Exploring the impacts of a low-carbon policy instrument: A case of carbon tax on transportation in China

The rapid growth of energy consumption and CO2 emission in transportation has brought great challenges to China's energy demand and environmental issues. Carbon tax, considered as an efficient low-carbon policy instrument, can effectively reduce the use of fossil fuels and improve energy efficiency. This study aims to explore the impacts of a transportation carbon tax on transport sectors, macroeconomy and social welfare by developing a computable general equilibrium (CGE) model. Meanwhile, to achieve fiscal revenue neutrality, two schemes are employed for revenue recycling. One is that all of the carbon tax revenue is recycled to subsidize households through lump-sum transfer; the other one is that carbon tax revenue is used to reduce the income tax of households and enterprises. The simulation results show that the appropriate carbon tax rate is 50 Chinese Yuan (RMB)/ton-CO2. At this level of taxation, energy demand and carbon reduction have fewer negative impacts on the macro-economy and transport sectors. We also find that the appropriate carbon tax rates among different transport sectors and different energy categories are different. The appropriate carbon tax rates for airlines, railway, urban transport and water transport are same (50 RMB/ton-CO2), while the appropriate carbon tax rate for road transport sector is 60 RMB/ton-CO2. The recycling of carbon tax revenue to households and enterprises should be implemented to realize the “weak double dividend” effect of the carbon tax.