Exploring impact of carbon tax on China’s CO₂ reductions and provincial disparities

China is facing an increasing pressure to curb greenhouse gas (GHG) emissions since it surpassed the US and became the largest carbon emitter in 2007 [1], [2]. In order to respond such a challenge, the Chinese government committed to reduce the intensity of carbon dioxide emissions per unit of GDP in 2020 by 40–45% compared with the level of 2005, and to increase the share of non-fossil fuels in primary energy consumption to approximately 15% by 2020 [3], [4], [5]. Considering that China is undergoing fast industrialization and urbanization, the Chinese government realizes that it may not be easy to achieve carbon reduction commitment if only traditional command and control measures (e.g., the measures for energy-efficiency) are used [6]. Thus, it is necessary to introduce market-based emission reduction measures such as carbon tax and carbon trading.

In 2013, China’s National Development and Reform Commission (NDRC) launched its "pilot emission trading scheme" in seven provinces and cities [7], [8]. Chinese President Xi Jinping further announced in September 2015 that China would launch a national cap-and-trade scheme in 2017 [9]. As for carbon tax policy, NDRC and the Ministry of Finance (MOF) had also issued their joint special report, proposing that a carbon tax should be levied in China around year 2012 [10]. However, it was postponed due to many reasons. Economists and international organizations have long advocated carbon taxes because they are easier and can generate larger carbon emission reduction with less negative impact on economic growth [11], [12], [13]. Moreover, the carbon trade scheme is a complicated and long process that cannot effectively respond current environmental problems, particularly the serious haze weather [14]. It is particularly critical to promote such a tax in China since China is facing serious challenges on responding climate change and promoting energy saving and emissions reduction [15], [16]. Therefore, considering the advantages of the policy itself and the possibility of being implemented in the near future of China, this study examines the impact of future carbon tax on China so that useful policies can be released to guide its future carbon tax implementation.

Carbon tax targets to levy tax on fossil fuels (such as coal, oil, natural gas) according to their carbon contents or their carbon emissions from combustion [17]. It is an incentive-based policy instrument for controlling the carbon dioxide emissions and has received global attentions since early 1990s [18], [19]. The ultimate objective of such a tax is to mitigate climate change by increasing the cost of fossil fuel usage. The implementation of this policy will result in a demand shift from carbon intensive fuels to "clean energy" (a process of optimization in energy mix) and also an industrial structure shift from energy intensive production to knowledge or service based economy [20]. The collected tax could be used to support the development of renewable energy by subsidizing the environmental protection projects or the technological development of energy saving and emission reduction [13].

Several studies have been done to evaluate the effect of carbon tax on China’s economic development, carbon reduction, living standard, social welfare, et al. For example, Liu and Lu investigated carbon tax impact on China’s economy using a dynamic CGE model, namely the CASIPM-GE model, and results showed that the carbon tax was effective to reduce carbon emissions with minor impact on China’s macro economy [21]. Liang and Wei [10] adopted a recursive dynamic CGE model to explore the impact of a carbon tax on the urban–rural gap and living standard, and found that the implementation of carbon tax under the current social welfare system would increase the income gap between urban and rural households. Li et al. [22] found that a uniform carbon tax may impede the economic development in less developed regions but will promote economic development in the more developed coastal areas. Wang and Yan [15] investigated the impacts of carbon tax on Chinese economy, energy saving and carbon emissions reduction by using one CGE model and concluded that lower carbon tax is a feasible choice under current economic situations. Yang et al evaluated the potential of China’s carbon tax policy in CO₂ mitigations from the perspective of inter-factor/inter-fuel substitution and found that nearly 3% reduction in CO₂ emissions from the 2010 level can be achieved by levying a carbon tax at 50 Chinese Yuan (RMB)/ton, particularly in the areas of East coast and Southwest China [20]. Zhu et al. investigated the impact of carbon tax on different Chinese industrial sectors and concluded that carbon tax has different impacts on different economic sectors and higher emission sectors may suffer from such a policy [23]. In addition, Zhang and Li further confirmed that carbon tax would stimulate economic development in most eastern regions but may have negative impacts on the economic development in the middle and western regions [24].

However, these published studies mainly focus on the whole China or one province or different regions. Since China is a very large country with imbalanced economic development, different resource endowments and technological levels [25], it is necessary to uncover the provincial disparities of carbon tax effect on both economic development and carbon reduction so that key provinces for carbon tax implementation can be recognized. Therefore, the main objective of this study is to predict future carbon tax impact so that valuable carbon tax policies can be raised to guide China’s low carbon development. A 30-Chinese-province CGE model has been developed for such a provincial evaluation. The whole paper is organized as below. After this introduction section, Section 2 presents the research methods, including a detailed introduction on the new 30-Chinese-province CGE model and scenarios setting, as well as data collection and treatment. Section 3 describes the research results on future industrial CO₂ reduction potentials for different industrial sectors and provinces under different carbon tax scenarios. Section 4 discusses policy implications with a special attention on carbon tax sensitivity and provincial carbon tax efficiency. Finally, Section 5 concludes the whole study and provides reasonable policy recommendations for implementing carbon tax in China.