Environmental taxes don't tackle real problem in China

• Source: Global Times
• [22:35 February 21 2010]
• Comments

By Peng Kuang

In classic economics, the theoretical argument for environmental taxes was put forward by Arthur Cecil Pigou, a British economist. In his book, Welfare Economics, he said we need to draw taxes from activities that have bad external effects such as environmental pollution, to compensate for the damage done by such activities.

Pigou reasoned that because the social costs of market activities are not covered by the private costs of the activities, environmental taxes should make up the difference.

Just before the Spring Festival, China completed its first environmental pollution census. Many believe the census is the first step toward imposing environmental taxes. This kind of census shows not only the impact of environmental pollution, but also the tax basis, which is important in Pigou's mechanism.

The census shows that automobiles produce 30 percent of all nitrogen oxide (NOx) pollutants. Automobiles may contribute the most pollution in cities. As a booming industry, the number of cars is increasing. Collecting pollution taxes from car owners is a possibility.

But China's environment is not the same as Pigou's Britain in the 1920s. Copying a theoretical result may bring unexpected consequences.

In 2002, the number of private cars in Beijing equaled the number of government-owned cars and other public service vehicles such as fire engines and ambulances. Moreover, the cost of private cars is about 8,215 yuan ($1,202) per 10,000 kilometers. Government cars can increase that cost to more than 10,000 yuan ($1,463).

Not only the costs, but the exhaust emissions of government cars are higher. The government usually uses limousines, which have big engines with much higher gas consumption, and most of them are used more frequently than private cars.

Furthermore, major pollution sources in China are not private activities. Due to the restrictions on capital, some huge industrial investments can only be made by the government in China. Private investments have increased, but State investments are still dominant.

Considering the damage done by environment pollution, State activities are worse than private activities. If we copy the design of environmental taxes, the extra burdens placed on private activities will make the situation even worse. And we can't charge taxes on State activities, because the source of them is taxes.