The short-term price effects and transmission mechanism of CO2 cost pass-through in China: A partial transmission model

Abstract: CO2 cost pass-through due to environmental policies will lead to an increase in general prices. Because of factors such as the market structure and technology level, the capability of cost pass-through is significantly different among sectors. This topic is related to the central environmental policies regarding who will bear the CO2 cost burden. To analyze the short-term impacts of CO2 cost pass-through on general prices and the transmission mechanism in China, this study simulates a carbon tax that will be levied in 2020 using a partial input-output model and a complex network theory. Two scenarios are compared: a complete transmission, in which CO2 costs are 100% transferred to downstream industries, and a partial transmission, in which CO2 costs are partially transferred. The results show that the cost pass-through capabilities of sectors vary significantly. Coal mining and service are the source of inflation and have the strongest cost pass-through capability. Second, the impacts of CO2 cost pass-through on general prices are significantly different between a complete transmission scenario and a partial transmission scenario. The average price increase in the partial transmission scenario is 0.24%, which is less than the average price increase of 0.58% in the complete transmission scenario. Finally, this study analyzes the price transmission mechanism between sectors in the process, including key sector analysis, critical paths analysis, and community analysis. Our research is valuable for further studies on the welfare effects of the carbon tax on producers and consumers.