How to improve the performance of carbon tax in China?

Abstract

The Chinese government committed to controlling carbon dioxide (CO2) emissions and promoting development of non-fossil fuels. Thus, it becomes a top priority for the government to develop effective climate policies. Against such background, this paper develops a new multi-country computable general equilibrium (CGE) model with detailed energy disaggregation. This study evaluates the impact of single policy instrument (carbon tax) and combined policy mixes, in order to investigate driving factors affecting the policy performance. The main findings are as follows. Firstly, the driving factors can be classified into two types. The first type of factors affects cost-effectiveness significantly, while the second type generates considerable effect on emission performance. Secondly, cross-border externalities function as important barriers to the CO2 emission reduction, since they imply extra competitiveness loss and result in considerable carbon leakage. Finally, this paper considers two integrated policy mixes, wherein carbon tax revenue is recycled to reduce capital tax or support clean energy subsidy. These policy mixes can improve both cost-effectiveness and emission performance, and thus perform better than carbon tax alone. In this way, carbon tax revenue can be used to improve the performance. Looking ahead, complicated policy mixes are preferred to improve the performance of China's carbon tax.