Hero or Devil: A comparison of different carbon tax policies for China

A carbon tax is a promising environmental regulation. Given its heavy industrial base and substantial reliance on coal, China is under immense pressure to transition to greener energy systems. This paper enriches Annicchiarico and Di Dio’s (2015) dynamic general equilibrium model for environmental policy analysis by integrating a Schumpeterian innovation-driven clean energy transition that endogenizes the carbon intensity of energy inputs. We analyze the environmental, energy, economic, and social impacts of various hypothetical carbon taxes – including an energy excise tax on households, an emission tax on general producers, and an energy tax on energy suppliers – across different tax rates and subsidy strategies for both short-term and long-term effects. We show that: (i) by internalizing carbon intensity, a carbon tax can achieve a “quadruple dividend”, encompassing emission reduction, energy transition, economic growth, and welfare enhancement; (ii) the optimal carbon tax strategy, integrating both an emission tax and an energy tax, directs revenue towards supporting the clean energy transition; (iii) under a single environmental regime, a composite carbon tax exceeding 250 CNY/ton is optimal, while under multiple regimes, 25 CNY/ton suffices to reduce carbon emissions per unit of output by over 90%; (iv) despite their benefits, all carbon taxes compel firms to reorganize production, inevitably risking unemployment.