Addressing the hidden costs of automobile use in China: The potential role of tax

The seriously falling air quality has become the most notable domestic environmental concern in China. So far China has only had an environmentally-related tax and charge system. Although an excise tax (called the consumption tax ) on transport fuel, in addition to the Value Added Tax (VAT), has been imposed in China for over two decades, it has proved to be inadequate in terms of addressing the country s severe automobile pollution problems. Recent reforms in tax law and policy have lifted the role of taxation in environmental protection slightly. A more comprehensive fuel tax system is needed, however, to help address the hidden costs of automobile use and tackle automobile pollution in China. The article suggests an environmental fuel tax, combined with a selection of other instruments such as regulation and standard-setting, could prove to be of real use in constraining the consumption of environmentally damaging fuel and abating automobile pollution.