B) Sector wide Price Hikes

When the carbon tax is levied, the product prices of 28 sectors will all rise to varying degrees. Taxes on carbon dioxide result in higher prices and higher costs in energy-intensive sectors. The price rise will be transmitted to other sectors through input–output relationships between production sectors. Thus, it results in cost-driven inflation. With the increase in carbon tax rate from 10 CNY/ton to 200 CNY/ton, the prices of various sectors will also rise. When the carbon tax rate is T* = 200 CNY/ton, the average price of 28 sectors will rise by 2.524%. Among them, the sector of Production and Supply of Electric Power is greatly affected, with the price rising by 17.382%. The sector of Smelting and Pressing of Metals ranked in second place, with the price rising by 5.844%. The sector of Nonmetal Mineral Products ranked third, with the price rising by 5.546%. A total of 7 of the top 10 sectors whose price changes of products are greatly affected after carbon tax is levied are heavy industries in the secondary industry. It is mainly due to the fact that China’s current economy is in the stage of heavy chemical industry. Therefore, the levy of carbon tax has little impact on the prices of the primary industry and the tertiary industry.

The carbon tax leads to the rise in product prices in various sectors, because no matter whether it is levied on producers or consumers, the tax burden is ultimately shared by producers and consumers due to the tax burden shifting. After the carbon tax is levied, the price paid by consumers will be raised, and the production cost of producers will also be raised. Consequently, the increase in production costs will lead to cost-driven inflation, which results in the price rising of all the sectors to varying degrees.