Carbon Tax in China：A Production Network Perspective

On September 22,2020,President Xi Jinping announced at the 75th Session of the United Nations General Assembly that China would strive to peak CO2 emissions before 2030,and achieve carbon neutrality before 2060.China is taking pragmatic actions towards these goals.As a responsible country,China is committed to building a global climate governance system that is fair,rational,cooperative and beneficial to all,and makes its due contribution to tackling climate change using its greatest strengths and most effective solutions. China's energy conservation and emission reduction policy system originated in the 1980s.With transition from a planned economy to a market economy,China's energy-saving and emission reduction policies have gradually transitioned from administrative directives to market-oriented economic incentives,accumulating rich experience in reducing carbon emissionsduring the past 40 years.The establishment of the dualcarbon goals in 2020 provides clearer goals and greater challenges for China's emission reduction undertakings. Carbon pricing mechanism is an important market-based policy option adopted by many countries and regions to address climate issues,and it mainly includes two methods：carbon tax and carbon emissions trading.Carbon emissions trading is currently the core market regulation mechanism in China.China proceeded carbon emissions trading pilots in seven provinces and cities in 2013,and the carbon trading market was officially launched in July 2021.It covered more than 4 billion tons of emissions,becoming the world's largest carbon trading market once the market went online.Carbon trading is playing an important role in the process of China's emission reduction,but its effect is limited. Carbon tax,another representative market incentive policy tool,is frequently advocated as a cost-effective instrumentin reducing emissions,so it might be necessary to be introduced to China in due time to make up for the shortcomings of current carbon trading policies.Many countries or regions have successfully achieved the synergistic development of carbon tax and carbon trading.Therefore,the feasibility of levying a carbon tax in China and how to realize the coordinated development of carbon tax and carbon market are hot topics of research. Studies on China's carbon tax system mainly focus on the feasibility analysis of introducing a carbon tax and using large-scale macro models such as “Computable General Equilibrium” (CGE) to simulate the impact of carbon tax on emission reduction and economics.Especially after the launch of the carbon emissions trading pilot in 2013,domestic research on the carbon tax has been concerned more about the design of the carbon tax mechanism,and the coordinated development of carbon tax and carbon trading,while research on quantitative analysis has stagnated.Earlier quantitative research on China's carbon tax system based on CGE models are complicated,with high computational costs,and it is difficult to clarify the policy transmission mechanism. Imposing carbon tax would have macroeconomic and environmental impacts.The economy acts as a complex network that closely connects the production sector with the consumption sector.The production network contains rich information about the structure and interactions of industries.Acemoglu et al.(2012) find that the production network is an important channel for the propagation of sectoral individualshocks into macroshocks.Microeconomic idiosyncratic shocks may lead to aggregate fluctuationsin the presence of intersectoral input-output linkages.Therefore,when formulating or evaluating policies,it is not comprehensive enough to consider the direct impact alone,but necessary to take the aggregate effects caused by the production network into account.The propagation mechanism proposed by Acemoglu et al.(2012) also applies to the carbon tax.King et al.(2019) found that sector-specific carbon tax changes can have complex general equilibrium effects in the presence of intersectoral linkages.They provide an analytical characterization of how incremental taxes on emissions of any set of sectors impact aggregate emissions,thereby offering a novel perspective for the analysis of carbon taxes. In this paper,we focus on theeffects of carbon tax in China from the perspective of production networks.We first calculate sectoral carbon emissions generated from energy consumption in 2020 and estimate the embodied carbon flow matrix based on Chinese 42-sector and 153-sector input-output tables.Then we simulate how an incremental sector-specific carbon tax influences the economys total carbon emission through the intersectoral production network linkage as well as the impact on the labor input,output and carbon emission of the taxed sector drawing on the model constructed by King et al.(2019).We find that,due to the existence of production networks,the imposition of a carbon tax will not only reduce the total carbon emissions of the economy by decreasing the output of the taxed sector,but also trigger indirect effects through the upstream and downstream linkages.Therefore,targeting sectors based on their position within the production network can achieve a greater reduction in aggregate emissions than taxing sectors solely based on their direct emissions. The simulation results show that the sectoral ranking of the carbon reduction effect and direct emissions does not correspond one-to-one.Taxing “Petroleum,Coking Products and Processed Nuclear Fuel Products”, “Production and Supply of Electricity and Heat”, and “Metal Smelting and Rolling Processed Products” among the 42 sectorsor taxing “Production and Supply of Electricity and Heat”, “Refined Petroleum and Processed Nuclear Fuel Products” and “Rolled Steel Products” among the 153 sectors will bring the most significantcarbon reduction effect.As the above sectors are the main suppliers of raw materials and major carbon emitters in the production network,imposing carbon tax will prompt them to reform their production technologies and optimize their energy structures,thereby achieving an effective reduction in the total carbon emissions of the economy through their upstream and downstream influences.In addition,taxing on “Petroleum,Coking Products and Processed Nuclear Fuel Products” can bring the biggest decrease in total carbon emissions with a smaller drop of its own production.