Designing tax levy scenarios for environmental taxes in China

Abstract

The "Environmental Protection Tax Law of the People's Republic of China" came into effect on January 1, 2018. However, it's unclear whether the current tax rates, taxpayers, and levy scenarios are scientific and effective. Thus, determining how to improve the environmental tax can better protect and improve China's environment by reducing pollutant emissions. First, we developed a tax rate adjustment (TRA) model based on a directional distance function. Next, we used a multi-regional input-output analysis to construct a production- and consumption-based tax (PCT) model. Then, based on the current tax levy, we proposed three new levy scenarios by combining the TRA and PCT models, and on this basis, identified two gradual environmental tax reform paths. To demonstrate our approach, we selected China's 30 provinces or provincial-scale administrations for an empirical analysis of sulfur dioxide (SO2) and nitrogen oxides (NOx). We found that China should prioritize raising tax rates in the short term, especially for NOx. In the long term, China should consider incorporating consumption-based environmental responsibility into the framework of the tax model. Our results provide theoretical support for gradual reform of environmental taxes and a scientific basis for promoting more sustainable development and rational planning of emission reduction plans.