China will introduce a new environmental protection tax that will include a levy on carbon dioxide emissions, according to a report from Xinhua News Agency, China's official press agency.

The Xinhua report is based on an article published on the website of the Chinese Ministry of Finance. The article quotes the head of the ministry's tax division policy, Jia Chen, as saying, "the government will collect the environmental protection tax instead of pollutant discharge fees, as well as levy a tax on carbon dioxide emissions."

Companies can evade China's current "pollutant discharge fees" by building close relationships with local governments, according to Ella Chou, a China expert at the Brookings Institution. The new tax represents "a change in form, but still a significant one," wrote Chou on her blog, because "conversion of that 'fee' to 'tax' would place legal responsibilities on the companies," making them subject to closer scrutiny from the central government.

China is by far the world's largest source of carbon dioxide emissions, according to estimates by the Emission Database for Global Atmospheric Research, having surpassed the United States at some point between 2005 and 2008. The Chinese government has vowed to reduce carbon intensity — the amount of carbon dioxide emitted per unit of economic output — by 40 to 45 percent by 2020 compared with 2005 levels.

The government is also investigating the possibility of taxing energy-intensive products like batteries, as well as luxury goods like private airplanes, according to Jia. A resource tax will also be levied on water usage. Jia did not specify when the new measures would be implemented.

The Chinese carbon tax has been in the pipeline for years. In March 2010 Xinhua reported that the Ministry of Finance's Research Institute of Fiscal Science recommended levying a carbon tax and promoting low-carbon awareness campaigns among the general public in an effort to combat global climate change.

At the time, the institute's director, Jia Kang, said an environmental tax on the carbon content of fuels "will help reduce carbon emissions, eliminate low-efficiency and backward technologies, encourage the development of clean energy and low-carbon industries, and promote sustainable development."

"As a tax directly targeting carbon emissions, a carbon tax is able to markedly strengthen the control of carbon dioxide emissions and energy consumption," Jia said.

Bill Barron, who last year ran for the U.S. Senate on a climate change platform, said a carbon tax is the most effective way to encourage industry to curb emissions. "This approach creates a market-based solution," said Barron, who pointed out that a cap and trade system is "more likely to be manipulated by special interests through carbon trading and carbon offsets."

Barron has been a strong proponent of a carbon tax in the United States. "A gradually increasing carbon tax placed at the source (mine, well, or port of entry) with 100 percent of the revenue returned to households would be the most direct and transparent way to address climate change and provide the mechanism to allow our economy to drive a transition to clean energy," he said.

While China's carbon tax signals the country's seriousness about tackling climate change, Chou of the Brookings Institution was quick to note that the tax on carbon would be "puny." The Ministry of Finance has recommended levying a 10 Yuan ($1.60) per ton tax on carbon dioxide in 2012, increasing to a 50 Yuan ($8) per ton tax by 2020, which could fail to provide a meaningful incentive for companies to reduce carbon emissions.

Take Huawei Technologies, for example, the Shenzhen-based telecommunications firm that brought in around $35 billion in revenue in 2012 and is seeking to make inroads into the U.S. market.

In 2011, carbon dioxide emissions from the company's research centers and production facilities amounted to a total of 690,065 tons, according to the company. With a carbon tax of $1.60 per ton, that would amount to just over $1.1 million in carbon taxes, or a little over 1 percent of what the company earns in revenue every single day.

Even if the tax were increased to the higher 2020 figure of $8 per ton, Huawei would still only pay a little more than $5.5 million, a paltry figure in comparison to the company's total revenue.

Still, the introduction of a carbon tax sets China, a country whose environmental challenges have received much commentary, ahead of several other advanced economies.

"In the U.S. or most of the EU other than Norway and Ireland, there is still no carbon tax," Thomas Kerr, the World Economic Forum's head of climate change initiatives, told GreenBiz in an email. "So if the Chinese government were starting small — using this very small amount to send a signal — and then planned to ratchet up the tax over time, that would be a very important move."

Barron, the senatorial candidate, echoed Kerr's sentiment. "China will play a critical role in whether we are able to limit catastrophic climate change," he said. "Although they are suggesting a modest price on carbon, it is a step in the right direction."

Several details still need to be clarified before the carbon tax will take effect. Hau L. Lee, a professor at Stanford University who specializes in supply chain management, put this concern in stark relief in an email to GreenBiz.

"If a company is a manufacturing one like Foxconn, say, then there would of course be clear carbon emissions coming out of the factories in the manufacturing process," he wrote. But what about the less obvious emissions:

Should we include the emissions of the materials used in production? If I buy materials from a neighboring factory, should that factory be responsible for the carbon tax of the materials, or should I be? Would that lead to my sourcing the materials from another country which does not have carbon tax? What about the transportation of the materials, which would also have carbon emission implications? How about the packaging materials used in finishing the products? Also, am I responsible for the carbon emission of the distribution of the product, or would that be charged to someone else? …There still needs to be a lot of clarification.

Lee also expressed concern over how companies will calculate their emission levels, and who will audit and monitor companies' emissions disclosures. The manner in which China answers these questions will in large part determine whether the tax will actually encourage companies to cut carbon emissions.

"The government will have to do a whole lot more work to be clear on the above issues," said Lee. "Otherwise, it has some PR effect that the Chinese government is doing something, but there would not be much of an impact."

Chinese flag photo by feiyuezhangjie on Shutterstock.