Assessing the impacts of an oil products tax in China using a computable general equilibrium model

Abstract

This study assesses the impacts of introducing an oil products tax on the general economy, economic structure, energy consumption, and air pollutant emissions (CO2, SO2, and NOx) in China using a static computable general equilibrium (CGE) model. The conclusion is that taxation on oil products is useful for slowing runaway oil demand and oil imports with small gross domestic product (GDP) loss and welfare impacts. Four types of revenue recycling schemes—Lump Sum, Food Tax Break, Manufacturing Tax Break, and Indirect Tax Break—are also assessed to investigate the effects of recycling oil products tax revenue to the household or industrial sectors by transferring or lowering existing taxes. The results of simulations show that the food tax break renders the best results, because it induces the largest decreases in oil consumption, total energy consumption, and air pollutant emissions, with smaller GDP loss. Furthermore, under this scenario the agriculture and food-processing sectors expand, which can mitigate the negative impacts on the rural population and may possibly improve their income.