Volume 20: Sustainable Energy Solutions for a Post-COVID Recovery towards a Better Future: Part III

Recycling Carbon Pricing Revenue and the Effects on Income Inequality and Regional Disparity: A CGE-based study of China Yibing Zhao, Yidan Chen, Can Wang, Wenjia Cai

Abstract

Carbon pricing policy is one of the most efficient tools to mitigate carbon emissions. However, additional carbon cost alters the production behavior and sectoral development, thus leading to income redistribution and regional disparity. Revenue recycling schemes use the carbon pricing revenue to reduce preexisting revenue-motivated taxes. This paper intends to evaluate the effect on income inequality and regional disparity of carbon pricing policy with different revenue recycling schemes. This study adopts the China Hybrid Energy and Economic Research (CHEER) model, a dynamic CGE model, and extends it to the CHEER-Plato model in order to better study the effects of the carbon pricing policy and the revenue recycling schemes. Results show several key findings. First, carbon pricing policy without recycling the revenue will lead to greater income inequality, increasing the national Theil index by 0.87% and 3.61% in 2030 and 2040 respectively. The inter-provincial disparity will raise obviously by 3.97% and 12.72%, while the inner-provincial inequality will change slightly. Second, recycling carbon pricing revenue through individual income tax return reduces income inequality. Compared with policy without recycling schemes, returning the revenue with progressive tax return rates by labor income groups, reduces the Theil index by 2.53% and 7.88% in 2030 and 2040, while the scheme with region-specified return rate by 1.42% and 4.42%, and the scheme with uniform return rate by only 0.43% and 1.23%. Third, carbon pricing policy reduces the inequality in Shanxi and Inner Mongolia by more than 2% and revenue recycling scheme with progressive tax return rates by labor income groups further narrows the income gap in Yunnan, Guizhou, and Xinjiang by over 3% in 2030.

Keywords Carbon Pricing Policy, Tax Revenue Recycling, Income Inequality, Regional Disparity, Dynamic CGE model