The optimal choice of environmental tax revenue usage: Incentives for cleaner production or end-of-pipe treatment?

Abstract

The environmental tax system is effective in pollution abatement. However, levying an environmental tax may be detrimental to economic growth. Reasonable use of environmental tax revenue may achieve both environmental protection and economic growth. This study proposes to earmark environmental tax revenue for pollution treatment. Taking fiscal expenditure theory into consideration, environmental tax revenue usage is divided into transfer expenditure and purchase expenditure. An environmental computable general equilibrium (CGE) model is established to evaluate the effects of environmental tax revenue usage. The optimal choice is to increase the environmental tax rate and simultaneously use tax revenue for cleaner production subsidies and end-of-pipe treatment expenditures. Under the optimal scenario, pollutant retention decreases by 21.45%, and GDP increases by 0.006%. For most regions in China, it is better to raise the environmental tax rate to the middle level of a specified range. Moreover, the government should distribute environmental tax revenue evenly across the expenditure of different environmental protection projects.