Dongliang Shen, Cecilia Tortajada and Zhihui Wang
GLOBAL WATER FORUM | March 13, 2025
In an effort to provide greater water security to its people and economy, China created the Water Law in 1988 to better manage water resources. An essential elements of the law was the collection of water resource fees to strengthen the management of water resources. More recently, in 2016, the Chinese Government has begun moving away from water resource fees to water taxes. Here, Dongliang Shen and colleagues discuss how this transition from fees to taxes has been managed, why it is necessary and how the transition has led to more effective sustainable water management and conservation practices. When you consider this transition covers regions that are home to over 1.4 billion people (or almost 18% of the world’s population), these tax reforms are some of the most ambitious ever attempted. Consequently, there are many significant challenges in their implementation due to substantial regional, economic, and regulatory disparities (Central People’s Government of China, 2024).
Water scarcity, uneven water distribution, and frequent droughts have long hampered China’s environmental and economic sustainability. In response to these challenges, China promulgated the Water Law in 1988, which stipulated fees for the direct extraction of groundwater by cities, to promote the rational use and management of water resources.
Corresponding measures were implemented in various regions, gradually forming a relatively systematic system for collecting water resource fees. In 2016, in view of the experiences of various regions, China initiated a transformation of the water resource fee policy to a tax reform (China Resource Tax Law, 2020). Recently the reform was expanded from ten provinces to the entire nation (China Youth Daily, 2024). This article explores the reform’s historical background, characteristics, rationale, and anticipated challenges.
Regulation for water security
Globally, water resource scarcity and pollution have become increasingly critical issues. Various countries have adopted economic incentives, such as taxes and administrative fees, to regulate water usage and encourage conservation. The European Union’s Water Framework Directive (EC, 2000) advocates economic tools like water fees and taxes to reduce water demand and mitigate pollution (European Commission, 2000).
In the Chinese context, where water scarcity is severe, regulation of water resources is essential to sustain human and environmental health and economic development (Lin & Chen, 2021). To promote the rational use and management of water resources, China has established a system of water licensing and payment for use. This applies to all water users with exemptions for small-scale domestic or agricultural water use, temporary emergency water use for public safety or environmental protection, and the use of water within rural collective economic organizations (National Bureau of Statistics of China, 2024).
Pilot project implementation
To further standardize water allocation and promote the conservation and rational use of water resources, the Chinese government developed a step-by-step plan to move from water resource fees to a tax reform (State Taxation Administration of China, 2024). Broadly speaking, the plan has three phases.
Phase One (2016): Hebei Province pilot. In 2016, the Ministry of Finance and the State Administration of Taxation jointly issued a notice on the promotion of water resources tax reform (State Taxation Administration of China, 2024). The Interim Measures for the Pilot Reform of Water Resource Tax were introduced to initiate the pilot program and the reform was first piloted in Hebei Province (Wu & Zhang, 2022). The choice of Hebei Province as the first pilot region is primarily based on factors such as its severe water scarcity, high pressure for water conservation, strong demonstration effect within the Beijing-Tianjin-Hebei region, solid policy foundation, and manageable reform risks (Zhong & Wang, 2023). This pilot study helps explore a water resource tax collection model suitable for China’s national conditions and provides valuable experience for nationwide water resource management reform. It covered surface water and groundwater, with specific quotas for collection.
The quotas were not the same for all users. In Hebei Province’s water resource tax reform, different users were subject to different quotas based on factors such as industry type, water source, and local water scarcity conditions. For example: Agricultural users often received more lenient quotas due to the essential nature of irrigation for food production. Industrial and commercial users had stricter quotas and were subject to higher taxes, especially if they exceeded their allocated amount. It was higher tax rates for extraction that exceeded the planned water use (a surcharge of 1 to 3 times) or that took groundwater from already over-extracted or severely over-extracted areas. In the latter case, the Hebei provincial government would recommend a specific scale of rates, ranging from 2 to 5 times the standard rate, for approval by the Ministry of Finance and related departments. Tax levels for regular water use in everyday production and domestic use would remain unchanged. The reason for these differences was to encourage water conservation, promote sustainable water use, and protect over-extracted groundwater resources while ensuring that essential water needs, such as agriculture, were still met. The idea was that this pilot would be gradually expanded to other regions and then eventually nationwide, when conditions were appropriate.
Phase Two (2017): expansion to ten provinces. In 2017, the Chinese Ministry of Finance, State Administration of Taxation, and Ministry of Water Resources jointly issued “Implementation Measures for Expanding the Pilot Reform of Water Resources Tax” (State Taxation Administration of China, 2024). The pilot areas for water resources tax reform were expanded from Hebei Province to ten provinces, including Beijing, Tianjin, and Henan, and specific tax rates were formulated based on each province’s water resources situation. Based on factors such as the total water resources, the degree of water scarcity, water usage patterns, consumption levels, groundwater over-extraction, and climate conditions in these provinces, minimum average tax rates were set for surface water and groundwater. The goal was to promote sustainable water use and protect scarce water resources.
Phase Three (2024): National implementation. In 2024, the Ministry of Finance, the State Administration of Taxation, and the Ministry of Water Resources issued “Implementation Measures for the Pilot Reform of Water Resources Tax,” which announced that the transformation of water resources fees into taxes would be expanded nationwide (State Taxation Administration of China, 2024). The document set minimum water resource tax rates for the different provinces and authorized them to determine specific rates based on local water availability, economic development, and conservation needs (as long as they met or exceeded the minimum rate). Minimum average tax rates were set for surface water and groundwater. When provinces determine specific water resource tax rates, they must consider the need for water conservation—that is, encouraging efficient and responsible water use. However, even if a province wants to set a lower tax rate to support local economic activities or industries, it must not set the rate below the national minimum tax threshold. This ensures that all provinces enforce at least a baseline level of taxation to discourage excessive water consumption and promote conservation.
Provinces are also required to impose higher rates for four types of water use: groundwater (relative to surface water for the same use); use in areas of severe shortage or overuse; unauthorized or excess withdrawals; and use by certain users, such as car washes, bathhouses, golf courses, and ski resorts. These guidelines were initially outlined in the 2016 pilot and have been expanded in the current trial phase. The 2016 pilot served as a test case for water resource taxation in one province (Hebei). Over time, it has evolved into a nationwide policy with higher taxes on unsustainable water use, greater flexibility for local governments, and stronger conservation incentives.
Key characteristics of the 2024 Water Resource Tax Reform
This reform has several important characteristics.
Interdepartmental Cooperation
The water resource tax reform involves multiple departments of the Chinese government, and its success will depend on cooperation between them. Before the expansion of the pilot program, the Ministry of Finance, State Administration of Taxation, and Ministry of Water Resources worked closely together to revise and improve the “Implementation Measures for Water Resource Tax Reform Pilot”.
Officials from the Ministry of Finance, the State Taxation Administration, and the Ministry of Water Resources, addressing questions about the nationwide implementation of the pilot reform converting water resource fees to taxes, highlighted that the reform is extensive in scope, highly technical, and of significant public interest. To ensure the smooth and orderly rollout of the pilot reform, fiscal, tax, and water administration departments at all levels will tailor their efforts to local circumstances. They will use various media platforms to provide targeted policy explanations and guidance to taxpayers, ensuring that taxpayers understand the policies, can file declarations, and know the procedures. This approach aims to enhance public awareness of the policies and improve the precision of their implementation. Additionally, they will establish a coordination mechanism between tax and water management departments for the transfer of taxpayer records. They will enhance the monitoring and guidance of pilot projects in each province, promptly summarize and evaluate the outcomes of the pilot efforts, and provide guidance to provinces in fulfilling their tasks and responsibilities.
Tax controls that depend on regional characteristics
This style of control not only discourages unsustainable water use but also promotes equitable water distribution across regions. The reform’s region-specific approach means higher rates in areas with critical water shortages, such as in the arid north, compared to those with abundant water resources, such as in the south. The policy allows provinces to tailor tax structures to fit local resource conditions while still aligning with national water conservation goals.
Revenue generated from the water resource tax is for local governments, enabling them to reinvest funds in water conservation projects and environmental protection initiatives. This encourages local authorities to take proactive measures in managing their water resources, fostering greater accountability and efficiency.
Reasons for Expanding the Pilot
There are three main reasons why the pilot has been expanded.
Policy efficiency
From the perspective of policy tools themselves, taxes have certain advantages over administrative fees. The mandatory and fixed nature of taxation makes it more economically effective. Under Chinese law, the consequences of failing to pay administrative fees and taxes are different, with the consequences of tax evasion being significantly more severe. Those who fail to pay, or delay payment of water resource taxes, may face legal penalties including potential imprisonment, while it is impossible to be criminally punished for defaulting on water fees. This mandatory and fixed nature of taxation ensures a stable and continuous source of funding, thereby enhancing economic efficiency. Thus, the collection of a water resources tax by the tax authorities carries greater compulsory force and rigidity in enforcement than a water resources fee collected by the water authorities.
Successful provincial pilots
From the perspective of reform practice, the shift from water resource fees to taxes in ten provinces was successful. The water resource tax is an upgraded version of water resource fees, with the policy goal of promoting water resource conservation and ecological environment protection by raising tax rates and taking advantage of their stronger legal basis and enforcement. The ten pilot projects have shown that a water resource tax is more conducive to strengthening water resource management and protection, optimizing water resource allocation, supporting industrial transformation and upgrading, promoting the conservation and efficient use of water resources, fostering environmental protection and ecological restoration, and driving sustainable economic and social development.
For example, to improve water efficiency, some industries in pilot areas have adopted various water-saving measures, such as implementing water-saving technologies, using water-saving equipment, and recycling water resources, effectively reducing water waste. In Sichuan Province, for example, industrial water use decreased from about 5 billion cubic meters in 2017, when the reform began, to about 2 billion cubic meters in 2022, while extraction of groundwater fell from 1.183 billion cubic meters to 0.592 billion cubic meters. In Sichuan in 2023, water consumption was 43.26 cubic meters per RMB 10,000 of GDP, and water use was 13.13 cubic meters per RMB 10,000 of industrial added value, marking reductions of 10.9% and 25.1%, respectively, compared to 2020 (National Bureau of Statistics of China, 2024).
Legal mandate
From a legal perspective, China’s Resource Tax Law specifies a timeline (Table 1) for implementing the tax reform (Central People’s Government of China, 2024). Per this law, which came into force on September 1, 2020, the State Council must report to the Standing Committee of the National People’s Congress the results of the pilot project within five years from the date of implementation of this Law. It should also suggest amendments to the law based on lessons learned. This provision provides legal support to expand the pilot project and also sets a time limit for the completion of the reform: September 1, 2025.
Table 1: A timeline for China’s Resource Tax Law
Challenges to expanding the Water Resource Tax Pilot
Overall, China’s expansion of the water resource tax pilot is having a positive effect on water resource conservation and environmental protection, but it also needs to address regional differences, to achieve better implementation results and fairness. We see challenges in five main areas.
Regional economic disparities
The nationwide reform faces challenges from the significant regional economic disparities and uneven distribution of water resources across regions in China. Insufficient acceptance and implementation of water resource taxes in some impoverished and also water-rich areas may lead to uneven policy implementation and outcomes. For example, in the south, water resources are relatively abundant, and lower tax rates may not be sufficient to promote water conservation, while in the north, water-scarce areas require stricter tax standards.
The Pilot Implementation Measures set different minimum average water resources tax rates for different provinces (State Taxation Administration of China, 2024). Beijing has the highest, with surface water taxed at 1.6 yuan per cubic meter and groundwater at 4 yuan per cubic meter. In contrast, water-abundant provinces like Sichuan and Fujian have minimums of only 0.1 yuan per cubic meter for surface water and 0.2 yuan per cubic meter for groundwater (State Taxation Administration of China, 2024). Across provinces, surface water rates differ by up to 16 times, while groundwater rates differ by up to 20 times.
Business costs
The water resources tax has increased the cost of water use to some degree, especially in high-water-consuming sectors. For some traditional sectors that rely on water resources, such as agriculture, chemicals, and manufacturing, the tax may cut into profits, slowing local economic development. And for some small and medium-sized companies, the extra financial pressure may hamper their operations, narrow their profit margins, and even jeopardize their viability.
Enforcement and monitoring
As the pilot program becomes a national program, the requirements for accurate metering and management of water resources will increase accordingly. More accurate meters for both groundwater and surface water will be needed to strengthen the data integration and information management by linking water consumption data with the tax system to ensure that tax payments align with actual water usage. This is likely to increase the management costs of local governments. At the same time, figuring out how to regulate the various water users and ensure fair collection of taxes will demand more work from tax management departments.
Alignment of water prices and taxes
At present, the price of water is low in some provinces. This makes it difficult to reflect the scarcity of water resources, impeding the water-saving goal of the water resource tax. To incentivize water-saving behavior and achieve the desired impacts of the policy, it is necessary to synchronize water prices with water resource taxes. Policymakers can also consider providing support measures for low-income households and vulnerable groups to ensure fairness and avoid negative economic impacts. At the same time, continuous monitoring and evaluation of the combined effects of water pricing and resource tax implementation are necessary to adjust policies and ensure their effectiveness in achieving water conservation goals.
Public and business acceptance
For some local companies, industries, and individuals, the promotion of the water resource tax requires a process of acceptance and adaptation. The financial pressure brought by the taxes may lead to a significant increase in water costs, especially in agriculture, which may prompt resistance from farmers. In addition, public awareness of water conservation and environmental protection still needs to be strengthened, which is also related to the long-term effectiveness of the water resources tax system.
Experiences from the Reform
As the water resource tax reform has expanded from pilot programs to a nationwide policy, several important lessons have emerged:
1. The regulatory impact of taxation has been validated. The pilot programs demonstrated that a water resource tax effectively regulates water use, particularly by discouraging excessive groundwater extraction.
2. Challenges in tax administration and enforcement. The diverse water resource conditions across different regions have led to variations in tax rates and enforcement. Ensuring both flexibility and fairness in tax implementation remains a key challenge. Some regions lack accurate metering and monitoring technologies, affecting the precision of tax collection. Strengthening water resource metering infrastructure and developing a unified national data management system will be crucial for future reforms.
3. Balancing local fiscal interests with water conservation. Since water resource tax revenues go to local governments, ensuring that these funds are used for water conservation and environmental protection rather than general fiscal expenditures . Some provinces have already invested tax revenues in water-saving projects and water recycling initiatives, but these practices need to be further documented and promoted as best practices.
4. Impact on economic activities. The reform has raised awareness of water conservation among enterprises, encouraging them to adopt water-efficient technologies and optimize production processes. However, for water-intensive industries (such as agriculture and manufacturing), balancing water conservation goals with the economic burden of taxation remains a policy challenge.
5. Need for adjustments in the legal framework. As the reform progresses, several provinces have suggested the need for clearer regulations regarding tax adjustment mechanisms and inter-regional coordination. This indicates that amendments to the Resource Tax Law may be necessary after 2025 to address implementation challenges nationwide.
The water resource tax reform has achieved some success, but it has also revealed practical challenges that need to be addressed. These lessons learned will serve as a foundation for potential legal amendments beyond 2025, ensuring that the tax system continues to be scientifically designed and effectively implemented.
References
Central People’s Government of China. (2024). The Resource Tax Law. Retrieved November 13, 2024, from: https://www.gov.cn/xinwen/2019-08/26/content_5424743.htm
China Resource Tax Law. (2020). Passed by the Standing Committee of the National People’s Congress and effective as of September 1, 2020. Retrieved November 13, 2024, from: https://www.gov.cn/xinwen/2019-08/26/content_5424743.htm
China Youth Daily. (2024, November 6). Water Resource Tax Reform Pilot Implementation Measures to Take Effect in December. Retrieved November 13, 2024, from: https://www.chinatax.gov.cn/chinatax/n810219/n810780/c5235670/content.html
European Commission. (2000). Water Framework Directive. Establishes a Framework for the Protection of Inland Surface Waters, Transitional Waters, Coastal Waters, and Groundwater across Europe. Retrieved November 13, 2024, from: https://environment.ec.europa.eu/topics/water/water-framework-directive_en
Lin, X., & Chen, Q. (2021). Public Perception of Water Resource Taxes in Rural China: Challenges and Strategies. Sustainability, 13(19), 10742.
National Bureau of Statistics of China. (2024). Annual Report on Water Resources and Environmental Conditions. Beijing: Government Printing Office.
State Taxation Administration of China. (2024). Implementation Guidelines for Water Resource Tax Reform Pilot. Retrieved November 13, 2024, from: https://fgk.chinatax.gov.cn/zcfgk/c102416/c5235222/content.html
Wu, H., & Zhang, Y. (2022). Economic Implications of Water Resource Taxes on High-Consumption Industries in China. Environmental Economics and Policy Studies, 24(3), 335-356.
Zhong, M., & Wang, L. (2023). Water Resource Tax Reform in China: Evaluating the Hebei Pilot and Implications for Nationwide Implementation. Journal of Water Resources Management, 57(1), 112-127.
Dongliang Shen, Visiting Scholar, School of Social & Environmental Sustainability, University of Glasgow, UK. Email: weibolu9@sina.com.cn. Cecilia Tortajada, Professor in Practice on Environmental Innovation, School of Social and Environmental Sustainability, University of Glasgow, UK. Email: Cecilia.tortajada@glasgow.ac.uk. Zhihui Wang, Key Laboratory of Soil and Water Conservation on the Loess Plateau of the Ministry of Water Resources, Yellow River Institute of Hydraulic Research, Yellow River Conservancy Commission, Zhengzhou, China. Email: Zhihui.Wang@glasgow.ac.uk