China’s Water Resource Tax Expansion

By Yuanchao Xu 14 February, 2018

As the water resource tax expands to 9 provinces, CWR's Xu reviews the pilot & additional provinces' selection

In May 2016, China launched a water resource tax reform to replace its water resource fee system (see our review here).
The reform stipulates the minimum tax rates for pilot provinces, which are RMB 0.1-0.6/m³ for surface water and RMB 0.2-4/m³ for groundwater . The minimum tax rates are more or less the same as previous water resource fees. However, provinces are allowed to increase the rates depending on local conditions. Special water extraction activities such as golf course maintenance, car washing and commercial bathing are required to have higher tax rates, as well as for enterprises in regions where groundwater is over-exploited.

After a trial in Hebei, the water resource tax has just been expanded to another 9 cities/provinces

After about a year and a half’s trial in Hebei, the tax has just been expanded to another 9 pilot cities/provinces. The Measures for Expanding the Pilot Project of Water Resources Tax Reform came into force on 1 December 2017, after which water resource tax collection will be conducted in Beijing, Tianjin, Shanxi, Inner Mongolia, Shandong, Henan, Sichuan, Shaanxi and Ningxia. Before we deep dive into these 9 additional provinces, we look at the successes of the Hebei pilot.

Hebei’s success story

According to the Ministry of Finance, Hebei has set a good example as a pilot province. Achievements in different aspects have been made including better water resource management, increased tax revenue, higher water use efficiency and stronger public water saving awareness. Such positive results provided the basis and preconditions for the expansion of water resource tax.
During the pilot, groundwater over-exploitation and “inappropriate water extraction” have been limited. Faced with higher water tax rates, special sectors such as golf courses, car washing and commercial bathing have indeed reduced their water extraction, by over 30%.

By July 2017, Hebei has collected RMB1.82bn in water taxes…
…the increase in the cost for water has forced co’s to upgrade to water saving equipment, control leakages or change water sources

Apart from the direct conservation of groundwater, the collection of water resource tax has also enriched local finance. By the end of July 2017, Hebei has collected RMB1.82bn in water taxes. Moreover, monthly water resource tax revenue has doubled compared with the monthly water resource fee revenue in 2015.
Meanwhile, the increase in water cost has forced enterprises to upgrade to water saving equipment, control leakages or change to alternate water sources. Transferred water from other provinces is encouraged as part of the water resource tax reform in Hebei. Previously, Hebei had only used 13.8% of its transferred water quota. After the reform, 85% of water supply plants have changed their water source from groundwater to transferred water. Some large industrial parks are also laying networks for increased transferred water supply.
The effectiveness of the reform can also be attributed to stringent enforcement. Hebei has re-issued over 4,300 water permits and stopped 935 self-providing wells during the trial. Plus, more than 4,700 groundwater/surface water intake points are now automatically monitored online. An information platform has also been developed to help with information sharing, water amount verification and tax notices.
With these successes, we now look the 9 provinces the pilot tax has expanded to.

Nine provinces at a glance

The Chinese government has not specifically explained why these 9 additional pilot provinces have been chosen for the water resource tax expansion, but we can see that the 9 provinces have their own characteristics and differ in water resources and types of water extraction. Beijing and Tianjin have the most developed economies, but are extremely water scarce. Shandong and Henan are receivers of the South to North Water Diversion Project. Shanxi, Inner Mongolia, Shaanxi and Ningxia have strong mining industries and mine water accounts for a large portion of these provinces’ water extractions. Sichuan is rich in water resources and a large fraction of its water extraction is for hydro power.
Apart from Sichuan, 8 out of the 9 provinces are facing serious water stress. This can be seen in the WRI Aqueduct baseline water stress map (see below). Sichuan, although not so water stressed, can provide a different experience of the tax expansion due to its special water extraction structure.

Apart from Sichuan, 8 out of the 9 provinces are facing serious water stress

Moreover, these provinces are home to many water-intensive industries. CWR’s report “Toward Water Risk Valuation” presents research on the 10 biggest listed power companies (5 coal mining, 5 power generation) in 2016. Below is a map of their mines and thermal power plants, highlighting that most of their mines and power plants are located within the 9 provinces. Along with other high water consuming industries such as steel, cement and chemicals, there is much thirst for the 9 provinces to quench. The water resource tax is a much needed measure to tackle the high water risk and we expect it will be complemented by other holistic regulatory policies.

Most of the mines & power plants from China’s 10 biggest listed power co’s are located within the 9 provinces

Enterprises will reap benefits in the long-term

From Hebei’s experience, heavy water consumers, especially groundwater consumers, may face higher water costs in the short term, which will compel them to upgrade water saving equipment or conduct new water use strategies. However, in the long-term, these solutions will add to enterprises’ resilience in coping with water competition.

It is likely that the reform will be fully promoted afterwards

The water resource tax reform shows China’s resolution in establishing a regulated and rational water use scheme, and the expansion will further enrich the experience from Hebei. Although there is no implementation date announced, it is likely that the reform will be promoted nationally afterwards, before which there is still time for other provinces and enterprises to prepare for a water efficient era.

Further Reading

• 5 Trends For 2018: The Year Of The Dog – We could be heading for dog days this year and China is getting ready with economic planning that considers water and climate. Check out our 5 trends and stay ahead of the pack
• 5 Laws To Watch Out For In 2018 – From environmental taxes to compensation mechanisms to nuclear safety, China is continuing its regulatory push in the new year. China Water Risk’s Yuanchao Xu reviews 5 key laws to watch out for in 2018
• Increasing Public Participation In China’s Environment – Can the public participate in environmental decision-making in China? Pacific Environment’s Guo Hanyuan, Kristen McDonald & Zhao Zhong expand on results from their 4-city pilot study and identify challenges
• The Water Footprint Of Hong Kong’s Diet – Urban centres are very much dependent on distant resources and as a result, their populations are unaware of their indirect water footprint. Davy Vanham from the European Commission looks at Hong Kong’s diet’s high water footprint
• Water As Leverage For Resilient Cities – Water represents man’s most challenging & complex risk but it can be leveraged for catalytic change. China Water Risk asks Henk Ovink, the first Special Envoy for Water in the world, how this can be achieved

• China’s Water Resource Tax Reform – The recently launched water resource tax reform will ultimately supersede the existing resource fee system. China Water Risk’s Yuanchao Xu on how the two systems compare and why Hebei is taking lead as the pilot city
• Reforming Water Permits in China – European and Chinese water policy experts Martin Griffiths & Chen Dongsheng gives an overview of their collaborative study on water permits systems as part of the China Europe Water Platform. What challenges lie ahead? What improvements are needed?
• Water Risk Valuation – What Investors Say – See what 70+ investors have to say on different valuation approaches we applied to 10 energy stocks listed across 4 exchanges. Is there consensus? What are they most worried about?
• BWS-China: WRI’s New Water Stress Map – With more granular data from the Chinese government, WRI China upgraded its Aqueduct  Baseline Water Stress (BWS) maps for China. BWS China developers Wang, Zhong & Long explain key differences
• GPC: Smart Subsidies For Renewables – China’s current subsidy system for renewable energy is overburdened. However, China Water Risk’s Yuanchao Xu sees positive change ahead with the recent initiation of Green Power Certificate trading