Carbon-Based Public Finance: Debt-Alleviating Effects of a Carbon Tax in China

Abstract

To mitigate China's soaring public debt, we advocate for a carbon-based public finance system centred around a carbon tax. CGE modelling shows that an origin-based carbon tax can significantly alleviate debt pressure, a finding subsequently supported by empirical research using a generalised DiD method. We believe that generating public revenue from carbon emissions is highly sustainable. However, spillovers are worth noticing, and destination-based carbon taxes warrant careful consideration. Apart from a carbon tax, the Chinese government should also advance an auction system for emission allowances in the carbon market, for the establishment of a comprehensive carbon-based public finance system.