Studies on effects of environmental taxes under perfectly competitive markets — Based on the simulation of China

Abstract

Based on the classical model established by De Mooij (2000) <sup xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">[1]</sup> , this paper attempts to investigate the effects of environmental taxes in a small open economy and simulate the results of the model with China's data, so as to propose policy suggestions for China's environmental tax reform. In our model, we suppose the small open economy is under a “second best” framework, where there are pre-distortions (mainly environmental distortions and tax distortions) in the economy. Our study indicates that when the environmental tax reform is carried out on the condition that the revenues of environmental taxes are used to finance distorting taxes, there is a tradeoff between environmental qualities and economic efficiency. Therefore, the effects of “double dividend” fail in our model and simulation on China's data. This also demonstrates that the optimal environmental tax rate under “second-best conditions” is lower than that of Pigouvian tax. However, empirical studies based on China's data indicate that there are great differences between environmental taxes on firms and households. A small environmental tax on households can improve environmental qualities at a very low cost of the economy, but environmental taxes on firms will sacrifice economic growth to a great extent though environmental qualities will be improved greatly.