The distributional effects of China'senvironmental taxation: A multi-regional analysis

Environmental taxation is regarded as an effective tool to improve air quality in China, but its distributional effects causing serious disparity among multi-groups and multi-regions are understudied. Here this paper constructs a multi-regional dynamic recursive computable general equilibrium (CGE) model to explore the distributional effects of China's environmental taxation among different income groups and regions, by specifying the elasticity parameters of urban households' consumption in the model, and combining with various micro-data such as household survey data and environmental statistics database. This paper simulates the air pollution reductions of China's environmental taxation, and the impacts on the income and expenditure of households with various environmental tax rates or manners of tax revenue recycling. Results have shown that China's environmental taxation will widen the gap between different income groups and different regions. Also, such adverse distributional effects will be increased by higher environmental tax rates. However, recycling environmental tax revenues to both households and enterprises can reduce the losses of households' income and consumption. Yet recycling revenues to enterprises is more effective in narrowing the gap between income groups and regions while improving regional economic development. Our findings may pave a way to design appropriate environmental tax rates and tax revenue recycling manners for China's future environmental tax policies at the regional level.