A (3:48)

Now we've all heard these stories about pollution in China and it's a very dramatic image that you're sitting by the window reading and the book is covered with dust. Presumably you had already noticed the pollution in China before then.

B (4:01)

Yeah, but it just struck me at that time because I think the hotel is very close to a coal mine. So all these combustions and of particular matters, it just didn't strike me. I mean, when I back in Beijing, because I was staying the university campus. So actually the small environment at the college level is actually fine. But if you go on the street, if you go on the street every day, you will feel the pollution is really bad. But only at that time at the field trip that I feel, oh, oh my goodness, can we do anything about that? At that time, many people, they try to learn computer science and get law degree because they wanted to make money. The environmental science as a major is actually not very interesting to a lot of students. And actually the environmental program in Beidai is very small.

A (4:56)

You also mentioned in the Bloomberg profile that having an opportunity to travel to Singapore played into your understanding and recognition of the degree of the pollution problems in China. How did that happen?

B (5:09)

I was attending a conference. So when I get off the plane, then I say, oh my goodness, all the buildings there seems pretty new. Then I ask some of my colleagues, I say, oh, are these like a new building? And then they said, no, it's like 30, 40 years old. Then I think, oh my goodness, 10 years ago. Think about the buildings with 10 years history in China and then you will see it looks like 30 years ago. So you can see how the acid rain made damages to the buildings just by comparing the Beijing, the ordinary buildings in Beijing and the buildings in Singapore. So that also struck me a lot by seeing these differences.

A (5:58)

I'm asking about the pollution in part because to give a little preview, in your proposal for carbon taxation in China, you show that there would be all kinds of immediate benefits separate from the climate because taxing carbon would help to reduce conventional pollutants. Before we get to those recommendations, I wonder if you can tell me about the project that you're involved in. It's a very big project. When you presented it here at cgd. Maybe we can put one of the slides up on the website. It strikes me, it looks to me like big science. There are so many pieces that go into this, not only economics. Who's organizing this and what is your role in that project?

B (6:42)

Yeah, it is a big project back at Harvard and we did that for like almost four years. So the project is led by the executive director, Chris Nielsen, my PhD advisor, Dale Jorgensen and Mike Mac at Harvard. So the idea is initially actually we have more than five years ago, everybody was actually doing very small pieces on that, but we didn't integrate them together. So we got some support from the Energy foundation and with the Energy foundation funding that we decided, oh, maybe we can integrate all the different pieces together, including the economic model, the emission, the very detailed emission inventory database and very advanced atmospheric modeling to incorporate all the chemicals and interactions. And then we use epa, the Bedman model to compute the public health damages and the impacts on the crop productions. So that's how we come with all the different models together. Actually, there's a book is forthcoming to describe all the modelings and the result and scenarios. And the book is published by the MIT Press, which is just coming, forthcoming this year in December.

A (8:23)

Indeed. Clearer Skies over China, the Harvard Tsinghua China Project. I have it on the slide that you presented here. And I think that this is a book that's going to attract a lot of attention. I presume it'll be in Chinese as well as in English.

B (8:38)

I see we have a complementary Chinese version of probably one chapter on that, a summary statistic, summary report on that.

A (8:49)

And this subtitle here I think is important Costs and benefits of Carbon Taxes and Sulfur Mandates in China. Because a lot of times people say, oh, we can't afford to tax carbon, it's going to slow down economic growth. The benefits of taxing carbon are only far in the future. But you and the team that you worked with I think found a rather different result. That's what we're going to come to right after this break.

B (9:13)

Okay, thank you, Sam.

A (9:52)

Welcome back to the Global Prosperity wonkast. I'm Lawrence McDonald. My guest today is Tao Jing. She is a non resident fellow here at the center for Global Development and one of China's leading experts on carbon taxes. We've been talking about how you became an environmental economist and the study that you have participated in, forthcoming in December. What's the key recommendation that you have regarding carbon taxation in China?

B (10:20)

So our results show that carbon tax will be a cost effective multi pollutant strategy on pollution control it will have significant co benefits on public health and crop production. The negative impacts on GDP can be tolerable and sometimes on the certain revenue recycling cases we could have win win solution. So if we count the health benefits into the cost benefit, then the carbon tax is very likely to be a no regrets policy.

A (10:57)

A no regrets policy. What an excellent policy summary. Before we talk about the level of taxation you're proposing, maybe it's useful for my listeners for you to explain a bit about China's current taxation system. I learned from you when you presented here at CGD that it's quite uneven and not sustainable. We have so much trouble here with fiscal issues and budget crisis in the United States. I tend to think well, China's probably got that pretty much under control. I learned something different from you.

B (11:30)

So for the Chinese tax system in some way the tax system is distorted. For instance, the tax on the companies on the value added are quite high compared to other countries. But the tax on energy is pretty low. Just to pick an example here, the kind of resource tax on the on the coal is only 0.3 yuan to 5 yuan. Average is about $0.40 per ton of coal in China.

A (12:03)

So $0.40 per ton of coal for burning coal?

B (12:08)

Yeah.

A (12:08)

How would that compare with say the tax in the United States? Do you have any idea?

B (12:16)

I'm not so sure about the carbon the coal tax in US But I know that for the US is actually a lot of the US tax are pretty low.

A (12:27)

Also we've got the big two offenders. Yes, we all know the gasoline tax is very low in the United States compared to Europe. When people travel to Europe, they always come back stunned that it's more like $4 a liter instead of $4 a gallon. But I was really surprised I had an opportunity to go to China three years ago. I expected gasoline taxes would be high. Gas is even cheaper in China than the U.S. right? Is it higher?

B (12:53)

It's higher right now it's higher, but not by much. Yeah, but not by much. It's almost. So I think US may be 13 cents 14 cents the China right now a little bit higher. 16 cents.

A (13:07)

16 cents a liter per liter?

B (13:09)

Yes, slightly higher. But for both countries because both countries has a lot of coal. But the coal tax is still unit tax. It's not at volume. So with the inflation, the coal tax is like constant. So the effective tax is very low. This is a problem for both countries.

A (13:28)

And I know you have many scenarios, your study is very sophisticated. But there's one in particular that you focused on that had a proposed level of coal taxation. You say the current tax is. Did you say about 40 cents a ton?

B (13:46)

Yeah, the current resource tax on coal is about 40 cents.

A (13:50)

And in your primary scenario, what are you suggesting raising it to?

B (13:55)

We are suggesting actually in the carbon tax. We're suggesting to increase the carbon contents of coal because this might be more effective. And we are thinking. We have six scenarios in our book. I was just picking one representative scenario here. So we are suggesting to start the carbon tax from a very low level, maybe like 10 yuan, 5 yuan or 15 yuan. So our scenarios per ton. So our scenario two as our central scenario is about. From 10 yuan per ton of carbon dioxide.

A (14:41)

Based on the carbon 10 of carbon dioxide, what does that work out in terms of dollars? I know in Nick Stern's early calculations, he said the social cost of carbon, if I remember correctly, was it $50 a ton he estimated in his early report. And your proposed carbon tax is substantially below that.

B (15:00)

This is pretty low compared to the Lixedon report. Yeah, but you know, it's so hard to impose a big tax on coal given that our, you know, the coal share of the total energy is almost set at 17%. So it will impact a lot of industries. So we think it's more politically feasible to start with a low level Same from the 10 yuan per ton of carbon dioxide. But we recommend a gradually increase of the carbon tax to 2020. So our scenario is one of our scenarios. From 10 yuan per ton of carbon dioxide increase gradually increase to 50 yuan per ton of carbon dioxide.

A (15:42)

55. 0.

B (15:43)

Yeah.

A (15:45)

And I know it has fluctuated a lot, but just to give our listeners a sense, do you know what the equivalent price is in the European trading scheme now relative to your proposal? What are your. What is the price in the trading scheme?

B (16:02)

The trading right now, the price is pretty low now because it seems the cap is not limiting the emissions. But the tax right now compared to the European level is still pretty low. Two or three years ago the tax is about. So the 50 yuan is. So two or three years ago, the trading price is about $15. So it's about 100 yuan. We have another scenario to try to reach more.

A (16:32)

So the proposed tax for China is even lower than the currently low EUTS price. But nonetheless you find some pretty big benefits from such a low tax. Tell us about the benefits.

B (16:45)

Yeah, so based on our benchmark assumptions that coal will continue to increase by 3%, gas will increase by 8%, the total energy will increase by 3%. So based on this benchmark scenario, our carbon tax scenarios, from 10 yuan per ton of carbon dioxide increase to the 50 yuan in 2020, we find the impact on the GDP is tolerable. It's about only minus 0.14% on the GDP.

A (17:25)

Minus 0.14% is more than tolerable. It's almost invisible. If you're growing at 7 to 10% and this is a 0.14, you say it's tolerable, but I think another word might be it's very small.

B (17:38)

Yeah, because we recycle the tax and we give the rebates to the households.

A (17:44)

Recycle the tax and give rebates to households. Why do you do that in your proposal?

B (17:49)

So we have different scenarios. So more political feasible things. We think is because the carbon tax will hit the most energy intensive sectors. So we try to compensate in the short term. We compensate a little bit on these energy intensive and trade exposed sectors and then we give some of the revenue shares to the households. Because the carbon tax is very likely to be regressive. It will hit the poor people because the energy share of the total expenditure will be relatively higher for the poor compared to the rich people. So we wanted to have as low as social impact on the whole society, but still try to get big cuts on the carbon emissions and all the other conventional emissions like SO2 and NOx.

A (18:43)

Do you propose recycling 100% of the revenue? Because China also has this fiscal problem, presumably there's some temptation to keep a big chunk of the revenue to address the fiscal problems.

B (18:54)

Exactly. We haven't done that study yet. So the results I'm showing here is all based on our 100% recycling to the household and companies. But you know that just like the U.S. you got this budget cliff and in China we have a really, really big local debt at the local government level. So we also think because a lot of the tax, like the VAT tax, you know, 17% of the revenue goes to the central government, but very little leave to the local government. So we think maybe this is a good opportunity. Right now the carbon tax can in our study can read like 3% of the total revenue, then it can somehow mitigate the local debt, just try to give more shares to the local government level.

A (19:43)

I have a fantasy because I think we have similar problems in China and the United States, the carbon tax, that once it could go in at a low level and people discover that their costs don't change very much, the impact on the economy is very small, maybe even in some scenarios, positive that people are going to start seeing this as maybe the goose that lays the golden eggs. And they're going to say, well, let's raise that tax and we'll cut taxes on employment or we'll cut taxes on value added or other unpopular taxes. And that there would be some social consensus to raise the carbon taxes maybe even faster once they got in place at a very low level. Is that something you think might happen?

B (20:27)

I think it possibly could happen. And especially now we have this very severe air poll and the public wanted to. Usually people hate taxes, but because of the very severe pollution problem, I think it might be a good niche for us to initiate a carbon tax right now. And especially in our study we show that the CO benefit is big. It can reduce carbon emissions by about 19 to 20% even with these very modest carbon tax. And it will also reduce about avoid about almost like 19,000 acute mortalities. And it will have a big benefit on agriculture, on crop productions. So I think.

A (21:20)

Tell me about the benefits to agriculture. So pollution is currently reducing the productivity of rice and wheat, is it?

B (21:27)

Yeah.

A (21:28)

And so when the pollution comes down, the productivity goes up.

B (21:32)

It's not. The thing is actually we are targeting on the carbon, but meanwhile the SO2 and NOx were also reduced.

A (21:41)

SO2 and NOx being the sulfur dioxide.

B (21:44)

Exactly.

A (21:44)

Nitrous oxide.

B (21:45)

Exactly. So the sulfate and so all these secondary pollutants will be reduced. So that's obvious benefits on the crop production. So the productivity will.

A (21:57)

This is an exciting finding obviously for China because the huge health benefits, the economic benefits that the Chinese people would experience. It's also I think of interest to the wider development community because of course, China is the largest emitter, the United States is the largest emitter in per capita terms of the major countries, China is the largest total emitter. You and I have been discussing how progress in either one of these countries indirectly exerts pressure on the other country to respond. And so we'll be watching that with great interest.

B (22:35)

Yeah, I think just in late September the US EPA just have a nuclear air act on carbon card in power plants. So I think it's like, it's like a game between China and the U.S. so U.S. has an initiative and then China wanted to do more. So I think it's a good reinforcement because both countries rely a lot on coal. So I think this is a good.

A (23:06)

Sign in the United States in our efforts to improve education, President Obama has talked about a race to the top in a competition between the states. And so I'm imagining maybe with some good luck we can get a race to the top between China and the United States to see who can get carbon sensible carbon policy first.

B (23:24)

Yeah, I think US and China will reach to the top.

A (23:28)

Before we close, you mentioned to me that the large international study that your work is part of is one of two studies that are reaching similar conclusions. Tell me about the second study, the one that's not yours.

B (23:42)

The second study was was conducted by a research institute associated with military finance in China. They also recommended to start with very low tax level. They tried different scenarios on 5 yuan per ton of carbon dioxide, 10 yuan and 15 yuan. So very similar to us. And the recent new study also starts with a very low level and gradually increase to 50 yuan per ton of carbon dioxide for 2020. And there they also have their own CGE model. They have very similar results showing that the impacts on the GDP is not very high. So I think the good thing is the consensus of the modeling results were, you know, help the policymaker to make a decision quickly and then, you know, the quicker the better.

A (24:39)

You know, we know that policymakers would much rather hear the same thing from different studies. It makes it a lot easier for them to proceed. So we'll be watching with great interest and hope that indeed we can see the United States and China moving towards a race to the top. Jing, it's great to have you as a colleague and wonderful to have you on the show. Thank you so much.

B (24:57)

Thank you Doris. I'm very glad to share my thoughts on China's carbon tax.

A (25:02)

This has been the Global Prosperity Wonkcast from the center for Global Development. My guest today is Cao Jing. She's a non resident fellow here at CGD and we've been talking about her forthcoming study on carbon taxation in China. You can find the Wong cast online on itunes and on stitcher. Just search for wonkcast or CGD and subscribe to hear a new interview every week. Until next time, I'm Lawrence MacDonald. Thanks for listening.

B (25:42)

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