China’s Water Resource Tax Reform

By Yuanchao Xu 20 July, 2016

CWR's Xu on how China's just launched water resource tax compares to the fee system & on Hebei taking lead

Fees collected since 1988 but problems persist: the lack of people's awareness to pay and collection measures
Hebei selected as pilot since 1/3 of China's groundwater over-extraction is here & water resources are 1/7 of avg
Differences between tax & fee aren't big now but signals show greater enforcement & higher rates = higher costs

To save water resources China started to collect water resource fees in 1988. This government non-tax income is specifically used for water conservation. However, there are some problems regarding the fee. According to, Zili Cai, head of the Department of Property and Behaviour Taxation of the State Administration of Taxation these problems include the lack of people’s awareness of paying fees and the lack of mandatory collection measures among others.  He added that it’s necessary for the government to strengthen their control over water use through water taxation.

Problems with resource fees include the lack of people’s awareness to pay & collection measures

Recently, China launched a comprehensive reform on “resource fees to resource taxes”, with Hebei as the pilot province. On 9 May 2016, the ‘Interim Measures for the Pilot Reform of Water Resource Tax‘ (“Water Tax Interim Measures”) for Hebei province was issued by the Ministry of Finance (MoF), the State Administration of Taxation (SAT) and the Ministry of Water Resources (MWR). This is to replace the water resource fee system in place. The Water Tax Interim Measures is in force since 1 July 2016. Here are some points of note:

What is the difference between fees and taxes in China?

According to the explanation from the SAT, there are three main differences between fees and taxes:

Differences between fees and taxes in China

From the above table we can see that fees and taxes are managed by different government bodies. It appears that taxes are standardised nationwide and are more flexible than fees. So why was Hebei province selected for the pilot?

Why Hebei province?

According to an interview of experts in China Financial and Economic News, Hebei province was likely selected due to its water scarcity levels and industrial structure.


As highlighted in the interview, the water resource per capita of Hebei province is only 1/7 of the national standard. Moreover, Hebei is facing severe groundwater over-extraction; a third of China’s total groundwater over-extraction is in Hebei.

A monthly report on groundwater from the MWR shows that in January 2015, the groundwater storage in the Hebei Plain decreased dramatically (about 4 billion m3) compared to January 2014. In January 2016, it continued to decrease by a further 2.2 billion m3, compared to January of 2015.

The government is trying to change this situation with the water resource tax.

Changes for Hebei province

Prior to the Hebei Water Tax Interim Measures, the ‘Procedures of Hebei Province on Collection, Use and Management of Water Resource Fees‘ (“Procedures of Water Resource Fees”), enforced on 1 February 2011, was the main water regulation for Hebei. However, with the new Water Tax Interim Measures, amendments have been made to this but it still exists. There also is the ‘Notice on Issues concerning the Standards for the Collection of Water Resource Fees‘ (“Collection Standard Notice”) since 2013 that set the province’s water resource fees.

The above regulations and the Water Tax Interim Measures have the following similarities:

  • A water permit still needs to be applied for;
  • The water resource rate is calculated according to the amount of water use;
  • The minimum water resource tax rates are the same as water resource fees in Hebei:
    • RMB0.4/m3 for surface water
    • RMB1.5/m3 for groundwater
    • RMB0.005/kWh for hydropower or once-through cooling type thermal power water use (as published in 2011);
  • Agricultural water use within a planned quota is exempt;
  • In the case of the overuse of agricultural water and domestic water, a reduced rate is applied;
  • For recycled mine water use and recycled geothermal air conditioning water use, a reduced rate is used; and
  • Recycled wastewater and reclaimed water are exempt.

And now for the main differences:

  • Hebei’s water resource fee rate is now zero (one of the amendments to the prior fee regulation. The fee rate is now replaced with a tax rate;
  • The water resource tax will be collected by local tax authorities instead of the local water administration or catchment administrations;
  • A cooperation mechanism on tax collection between Water Administrations and local Tax Authorities shall be established. The Water Administrations shall provide details on the issuance of water permits and any overuse above the allowed quotas. They will also help check submitted water-related information from companies to the Tax Authorities;

So what does the Water Tax Interim Measures mean?

The ‘Notice on Comprehensively Promoting the Reform of Resource Tax‘, published simultaneously with the Water Tax Interim Measures, states that water extraction involves a lot of aspects and is complicated to handle. In order for a smooth and orderly reform, the Water Tax Interim Measures is enforced firstly in the pilot province Hebei.

The SAT says the normal industrial and domestic water use cost will remain the same as before. However, we can still gage some potential changes from the Water Tax Interim Measures.

First is about the enforcement of the Water Tax Interim Measures. In 2013, the Collection Standard Notice provided minimum water resource fee rates for different provinces, and said it is “to be enforced in principle”; while the rates remain the same in the Water Tax Interim Measures, but the wording has changed to “to be enforced”. Together with the characteristics of a tax, “normative and mandatory“, it seems, this time, the Water Tax Interim Measures is to be enforced strictly.

Enforcement is likely to be more strict…
And, water resource taxes for groundwater over-extracted regions & severely over-extracted regions can be 5 times higher

The second is regarding groundwater. The Procedures of Water Resource Fees says for water use in groundwater over-extracted regions, the water resource fee is doubled; for water use in groundwater severely over-extracted regions, the water resource fee is tripled. However, in the Water Tax Interim Measures, the water resource taxes in groundwater over-extracted regions and severely over-extracted regions can be 5 times the normal rate. Specific rates shall be proposed by the People’s Government of Hebei Province, and then fixed by the MoF and relevant departments; if the proposed rate is higher than 5 times the normal rate, it should be reported to the State Council.

Specific rates are still missing at the moment but the increased range for water resource tax rate indicates that companies in groundwater over-extracted and severely over-extracted regions could face costs.

Looking elsewhere: Water resource tax experiences in Europe

Many European countries have water resource taxes at various levels. Unsurprisingly, results indicate that high water resource tax rates can have a positive impact on water conservation.

High tax rates have a positive impact on water conservation

The Netherlands was the first country to start collecting water resource taxes, including a surface water pollution tax in 1970 and a groundwater tax in 1981. According to Chinese researchers1, with the introduction of the surface water pollution tax in the Netherlands, pollutant discharge decreased greatly. Most of the companies taking part in the research said their reduction was due to this tax. As for the Netherlands’ groundwater tax (EUR0.1785/m3), after its introduction both industrial and domestic water use decreased. Thus the researchers concluded that the tax effectively contributed to groundwater conservation.

Denmark has one of the highest water tax rates globally (EUR0.7/m3). About 99% of drinking water in Denmark come from groundwater. As part of the tax reform in 1994, water resource tax was enacted to secure water resources and avoid over-extraction. The tax has lowered domestic water use.2

Germany and the UK also have water resource taxes. However, due to low tax rates (EUR0.005-0.006/m3 for Germany and EUR0.006-0.03/m3 for the UK), they have almost no effect on water conservation.2

The water tax reform could be a solution for not just Hebei’s depleting groundwater but also water pollution

As one of China’s most water-scarce provinces, Hebei is leading the way for the country’s new water resource tax, a stricter and more comprehensive measure. Although differences between the old fees and new taxes are not great at the moment, there are positive signals towards a stricter enforcement. On top of groundwater depletion, Hebei is also facing pollution which threatens groundwater. According to Chinese experts, 91% of Hebei province is located in the most polluted river basin in China, the Haihe Basin. With more specific measures and tax rates still to come, the water resource tax may be a solution for the groundwater woes in Hebei.

1 Ren, T. & Wang, G. Enlightenment of Netherlands’ water resource taxation on China’s water resource taxation. Jiangsu Commer. Forum 86 (2010).
2 Wu, L., Zhu, H. & Peng, Z. Experiences and references of water resource taxation of European Countries. World Agric. 58–61 (2016). at <>

Further Reading

  • 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
  • Wind & Sun: Relief For China’s Dry North – China’s North is parched but is home to a significant amount of coal reserves & arable land. Can wind & solar power help bring relief? CWR’s Thieriot on how but be warned, challenges remain
  • Can We Build A Clean & Smart Future On Toxic Rare Earths? – Almost all smart, green & clean tech need rare earths to work, but mining & processing these are highly polluting. Lead author Liu of China Water Risk’s new report:  “Rare Earths: Shades Of Grey” explores this paradox. It is time to rethink our clean & smart future
  • Rare Earth Black Market: An Open Dirty Secret – The black market exacerbates environmental pollution from rare earth mining in China. With low prices, depleted reserves and contaminated drinking water, find out if your smartphone, tablet or electric car is party to this. Hongqiao Liu expands

Water management & groundwater in China

  • Quantifying Water Risk: What’s My Number? – Industries are exposed to water risks but financial valuation of such risks remain elusive. China Water Risk’s Thieriot reviews existing quantification tools & methods and highlights gaps that need to be filled to put a number on water risks
  • Groundwater Crackdown – Hope Springs – The economy slows down but the Chinese government speeds up groundwater crackdown with increased transparency, blacklists at both central and provincial levels
  • Underground Shifts: Subsidence Review – Subsidence goes hand in hand with groundwater over-extraction. With over 400 out of the 655 cities in China reliant on groundwater, can China mitigate subsidence risk? We explore related costs such as infrastructure damage, saltwater intrusion & increased desertification
  • 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 Permits: How to Get Water in China – How are water total water quotas set? How can you access water in China? China Water Risk gives an overview on these and the risks associated when China’s water permit system is reformed
Yuanchao Xu
Author: Yuanchao Xu
Yuanchao uses his analytical proficiencies towards the assessment and visualization of water risks for China Water Risk. Prior to joining, Yuanchao was based in Europe completing the Erasmus Mundus Master Program where he specialsed in hydro-informatics and water management. He applied his skills in climate forecasting and water resource modelling to the EUPORIAS project with DHI (Danish Hydraulic Institute) which resulted in a conference paper on seasonal climate forecasting. Building on this work, he went on to develop hyfo, an open-source R programme for climate scientists and modellers to analyse and visualize data. Yuanchao’s bachelor degree was from the China Agricultural University where he specialized in heat energy and power engineering. During his time there, he also patented a testing instrument for hydraulic machinery. He has studied and worked in Beijing, Nice, Newcastle and Copenhagen.
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