Taxation and the Environment–Health–Poverty Trap: A Policy Experiment Perspective

• Date: 01 January 2019
• Author: Sumei Chen,Ling‐Yun He
• Published date: 01 January 2019
• DOI: http://doi.org/10.1111/cwe.12268

China & World Economy / 72–92, Vol. 27, No. 1, 2019

72

©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Taxation and the Environment–Health–Poverty Trap:

A Policy Experiment Perspective

Sumei Chen, Ling-Yun He*

Abstract

Under pressures related to economic growth and environmental protection, China is facing

an increasingly severe “environment–health–poverty” trap risk. Fuel taxation is generally

considered an effective policy to counter such a risk. Since 2009 China has raised the

fuel tax rate many times to enhance tax reform. However, the effects of this policy remain

unknown. Therefore, it is vitally important to estimate the impacts of China’s current

fuel taxation policy on environment, public health and the national economy. As the rst

attempt in existing literature on China, this paper builds a general equilibrium framework

with the feedback effect of public health on economy. We nd that that the fuel tax policy

benets the adjustment of the economic structure and improves human health; however, it

is detrimental to economic growth, public welfare and price stability. In this sense, it plays

a limited role in reducing the trap risk and might not be sustainable in the long term.

Key words: economic growth, environment–health–poverty trap, fuel tax, public health

JEL codes: H23, I18, P28

I. Introduction

Since 1978, China’s tremendous energy-intensive economic growth has been

accompanied by immense pressure on the natural environment and human health. It

may even have hindered economic growth because of the loss of workdays and excess

medical expenses resulting from the health issues caused by pollution.1 In this light, it

*Sumei Chen, Assistant Research Fellow, Institute of Industrial Economics, Chinese Academy of Social

Sciences, China. Email: csm_cau@163.com; Ling-Yun He (corresponding author), Professor, College of

Economics, Jinan University, China. Email: lyhe@amss.ac.cn. The authors acknowledge financial support

from the National Natural Science Foundation of China (Nos. 71874070, 71803191 and 71573258).

1Because of serious environmental pollution, China has been named the air pollution capital of the world

(Watts, 2005). In terms of notorious haze, ne particulate matter with an aerodynamic diameter smaller than 2.5

μm (PM2.5) is a major component and causes severe health concerns. In 2013, the annual mean PM2.5 level in

China reached 72 μg/m3, which was 7.2 times higher than the reference standard recommended by the World

Health Organization (WHO, 2006). More seriously, in 2007, China experienced a staggering GDP loss of

approximately RMB361.47bn and a welfare loss of approximately RMB227.65bn as a result of air pollution

(Chen and He, 2014).

Taxation and the Environment–Health–Poverty Trap 73

©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

is quite possible that such a vicious cycle may lead China to fall into the “environment–

health–poverty” trap (Qi and Lu, 2015a, b; Chen and He, 2017).2 This issue has attracted

a great deal of attention from the general public and the government.3 To counter this

“environment–health–poverty” trap risk, China faces the difcult but vitally important

task of balancing economic growth, human health and environmental protection.

In recent years, fuel consumption has been a major anthropogenic emission source

with a significantly negative externality.4 In developed countries, fuel taxation is

recognized as an effective tool to abate pollution (Hibiki and Arimura, 2005; Sterner,

2007). It is particularly relevant for China with such a severe environment–health–

poverty risk. As Table 1 shows, China’s fuel tax rates have been raised many times, but

their impact remains unknown. In particular, the rise of fuel tax rates may threaten the

economy and residential welfare. It is this very concern that has led the government to

proceed cautiously when making changes to the fuel tax policy. Naturally, the following

questions, key to promoting fuel tax reform, need to be addressed: Does China’s

current fuel tax policy make a real difference? And how do key variables such as air

quality, human health, GDP and social welfare, interact with the current fuel tax policy?

Thus, this paper aims to analyze the impacts of China’s current fuel taxation on the

environment, economy and human health.

Because fuel tax is closely connected to transportation, as well as other industries

that use fuel oil as an intermediate input, any changes might have wide effects on

resource allocation, industry output and overall economic performance. To deal with

such a complex but important issue, a computable general equilibrium (CGE) model,

which can capture key features of related sectors and markets, as well as economic

activities, would be appropriate. To date, a body of literature analyzing China’s fuel

tax policy has employed the CGE approach. Jiang (2006) found that imposing a fuel

consumption tax in Beijing would improve air quality but slow economic growth.

Pang et al. (2008) showed that fuel tax reform would have a significant effect on

energy conservation, despite welfare loss. Xiao and Lai (2009) further found that, over

time, fuel tax reform would result in more losses to capital-intensive than to labor-

2With regard to the environment–health–poverty trap, all of the underlying mechanisms in these studies refer

to the relationship among environmental pollution, public health and the economy. As there is a potential risk

for China to fall into this trap, further policy intervention is required.

3As stressed by China’s President Xi Jinping, “we cannot achieve our goal of building a moderately prosperous

society in all respects without protecting public health; we must place health at the heart of all policy making.”

Source: http://news.xinhuanet.com/politics/2016-08/21/c_129244493.htm (cited 5 June 2018).

4Taking Beijing as an example, the motor vehicle is the largest PM2.5 source. See: http://www.xinhuanet.com/

politics/2018-05/15/c_1122832062.htm (cited 5 June 2018).