ISETS Working Papers

ISETS Working Paper No. 22-0001

Mitigating Size Bias for Carbon Pricing in Small Asia-Pacific Countries: Increasing Block Carbon Tax

Yunfei An, Dequn Zhou, Qunwei Wang, Xunpeng Shi, Farhad Taghizadeh-Hesary

Abstract: While the popularity of emission trading schemes (ETS) has exceeded that of carbon taxes, ETS is not applicable to all countries. This paper investigates the increasing block carbon tax (IBCT), which is a modified carbon tax based on the increasing block tariffs theory. The IBCT considers the size bias in emission reduction, and this paper discusses whether it is suitable for small Asia-Pacific countries (SAPCs). Both theoretical analysis and numerical simulation were used to compare the impacts of IBCT and flat carbon tax (FCT) on the emission reduction behavior of manufacturers in both purely competitive and co-opetitive market environments. This study demonstrates that the IBCT is better than the prevailing FCT, and the results indicate that this could be a better choice for SAPCs. The implementation of the IBCT policy in SAPCs can protect domestic manufacturers and decrease the risk of carbon leakage. The IBCT promotes low-carbon production when the manufacturers expand their scale, which can lead to a win-win situation for social welfare and environmental development. We suggest that the IBCT should be implemented in high-carbon industries; its formulation needs more market details than FCT. Besides the policy, the development of reduction technologies also cannot be ignored.