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Promoting Energy Conservation and Environmental Protection by Formulating Finance and Tax Policies

Date: Aug 10, 2010      Source: IEEPA      

Su Ming: Deputy Director of Research Institute for Fiscal Science, Ministry of Finance

First of all, I’d like to talk about finance and tax policy for energy conservation and emission reduction.

1. Export Rebate Policy. It should focus on structural adjustment, namely, adjustment according to economic mode development. We should reduce or cancel export rebate rate on resource-type or high energy-consumption products, in order to restrict export.

2. Tax and Fee Reform on Resources. Resource tax reform involves increasing tax rate and changing tax base, whose pilot project has been launched in Xinjiang Uygur Autonomous Region since June, with the focus on oil and gas. This project should be expanded nationwide as soon as possible, and not limited by oil and gas. China has replaced road toll with fuel tax since 2009, which was a successful reform generally despite some problems remained.

3. Environmental Tax and Carbon Tax, which serves as an important means to transit China’s economic growth mode. Carbon tax is necessary in China, but shall be low rate in the beginning, because domestic industries, enterprises and economies may not bear high rate.

4. Policy on Government Procurement. On the premise of expanding government procurement plan, we shall incorporate product and important equipments on environmental protection, energy conservation, or even strategic emerging industry, which on the one hand expanded government procurement scale, more importantly, it is favorable to the development of China’s environmental protection, energy conservation industry.

According to conference agenda, my report covered two aspects: firstly, current situation and development trend of China’s financial policy. Second, fiscal policy on energy conservation and emission reduction.

For years of reform, financial reform has made effects on four aspects.

1. New fiscal and tax system has been built up. Since 1996, when China decided to take four-economies as reform direction, China’s central and local fiscal and tax systems, including tax reform, have made great progress in market economy. 2. Regulation and control of financial policy play an important role in the process of economic growth and economic adjustment, especially when China implemented positive financial policy from 1998 to 2004 to respond to Asian financial crisis.

2. Furthermore, this international financial crisis we are facing, starting in the later half of 2008, has more adverse effect on us than that in 1998. As a result, we shall implement positive fiscal policy, namely, expanding fiscal policy.

3. Financial resource grew at an extraordinary speed after 30 years of development. For example, financial revenue reached about 110 billion in 1978, and 340 billion in 1992; by 2009, fiscal income had reached 6840 billion, or 62 times compared with 1978.

4. China’s budget management is increasingly standard in general. Specifically, we practice a series of vital measure, including budgeting, enforcement and supervision.

I’d like to summarize China’s finance problems, shown in 6 aspects. 1. The deficit and debt are huge in China. From 2001 to 2008, the lowest central financial deficit was 250 billion, the highest 320 billion. Last year, in order to respond to international financial crisis, central government plunged into 950 billion of budget deficit.

1. By the end of last year, debts of central government had reached 5300 billion, and numerous debts also existed in local government. Specific data has not been published. According to bank’s data, loan balance of local government has reached round 7380 billion by now.

2. The central government, in my opinion, has faced many difficulties: governable financial resources decreased while debts rose. All governmental debts released presently are from central government.

3. Fiscal charges. Some expenses which should not be embraced in fiscal charge are still paid by government, which indicated that reform had not yet been completed. At present, some financial capitalRecursos financieros were wasted in the process of transfer from central government to local one. We can see it from auditing administration information released every year.

4. Generally, grass-roots levels of county and township have also faced lots of difficulties.

5. As we all know, great gaps still existed at different regions in terms of economy, finance and residents’ income and consumption, from China’s east, middle to west regions.

6. Our system and mechanism are not completed, with some problems still remained.

Next I will briefly talk about the arrangement of entire financial policy.

1. Transformation of financial policy. Since the first half of 2008, China has carried out positive financial policy, which, in my opinion, won’t change next step. we need keep on expansion of deficit ratio, which is round 3.0% in 2009. This year, central deficit has increased 100 billion, to 1050 billion, which is still bearable.

We should considerably expand national debt, namely, to expand budget investment. Central government investment reached more than 900 billion last year, and will break through 1000 billion this year. Concerning government loan and budget investment, there are several aspects to be concerned, (1) under-construction project; (2) three-rural issues; (3) environmental protection and energy conservation; and other important industry, especially for strategic emerging industry, which should be supported by financial investment policy in China for the next step.

2. Concerning the direction and emphasis in nation’s finance? Firstly, three-rural issues, rural infrastructure, agricultural structure optimization, agricultural service system construction, as well as farm subsidy system. Secondly, proportion of social security should be increased in gross fiscal charges, and key points of urban and rural should be made clear. Finally, social insurance budget should be built up.

We shall offer financial support to enterprises or economy. As for support mode,

(1) changing idea, historically, finance and tax policies are executed by   ownership system, and numerous preferential policies have been offered for enterprises;

(2) offer preferential policies, industries, products and enterprises, which are encouraged by the state, have the qualification to obtain preferential policy.

(3) Administrative means, which are divided into 5 types: (i) investment allowance, which is focused on production links at present, and also on consumption links in the next step; (ii) slashes of interest rate; (iii) share investment; (iv) fiscal policy, which supports guarantee business vigorously by taxation, increases capital through finance, establishes guarantee risk fund; (v) tax preference, income of interest rate reduction, including accelerated depreciation, capital allowances, tax relief; (vi) support to environmental protection technology education.

(4) Intergovernmental fiscal relations, which are important content for next reform, shown as following: (i) China's income tax sharing policy, 60% from central government, 40% from local one, include business income tax, which remains stable in the future; (ii) constant transfer payment, annual transfer payment from the Ministry of Finance reached 1200 billion Yuan, we shall expand equal transfer payment to underdeveloped area, and increase its transparency. In addition, we shall promote "Province Administrating County" system, establish county-level minimal financial guarantee system.

(5) We shall take measures to ensure standard and scientific budget management. In the next, I will talk something on finance and tax policies in terms of energy conservation and emission reduction, which covered eight aspects:

    (i) Two-tax integration policy on enterprise income tax, which has been executed since 2008, and covered national-funded enterprises and foreign-funded ones. (a) we made reform on four unification of national business income tax;(b) we unified tax rate from 33% to 25%; (c) we unified pre-tax deduction, which included business entertainment, advertising and publicity costs, public welfare donation, tax wage.

(d) We unified taxation preferential policy, which covered three aspects: (aa) reduce tax rate of small-sized enterprises to 20%, (bb) reduce tax rate of new and high-tech enterprises to 15%.

(cc) Industry preferential policy, We implemented following preferential policies as full tax-free for agriculture, three tax-free for listed infrastructure enterprises, capital allowances for advantageous industry. Our national taxation policy and fiscal policy will offer support to strategic emerging industries like new energy, environmental protection, energy conservation, electric vehicle and so on.

(ii) Value added tax transformation, Chinese government has come into force value added tax transformation since 2009, which means the transformation is from production-oriented to consumption-oriented.

(iii) Export rebate policy. In recent years, in order to respond to financial crisis, Chinese government continued to reduce export rebate rate, which means structural adjustment on export rebate policy: (a) increase export rebate rate properly if something goes wrong in next economic growth rate; (b) reduce or cancel export rebate rate for restrictive products, which is conducive to Chinese's resource saving and protection.

(iv) Tariff policy. Generally, we shall reduce or exempt tariff for importing advanced equipments, parts and high-tech products or services, including reduce import-based value added tax and consumption tax.

(v) Resources tax reform policy, which included tax rate increasing and tax base changing. As we all know, pilot work of resources tax reform started from June, which is aimed at petroleum and natural gas. In my opinion, the reform shall be expanded nationwide and not be limited by petroleum and natural gas. The reform of mining right covered prospecting right and mineral one. We have made reform on mineral rights in coal field, and environmental governance in resource-type mining field. we shall establish responsibility sharing mechanisms involving central, local and enterprise investments.

(vi) Other taxation policy. (a) fuel tax policy: we have replaced road toll with fuel tax since 2009, which is generally successful, but is also confronted with some problems like secondary toll highway; (b) consumption tax reform, we shall impose heavy tax on high energy-consumption industry like large auto tail-gas discharge; (c) urban maintenance and construction tax and education supplementary tax, which also include tax from foreign funded enterprises; (d) local tax reform, which covered property tax, we shall formulate property tax as soon as possible, which is favorable to sound development of China's real estate, reasonable pricing, banking risk protection. (e) environment tax and carbon tax. As for environmental protection energy conservation, we shall make various measures including legal means, economic means, administrative means, environment tax, carbon tax. We shall impose tax on carbon dioxide.

As for carbon tax. We shall insist low tax rate in the beginning, Over high tax rate will have adverse effect in our industry, enterprise and economy. As a result, we shall add carbon tax step by step.

(vii) energy conservation fiscal policy. (a) investment channel, which includes  national debt, investment, budget expense, transfer payment, special fund, which are designed for renewable energies, wind energy, methane, illumination product, building fields and so on; (b) discount; (c) guarantee; (d) share investment.

China's government procurement scale has expanded to 700 billion per year, or 10% financial revenue. In the next step, the proportion will continue to increase. Internationally, the proportion reached round 30%. We shall incorporate equipments and products of environmental protection, energy conservation,strategic emerging industry into such plan, which is favorable to China's industry development.

(viii) Environment investment and charging policy. (a) We shall integrate budget investment with national debt investment channel, to guarantee reasonable growth of environment investment; (b) we shall make division on the responsibility of central government and local one. We shall refer to international experience; (c)  we shall enhance the support to ecological protection in development areas.

In addition, we shall increase charging standard of modern water pollution fee. The governance of special funds shall be controlled from the source rather than terminal, which will be conducive to improvement of energy efficiency, energy conservation, reduction of ultimate pollution emission. That’s all, Thank you.

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