Environmental protection tax is about to be expanded, with volatile organic compounds (VOCs) associated with air pollution becoming newly taxable substances.

On July 24, the Ministry of Finance, the State Taxation Administration, and the Ministry of Ecology and Environment jointly released the Implementation Measures for the Pilot Environmental Protection Tax on Volatile Organic Compounds (the “Measures”). The Measures stipulate that, starting January 1, 2027, an environmental protection tax on VOCs will be levied on eight industries, including automobile manufacturing, pharmaceutical manufacturing, general equipment manufacturing, and special equipment manufacturing, at a rate of RMB 8 to RMB 12 per pollution equivalent.

Volatile organic compounds are organic compounds that participate in atmospheric photochemical reactions, or organic compounds identified in accordance with relevant national regulations. They are important precursors of ozone and fine particulate matter (PM2.5), and can cause atmospheric environmental problems such as smog and photochemical smog. They are currently a key focus and major challenge in air pollution control.

Therefore, to protect the environment and reduce pollutant emissions, China imposed an environmental protection tax on 18 toxic or odorous VOCs, such as benzene, toluene, and formaldehyde, when it introduced the tax in 2018. In practice, however, VOCs include far more than these substances. More than 300 VOCs can currently be monitored. In recent years, with technological advances, government authorities have signaled that the scope of VOC taxation would be expanded, and the issuance of the Measures means that the plan has now been implemented.

VOCs are invisible and intangible, making taxation difficult. The Measures therefore select certain industries for pilot taxation first, with the scope to be gradually expanded later.

According to the Measures, the first eight industries included in the taxation pilot are printing; chemical raw material and chemical product manufacturing; petroleum, coal, and other fuel processing; pharmaceutical manufacturing; ironmaking and steelmaking; general equipment manufacturing; special equipment manufacturing; and automobile manufacturing. VOC emissions from these eight industries account for more than 70% of total industrial-source emissions.

Relevant officials from the Tax Policy Department of the Ministry of Finance stated that the selection of these eight industries was based on factors including the emission scales of enterprises in different industries, environmental protection regulatory requirements, and tax collection and administration conditions. In the next step, the Ministry of Finance and other authorities will closely track the pilot program, promptly summarize experience, evaluate its effectiveness, and expand the collection of the environmental protection tax on VOCs to other industries when appropriate.

VOCs fall under the category of air pollutants. At present, the tax rate for air pollutants under the environmental protection tax ranges from RMB 1.2 to RMB 12, with the specific rate determined by each province based on local conditions. The final tax rate in the vast majority of provinces is below RMB 5, and many regions levy the minimum rate of RMB 1.2.

However, the Measures classify VOCs, which fall under the category of air pollutants, as a separate category of air pollutants for taxation, setting the minimum tax rate at RMB 8. This represents a substantial increase compared with the minimum rate of RMB 1.2 for the aforementioned air pollutants. Why is this the case?

The relevant officials explained that the air pollutants currently subject to the environmental protection tax, such as sulfur dioxide, nitrogen oxides, and particulate matter (including general dust and soot), are primarily emitted through organized discharge methods such as chimney emissions. VOCs, by contrast, are mainly emitted through fugitive sources, such as evaporation from open liquid surfaces and leakage from static and dynamic sealing points. They involve many emission-generating processes and require comprehensive management throughout the entire process, every stage, and the whole chain, including “source substitution + process control + end-of-pipe treatment.” As VOCs are more difficult and costly to control, the tax rate has been set at RMB 8 to RMB 12.

The Measures also clarify the methods for calculating VOC tax, calculating emissions for tax purposes, applicable preferential policies, and tax collection and administration requirements.

For example, in terms of tax incentives, taxpayers with an environmental performance rating of A or B in key national industries will be subject to the VOC environmental protection tax at 50% and 75%, respectively, of the payable tax amount.

The relevant officials stated that, in the next step, the Ministry of Ecology and Environment, together with the Ministry of Finance and the State Taxation Administration, will issue specific methods for calculating emissions from each emission source. The authorities will also provide, by level and category, the collection and removal efficiencies for exhaust gases from various facilities. Meanwhile, the State Taxation Administration will take the lead in formulating supporting tax collection and administration announcements to further clarify specific operational matters.

The official stated that this pilot program will directly link the environmental protection tax with VOC emissions: “more emissions, more payment; fewer emissions, less payment.” By establishing incentive and constraint mechanisms, it will guide enterprises to implement source substitution, improve production processes, increase resource utilization efficiency, strengthen collection and treatment, promote in-depth VOC control throughout the entire process, every stage, and the whole chain, support continued efforts to protect clear skies, and respond to the public’s expectations for blue skies, white clouds, and a better living environment.

According to data from the Ministry of Finance, environmental protection tax revenue totaled RMB 28.7 billion in 2025, up 17% year on year and accounting for approximately 0.16% of national tax revenue for the year. Environmental protection tax revenue reached RMB 16.7 billion in the first half of this year, an increase of 18.6% year on year.