Optimal carbon taxes for China and implications for power generation, welfare, and the environment

China is expected to constitute about half of the world's emissions between 2010 and 2040. As concerns about climate change intensify, the Chinese government is poised to commit to a low carbon economy. These conditions make China a suitable case in which to study how emission policies impact on energy supply, welfare, and the environment. To achieve this purpose, we incorporate abatement technologies into the GTAP computable general equilibrium model and show that optimal taxes range between 0.03% for services and 2.02% for manufacturing. In most cases, simulated tax rates are by far higher than pollution taxes stipulated in the new Chinese environmental tax law. Furthermore, despite a decline in output of many sectors including the electricity sector, overall welfare gains exist from introducing carbon taxes. Moreover, these taxes reduce environmental pollution by approximately 62.5%. In general, carbon taxes are insufficient for mitigation in China, and due to a coal-dominant energy structure, implementing these taxes leads to a decline in power generation. Hence, the Chinese aggressive investment strategy for renewable electricity technologies as stipulated in its 13th Five-Year Plan is understandable.