Distributional impacts of taxing carbon in China: Results from the CEEPA model

Abstract

This study aims to examine how mitigating CO 2 through a carbon tax might affect the development goals of narrowing urban–rural gap and improving people’s living standard. In this study, the China Energy and Environmental Policy Analysis (CEEPA) model, a recursive dynamic computable general equilibrium model, was employed to simulate taxing carbon in China. Different carbon tax schemes were designed and their impacts on household disposable income, household welfare, economic growth, and CO 2 emissions were compared. Results show that, given the current social security system that obviously favors urban households and the current investment-driven economic growth pattern, without complementary measures for protecting households, a carbon tax will not only widen the urban–rural gap, but also reduce the living standards of both urban and rural households. The negative impacts caused by carbon tax will enlarge over time. An ideal solution, no matter under an emission intensity goal or a total amount control goal, is to reduce indirect tax with carbon tax revenue, whilst increase the share rural households obtain in government transfers.