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.
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.
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.
The opinions outline six key directions and areas that will be supported under the financial support system, as described below.
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.
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.
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 firstname.lastname@example.org.
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 email@example.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.
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