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Cost-push impact of taxing carbon in China: A price transmission perspective

Chang, Ning, Han, Chaohui
Journal of cleaner production 2020 v.248 pp. 119194
carbon, carbon dioxide, carbon markets, greenhouse gas emissions, models, policy analysis, prices, public services and goods, taxes, China
This paper aims to provide a comprehensive look at the potential price effects of a carbon tax at the sectoral level in Chinese economy. From a production perspective, the sectors subjected to the levy are discussed based on sectoral linkage characteristics, and then the tax-induced repercussions of output prices are simulated using an extended I–O price model. The results, based on the Chinese economy for the year 2012, show that levying a carbon tax on sectors with above-average CO₂ emission linkages and non-significant production linkages will increase their output prices by an average of 1.93%, while induce relatively slight price increases in the encouraged group (0.30%) and the other group (0.34%); the household is the least affected sector (0.28%) in the economy. This means that an appropriate tax design tends to shift intermediate inputs and expenditure toward less CO₂-intensive goods and services by its uneven cost-push impacts on production sectors, and the entire economy will ultimately get affected. By establishing techniques for policy evaluation, our analysis highlights the value of linkage analysis in the design of a carbon tax and brings more clarity to price transmission after the imposition of a carbon tax in the economy; consequently, the indirect effect of carbon tax on household can be better understood.