflation is expected to remain stable around 3 per cent (owing to non food price stability) and a stable balance of payment surplus (2.25 per cent of GDP),  the continued focus on growth will require continued efforts and implementing green fiscal reform which can support the country’s transition to a green economy.

Policy and Strategic Framework for Green Economy

At the planning level, both the 11th (2006-2010) and the 12th Five-Year Plans (2011-2015) have emphasized the importance of greening the Economy. China’s 12th Five Year Plan integrates elements of the Green Economy: including a drive for energy efficiency, inclusive growth, reduction of greenhouse gas emissions, sustainable development and low-carbon technology development. The Plan has led to investment in greening the economy amounting to US $468 billion, compared to US $211 billion over the previous five years. Investments were focused on waste recycling and reutilization, clean technologies, and renewable energy. With this public support, China’s environmental protection industry is expected to continue growing at an average of 15-20% per year with output to reach US$ 743 billion during the 2011-2015 period.  In addition, the Chinese government has committed itself to producing 16 per cent of its primary energy from renewable energy sources by 2020.

More recently, in April 2014, the government announced amendments to the Environmental Protection Law, which was first passed in 1989. The revised law will come into effect on January 1st, 2015. Some of the provisions of the amended law include the removal of limits on how much companies can be fined for pollution and harsh punishments for authorities who do not undertake environmental impact assessments or who cover up environmental wrong-doing. Moreover, a new chapter of the law mandates information disclosure, and allows citizens to request information on the environment, thereby promoting transparency and reporting.

Fiscal Measures for Green Economy

China has a range of fiscal incentives for a green economy. China began to put in place an environmental legal framework in the 1970s and green fiscal policy is already applied in some fields. Examples are the Forest Ecological Benefit Compensation Fund, electricity pricing measures, and an extensive pollution levy. Other fiscal instruments include direct public expenditure, environmental taxation and levies and environmental pricing.

China’s Pollution Levy System fixes charges on 200 substances applicable to emissions, water discharges, noise pollution, and solid and radioactive waste. These funds are then utilized for local environmental protection agencies and environmental enforcement. China also announced that it would introduce a carbon tax in 2015, applicable to a variety of emissions although no political decisions have yet been taken. Additionally, the 12th FYP reaffirms China’s commitment to develop a carbon trading market.

Despite the lack of existing carbon pricing strategies, a number of policies support the development of renewables in China. In 2009, the government introduced a FiT for wind power generation, applicable for a period of up to 20 years. In 2011, a FIT of 0.18 USD/kWh was applied to solar PV projects approved by July 1st and operating prior to December 31st, of the same year.  In 2012, the National Energy Agency released a list of over 200 renewable electricity projects in ten Chinese provinces that had been allocated subsidies in 2012. The Renewable Energy Tariff Surcharge Grant Funds Management approach, introduced in 2012, also provides investment or subsidies for the development of RE systems. Subsidy standards were tentatively set at CNY 4,000/kW per year. Similarly, a renewable electricity generation bonus increased from RMB 8/kWh to RMB 15/kWh in 2013. Additionally, coal-fired plant that are retrofitted to lower their emissions of nitrogen oxide are able to receive a subsidy of RMB8/kWh. Investment programs such as the photovoltaic and Golden Sun demonstration programs in 2009 and the Green Energy Demonstration Country and New Energy City programs in 2011 have also illustrated the government’s commitment to green growth through investment financing.

There are also tax incentives for renewables, including a 50 per cent reduction on VAT for wind; import duty removal on wind and hydro technological equipment’s, and three years of income tax exemptions, followed by three years of tax reductions. Similarly, a 10 percent income tax reduction exists on biomass as well as a VAT refund policy. Finally, import duties and VAT on products used to generate wind and hydroelectricity were removed completely in 2010.

To stimulate a shift to clean energy, energy taxes are currently levied on coal, crude oil, natural gas and other fuels (between RMB0.30 and RMB30 per tonne). In addition, an excise tax reduction is available for biodiesel and other reductions are available for renewable energy production and consumption (13 per cent VAT vs 17 per cent on accelerated depreciation of assets ) and a 10% discount on enterprise income tax rate.

Other initiatives included the fiscal stimulus that the government of China committed to in response to the economic and financial crisis. In absolute terms, China’s green stimulus of US$ 218 billion was the largest in the world. Almost half of this amount was allocated to railway infrastructure. As of 2010, approximately US$ 33 billion (15%) had been disbursed mainly for the construction of much needed water infrastructure that benefits 14.6 million people, thereby contributing to the achievement of the related Millennium Development Goal (MDG 7).

Fossil Fuel Subsidy Reform

Today, the National Development and Reform Commission (NDRC) and the National Energy Administration (NEA) hold primary responsibilities for administrative functions related to energy. The government provides subsidies through tax breaks and low interest or interest-free loans, to support national industries. Between 2008 and 2009, the National Development and Reform Commission of China increased consumption tax for oil products and switched to formula-based pricing for diesel and petroleum, departing from a system of subsidizing energy products in an ad-hoc manner. The government also raised electricity tariffs on industry in 2011, and liberated coal prices in 2013 (which were previously fixed). Also, it raised natural gas prices for non-residential users in July 2013 by 15%. However, according to one estimate, subsidies to fossil fuels remain and are believed to have reached US$45.4 billion in 2012, with petroleum accounting for between 53% and 70% of the total. Moreover, capital investments for infrastructure projects have generated direct and indirect subsidies to particular fossil fuels.

One of the challenges to tackling fossil fuel subsidies, as highlighted by the Global Subsidies Initiative (GSI), is the general lack of detailed data availability on fossil-fuel subsidies. Additionally, as apparent in the last NDRC Five-Year Plans, expenditures and policy support pertaining to harmful environmental externalities are not disclosed. Subsidies for rural electrification and resource development in remote regions are likely substantial, but are difficult to track. Thus, there is a strong need to quantify subsidies by fuel type.

It is clear that more data collection and reporting remains fundamental to ensuring measurable progress within the context of the green economy.

Additional Reading

Reference: http://www.unosd.org/content/documents/710EFR%20Case%20Studies%20-%20GIZ%202013.pdf

GSI. Mapping the Characteristics of Producer Subsidies: A review of pilot country studies. Retrieved from: http://www.iisd.org/gsi/sites/default/files/mapping_ffs.pdf

IISD, 2013 (and CNREC). Green Revenues for Green Energy: Environmental fiscal reform for renewable energy technology deployment in China. Retrieved from: http://www.iisd.org/sites/default/files/publications/china_green_revenue_en.pdf

IMF, 2013. Peoples Republic of China. 2013 Article IV Consultation. Retrieved from: https://www.imf.org/external/pubs/ft/scr/2013/cr13211.pdf

UNEP. China’s Pathway to Green Economy. Retrieved from: http://www.unep.org/greeneconomy/AdvisoryServices/China/tabid/56270/Default.aspx