This paper investigates the impact of carbon taxes on inequality in China using a Computable General Equilibrium (CGE) model. The model shows that the effects on inequality depend on the distribution of climate damages, tax payments, and revenue recycling. A positive correlation between income and climate damage leads to lower inequality, while a negative correlation increases it. Tax payments by high-income households reduce inequality more than proportional or income-independent taxes. Recycling revenues to low-income households is the most effective method for reducing inequality. The study highlights that absolute income is a more significant determinant of relative utility than income inequality, suggesting that increasing national income can mitigate negative feelings about inequality even if the policy increases inequality.

Shuyang Chen