This paper uses a dynamic computable general equilibrium (CGE) model to analyze the effects of revenue-neutral carbon emission trading schemes (ETSs) in China, focusing on government subsidies and value-added tax (VAT) relief. The study finds that reallocating market revenues to the production sector, through subsidies or VAT cuts, can achieve carbon peaking before 2030 with minimal GDP impact. VAT relief to ETS-covered industries is most effective in reducing income inequality, while VAT relief to non-ETS-covered industries is least effective. The paper concludes that reallocating carbon market revenues to ETS-covered sectors is crucial for effective energy consumption regulation and a sustainable energy pattern.
