Income distribution effects of a carbon tax in China

One of the policies considered to reduce CO₂ emissions is the introduction of a carbon tax. Introduction of a carbon tax will increase energy prices and this increase will reduce fossil fuel consumption, which will lead to a reduction of CO₂ emissions. On the other hand, a carbon tax will impose a burden on household consumption since high energy prices will lead to a price increase of almost all goods and services. This burden will not be the same for all income groups since the consumption basket of these groups differs.

Looking at rates of increases in household expenditure by income group, we find that the tax burden for households is regressive in urban areas but it is progressive in rural areas in contrast. If the tax rate is the same in urban and rural areas, households in rural areas will have to bear a relatively high burden compared with urban households.