Would carbon tax be an effective policy tool to reduce carbon emission in China? Policies simulation analysis based on a CGE model

In China's 2019 VAT reform, the VAT rate for manufacturing was adjusted from 16% to 13%. This inevitably promotes manufacturing production and triggers a substantial increase in carbon emissions. Would carbon tax be an effective policy tool to offset the negative externalities of the VAT reform on carbon emissions? We construct a multi-regional dynamic-recursive computable general equilibrium (CGE) model to evaluate this possibility and to investigate the potential impacts on the economy, energy, and environment arising from this reform. The scenarios set includes the VAT reform policy, a carbon tax, and three combined policies. The results show that while China's VAT reform is a positive fiscal policy that can boost long-lasting macroeconomic development, it has a negative impact on environmental protection. A carbon tax can significantly curb traditional energy consumption and emissions, but it would hinder economic development. Combined policies yield 'double dividends', that is, a long-run increase in macroeconomy and emissions reductions will be achieved, helping China to attain its Intended Nationally Determined Contributions goal. The combination of VAT reform and a stepped carbon tax maintains a more stable economic growth while sustaining carbon emission abatement.

Automated summary

The 2019 VAT reform in China led to an increase in carbon emissions despite boosting manufacturing production. Research suggests that introducing a carbon tax can effectively reduce traditional energy consumption and emissions, but may hinder economic development. Combining VAT reform with a phased carbon tax can achieve 'double dividends', promoting long-term macroeconomic growth and emission reductions.