Carbon taxation policy in China: How to protect energy- and trade-intensive sectors?

China's economy is now growing fast; as is the increase in requirements of energy and CO₂ emission. The coming into force of the Kyoto Protocol confronts China with a realistic and tough challenge. The disregard of the environment is one of the major causes of the current severe status of China's pollution. Carbon tax could be an ideal economic tool to deal with the post-Kyoto pressure that China is faced with. However, the foundation and implementation of a carbon tax policy would be complex. One of the primary negative effects of carbon tax would be its potential strike on the international competitiveness of energy-intensive sectors. This study established a computable general equilibrium model simulating a carbon tax policy in China, and compared the macroeconomic effects of different carbon tax schemes as well as their impact on the energy- and trade-intensive sectors. The results show that the negative impact of carbon tax on the economy, and on the energy- and trade-intensive sectors, could be alleviated through properly relieving or subsidizing production sectors. One approach of taxing is to combine the tax exemption for energy- and trade-intensive sectors with the reimbursement of tax revenue to the un-exempted sectors.