"Green" Tax and Fiscal Reform Needed for Green Growth in People's Republic of China - ADB Report

News Release | 15 August 2012

MANILA, PHILIPPINES - Policy makers in the People's Republic of China (PRC) need to initiate comprehensive fiscal, economic, and legal measures to achieve ambitious targets for reducing pollution, the Asian Development Bank (ADB) says in a new country environmental report.

"The PRC's environmental challenge is arguably the most complex that any country has confronted," said Robert Wihtol, Director General of ADB's East Asia Department. "While the PRC's environment has improved in many respects, the overall situation continues to deteriorate as environmental pressures increase. The country's environmental situation has not yet reached a turning point."

Toward an Environmentally Sustainable Future, ADB's second environmental analysis of the PRC, provided key inputs to the country's 12th Five-Year Plan. The report acknowledges a number of notable environmental achievements in the PRC, particularly during the past five years. These include increased investment on environmental infrastructure, greater focus on achievable targets, and strengthened accountability and enforcement. As a result, chemical oxygen demand and sulfur dioxide emissions were reduced by 10% and energy consumption per unit of GDP was cut by nearly 20% despite continued robust growth.

These achievements notwithstanding, the PRC faces potential crises in water pollution, water scarcity, and solid waste. Urban and industrial wastewater treatment and solid waste management remain major challenges. Nonpoint source pollution, including fertilizer runoff, pesticides, and discharges from livestock facilities, threatens the aquatic health of lakes and estuaries. Addressing these issues will require innovative strategies, regulations, and economic incentives.

The report highlights four root causes behind the country's complex environmental agenda: the rapid pace of economic growth; the economy's heavy reliance on exports and investment; the country's strong dependence on coal; and rapid urbanization.

To change this unsustainable growth pattern, ADB urges the government to reform the pricing of resources and introduce a green taxation system. This would tax resource extraction and pollutant and carbon dioxide emissions, and allow tax deductions to offset investments in pollution control equipment.

Fiscal reform should accompany these economic incentives. This will help to recycle new revenues and savings from environmental taxes to sub-provincial governments in a way that encourages them to invest in further environmental protection and resources conservation.

The report encourages the government to invest in natural resources. It calls for a national regulatory framework of "eco-compensation," an initiative where the government or private sector pays for ecological services protection by households, communities, or local governments. In developing a national eco-compensation ordinance, the government needs to evolve from being the main purchaser of ecological services to an "enabler" that encourages private sector participation.

Legal reform is critical to improving environmental governance. Such reform should clarify institutional responsibility, reduce ambiguity and redundancy in regulations, and empower enforcement authorities.

Under its Country Partnership Strategy for the PRC (2011-2015), ADB supports the government in pursuing clean and sustainable growth; prioritizing renewable energy and energy efficiency; encouraging low-carbon transport systems; protecting degraded rural ecosystems; and developing livable cities.