STUDY ON IMPACT OF ENVIRONMENTAL PROTECTION TAX ON ENTERPRISE ENVIRONMENTAL COST. Shuting Gao, Chazhong Ge, Xiaoqiong Li, Qijia Yang, Feng Long

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1 STUDY ON IMPACT OF ENVIRONMENTAL PROTECTION TAX ON ENTERPRISE ENVIRONMENTAL COST Shuting Gao, Chazhong Ge, Xiaoqiong Li, Qijia Yang, Feng Long Chinese Academy for Environmental Planning Abstract: Environmental protection tax is not only an important means to internalize external environmental costs, but also a part of enterprises environmental cost. From January 1 st, 2008, the Environmental Protection Tax Law will come into force. Based on the perspective of enterprises cost management, this paper chooses typical cases and analyzes pollution control measures as well as their cost structure that enterprises need to adopt to abide by environmental laws, so as to study the influences of the implementation of Environmental Protection Tax Law on enterprises. Analysis shows that although the share of environmental protection tax in enterprises environmental cost is not big, it still increases the total environmental law-abiding cost of enterprises and arouse their enthusiasm on pollution control. As such, it is necessary to strengthen enterprises environmental cost management and make comprehensive use of tax and other environmental management means. This paper consists of four parts: firstly the analysis of the structure of enterprises environmental cost, secondly the analysis of factors influencing enterprises environmental cost, thirdly incentives generated by environmental protection tax for enterprises and influences of the tax on environmental costs, and fourthly, suggestions on how to strengthen enterprises environmental cost management. Cost control of CO2 emission, pollution losses and fines are not included in this study. Key words: environmental cost, environmental protection tax, law-abiding cost

2 From January 1st, 2008, the Environmental Protection Tax Law will come into force. It is a hot topic if the tax will aggravate the burden of enterprises. In recent years, stricter environmental laws and regulations and Its enforcement have also led to an increase in the environmental costs of enterprises in China. The environmental cost also accounts for an increasing proportion in the product cost. Taking the iron & steel enterprises as an example, this paper analyzes the structure of enterprise environmental costs by means of activity-based costing, and studies the impact of environmental protection tax on enterprise environmental costs, so as to better play the role of environment protect tax. 1. Concept and Structure of Enterprise Environmental Cost 1.1 Concept of Enterprise Environmental Cost The Environmental cost research mainly focuses on environmental accounting and environmental economic evaluation. The concept of environmental cost and contents are different in different studies. Li Minghui (2005) ianalyzed the different concepts and metering models of environmental cost, and summarized the concept of environmental cost as micro financial cost, microeconomic cost and macroeconomic cost. Xiao Xuii, Yang yuqingiii give the definition and framework of enterprise environmental cost accounting. This paper adopts the definition of environmental cost in <Accounting and Financial Reporting of Environmental Cost and Liabilities> iv. Environmental cost comprise the steps taken, or required to be taken, to manage the environmental impacts of an enterprised s activity in an environmentally responsible manner, an well as other costs driven by the environmental objectives and requirements of the enterprises. In other words, it is the environmental compliance costs.

3 In accordance with the relevant national and local laws and regulations, rules and normative documents, standards and specifications and so on, the enterprise must establish environmental management system, use advanced clean production technologies, improve resource utilization efficiency, and reduce pollutants generation. They must also Equipped with dust removal, desulphurization, wastewater treatment plant and other environmental treatment facilities. The facilities operate effectively to meet the discharge standards. The solid wastes must be comprehensively utilized or safely and properly disposed. The disposal and storage of hazardous waste shall be compliance with the Standard for Storage of Hazardous Wastes and Pollution Control. The pollutants emission shall be discharged in accordance with the discharge permit. The enterprises shall disclose their respective environmental information. The online automatic monitoring system shall be furnished for major pollutant discharge ports, and so on. The enterprise environmental cost accounting method has total cost accounting method, Activity-based costing (ABC) method, life cycle method and so on. ABC method is a cost calculation method for assigning indirect costs and auxiliary resources more accurately to assignments, production processes, products, services and customers. That is the cost drivers allocate the cost of environmental operations to different products v. Through the reading of literature, Duan Huachao(2017) vi found that the most combination of environmental cost accounting is the life cycle cost method and ABC method. Zhang yi (2005) vii, yao yuying (2006) viii, Shang Fangfang (2013) ix, Liang Guangde (2017) x, wang guangxiaxi, etc. used ABC to study the enterprise environmental cost accounting. Song Ziyi (2017) xii carried out a comparative analysis of environmental costs before and after the introduction of the new

4 environmental law. These findings provide a reference for this study. Data acquisition is one of the difficulties in enterprise environmental cost accounting. The cost based on the actual cost of expenditure. The missing cost data of project will be got by engineering replacement method or split ratio method. 1.2 Structure of Enterprise Environmental Cost From the perspective of the applicable laws and regulations, as well as the enterprises environmental practices in China, the enterprise environmental compliance cost is composed of three parts: the first is investment for procurement and installation of environmental equipment; the second covers material costs, utility charges and staff outlay for routine operation of the environmental facilities, as well as processing costs of the third party, and expenditures for pollution cleaning; the third covers pollutant discharge fee (environmental protection tax) paid as stipulated, environment-monitoring expenditure, expenses and staff salary of the specialized environmental division established by the enterprise, R & D expenditure to reduce pollution, expenditures for environmental impact assessment and clean production audit, and certification fee for mark of green products, etc. The total cost can be divided into the fixed cost and variable cost. Among them, the former covers the facilities investment depreciation, inspection fee personnel salary, monitoring equipment Purchase expense, management expenses, etc. While the later mainly refers the consuming expenses of environmental facilities during operation, including the fees of reducing agent and catalyst, energy consumption, maintenance and monitoring, and expenditure of environmental protection tax/fees, Cleaner production audit, EIA, etc. Financial subsidy should

5 be cut. 1.3 Accounting Method for Enterprise Environmental Cost Generally, the enterprise environment cost is burdened by the enterprise itself, but not listed separately in accounting. In order to fully reflect the information on environmental cost and be conductive to the production cost control, the activity-based costing is employed to accurately assign the indirect cost and auxiliary resources among the operation, production process, product, service and customer. The cost pool is established in terms of the manufacturing unit one by one, so that every cost can be sorted out separately. Each cost can be based on the actual expenditure. In the event of insufficient data for some items, the project substitution method can be employed; the sewage treatment work can be split into each operating unit in accordance with the equal ration method. 2. Analysis on Factors of Enterprise Environmental Costs In view of the structure of environmental cost above, there are many factors affecting the enterprise environmental cost, including the laws & regulations and the enterprise's environmental responsibility, especially for administrative command and economic means. 2.1 Administrative Command Following the Environmental Protection Law of the People's Republic of China was revised in 2014 (effective since January 1, 2015), many relevant laws have been revised in succession, including Law of the People's Republic of China on the Prevention and Control of Atmospheric Pollution, Law of the People's Republic of China on Environmental Impact

6 Assessment, Marine Environmental Protection Law of the People's Republic of China, and Law of the People's Republic of China on Prevention and Control of Water Pollution; the public opinions are solicited for the Law of the People's Republic of China on the Prevention and Control of Soil Pollution; the relevant laws on environmental protection are gradually tightened, and accordingly the enforcement has been strengthened. Some analysts point out that, the iron & steel enterprises need to add 13% of the environmental investment per ton steel for the compliance discharge after the new Law of Environmental Protection comes into effective. According to the Standard for Pollutants Emission of Coking Chemical Industry, Standard for Air Pollutant Emission from the Sintering And Pelletizing of Iron and Steel Industry, Standard for Air Pollutants Emission of Iron-making Industry, Standard for Air Pollutants Emission of Steel-making Industry, Standard for Air Pollutants Emission of Steelrolling Industry, Standard for Water Pollutants Discharge of Iron & Steel Industry, and Announcement on Implementing Special Limits of Air Pollutant Discharge, some experts analyzed that, after the environmental standards are revised, 70% iron & steel enterprises can t reach such standards, and must increase the treatment costs to take necessary measures in order to meet the discharge standards. During the inspection of law enforcement in early 8 months of 2016, the on-site inspections have been carried out on 1019 iron & steel enterprises by the departments of environmental protection at all levels, the environmental violations were found among 173 enterprises, the discharge beyond standard are existed among 35 enterprises and fugitive dust emissions are existed among 25 without effective control.

7 2.2 Reform of Environmental-Economic Policy Pollutants Levy system(pls) is an earliest important environmental & economic policy. Some local governments gradually enhanced the sewage charges for pollutants, such as sulfur dioxide, nitric oxide, COD and ammonia since 2007; the charge criteria were adjusted nationwide in The study on PLS into tax is carried out simultaneously with PLS reform. Environmental Protection Tax Law of the People's Republic of China will be effective in 2018(it will replace the PLS),replacing PLS. The state and local organizations carry out some pilots for the paid use and trading of emission permits, and pilots of eco-compensation policies and differential tariff policies for the heavily polluting industries. In addition, they grant the preferential income tax to some enterprises of which carry out the comprehensive resources-utilization project, energy-saving project, water-saving project or environmental protection project. Some of them established special funds to support the prevention and control of water pollution, air pollution or soil pollution, etc. 3. Case Study of Environmental Costs in Iron & Steel Industry and Enterprises 3.1 Overall Industrial Situations In the past ten years, the environmental cost of iron & steel industry has been increased by 48% in view of the trend of such costs, as shown in Figure below.

8 Fig. 1 the environmental cost per ton of steel in the iron & steel industry In the structure of environmental cost, the cost of air pollution control is the largest proportion, accounting for about 68%, as shown in Fig. 2. Waste Waste Sewage 废水废气固体废物 Solid waste 排污费 Management 管理费 expenses water gas charge Fig. 2 the environmental cost structure of iron & steel industry

9 3.2 Cases of Enterprise Environmental Cost Accounting Status Quo of Enterprises Pollution Control As an iron & steel complex integrated the mining, ore dressing, smelting and rolling material, a Steel Corp owns capacities of crude steel, pig iron, steel, coke, sinter, pellet production of 6.16 million t/a, 5.30 million t/a, 6.78 million t/a, 0.71 million t/a, 3.58 million t/a and 5.93 million t/a respectively. Its main equipment covers 5 blast furnaces, 6 converters and 16 steel production lines. From 2008 to 2015, its total investment in energy conservation and environmental protection amounted to RMB 2.10 billion. In 2014, the investment in environmental protection was about RMB 760 million, of which RMB 180 million was used in upgrading the environmental facilities that cannot meet the new environmental standard and comprehensive treatment of pollution sources, and RMB 580 million as the operating costs of environmental facilities. In addition, RMB million was donated for environmental protection. In 2015, the environmental investment was about RMB 470 million, of which the operating cost of environmental facilities was about RMB 400 million. All boilers have been transformed into the gas boilers; all pellet sintering have been equipped with desulfurization and dust removal devices; the large-scale blast furnace and converter adopt the dry-type dust removal; now, 100% of online monitoring data can meet the standard; the environmental incident is zero; 100% of solid waste have been effectively utilized, all newly-built environmental project can meet the standard. The clean production audit is carried out every year within the company; the environmental management organizations have

10 sound structures with the environmental and occupational health management system and various rules & regulations established Cost Accumulation The environmental costs are accumulated in terms of each process in accordance with the iron & steel process, construction and operation of the environmental facilities, as well as construction and implementation of environmental organizations and institutions. As shown in table 1 Table 1 the environmental cost accumulation Item Level I Level II Level III Coking process cost Waste water 806 Fixed cost RMB/t 2561 Variable cost 507 Waste gas 1755 Fixed cost 362 Variable cost 1394 Sintering and process cost Waste gas Fixed cost 4650 Pelletizing Variable cost RMB/t Iron-making process cost Waste water 3612 Fixed cost RMB/t Variable cost 2511 Waste gas 7952 Fixed cost 1535 Variable cost 6417 Steel-making process cost Waste water 8007 Fixed cost 3634

11 100 RMB/t Variable cost 4373 Waste gas Fixed cost 4338 Variable cost Steel products process Waste water Fixed cost RMB/t cost10249 Variable cost 4525 Total cost Summation Waste water Fixed cost Variable cost RMB/tsteel Waste gas Fixed cost Variable cost Environment management 1238 PLS 943 Others 295 NOTE: Unit, 10 4 RMB 3.3 Impact of Tax and Fee Reform on Iron & Steel Enterprises Impact of Charge Adjustment In view of the iron & steel industry and enterprises, the sewage charge is declined with pollution emission intensity decreased; however, sewage charge presented a contrary trend since 2015 with pollution control intensity strengthened. With the criteria of sewage charge increased since 2015, especially for sewage charge of nitrogen oxide, sewage charge per ton of steel has been increased significantly. See Fig. 3.

12 fee/t-steel SO2/t-steel dust/t-steel Fig. 3 changes of sewage charges and pollutant emissions of enterprises Impact of Fee-to-Tax Compared with the existing criteria of sewage charge, the tax rates for pollutants beyond four major pollutants have been improved since the fee-to-tax reform. According to the data of charge collection in 2015, the revenue of the environmental protection tax was increased by 26.8% than sewage charges in the iron & steel industry, mainly because the tax rates of water pollutants and air pollutants have been increased than the sewage charges before; and the environmental protection tax revenue from solid waste and noise did not change much. 4. Conclusions and Recommendations 4.1 Impact of the Environmental protection Tax on the Enterprise Environmental Cost In view of the overall situations of the iron & steel industry and some enterprises, the criteria of sewage charge or unit amount of environmental protection tax have larger effect on

13 total revenue of the enterprises; however, the levy has little effect on the total environmental cost of enterprises. It is mainly result that the environmental protection tax/sewage charges accounted for a smaller proportion of the environmental cost, while the operating cost of environmental facilities accounted for the highest proportion; moreover, the environmental protection tax rate was just enhanced a very small range in compared with the Emission fees, it is almost an equal conversion. However it will be a more impact on steel enterprises than on other industry. 4.2 Strengthen the Enterprise Environmental Cost Management Among the compliance cost of enterprise, the installation and operation costs of environmental facilities account for the highest proportion; while power consumption accounts for a larger proportion in the operation cost, the situations of stressing on construction and ignoring operation has not been fundamentally changed, the incentive measures are inadequate to the operation cost of enterprise in the existing policies. The accounting system with cost accounts in terms of production processes shall be set up for the enterprise environmental cost; the environmental enforcement shall be strengthened to promote the enterprise environmental compliance. 4.3 The environmental cost accounting is beneficial to environmental protection tax The enterprise environmental cost accounting establishes the connection between the product and the environmental cost. it makes the enterprise clear own law-abiding cost. it is conducive to control pollution.

14 It also helps the government and the public understand the basic situation of the industry and provide stronger support for policies implementation, such as environmental law and environmental protection tax, etc. i Li Minghui. Environmental cost: Different Concepts and Measurement Models. CONTEMPORARY ECONOMIC MANAGEMENT Vol.27 No.5: ii Xiao Xu, Mao Hongshou, Some Discussion on the Application of Enterprise Environmental Cost. Accounting Research NO6,2000:55-59 iii Yang Yuqing, The Research on Enterprise Environmental cost Accounting System. Zhongyuan University of Technology iv The Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR). Accounting and Financial Reporting for Environmental Cost and Liabilities. United nations fifteenth conferenc.e on trade and Development, v Wang Jinnan, etc. Green National Accounting for China Beijing, Chinese Environmental Science Press, vi Duan Huachao overview of the research methods of environmental cost accounting for enterprises in China. Commercial Accounting 2017(2):78-80 vii Zhang Yi Accounting the Environmental Cost by Using An Activity-Based Costing Approach Journal of West Anhui University Vol.21 NO1.:47-48 viii Yao Yuying, Study on environment cost of steel Enterprises Beijing Forestry University ix Shang Fangfan, Study on Environment Cost Accounting System of Iron and Steel Enterprise in China. University of Science and Technology Liaoning. Thesis for Master s Degree x Liang Guangde, Research on enterprise environmental cost accounting based on ABC. Northern Economy and Trade. 2017(7): xi Wang Guangxia, Study on the Environmental Cost Accounting and Reporting of Coal-fired thermal power enterprises. Ocean University of China. Thesis for Master s Degree xii Song Ziyi, comparative analysis of environmental costs before and after the reversion of the environmental law. Journal of Chifeng University(Natural Science Edition)Vol. 33 No.3: