China Lays Fiscal Policy Foundation for Reaching Carbon Targets

Posted by Written by Arendse Huld Reading Time: 8 minutes

A set of opinions from the Ministry of Finance seek to establish a financial support system to achieve China’s carbon targets. The opinions form part of China’s environmental policy framework – they propose various fiscal tools to boost green development and offer foreign investors key insights into the trajectory of the country’s green industries. We outline the fiscal tools proposed and the industries that are set to benefit.


On May 25, 2021, China’s Ministry of Finance (MOF) released a new set of opinions on fiscal policies for supporting the country’s key climate targets, titled the Opinions on financial support for reaching peak carbon emissions and carbon neutrality (the “opinions”). 

The opinions seek to form a policy framework by proposing a series of fiscal policy tools to support China’s green transition. These tools include fiscal funds, tax incentives, investment, and government green procurement, among other measures. The opinions also provide direction on the fields and industries that should receive financial support. 

Then on May 31, the State Tax Administration (STA) released a set of guidelines for supporting green development, which outlines 56 preferential tax policies for supporting green development. These tax policies are designed to support environmental protection, energy conservation, comprehensive utilization of resources, and promote low-carbon development. 

Background: 1+N framework 

The opinions are the latest addition to China’s “1+N” policy framework for reaching China’s two main carbon goals: peak carbon emissions by 2030 and carbon neutrality by 2060. The “1” is the overarching policy document of guiding principles, which was released at the end of October 2021 (the Working Guidance For Carbon Dioxide Peaking And Carbon Neutrality In Full And Faithful Implementation Of The New Development Philosophy). 

The “N”, meanwhile, represents a series of auxiliary policy documents targeting specific industries, fields, and methods for reducing carbon emissions and transitioning to a green economy. The first “N” document was an Action Plan for reaching peak carbon emission by 2030, released on October 26, 2021.

The opinions are the first “N” document to address fiscal measures for decarbonization and act as a blueprint for the creation of a broader fiscal support system for green transition and decarbonization. 

To this end, the opinions propose to establish an initial fiscal and tax policy framework conducive to green and low-carbon development by 2025. By 2030, the opinions target to have ‘basically formed’ this system and have begun to establish a long-term mechanism for supporting green and low-carbon development. 

Which financial measures has China previously adopted to reach climate targets? 

The Chinese government had already implemented supportive measures for decarbonization and green development prior to the release of the opinions. 

According to a media Q&A released along with the opinions, the government allocated about RMB 350 billion (US$52.1 billion) in funds to support green and low-carbon development in 2021. It has also rolled out numerous supportive measures for green products, such as reduced tariffs for some environmental products like diesel engine filters, and subsidies for the purchase of electric vehicles (EVs), which may be extended to 2023 after expiring in 2022.

Government procurement as a tool to support green and low-carbon development has also been ramped up in recent years, with mandatory and prioritized procurement of green and energy-saving products, as well preferential procurement policies for eligible green products. According to the media Q&A, energy-saving and environmentally friendly products accounted for over 85 percent of the government procurement of products of the same type in 2020. 

China has also previously used the tax system as a means of encouraging green development and discouraging the consumption of polluting commodities. For example, for vehicle sales, it increased purchase tax for high-emission vehicles and waived purchase tax for EVs, while reducing the tax on energy-efficient vehicles and vessels. 

Since 2018, China has also levied an “environment protection tax” on air, water, solid waste, and noise pollution. The cost of discharging pollutants for high energy-consuming and high emissions enterprises in industries, including thermal power, steel, cement, and chemicals, has also increased to encourage cleaner production and promote energy conservation and emissions reduction. 

Which areas will be supported through fiscal measures?  

The opinions outline six key directions and areas that will be supported under the financial support system, as described below. 

  1. Supporting the construction of a clean, low-carbon, safe, and efficient energy system. This focuses on upgrading the energy system to reduce the reliance on coal and other fossil fuels while increasing the proportion of energy that comes from renewable sources. Among other measures, the opinions propose replacing fossil fuels by supporting the growth of renewable energy, such as photovoltaics, wind power, and biomass. Regions, where conditions are suitable, are also encouraged to develop energy storage and improve energy management capabilities (such as peak shaving). Finally, the opinions call for strengthening supervision of key industries and equipment and organizing energy measurement reviews to improve energy conservation. 
  2. Supporting green and low-carbon transformation of key industries. The key industries are the industrial sector, transportation, heating, and construction. Among other proposals, the opinions call for supporting the development of EVs, expanding support for clean heating in the winter in northern regions, and promoting the replacement of coal and oil with electricity in the fields of industry, transportation, construction, and agriculture, as well as in rural areas. 
  3. Supporting green and low-carbon technological innovation and basic capacity building. Among other proposals, the opinions call for increased support for the R&D, promotion and application of low carbon, zero carbon, negative emissions, and energy-saving technologies and encourage qualified companies and regions to develop new materials, technologies, and equipment for these technologies. They also call for building capacity for climate change adaptation and disaster prevention and mitigation. 
  4. Supporting recycling and resource conservation. The opinions call for promoting the recycling and utilization of waste products, including urban and rural garbage, rural waste resources, crop straw, livestock and poultry manure, and plastic film. They also propose establishing and improving the extended producer responsibility system (whereby producers are held responsible for the management of their products after consumers no longer use them) for automobiles and electrical and electronic products. 
  5. Supporting the consolidation and improvement of carbon sink capacity. The opinions call for enhancing China’s carbon sink capacity through a broad range of protection and restoration measures for key natural areas such as forests, grasslands, wetlands, and oceans. Specific measures include land greening, protecting and restoring natural forests, wetlands, and greenlands, returning farmland to forests and grasslands, supporting forest and grassland fire prevention and control, and improving the carbon sequestration capacity of mangroves, seagrass beds, and salt marshes. 
  6. Supporting the green and low-carbon market system. The opinions seek to provide more support for building out China’s carbon trading, energy use, and pollution markets by strengthening the monitoring and measurement system and related standards. They also call for improving the management of quota allocation in the carbon trading market and expanding the scope of trading industries and implementing a pollutant discharge permit system and trading of pollution discharge rights. Finally, it proposes improving the carbon emissions reporting and information disclosure systems for companies and financial institutions. 

What are the fiscal measures to support green and low-carbon development? 

The opinions provide general guiding principles for the types of financial tools that can be developed to support green and low-carbon development, rather than specific measures. These will provide a basis for the development of fiscal tools for green development and achieving China’s carbon targets. 

The support mechanisms proposed include targeted funding for key industries and projects, investment tools, tax incentives, government procurement mechanisms, and international engagement in climate action. 

  1. Strengthening the role of financial support as a guide for green development. The opinions call for ensuring that fiscal funding arrangements adhere closely to the Central Committee of the Chinese Communist Party (CCCPC) and the State Council’s work on reaching peak carbon emissions and carbon neutrality, and providing targeted and precise funding for key industries. The opinions also state that the central government will consider local governments’ achievements in promoting green and low carbon development when allocating transfer payments. 
  2. Improving market-oriented diversified investment mechanisms. The opinions seek to support green and low-carbon development through the establishment of new funds and leveraging existing funds. These include establishing a national fund to support the green transformation of traditional industries and further leveraging the National Green Development Fund, a fund established in 2020 to invest in environmental protection and green development. They also propose including eligible green and low-carbon development projects into the scope of government bond support and supporting public-private partnership (PPP) projects in the field of ecological and environmental fields. 
  3. Fully leveraging the role of tax policy incentives and constraints. The opinions seek to expand the use of tax tools to encourage green development and disincentivize pollution and carbon emissions. The proposed tax tools include an environmental protection tax, resource tax, consumption tax, vehicle and vessel tax, vehicle purchase tax, value-added tax (VAT), and corporate income tax (CIT). They also propose implementing preferential tax policies for energy and water conservation and the comprehensive utilization of resources. 
  4. Improving government green procurement policies. The opinions seek to increase government procurement in fields such as green and low-carbon products and green buildings and building materials. Standards and requirements for green government procurement are also to be further clarified and developed. The opinions also call for all vehicles and vessels procured for official government use to be driven by new and clean energy whenever possible. 
  5. Strengthening international cooperation on climate change. The opinions seek to improve international cooperation on climate change by boosting China’s standing participation in international climate negotiations and efforts. This includes participating in United Nations climate funding negotiations, developing international sustainability disclosure standards, collaborating to advance global climate and environmental governance, and supporting the implementation of the United Nations Framework Convention on Climate Change (UNFCC) and the Paris Agreement. They call for China to seek technical, financial, and project assistance from international financial organizations and foreign governments. 

What are the tax incentives for supporting green development? 

Shortly after the release of the opinions, the STA released a range of tax measures for supporting green and low-carbon development and disincentivizing carbon emissions and pollution. The document contains 56 tax incentives to support environmental protection, energy conservation, comprehensive utilization of resources, and promote low-carbon development. 

In order to reduce the discharge of major pollutants and effectively control environmental risks, the state actively supports the construction of ecological and environmental protection projects, promotes enterprises to speed up the upgrading of environmental protection equipment, promotes third-party governance of environmental pollution, and optimizes the development of the natural ecological environment.

Below we list some of the major tax incentives outlined in the document. 

Preferential Tax Policies for Environmental Protection and Green Development 
VAT
  • Temporary exemption of VAT on goods and services for energy management contracts 
  • VAT exemption for drip irrigation products 
  • VAT refund for new wall materials (that are not classified as “high pollution” or “high environmental risk”) 
  • VAT refund or exemption for reclaimed water produced by the sewage treatment plant 
  • VAT refund or exemption for waste and sludge treatment, disposal labor services, and sewage treatment labor services 
  • VAT exemption for sewage treatment fees 
  • VAT refund for wind power generation 
CIT
  • Regular CIT relief on income derived from qualified environmental protection activity 
  • A reduced CIT rate of 15 percent for third-party companies engaged in pollution prevention and control (the standard CIT rate in China is 25 percent) 
  • Regular reduction or exemption of CIT on income derived from qualifying energy-saving and water-saving projects 
  • CIT exemption for income derived from China’s Clean Development Mechanism (CDM) Fund 
  • CIT exemption or reduction for implementation of CDM projects 
Consumption tax
  • Exemption from consumption tax for energy-saving and environmentally friendly batteries and coating materials 
  • Exemption from consumption tax for the production of pure biodiesel from waste animal and vegetable oils 
Vehicle and vessel taxes
  • Exemption of vehicle and vessel tax for new energy vehicles and vessels 
  • 50 percent reduction of vehicle and vessel tax for energy-saving vehicles and vessels 
  • Exemption of vehicle purchase tax for new energy vehicles 
Land-use tax
  • Exemption of land use tax for public green land outside a company’s factory area 
  • Exemption of land use tax for part of the land used for hydropower stations and nuclear power plants  
Water resource tax
  • Exemption from water resource tax for taking recycled water from sewage treatment 
  • Exemption from water resource tax for pumped storage power generation 
Note: The above list is not exhaustive.
Source: State Tax Administration.

Next steps for green fiscal incentives 

The opinions are a blueprint for the development of a broader fiscal system for supporting green and low-carbon development. The various government ministries are expected to roll out further concrete policies to flesh out the financial support system. These will impact government procurement standards, tax incentives, development of China’s carbon trading market, and more financing for green projects through central funds and local government transfers. 

Reaching China’s two key carbon targets will be an exceedingly difficult and expensive task, and will require the participation of almost every segment of society and close collaboration between the government and the private sector. It will also take a considerable amount of funding and financial incentive to steer the ship around. A robust fiscal framework can ensure that the country is on track to reach these goals.

Moreover, the opinions act as an indicator of the direction of green development in China. There is also significant overlap between the fields that benefit from these fiscal incentives and the fields listed in the draft version of the Catalogue of Encouraged Industries for Foreign Investment, with the addition of fields such as waste management and water treatment, development and application of environmentally-friendly technologies, and clean production evaluation and auditing. The implication is that foreign companies will also have a role to play in China’s journey toward carbon neutrality. 

To better understand the opportunities and preferential policies available to foreign investors in China’s green and low-carbon markets, investors can inquire about our environment and cleantech services by emailing china@dezhshira.com. 


About Us China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com. Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.