Abstract: By constructing an overlapping generation model with individual heterogeneity, this paper conducts a comprehensive quantitative analysis of the environmental, economic, welfare and distribution effects of China’s environmental tax policy. The results show that the determination of the rate of environmental tax should take into consideration China’s economic growth and emission reduction targets; in the early period of collection, low tax rates should be adopted, so as to reflect the relationship between environmental taxes and macroeconomic pro-cycle. In general, the environmental tax policy in line with the principle of tax neutrality is better than non-tax-neutral policies to increase the overall tax burden. Under different expenditure and tax return forms, the policy effects of environmental taxes are quite different. The government needs to balance their efficiency and fairness to select policy options which are consistent with the policy objectives.

Key words: environmental taxes; tax-neutrality; policy effect; individual heterogeneity