Carbon Leakage in Carbon Taxes and Emissions Trading Scheme Taking China as an Example

This study uses a computable general equilibrium model to analyze how the economic and environmental effects of an industry-wise carbon tax and domestic emissions trading in the Chinese economy are affected by the expansion of the target sectors. The results confirm that emissions trading for all sectors has the most negligible economic burden. If emissions trading is implemented in eight sectors, as is planned for China, it may be possible to reduce the economic burden by excluding petroleum/coal products. Furthermore, it is observed that the expansion of the target sectors impacts carbon leakage. While lower coal prices bring about carbon leakage in non-reduced sectors, CO2 emission reductions in the electricity sector promote CO2 emission reductions from the coal sector. Furthermore, CO2 emission reductions in the petroleum/coal products sector promote CO2 emission reductions from the transportation sector and households (negative carbon leakage). If energy-intensive sectors are not target sectors, the effects of carbon leakage exceed those of negative carbon leakage, and China experiences domestic carbon leakage. When energy-intensive sectors are targeted for reduction, the latter’s effects outweigh the former’s, and domestic carbon leakage may not occur. However, ironically, it was found that global carbon leakage occurs through international trades when domestic carbon leakage does not occur in China.