How does tax system on energy industries affect energy demand, CO2 emissions, and economy in China?

Highlights: • The impact of changes in the fossil fuel tax system is analyzed. • The elasticity of the ad valorem tax rate is greater than that of other types of tax. • How tax reform on energy industries affects the energy demand is discovered. • We encourage raising ad valorem tax rates in the context of resource tax reform. -- Abstract: Energy savings and CO₂ emission reduction have become a major issue in recent years. Taxes on energy production sectors may be an effective way to save energy, reduce CO₂ emissions, and improve environmental quality. This paper constructs a dynamic recursive Computable General Equilibrium (CGE) model to analyze the impact of the energy tax on energy, economy, and environment from the perspective of tax rates and tax forms (specific tax and ad valorem tax). The results show that adjusting the tax system and the tax rate has important implications for energy conservation while having minor impacts on the output of other industries. The impact of an increasing energy tax on the energy demand is greater than the impact on sectoral output, indicating that energy efficiency will be increased to some extent. The CO₂ reduction will increase over time when an ad valorem tax is implemented on enterprises. We found that ad valorem tax has greater elasticity of economic output, energy demand, and CO₂ emission reduction. The results support the direction of China's resource tax reform. However, we argue that it is better to increase the tax rate relatively and relax the control on energy prices so that energy efficiency will increase.