Will a carbon tax hinder China’s efforts to improve its primary income distribution status?

Global climate change has become a considerable threat and has raised widespread concern. The carbon (C) tax is a significant policy option for China to address climate change. However, China is also facing pressing domestic issues, such as the severe income disparity of the primary distribution, which have to be considered when introducing a C tax. Employing a recursive dynamic computable general equilibrium model and considering three labor market scenarios, this study aims to assess the impacts of taxing C on China’s primary income distribution from an economy-wide perspective. The results indicate that taxing C would reduce labor remuneration and its share of the primary distribution, with capital income and its share also decreasing, while net product tax and its share would increase, indicating that taxing C would further deteriorate China’s current primary income distribution status and damage both households and enterprises, while the government would benefit the most. However, in the long run, a low C tax will not strongly exacerbate the inequity in the primary income distribution. The results also indicate that the C tax would perform differently under different labor market scenarios, as well as under different critical elasticity values, which indicates that the complex features of China’s labor market and the development of production technology during the transition period should be taken into consideration when introducing a C tax. Moreover, all scenarios could clearly reduce carbon dioxide (CO₂) emissions, with the reduction under the labor-surplus scenario being more obvious.