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, however since 2017, when annual GDP growth was at 6.9%, growth has been slowing down. In 2018, annual GDP growth was of 6.5% and by 2020, it is forecasted to slow down to 6.2% . 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. With an increasing focus on pursuing green growth since 2015, green fiscal reforms and applications of new instruments addressing environmental issues are required for China’s transition to a green economy . The 13th Five-Year Plan also set new goals for fiscal reforms between 2016-2020, including a gradual increase of direct taxation, a replacement of business taxes with VAT, establishing a standardized consumption-based VAT system, and introducing an environmental protection tax and a real estate tax .
Policy and Strategic Framework for Green Economy
Significant policy adjustments are required for China’s sustainable growth. China’s 12th Five-Year Plan (2011-2015) and the 13th Five-Year Plan (2016-2020) set targets to eliminate environmental and social imbalances, reduce pollution, increase energy efficiency, improve access to education and healthcare, and expand social protection . The significance of a green economy and green growth has been brought into the spotlight since the 12th Five Year Plan. By integrating elements of the Green Economy, the 12th Five Year Plan included a drive for energy efficiency, inclusive growth, reduction of greenhouse gas emissions, sustainable development, and low-carbon technology development. Under the Plan, the Chinese government invested US$468 billion in greening the economy over 2011-2015, compared to US$211 billion in the previous five-year period. Investments were focused on waste recycling and re-utilization, clean technologies, and renewable energy. With this public support, such investment is projected to exceed US$2.2 trillion over the 13th Five-Year Plan period (2016-2020), with the focus of industrial development shifting from environmental pollution control to environmental quality improvement.
Compared to the 12th Five-Year Plan, the 13th Five-Year Plan goes even further on integrating social and environmental considerations with economic development . In addition to setting out a series targets for natural resource management (e.g. water, soil, air, land, forest and biodiversity), the Plan includes the reduction of Volatile Organic Compounds for the first time. The critical components of fine particulate matter (PM 2.5) and ozone is planned to be reduced by at least 10% in the agenda, reflecting a concrete action combating severe air pollution.
Climate change mitigation and adaptation remain the first priorities in the 13th Five-Year Plan, with the biggest shift that China is committed to launch a national Emission Trading Scheme (ETS) in late 2017. In addition, the plan also sets up an energy consumption target that limits total energy consumption below 5 billion tonnes of coal equivalent by 2020. In 2015 China listed their first renminbi-denominated green bond and by 2018, China had issued close to US$31 billion in green bonds, thus accounting for 18% of all new global green bond issuance .
Apart from social and economic development plan, in April 2014, the government announced amendments to the Environmental Protection Law, first passed in 1989. The revised law came 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 wrongdoing. 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 adopted a variety of fiscal policies for the transition towards a green economy, ranging from carbon pricing initiatives to conventional fiscal incentives. 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.
The most prominent fiscal policy currently in place is China’s regional ETS, a cap-and-trade scheme for CO2 emission. It is still a city-level (or provincial level) pilot scheme that was first launched in 2013 in Shenzhen, followed by six other cities and provinces (Guangdong province, Beijing, Shanghai, Tianjin, Hubei province, and Chongqing) during 2013-2014. These regional pilot markets are self-mandate, meaning that each pilot region independently determines its cap, rules, industries covered, initial allowances allocation, and thresholds of joining the trading scheme. Moreover, allowances are only traded within each pilot market, for their valid time－no banking or transactions between regional markets are allowed at the current stage. Empirical assessments of the results of the regional ETS remain extremely limited. However, the prices of tradable permits are considered too low －RMB 20-50/t CO2 (US$ 3-7.5/t CO2)  – to signal strong investment in clean technologies. Companies will not feel sufficient pressure to cut emissions until the carbon price reaches US$ 30- $45, which is expected to come no earlier than 2020 . Nevertheless, as highlighted in the 13th Five-Year Plan, China is committed to put a price on carbon emissions. In December 2017, China launched its national ETS, building on the success from the piloting carbon markets in seven regions. China opted for an incremental development of the ETS over three phases: the first one focused on the development of market infrastructure, then simulation trading and finally the deepening and expanding phase expected to start from 2020 . China expects, between 2016-2020, a reduction in carbon emissions per unit GDP by 18% compared to 2015 level. If successfully implemented , it would represent the biggest jump in the share of global emissions covered by carbon pricing initiatives－the total coverage would be boosted from 13% to 20%-25% .
Chinese government is also implementing a number of policies to promote the development of renewables. To promote solar energy, in 2009, the Golden Sun programme was launched to provide financial subsidies to grid connected and off-grid solar PV power generation projects . In the same year, a feed-in tariff was introduced for wind power generation to support the deployment of electricity from onshore wind, applicable for a period of up to 20 years. Similar supportive programmes also include the Renewable Energy Tariff Surcharge Grant Funds Management approach that also provides investment or subsidies for the development of renewable energy systems.
There are also direct tax incentives for renewables, including a 50% 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% 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% VAT vs 17% 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$ 221 billion was the largest in the world in 2009. Almost half of this amount was allocated to railway infrastructure. By 2020, China expects an overall investment of RMB 5 trillion (USD 750 billion) in rail expansion . 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). Between 2013‑15 period, China focused on municipal engineering, such as road and pavement construction and maintenance, water supply networks and sewage facilities . In the last few years, the focus has shifted back to transportation infrastructure, particularly national road and warehousing networks, given the increasing demand due to e-commerce.
In 2016, China announced a new Environmental Protection Tax (EPT) Law came into force on January 1, 2018, which intends to further combating pollution . The tax was introduced on 1 January 2018, replacing a previous pollutant discharge fee. It targets enterprises and public institutions that discharge listed pollutants directly into the environment, covering air, water, solid waste, and noise pollution. Central authorities set lower and upper limits for the tax rates, which allows each province, autonomous region and municipality to determine the rates. Local authorities set the tax rates and collect revenues, which are then spent locally. Broadly speaking, the more developed and urban areas of China have opted for higher rates. Tax reductions provide incentives to cut emissions while high fines and criminal penalties for offenders encourage compliance through its deterrence effect. Estimates suggest revenues up to 50 billion yuan (approx. $7.68 billion) annually, which are to be spent at local level to support efforts to address pollution.
Taxpayers must declare specific EPT related information to local tax authorities on a quarterly basis or per discharge. At the same time, competent environmental protection authorities provide discharge data and other relevant information on entities discharging pollutants under their monitoring and administration to tax authorities on regular basis. This gives tax authorities the ability to compare tax data and information collected from two sources.
Another prominent fiscal policy in China is the New Energy Vehicle (NEV) subsidy. Consumers of NEVs are paying lower prices due to these subsidies  that were worth up to US$ 15,000 per vehicle in 2016 . In fact, at that moment China was the second most generous country on subsidizing NEVs after Norway. This generous subsidy significantly promoted both the production and consumption of NEVs. In 2015, the production and sales of NEVs hit 340,471 and 331,092 unites respectively, increasing 3.3 times and 3.4 times relative to 2014. However, the country has slowly been rolling back the program. The Ministry of Finance announced that this subsidy would be phased out after 2020 arguing that firms have become too reliant on the funds .
In 2016, the government cracked down and released a series of regulatory measures to consolidate the industry and prosecute violators of the subsidy program. These measures included increasing the regulatory standards to make it more difficult to qualify to manufacture NEVs in China. The central government also vowed to wind down subsidies, with 20% cuts from 2017 to 2018 and 40% cuts from 2019 to 2020, compared to 2016 levels .
Sloping Land Conversion Program
In 1999, China initiated the Sloping Land Conversion Program (SLCP), the largest land retirement program among developing countries as well as the world’s largest payments for environmental services (PES) program . With a total budget of RMB 337 billion (US$ 50 billion), the program aimed to convert 14.67 million hectares of fragile cropland by 2010, with an additional goal of afforesting a roughly equal area of wasteland within the same period . Unlike China’s other forest-sector programs, SLCP uses a public payment scheme that directly engages rural households as core agents of the implementation, and has the stated principle of volunteerism. Households, in most cases, received compensation payments more than the forgone income of cultivating the cropping land for participating in afforestation.
However, despite the innovative elements, results suggest problems in the programme’s design and implementation including lack of technical support, insufficient respect of the principles of volunteerism, and shortfalls in subsidies delivered to households. Further, the impacts have been questionable. As opposed to the official government report, some researchers have found that the income levels of participating households have not been significantly improved, whereas agriculture production was found to be significantly reduced due to the program. Others meanwhile, have suggested positive ecological and socioeconomic impacts, as well as other benefits such as increased vegetation cover, carbon sequestration, and reduced soil erosion and dust .
Fossil Fuel Subsidy Reform
Internationally, fossil fuel subsidies (FFSs) have been found to be a very expensive and insufficiently transparent tool. These subsidies are substantial in China. China’s subsidies to coal production were estimated to be about US$ 5.8 billion in 2013, including a variety of channels and support mechanisms, but excluding the preferential element of credit support to the industry . Among the largest is the compensation for phase-out plans in which coal mines are shut down, upgraded or consolidated with state-owned enterprises (SOEs), estimated to be approximately US$ 1.1 billion.
Against this background, China has already pledged to phase out “the inefficient fossil fuel subsidies that encourage wasteful consumption” under both Asia-Pacific Economic Cooperation and G20 processes. Between 2008 and 2009, the National Development and Reform Commission (NDRC) 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%. In December 2013, China and the United States announced voluntary peer reviews of their FFSs, leading the way for other G20 countries. In September 2016, the first publication of their peer reviews was released on the G20 summit in Hangzhou . Out of the nine policies identified as subsidies, China was able to estimate three which totaled around US$14,42 billion, mostly directed to lower petrol prices .
Another challenge to subsidy reforms in China is the misalignment of central and local governments when adopting subsidy-reducing policies. Even if the central government implements subsidy-reducing policies, provincial and local government have discretion to continue to provide subsidies to offset government efforts and erode positive impacts that subsidy reforms could bring about. Thus, in addition to work on data collection and assessment at the national level, further work at the sub-national level is also needed .
To make growth greener, the OECD, based on the Economic Survey of China, suggests that the country enforces more strictly environmental regulations, which entails raising environmental taxation, especially on fossil fuels, and increasing fines for polluters. Moreover, the construction of coal-fired power plants should cease while investment in pollution treatment facilities should increase, along with urban water treatment and rural sanitation .
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