Abstract: This paper points out the dilemma of rare earth trade, that is, exporting rare earth at unreasonable low prices or limiting rare earth export quotas resulting in forthcoming trade disputes. Environmental tax is an effective solution to the dilemma upon analyzing the current taxation policy on China's rare earth industry. The overall environmental taxation system is planned on the aspects of taxation categories, taxpayer, taxation object, taxation steps, tax basis, tariff and international coordination. Environment security deposit collection on mineral resources such as rare earth can be used as transitional measure before the official practice of environment tax.