Income distribution effect of carbon pricing mechanism under China's carbon peak target: CGE-based assessments

Abstract

China has implemented a national carbon emission trading scheme (Carbon ETS) to mitigate climate change and has set a goal to reach the peak of carbon emissions by 2030. The potential performance of the carbon tax as a supplement to the carbon ETS may contribute to achieving the carbon peaking target by reducing income inequality among the various labour forces. Nevertheless, carbon pricing places a greater burden on lower-income households than on wealthier households. In this paper, we construct a multisectoral dynamic computable general equilibrium (CGE) model and incorporate the carbon ETS and carbon tax modules with 20 labour income distributions (ID-CGE model). The results indicate that the carbon pricing mechanism has a progressive effect on income distribution and a heterogeneous effect on the income of rural and urban workers. In rural areas, the middle- and high-income labours have witnessed a higher loss in income. In contrast, in urban areas, the low-income labours have experienced a greater decrease in income. Combining carbon tax and ETS policies to achieve carbon peaking goals by 2029 is a superior strategy.