Carbon tax and double dividend in China – a CGE application

This paper examines the impact of carbon pricing and the ways of using the revenues in China. We use a dynamic CGE model to simulate a carbon pricing scheme between 2015 and 2030. 7 revenue recycling schemes are tested, namely 1) lump-sum transfer to households, 2) cutting consumption tax rate, 3) cutting investment tax rate, 4) cutting export tax rate, 5) cutting intermediate tax rate, 6) cutting labour tax rate and 7) cutting capital tax rate. The budget deficit to GDP ratio is fixed at the base-case level in all scenarios. We examine the economic efficiency using three indicators, including real GDP, real GNP and the erosion of the tax base. The weak form of the double dividend is evident in all non-lump sum revenue recycling schemes, tested by all three economic efficiency indicators in all policy years, with few exception. The strong form is less certain and varies. Nevertheless, the deviations in emission intensity of GDP are similar across the revenue recycling schemes.