China's Environmental Tax Aggravates Cities’ Affluence Disparities

Abstract

Cities are at the frontier of combating environmental pollution and climate change, thus support from cities is crucial for successful enforcement of environmental policy. To mitigate environmental problems, China introduced at provincial level the Environmental Protection Tax Law in 2018. Yet the resulting economic burden on cities with significantly different affluence levels remains unknown. The extent of the economic impacts is likely to affect cities’ support and public acceptability. This study quantifies the economic burden of urban households from taxation of fine particles (PM2.5) for 200 cities nationwide from a “consumer” perspective, accounting for PM2.5 emissions along the entire supply chain. Calculations are based on a Multi-Regional Input-Output (MRIO) analysis, the official tax calculation method and urban household consumption data from China’s statistical yearbooks. We find that the current taxation method intensifies economic inequality between cities nationally and within each province, with some the richest cities having lower tax intensities than some of the poorest cities. This is due to the fact that taxes are collected based on production-based emissions rather than consumption-based emissions, and that cities with very different affluence levels within a province bear the same tax rate, and that emission intensities in several less affluent cities are relatively high. If the tax could be levied based on consumption-based emissions of each city, with tax rates determined based on cities’ affluence levels and with tax revenues used to support emission control, intercity economic inequality could be reduced. Our work provides quantitative evidence to improve the environmental tax and can serve as the knowledge base for coordinated intercity policy.