The Distributional Effects of a China Carbon Tax: A Rural–Urban Assessment

Abstract

In September 2009, the National Development and Reform Commission and the Ministry of Finance of China—the country that emits the most greenhouse gases—issued a report on the necessity and feasibility of imposing carbon taxes in the country. The Commission also explored a tax design. In this study, we use input–output analysis to examine the scenario presented in that report, and attempt to measure the potential distributional impact of carbon taxes on Chinese residents. The results suggest that a carbon tax in China would be regressive in urban areas but progressive in rural ones, and that rural areas are more heavily burdened than urban areas. In addition, given that most policy options with regard to revenue-recycling—as implemented in industrialized countries— are not feasible in China, we show that lowering the electricity prices for households would be a practical approach that would lighten the burden on poor urban households and narrow the rural– urban disparity in tax burden. This would offset the adverse distributional effects of the carbon tax.