The Chinese government needs to introduce a "green" tax to reduce pollution, says the Asian Development Bank.

In ADB's latest report on China's environment -- "Toward an Environmentally Sustainable Future" -- the bank's analysts recommend that China impose taxes on resource extraction and pollutant and carbon dioxide emissions.

The report acknowledges that China, the world's largest emitter of carbon dioxide, has attained a number of notable environmental achievements particularly during the last five years, including more investment in environmental infrastructure and stronger accountability and enforcement.

These measures have helped the world's second-largest economy to reduce chemical oxygen demand and sulfur dioxide emissions 10 percent and cut energy consumption per unit of gross domestic product by almost 20 percent, the ADB says.

While China's environment has improved in many respects, "the overall situation continues to deteriorate as environmental pressures increase," Robert Wihtol, director general of ADB's East Asia Department said in a statement.

China's environmental challenge, Wihtol said, "is arguably the most complex that any country has confronted."

ADB points to four root causes behind the country's complex environmental arena: the rapid pace of economic growth; the economy's heavy reliance on exports and investment; the country's strong dependence on coal; and rapid urbanization.

Although China over the last few years has hinted at introducing a comprehensive environmental tax policy, no such policy has been introduced by the government.

China's State Council last October said it would "conduct research regarding the collection of an environmental tax."

But Zhang Peisen, a researcher with the State Administration of Taxation, told state-run news agency Xinhua that a new environmental tax would be complicated for China, as it would have to take into consideration the relationships that already exist between the country's existing taxes.

The ADB report also points to potential crises in water pollution, water scarcity and solid waste.

While the Chinese government has achieved major advances in controlling industrial and domestic sources of water pollution, it says, water pollution remains a problem, with urban and industrial wastewater treatment and solid waste management posing major challenges.

The country's lakes and estuaries are threatened by non-point source pollution, including fertilizer runoff, pesticides and discharges from livestock facilities.

Addressing these issues, ADB says, "will require innovative strategies, regulations, and economic incentives."

The ADB report also urges a national regulatory framework of "eco-compensation" whereby the government or private sector would pay for ecological services protection by households, communities or local governments.