Would an increasing block carbon tax be better? A comparative study within the Stackelberg Game framework

Abstract

Carbon tax is a policy for controlling carbon emissions, and is widely used worldwide. However, a non-differentiated carbon tax increases financial burden on manufacturers and inhibits their willingness to produce. Herein, a novel carbon tax policy involving an increasing block carbon tax is proposed, and the policy's possible implementation effects are analyzed. First, based on the Stackelberg game, the study constructs a social welfare model considering carbon emissions. Then, the study discusses the theoretical characteristics of the proposed carbon tax policy. After that, the differences and similarities between a flat carbon tax and an increasing block carbon tax are analyzed using a numerical simulation. The results indicate that: (1) compared to flat carbon tax, an increasing block carbon tax has the same controlling effect on carbon emissions. Both forms of taxes can restrict total carbon emissions within the desired range. (2) An increasing block carbon tax policy can significantly reduce tax burdens for manufacturers, and encourages low-carbon production. (3) An increasing block carbon tax can flexibly adjust the relationship between government's carbon tax revenue and manufacturer's tax burden. Finally, some policy implications for the proposed strategy are revealed.

Keywords: Carbon emissions; Increasing block carbon tax; Social welfare model; Stackelberg game.