Controlling carbon emissions in China

Abstract

We examine the use of carbon taxes to reduce emissions of CO 2 in China. To do so, we develop a dynamic computable general equilibrium (CGE) model of the Chinese economy. In addition to accounting for the effects of population growth, capital accumulation, technological change, and changing patterns of demand, we also incorporate into our model elements of the dual nature of China's economy where both plan and market institutions exist side by side. We conduct simulations in which carbon emissions are reduced by 5, 10, and 15% from our baseline. After initial declines, in all of our simulations GDP and consumption rapidly exceed baseline levels as the revenue neutral carbon tax serves to transfer income from consumers to producers and then into increased investment. Although subject to a number of caveats, we find potential for what is in some sense a "double dividend," a decrease in emissions of CO 2 and a long run increase in GDP and consumption. * This work was supported through the Harvard University Committee on the Environment's China Project with funding from the U.S. Department of Energy under contract #DE-FG02-95ER62133. We would like to thank three anonymous referees for their helpful comments on our original submission. NON-TECHNICAL SUMMARYIn this paper we examine the use of carbon taxes to reduce emissions of CO 2 in China. To do so, we develop a dynamic computable general equilibrium (CGE) model of the Chinese economy. In addition to accounting for the effects of population growth, capital accumulation, technological change, and changing patterns of demand, we also incorporate into our model elements of the dual nature of the Chinese economy where both plan and market institutions exist side by side.After specifying the time paths of the exogenous variables used in the model, we run a "business as usual" baseline simulation that gives us estimates of GDP, carbon emissions, and other endogenous variables for the 40 years starting from the 1992 base year. Most analyses for developed countries look at the effects of stabilizing or reducing emissions below some target, such as 1990 levels. However, China and other developing countries have raised strenuous objections to attempts to get them to agree to these types of targets. Therefore, we instead simulate the effects of uniform emissions reductions of 5, 10, and 15% from our baseline. To do this we use the model to calculate a carbon tax rate that will hold carbon emissions to a given percentage of the baseline level. The imposition of the carbon tax raises additional revenue for the government. In order to keep the emissions reduction simulations revenue neutral, we reduce all other taxes proportionately.We then compare the outcomes of the carbon reduction simulations with the baseline solution. Increasing the percentage reduction in emissions requires a more than proportionate increase in the per unit tax rate on a ton of carbon. In the case of a 15% reduction in carbon emissions, the imposition of sectoral carbon taxes on coal and oil resul...

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