Modeling a Chinese Carbon Tax - Cao Jing

October 16, 2013

My guest on this week’s Wonkcast is Cao Jing, one of China’s leading experts on carbon taxes. A CGD visiting fellow and associate professor of economics at Tsinghua University in Beijing, Jing was recently the subject of a Bloomberg profile. Working in collaboration with others at Harvard University, she is developing a proposal for China to tax carbon emissions. She is also involved with the "New Climate Economy Study" (also called Stern 2, to review economic costs and benefits of tackling climate change) led by former President of Mexico Felipe Calderón and Lord Nicholas Stern, author of the landmark Stern Report on the economics of climate change. Jing recently presented the plan at CGD’s Research in Progress seminar, and I’m delighted that she agreed to join me on the show to discuss it.

First a bit of background: here in the United States those who would prefer that we not take action to address climate change often point to China, the world’s largest emitter of heat-trapping gasses, as an excuse not to act. But it’s important to remember that China’s per capita emissions are still only about a quarter of the per capita emissions of Americans [Sophia please check]. Moreover, China is beginning to act. Some listeners know that China has set up an experimental cap-and-trade system, with pilots in five cities and two provinces, and in February the ministry of finance announced the intention to impose a carbon tax.

I ask Jing, who was originally studying geology at Beijing University, how she came to focus on environmental economics instead.

She recalled travelling on a school field trip to Qinhuangdao, China’s largest coal-shipping port. “I was staying in a hotel and reading a book by the window, and in just five minutes the book pages were covered with dust,” Jing says. “I thought ‘can we do anything about that?’”

Not long afterwards, on a trip to Singapore, she was struck at how new the buildings appeared, even though they were much older than those in Beijing. “Buildings with 10 years’ history in China look like they are 30 years old. The damage of acid rain on the buildings in Beijing compared to the buildings in Singapore struck me a lot,” she says.

Today she is the co-author of a forthcoming MIT study, Clearer Skies Over China, that draws upon integrated economic models, emissions database information, weather patterns, agricultural productivity, and other advanced modeling techniques to estimate the impacts of various carbon taxation scenarios. I ask Jing for a preview of the report’s key recommendations.

“Our results showed that a carbon tax would be a cost-effective multi-pollutant control strategy, and it would have significant co- benefits to public health and crop production,” she explains. “The negative impacts on GDP can be tolerable and, under certain revenue cases, can lead to a win-win solution. If we include the health benefits, the carbon tax is likely to be a no-regrets policy.”

Jing explains that China’s energy taxes are currently quite low—and not indexed for inflation. For example, the tax on coal is the equivalent of only about 40 US cents per ton. Among the many scenarios proposed in the forthcoming study, one has carbon taxes starting 10 yuan per ton of emissions and rising gradually to 50 yuan by 2020. The study estimates the positive effect on crops and human health—through associated reductions in conventional pollution—and finds only a tiny negative impact on GDP growth, a reduction of just 0.14 percentage points. Says Jing: “it’s an almost invisible change.”

Jing also describes her team’s proposal to recycle some of the revenue by providing rebates to households. “The tax will be likely to be regressive, because the total share of energy expenditure will be relatively higher for poorer people than rich people,” she says.

I asked Jing if 100% of tax revenue would be recycled or if some would be retained. Jing suggests that some of the revenue could be retained by local and provincial governments, which lack adequate revenue sources and have high and rising debt. Such an approach would be in line with the Finance Ministry’s announcement earlier this year.

We close by discussing whether the US may move towards a similar carbon taxation policy. We agree that progress in either country indirectly exerts pressure on the other. Jing says that the US Environmental Protection Agency’s announcement of new rules for power plant emissions in September caught the attention of Chinese policymakers, who felt increased pressure to proceed with their own policies to address climate change.

“I think it’s a game between both countries that serves as reinforcement,” Jing says.

My thanks to Sophia Bernazzani for an initial draft of this blog post, and to Kristina Wilson for recording the Wonkcast.


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