Effects of carbon tax on social welfare: A case study of China

Abstract

Almost all countries around the world concern about the emission of greenhouse gas. The most widely used model of carbon tax is based on complete competition model of energy market, which, however, cannot completely reflect the real condition. This article establishes a social optimal welfare model that based on oligopoly competition of energy department. According to the model, the article calculates the substitution elasticity of factors in China’s energy sectors, non-energy department and consumption preference in domestic energy and non-energy commodities. Based on the social optimal welfare model, the effect on social welfare caused by carbon taxes in different links is further evaluated. The results show that a certain amount of carbon tax in the production link raises the social welfare, while in consumption and redistribution links lowers the social welfare. Specifically, the absolute value of marginal social welfare in the redistribution link is larger. Moreover, the values of the three types of carbon taxes vary under different redistribution demands though the variation trends of tax in the same link are similar. As a result, a small amount of carbon tax on the production link contributes to the growth of social welfare.