THE IMPACT OF COAL RESOURCE TAX REFORM ON THE CHINESE ECONOMY: A CGE ANALYSIS

Abstract

China’s coal resource tax reform, introducing an ad valorem tax to replace previous volume-based tax from December 2014, marked a new stage of the resource pricing mechanism reform. In particular, coal, as a pollution-intensive energy, is the main source of energy for China. With this in mind, it is the time to ask what the impacts of this reform would be on Chinese economy. A computable general equilibrium (CGE) model is applied to explore the impact of a 5% ad valorem coal resource tax on Chinese economy under four scenarios involving distinguished electricity pricing mechanisms and tax revenue recycling scheme by deducting consumption tax. Simulation results show that levying ad valorem tax will reduce the output of energy-intensive industries with minor negative impact on economy. A consumption tax deduction can offset the negative impact on real GDP and help the economy to restructure. The concern that reform will push up inflation is unnecessary, even under the market price mechanism of electricity. In terms of winners, export-oriented industries benefit when no tax revenue recycling, while industries producing private consumption goods benefit when ad valorem coal resource tax revenue is used to deduct consumption tax.