Is a fuel tax of one-yuan-per-liter too expensive?

Though we now pay less to fill our tanks, fuel taxes have increased by 0.8 Yuan per liter for gasoline and 0.7 Yuan per liter for diesel. The tax replaces 6 categories of road and waterway fees. According to a poll by sina.com, one of China’s most popular portals, nearly 60% of online polltakers favored a fuel tax instead of road and waterway fees. But over 570,000 people accounting for 80% thought a tax rate of 1 Yuan per liter of gas was too high.

P: Whether one Yuan is too high or too low, whether it’s reasonable or not, that’s in anybody’s interest. So before we get onto that question, the fundamental thing that we need to establish now is, what is the purpose of this tax, how is it calculated, and where does it come from.

W: The general purpose actually is almost the same. For every country, if they implement such kind of excess tax on energy consumption, their objective is to stimulate energy conservation and also try to compensate the social cost and benefits of the energy exploration and also like energy consumption, some negative impacts of energy consumption. And also because like energy, like the petroleum, it’s not so renewable, which means that if this generation consumes all of them, then for the next generation they can consume nothing. So it has a kind of required scare value. So it means that for the current price, they should somehow count for such kind of scare value. So the excess tax also can have such kind of function to compensate the scare value.

P: Am I right to say that there’s somehow wide-spread misunderstanding here that a lot of people think this one-Yuan per liter of gasoline tax is actually what in Chinese we call“Fei Gai Shui”, from fees, for example, road tolls, waterway maintenance fees, simply these annual fees being converted into gasoline, petrol or diesel taxation. So that’s wrong?

W: That’s very normal understanding, but I should say it’s somehow wrong, because truly for the central government, they cannot calculate or convert the fee directly into the tax. When they set up such kind of tax ratio, like one Yuan per liter for the gasoline and 0.8 Yuan per liter for the diesel, they set up a kind of tentative. They set up the tax ratio. For China, we are developing country in the stage of industrialization. We cannot afford very high level of energy tax. Maybe 20% is somehow a reasonable level.

P: Essentially you are saying that one Yuan per liter of gas is still calculated on the basis of 20% rather than flat fee.

W: Yes, always like that. It just means that at the current price level, 20% is acceptable for the Chinese economy. Also for such kind of fixed amount, taxation system, when the oil price is somehow low, then the taxation will become somehow significant. It can stimulate the energy conservation because when the price is low, people try to do the excess demand. When the price is very high, then such kind of part, the taxation will somehow become trivial. Then it will not bring additional burden to the world economy. This is the consideration of the central government.

P: So are we actually saying that like you said one Yuan out of five Yuan has significantly more influence on customers’decision making than one Yuan out of 15 Yuan for example. So if the international crude oil goes upwards and the retail price goes upward here in China accordingly, are we going to see the fuel price going upward as well?

W: Now according to the policy released by the NDRC, they never say that they will adjust the tax simultaneously when the oil price increases again. So I guess that for the central government, they try to implement the excess tax at this moment. But this is just a trial. When the world crude oil price increases, for the government they will consider, they will do some trade-off between the objective of environmental protection and energy conservation and also the economic growth.

Charging a fuel tax is a common practice in many countries. For example, in France, fuel tax is 300% of its fuel prices, while in Canada and the U.S. it is 33% and 30%. In other countries like Germany it's 260%, with Japan at 120%.

P: Would you be able to give us a comparison between China’s fuel tax system and those of other countries and other countries at different levels of development, developed countries, Western Europe, North America, to emerging economies in Asia?

W: Now China is implementing excess tax. But for other countries, especially the developed countries, some countries they use the value added tax. For value added tax, it is somehow different from the excess tax. For value added tax, most of the cost of the tax will be taken by the final consumers. For the tax ratio, it is also around 20% to 40% in the OECD countries. For the excess tax, the highest region is mainly located in the Europe, like UK or like Turkey. I remembered more than 100%, around 120%, very high. So for China, 20%, as I mentioned before, is a starting point. For the future tendency, it also depends on the economic growth and also the trade-off between the growth and other objectives.

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