Abstract

This paper investigates the distributional effects of China's National Emissions Trading Scheme (ETS) on different income groups by using a recursive dynamic computable general equilibrium model including 11 household groups (including one rural household group and ten urban household groups). Scenarios are designed along two dimensions including sectoral coverage and revenue recycling. For each scenario, distributional effects are decomposed from both source-side and use-side perspectives. Simulation results show that if ETS's carbon revenues are not recycled to households but used for government expenditures, the overall distributional effects are regressive. If ETS's carbon revenues are recycled to households through income tax reduction, there still exist strong regressive distributional effects. However, if revenues are recycled to households through lump-sum transfers, the overall effects are progressive since the positive source-side effects dominates the negative use-side effects. The distributional effects will become slightly progressive when revenues are recycled to households through consumption tax reduction with a broader sectoral coverage. Rural household will benefit from the scenario that revenues are recycled through lump-sum transfers and income tax reduction but suffer from other scenarios. The findings of this paper suggest that policy-makers should pay great attention to the revenue recycling forms since they can have decisive distributional effects on households' welfare. Besides, ETS market should also be carefully designed since a broader sectoral coverage will also alleviate the negative use-side distributional effects.

Citation

Wu, L., Zhang. S., & Qian, H. (2022). Distributional effects of China's National Emissions Trading Scheme with an emphasis on sectoral coverage and revenue recycling. Energy Economics, doi: 10.1016/j.eneco.2021.105770