## The Overwhelming Case for a Carbon Tax in China

_IMF Blog, July 27, 2016_

## Source details

**Canonical URL:** [The Overwhelming Case for a Carbon Tax in China](https://www.imf.org/en/blogs/articles/2016/07/27/the-overwhelming-case-for-a-carbon-tax-in-china)

## Other formats

- [Markdown version](/en/blogs/articles/2016/07/27/the-overwhelming-case-for-a-carbon-tax-in-china/index.md)
- [Structured JSON version](/en/blogs/articles/2016/07/27/the-overwhelming-case-for-a-carbon-tax-in-china/index.json)
- [Bundle manifest](/en/blogs/articles/2016/07/27/the-overwhelming-case-for-a-carbon-tax-in-china/bundle-manifest.json)

## Bibliographic details
- Authors: Ian Parry, Philippe Wingender
- Published: July 27, 2016

---

### Key findings
- A carbon tax—an upstream tax on the carbon content of fossil fuel supply—could dramatically cut greenhouse gases, save millions of lives, soothe the government’s fiscal anxieties, and boost green growth.
- A tax on carbon dioxide (CO2) emissions, rising by $5 per year between 2017 and 2030, could reduce CO2 emissions by 30 percent in 2030.
- The carbon tax could save close to 4 million lives during this 14-year period, principally by deterring use of coal, the main source of the fine particulates that elevate the risk of strokes, heart, and lung diseases.
- The tax would raise well over 2 percent of GDP in new revenue by 2030, representing more than enough to double government spending on healthcare.
- China contributed 25 percent to the global CO2 total in 2013, compared with 16 and 6 percent from the United States and India, respectively.

### Methods and projection assumptions
- Findings are based on a new spreadsheet tool developed at the IMF for projecting future fuel use by economic sector.
- Projections use assumptions about how fuel demand responds to price changes and previous IMF estimates of local air pollution deaths from fuel combustion for China.
- The central policy scenario specifies a carbon tax rising by $5 per year between 2017 and 2030.
- The future is inherently uncertain; the numbers provide a broad indication of likely impacts rather than precise forecasts.

### Public health and fiscal impacts
- Estimated lives saved: close to 4 million over 2017–2030.
- Estimated fiscal revenue: well over 2 percent of GDP by 2030.
- Example consumer impact: in 2020 the carbon tax raises electricity prices by around 5 percent.

### Distributional impacts and compensation options
- The carbon tax imposes a disproportionately large burden on low income households: 50 and 25 percent larger for the lowest 20 percent of income earners, compared with the top ten percent of income earners.
- Only about 5 percent of carbon tax revenues would be needed to compensate the bottom twenty percent, for example through reduced social security contributions and increased welfare and social spending.

### Sectoral impacts and export considerations
- Exporting sectors do not bear a disproportionate share of the tax burden compared with other sectors.
- Compensation for export industries would use at most 10 percent of carbon tax revenues and should be temporary to allow uncompetitive firms to exit or adapt.
- Needed compensation could be smaller if more countries adopt comparable emissions pricing.

### Implementation notes and administrative feasibility
- Administering a carbon tax is straightforward: levy at point of entry with rates based on tons of CO2 produced per unit of fuel.
- Possible collection points: mine mouth for coal (where royalties are already collected), coal processing plants, refineries for petroleum products, and the border for imported fuel products.
- Downsides are manageable; the most difficult challenge is addressing higher energy prices for vulnerable groups.

### Carbon tax versus emissions trading system (ETS)
- China committed to introducing a nationwide ETS in 2017 for large industrial sources.
- A carbon tax, by comprehensively covering fuels and emissions, has about twice the environmental and revenue impacts of an equivalently scaled ETS.
- The tax can be introduced in tandem with the ETS for the interim (for example, allowing carbon tax refunds for entities required to obtain emissions permits).
- The priority is establishing a robust and far-reaching emissions price to realize health and fiscal benefits while addressing the global environmental challenge.

*Source: The Overwhelming Case for a Carbon Tax in China, Ian Parry and Philippe Wingender, July 27, 2016.*

---


## References

- [https://www.imf.org/wp-content/uploads/2016/07/rev-2figure.jpg](https://www.imf.org/wp-content/uploads/2016/07/rev-2figure.jpg)
- [findings](http://www.imf.org/external/pubs/cat/longres.aspx?sk=44120.0)
- [previous IMF estimates](http://www.elibrary.imf.org/view/IMF071/21171-9781484388570/21171-9781484388570/21171-9781484388570.xml?highlight=true&redirect=true&result=1&rskey=kHyJS5)

_Source: https://www.imf.org/en/blogs/articles/2016/07/27/the-overwhelming-case-for-a-carbon-tax-in-china_