Are tax revenue recycling schemes based on industry-differentiated carbon tax conducive to realizing the “double dividend”?

Abstract

Carbon tax policies based on industry differences can produce better emission reductions, but their economic losses have not been fully considered. To guarantee the fairness and economic effectiveness of the carbon emission reduction, this paper explores the policy impacts of revenue recycling schemes based on industry-differentiated carbon taxes using a dynamic CGE model. The findings show that revenue recycling schemes can effectively mitigate the negative macroeconomic and industry output impacts of industry-differentiated carbon taxes, but also affects their carbon reduction effects. The indirect carbon tax revenue recycling schemes are more beneficial than the direct recycling schemes in reducing GDP loss, and corporate income tax reduction is most effective in mitigating the reduction in fixed asset investment. The applicability of different carbon tax revenue recycling schemes varies across industries, and in general corporate income tax reduction and subsidies to clean energy industries are more beneficial to carbon emission reduction, and indirect carbon tax revenue recycling schemes that reduce residential and corporate income taxes can achieve stronger “double dividend”. This paper suggests that China should adopt a industry-differentiated carbon tax with a fair distribution of emission reduction responsibilities, while achieving a “double dividend” through appropriate revenue recycling schemes.