Clean break: how China’s new Environmental Protection Tax Law could affect mining

22 November 2017 (Last Updated November 23rd, 2017 11:58)

China’s new Environmental Protection Tax Law is due to come into effect on 1 January 2018 and is expected to have wide-ranging ramifications for mining and mineral processing. Julian Turner reports on how this historic crackdown on pollution could impact commodities production in China, and worldwide.

Clean break: how China’s new Environmental Protection Tax Law could affect mining
The nation’s historic new Environmental Protection Tax Law comes into force on 1 January 2018 and will, for the first time, levy specific environmental protection taxes on industry. Pic courtesy Max Braun.

Death and taxes. The only two certainties in life, according to Benjamin Franklin’s famous adage, and also a consequence of, and potential solution to, China’s pollution problem.

The State of Global Air’s 2017 report claims that pollution was responsible for 1.1 million early deaths in China in 2015. According to this research, a third of all deaths in the world’s second most populous nation may be linked to smog.

As anyone who has been to Beijing and breathed in the acrid haze that periodically blankets the city will attest, tackling China’s pollution problem is a mammoth task, one that the government under President Xi Jinping has so far appeared ill-equipped to seriously address.

The nation’s historic new Environmental Protection Tax Law comes into force on 1 January 2018 and will, for the first time, levy specific environmental protection taxes on industry. The law replaces the controversial Pollutant Discharge Fee, which Beijing has been collecting from businesses since 1979, and in which regulators have long argued that businesses have been able to identify and exploit the loopholes.

“With the replacement of the existing discharge fee system with the environmental tax system, China’s regulation of environmental pollution by businesses is expected to be more efficacious,” commented Scott Daniel Silverman and Danian Zhang of multinational law firm Baker McKenzie.

“The loopholes that have been exploited by local authorities and enterprises will disappear. Accordingly, the enterprises that directly discharge the taxable pollutants in China will be liable for the new tax payments under the law.”

Greening the machine: China’s new environmental law, explained

Currently, the most profitable businesses i.e. those that contribute a higher proportion to fiscal revenue, can be exempted from paying the aforementioned Pollutant Discharge Fees.

Therein lies a major potential hurdle to the success of the new tax law. The Chinese Government claims it is committed to its enforcement, not only in heavily polluted urban areas, but nationwide.

However, analysts argue that the new laws threaten to make a significant proportion of the nation’s mining and minerals capacity uneconomic, impacting the market for mineral concentrates into China. With commodity prices finally recovering, can the world’s second-largest economy take the hit?

The new tax law sets rates of CNY1.2 ($0.17) per unit of air pollution, CNY1.4 per unit of water pollution, CNY5 per tonne of coal waste, and CNY5-CNY1,000 for each tonne of solid ‘hazardous’ waste.

For example, polluters will pay CNY1.2 for emitting 0.95kg of sulphur dioxide and CNY1.4 for 1kg of chemical oxygen demand (COD). In addition, industrial noise polluters will pay three levels of taxes ranging from CNY350 to CNY11,200 per month, according to their decibel level.

The law only targets enterprises and public institutions that discharge listed pollutants directly into the environment. Interestingly, carbon dioxide (CO2) and other greenhouse gases are not included in the levying list, exemptions that have been questioned by Chinese Government researchers.

Taxable pollutants from agricultural production, excluding scale-intensive farming, as well as motor vehicles, locomotives, ships and aircraft, are also temporarily exempt from the new system of levies.

The law grants local governments the discretion to determine and adjust the applicable tax amount on air and water pollutants within a specified range. Provincial authorities can raise the rates for air and water pollution by up to ten times, if approved by the people’s congresses. Lower rates may also be applicable if emissions are below national standards as a way of incentivising firms to release less pollution.

Is this final goal realistic? Jia Kang of the Chinese Ministry of Finance’s Institute of Fiscal Science has criticised the new taxes as too conservative, noting that the tax rate per tonne of sulphur dioxide is still much cheaper than paying for the equipment required to prevent it from entering the atmosphere.

Deep impact: what does the new tax mean for Chinese industry?

So, what are the implications of the new tax environmental system in particular, and the Chinese Government’s clean energy policies in general, for the mining and minerals industry within China?

In the short term, mineral processing costs look set to rise and production of industrial commodities will fall. According to John Meyer of banking consultancy SP Angel, the impact is already being felt.

“The application of stricter rules on environmental regulation is already seeing marked price rises in speciality metals, such as vanadium, tungsten and antimony,” he says. “Tougher standards on pollution are causing discounts to widen for lesser quality mineral concentrates into China and growing premiums.

“The impact has been to raise prices and to restrict exports of metals into overseas markets. Prices in Europe are now expected to close in on domestic China price levels, which have been markedly higher in many areas, particularly in spot markets.”

Chinese industry is being offered the option of shutting urban polluting capacity during the worst winter months, potentially rendering much of its capacity uneconomic. The nation’s anti-pollution crackdown is also being extended to the regions, multiplying its impact on production and capacity.

“In the aluminium-producing, coal-consuming provinces around Beijing, Henan, Shanxi and Shandong, around 30% of aluminium smelting capacity could potentially be closed between November and March every year, in an effort to reduce thick smog like that seen in the first weeks of 2017,” Alan Clark of consultancy and analysis firm CM Group, wrote in the Financial Times.

 “There is also talk of an envisaged 30% cut to alumina production in the same provinces, reducing supply of the key raw material required to produce aluminium,” he adds. “While tighter regulations governing environmental protection and energy consumption were issued two years ago by the Chinese Government, this year, many more smelters are being threatened with the off button.”

SP Angel concurs, noting that the proposed new environmental tax may result in industrial furnaces, many open to the atmosphere, having to be shut − and that the worst of these may never reopen.

Sustainability vs growth: the cost of China’s clean energy policies 

Coal still produces around 70% of China’s electricity but, as Clark points out, consumption of the polluting fossil fuel has dropped in each of the last three years − and fell 4.7% last year alone.

The new environmental tax is not the only challenge facing China’s worst-offending industrial polluters. According to metals and mining intelligence provider CRU, a carbon tax of just $30 per tonne of CO2 equivalent could increase production costs in China for the metal by almost $450 per tonne.

The proposed carbon tax would hand competitive advantage to China’s aluminium-producing rivals around the world. And in addition, Beijing is trialling its own carbon emissions trading scheme.

“Chinese producers and local authorities are caught between pressure to keep plants open in order to avoid social unrest and demonstrations by environmental protesters at some of the plants,” said Clark.

“The debate over whether faster-growing economies should prioritise sustainability at the expense of growth has been a contentious aspect of climate change treaties for many years,” he continues.

“Hopefully, these global actions will not come too late for the clouds of smog to finally lift around this discussion.”