Impacts of U.S. Carbon Tariffs on China’s Foreign Trade and Social Welfare

A recursive multisector dynamic computable general equilibrium (DCGE) model simulates the economic impacts of carbon tariffs, as proposed by the USA, ranging from $40/t to $60/t CO 2 . We examine a carbon tax and export subsidy as response policies to the U.S. carbon tariff, respectively. The dynamic model shows the possible impacts of these policies on China’s economic structure, carbon emissions, and social welfare from 2020 to 2030. Simulations show that a carbon tariff changes the structure of China’s exports and promotes trade diversion from the USA to other countries and regions. A domestic carbon tax and subsidy policy can dampen the adverse impacts of carbon tariffs on trade. A carbon tax shows an effective impact on increasing clean energy use, decreasing the carbon intensity of output, and reducing carbon emissions. A subsidy on exports to the USA reduces the adverse impact of a carbon tariff on China’s social welfare in the short term.