Optimizing carbon tax rates and revenue recycling schemes: Model development, and a case study for the Bohai Bay area, China

Abstract

Carbon taxation has long been proposed to mitigate carbon emissions. Carbon tax rate determination and tax revenue recycling are two key steps to achieve a double dividend under carbon taxation. However, few research has sought to optimize the allocation proportion of tax revenue to various categories of taxpayers (households, enterprises, sectors, etc.), or to optimize the two steps synchronously based on nonlinear optimization methods. In this study, a computable general equilibrium model was established to explore the influence of carbon tax rate and tax revenue recycling shares on the economy and on carbon emissions. Meanwhile, a nonlinear optimization model was proposed, for optimizing both steps of carbon taxation synchronously, as well as for promoting GDP and CO2 emission reduction. The Bohai Bay area, a typical area with enormous carbon emissions in China, was adopted as the study case for this research. The results showed that the optimized taxation scheme could lead to lower carbon emissions and greater economic growth, i.e., a strong double dividend was obtained. The optimized taxation scheme could lead to both cleaner air and cleaner energy and industrial structures while still promoting economic growth.