Addressing the competitiveness effects of taxing carbon in China: domestic tax cuts versus border tax adjustments

Abstract This study focuses on the international competitiveness effects of levying a carbon tax in China. Based on a computable general equilibrium model, this study analysed the impacts of a carbon tax on different sectors from the aspect of changes in market shares of domestic producers in the domestic markets and changes in exports. The effects of different measures, including domestic tax cuts and border tax adjustments, in alleviating the unfavourable competitiveness impacts were also analysed and compared, as were the impacts of different tax schemes on the macro-economy, sectoral profits and carbon emissions. The results show that without any complementary measures, a carbon tax would negatively shock the domestic market shares and exports of almost all tradable sectors and the profits of almost all sectors. As for cushioning the unfavourable effects, the domestic tax cuts are able to ease the negative impacts on the domestic market shares and exports of almost all tradable sectors. Moreover, the unfavourable impacts of domestic tax cuts on both the macro-economy and the sectoral profits are obviously smaller than those of the other schemes, regardless of the use of the same tax rate or emission reduction amount. Among the border tax adjustment measures, the best performance in general corresponds to the measure purely implementing adjustments on exports.

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