Given the internalization of emission costs and the scarcity of permits, carbon emission permits become an integral production input. We regard carbon emission permits as a new factor and add them into the general equilibrium model to analyze their burden distribution on other classical factors, capital, and labor. We find that the impact of scarce carbon emission permits on capital and labor income can be decomposed into two major effects: the substitution effect and the output effect. The substitution effect reveals that policy restrictions on carbon emission permits may be more burdensome to the factor that is a better substitute for carbon emission permits. The output effect indicates that it may burden the factor used intensively in high-carbon goods production. If the policy restriction on carbon emission permits is changed from a mass-based scheme to a rate-based scheme, the output effect becomes an output-subsidy effect. It instead places less burden on the factor used intensively. We further calibrate the model to China’s economy. The results of the numerical analysis show that China’s carbon emission trading schemes (ETS) help labor and hurt capital. Specifically, under the LC scenario, taking 2030 as the base year, the labor income is equivalent to a 30.0% increase in 2060, and the capital income is equivalent to a 32.5% reduction. Moreover, it can also increase the welfare of society in general and middle-income households in particular. These findings provide initial empirical evidence that granting permits to carbon emissions may help reduce excessive dependence on capital, thereby alleviating the global trend of declining labor income share.
Yu et al. (Mon,) studied this question.