Study on the optimal policy options for improving energy efficiency and Co-controlling carbon emission and local air pollutants in China

China faces multiple pressures from both global climate change and local pollution. The computable general equilibrium model is used to examine and compare three policy instruments including environmental protection inspection, carbon tax, and non-fossil energy subsidy, in order to determine the optimal policy option to improve energy efficiency and co-control carbon as well as local pollutant emissions with cost-effectiveness. The results show that the ongoing environmental protection inspection can generate a considerable reduction effect on China's local air pollutants and CO₂, and its effect on local air pollutants is more significant. In comparison, the carbon tax policy achieves more balanced co-control effects on local air pollutants and CO₂ reductions. As a result of recycling carbon tax revenue to support non-fossil energy subsidies, the energy efficiency and co-control effectiveness are better than a carbon tax alone, through promoting a composition effect and a technology effect in the economy. Moreover, if the environmental protection inspection involves CO₂ mitigation targets, the policy effects of the carbon tax and non-fossil energy subsidies can be strengthened via increasing costs for non-compliance and improving enforcement. For some developing countries like China, given the lack of enforcement, corruption, as well as a questionable deterrent effect of market-based instruments, policy mix designs involving comprehensive inspection, might be second-best options for future energy efficiency promotion and co-control of local air pollutants and CO₂ to gain double dividend in both economic and environmental welfare.