The Distribution Effects of a Carbon Tax on Urban and Rural Households in China

Abstract

Carbon tax is an important carbon emission mitigation tool and has been widely recognized as an efficient mechanism for slowing down global warming. The imposition of a carbon tax will, however, inevitably affect income distribution, as a household’s income level influences its priorities regarding consuming the affected goods. This will have important implications for the government, which will have to formulate policies that can achieve efficiency as well as equity. In this study, we apply the input–output price model to estimate the distribution effects of a carbon tax for urban as well as rural areas in China. Our results show that the price increases due to carbon taxes affect rural areas more than urban areas. The Suits index in rural areas is −0.1928, while the value in urban areas is −0.0588. This indicates carbon tax is regressive in all areas, especially the rural ones, and there is a need to formulate suitable policy measures to alleviate a possible widening income gap among income groups and between urban and rural areas.