From the economic perspective, carbon emissions resemble other environmental pollution issues; economic entities maximize their self-interest by overexploiting public goods like the environment, causing environmental damage and generating negative externalities (Hardin, 1968; Zhang et al., 2019). The economic entity cannot fully internalize the costs of pollution emissions, preventing markets from accurately reflecting true environmental costs. The Organization for Economic Cooperation and Development (OECD) proposed the “polluter pays principle”, providing the theoretical foundation for carbon taxation (OECD, 2008; Tan et al., 2022).

The concept of carbon tax originates from the book “Economics of Welfare” published by the British economist Pigou in 1920, also known as the Pigou tax (Pigou, 1920). Carbon tax refers to the tax imposed on carbon dioxide emissions, which is often collected at the production or consumption side of fossil fuels (Aldy and Stavins, 2012). It has the dual attributes of environmental law and tax law, as well as the mechanism functions of both the government and the market, generating potential “dual dividends” that can improve the environment and enhance economic efficiency simultaneously. Pearce (1991) formally defined the dual dividend concept when discussing tax system reform, demonstrating that the carbon tax could enable the government to achieve dual targets. The first dividend is the “green dividend”, which increases the cost of using traditional fossil energy to prompt enterprises to adopt new types of energy or improve energy utilization efficiency, thereby achieving emission reductions. The second dividend represents the “social dividend”, tax revenues can further support emission reduction initiatives, enhance economic efficiency, promote social equity, and increase social welfare (Avi-Yonah and Uhlmann, 2009; Chen and Nie, 2016). Liu (2024) even believes that by internalizing carbon intensity, a carbon tax can achieve a “quadruple dividend”, encompassing emission reduction, energy transition, economic growth, and welfare enhancement.

The carbon tax has established mature theoretical frameworks and practical experience in developed countries and regions such as the European Union. According to The World Bank’s report “State and Trends of Carbon Pricing 2025”, as of April 2025, more than twenty countries and regions have implemented the carbon tax (World Bank, 2025a). These jurisdictions exhibit significant variations in carbon tax rates, as shown in Figure 2 (World Bank, 2025b). Overall, the carbon tax rates in European countries are relatively high, but currently, the carbon prices of most countries are still far below the level of 40-80$/t CO₂ required to achieve the 1.5°C temperature control target of the Paris Agreement. The High-Level Commission’s report has determined that to keep the global temperature control target below 2°C by 2030, the carbon price needs to be set at 50-100$/t CO₂. It can be seen from this that the current carbon tax rate is relatively low and still needs to be further raised.

To reduce carbon emissions in the shipping industry, international organizations and governments worldwide have implemented various policy measures to promote carbon emission reduction (Zhang et al., 2022; Jin et al., 2024). Since January 1, 2024, the shipping industry has been officially incorporated into the EU emissions trading system. Under this system, ship operators must pay carbon quotas for each ton of carbon dioxide they emit.

Carbon tax and emissions trading system (ETS) have consistently attracted significant academic attention as the two most important market-based emission reduction strategies (Li and Su, 2017; Gao et al., 2020; Wang et al., 2022; Xu et al., 2023). ETS implementation conditions are relatively strict, and the implementation cost is relatively high, often only applicable to large-scale enterprises in a specific industry (Liu et al., 2015). In contrast, the carbon tax mechanism follows a price control approach, where the government sets the price, it provides stronger price signals, imposes lower administrative costs, offers greater policy flexibility, and facilitates better coordination with other climate policies (Morgan and Patomäki, 2021). Carbon tax typically achieves greater emission reductions than ETS (Green, 2021; Ahmad et al., 2024), carbon tax is more significant in the long run, and the emission reduction cost is also lower than ETS (Yu, 2020). A detailed comparison between the carbon tax and ETS is shown in Table 2.

Emission reduction strategies in the shipping industry usually include optimizing navigation decisions, such as route optimization, speed optimization, etc (Moore et al., 2018). Or use cleaner alternative fuels, such as low-carbon fuels like LNG and methanol (Arefin et al., 2020; Tvedten and Bauer, 2022; Elkafas et al., 2022), and zero-carbon fuels like hydrogen and ammonia. Optimizing operational measures and using alternative fuels are highly dependent on the autonomy of enterprises, which may lead some enterprises to refrain from taking action to save costs. The carbon tax is enforced through legislation, covering all eligible ships to prevent operators from evading their emission reduction responsibilities. The comparison among Carbon tax, optimized navigation decisions, and cleaner alternative fuels is shown in Table 3. The carbon tax is not in competition with the other two measures, it’s a key policy that coordinates and leads them. Aims to create a fair, competitive environment, allowing the market to independently discover the most cost-effective emission reduction combinations (such as prioritizing adopting optimized navigation decisions and gradually transitioning to cleaner alternative fuels). Consequently, this approach achieves emission reduction goals at the lowest overall cost to society.

The International Maritime Organization (IMO) and national governments typically formulate energy conservation and emission reduction policies for the shipping industry, but policy effectiveness always depends on the industry’s implementation efforts. To date, the IMO has established a series of work plans and guidelines, including the carbon tax (Wan et al., 2018; Garcia et al., 2020).

Many scholars have also explored the feasibility of imposing the carbon tax on the shipping industry (Lagouvardou et al., 2020; Tiwari et al., 2021). The exerted limited impact of imposing a lower carbon tax price (10-50$/t CO₂) on transportation costs, the national economy, and import prices, etc (Halim et al., 2019). When imposing a relatively high carbon tax (90$/t CO₂), China’s GDP loss is the greatest among all countries (Lee et al., 2013). Cariou et al. (2023) conducted the standard gravity model and found that imposing the carbon tax of 50$/t CO₂ was insufficient to change shipowners’ decisions. Therefore, they suggested imposing a carbon tax of 100$/t CO₂, which could effectively reduce carbon emissions. Yuan et al. (2023) evaluated multiple speed optimization models with different objective functions, concluding that a carbon tax of 1,300 ¥/t CO₂ would be most appropriate for the shipping industry. Harahap et al. (2023) conducted a comparative analysis of alternative marine fuels, found that methanol is economically viable when the carbon tax exceeds 100€/t CO₂, while ammonia gains economic advantage at tax rates above 200€/t CO₂. Several scholars have begun investigating progressive carbon taxation schemes. Ding et al. (2020) examined various carbon tax designs across different shipping routes and alternative fuels, demonstrating that progressive carbon taxes outperform fixed carbon taxes on specific routes. Similarly, Mundaca et al. (2021) argue that gradually increasing carbon tax rates represent a more rational approach to tax policy design.

Existing studies demonstrate that scholars worldwide have extensively explored the feasibility of implementing the carbon tax in the shipping industry, providing scientific foundations for policy formulation (Li and Yang, 2024; Pereda et al., 2025; Wang and Countryman, 2025). However, significant variations in economic systems, taxation regimes, and maritime trade patterns among nations make it challenging to establish a unified global carbon tax standard for shipping. Given this context, individual countries must develop tailored shipping carbon tax policies based on their specific national conditions and shipping trade development, and jointly assist the shipping industry in reducing emissions.

The novelty of this article lies in the fact that we determined the upper limit of the progressive carbon tax. Compared to previous studies, this approach designs both the tax rate and the progressive brackets for the progressive carbon tax mechanism more systematically. The theoretical equity of the progressive tax system aligns with the development needs of China’s current dual carbon targets. There are significant differences in the size of ships, large-sized ships typically generate higher carbon emissions and greater economic benefits. By imposing higher tax rates on these high-emission and high-income ship operators, the progressive tax mechanism can narrow the economic disparity to some extent. This policy is consistent with China’s pursuit of common prosperity, while also facilitating the realization of its dual-carbon targets.

The 83rd session of the Marine Environment Protection Committee (MEPC 83) approved a net-zero framework that explicitly explores Market-Based Measures (MBMs) and demonstrates a clear inclination toward the ETS (IMO, 2025). This latest development has sparked a critical policy question: If ETS becomes mainstream, will it still be necessary for China to impose a national carbon tax? Could this lead to policy overlap and weaken the international competitiveness of China’s shipping industry due to increasing costs?

This study holds that carbon tax and ETS are not a simple substitution relationship, but should rather be regarded as complementary policy instruments that perform distinct functions at different levels (Goulder and Schein, 2013). Even after the international carbon market mechanism has matured, the carbon tax at the sovereign level will continue to offer unique strategic value. The international shipping ETS is a mechanism designed to address global carbon emissions caps and ensure fair competition among nations. Its primary objective is to prevent carbon leakage and raise funds for the global green shipping transition. Carbon tax is a fiscal and environmental policy tool within national sovereignty. Firstly, it’s the core advantage of providing domestic enterprises with a stable and predictable long-term carbon price signal (Metcalf and Stock, 2020). This price certainty is crucial for guiding domestic shipping companies to make high-risk, long-cycle, low-carbon capital investments, such as investing in new energy ships or developing alternative fuels. It effectively compensates for the potential uncertainty in ETS carbon prices caused by market fluctuations. Secondly, implementing a national carbon tax is a strategic measure to safeguard the country’s economic sovereignty and enhance long-term competitiveness. Relying solely on the eventual formation of an international mechanism could place China’s shipping industry in a strategically passive position. Establishing a domestic carbon pricing first can proactively internalize environmental costs, thereby driving technological upgrades and structural optimization. Carbon tax strengthens resilience to international compliance requirements (Aldy and Stavins, 2012). More importantly, directing carbon tax revenue to reduce other taxes and fees for domestic shipping companies, subsidize green technology innovation, or invest in low-carbon port infrastructure can effectively offset their compliance costs and avoid weakening the overall industry competitiveness (Murray and Rivers, 2015). In the long term, exploring a carbon tax system provides a theoretical basis and policy options for China to develop a multi-layered and integrated policy framework for reducing shipping industry emissions, which is of crucial strategic significance for China to achieve its dual carbon targets smoothly.

Fiscal subsidy is an important means to facilitate the transition between conventional and new energy sources (Rentschler and Bazilian, 2017; Zhang and Zahoor, 2025). In this context, ship operators would naturally prefer purchasing clean-energy-powered ships. However, large-scale subsidy programs would impose substantial fiscal burdens on both central and local governments and are not sustainable in the long term (Du et al., 2023). Meanwhile, for ship operators, if the replacement cost is too high, they may find even subsidies insufficiently attractive. Therefore, the shipping industry requires more effective policy mechanisms to incentivize emission reductions.

China plans to establish a green tax governance system featuring “multi-tax co-governance” and “multi-strategy combination” of tax preferential policies. The current tax system only imposes resource taxes or consumption taxes on fossil fuels. Although it can objectively play a certain role in reducing emissions, the effect is minimal (Hu et al., 2021; Gao et al., 2024; Arcila et al., 2024). Overall, China’s current tax policies have not yet developed clear responses to the critical directive outlined in the “Carbon Peak Action Plan Before 2030”, which calls for establishing a tax policy system conducive to green and low-carbon development to enhance taxation’s role in promoting market entities’ sustainable transition. The proposal of the shipping carbon tax could provide valuable supplementation to improve China’s green tax system.

Climate change is a global challenge, and the environment is a global public good (Uitto, 2016; Dupoux and Martinet, 2022). All nations and industrial sectors must undertake the responsibility for energy conservation and emission reduction. Although the IMO has formulated relevant emission reduction policies, current enforcement efforts still require strengthening. Additional policy measures are needed to achieve the shipping industry’s decarbonization targets (Bertoldi, 2022). The shipping industry is characterized by cross-border operations, with over 90% of international trade conducted by sea. A carbon tax can effectively address the “tragedy of the Commons” issue and prevent the transfer of emission reduction responsibilities among countries. The European Union has taken the lead in incorporating shipping into the carbon market (EU ETS). If China does not establish an independent carbon tax system, it will passively bear the carbon cost of the European Union.

The decarbonization of the shipping industry is a long and complex process, yet remains an essential pathway (Romano and Yang, 2021; Urban et al., 2024). To enable China’s shipping industry to effectively lead the global shipping industry to accelerate the realization of decarbonization goals, it is necessary to rely on the government’s coerciveness to formulate new policy measures. As a developing country, China started its research and implementation of shipping emission reductions later than developed nations (Wu et al., 2024). However, as a responsible major country, China still actively participates in shipping emission reduction. If China participates in formulating the rules for the carbon tax on shipping, it is expected to make a significant contribution to reducing emissions in the global shipping industry, expand its influence in international shipping affairs (Liu et al., 2023).

Establishing the shipping carbon tax in China not only provides a valuable reference for energy conservation and emission reduction in the shipping industry of a large number for developing countries, but also plays a key role in future cooperation on emission reduction in the shipping industry among countries and regions, enabling China to contribute “Chinese wisdom” and “Chinese solutions” under the framework of energy conservation and emission reduction of the IMO. Play a leading role in the construction of climate governance mechanisms for the global shipping industry, jointly promote the sustainable development of international shipping, and have a profound impact on the development of emission reduction mechanisms in the global shipping industry.

Theoretically, environmental tax frameworks have been progressively refined, evolving from environmental negative externalities to “Pigouvian tax” and the “Polluter pays principle” (Pigou, 1920). Environmental negative externalities refer to the negative impacts on the environment caused by certain behaviors in economic activities, which are not borne or compensated by the parties involved in the relevant behaviors (Tian et al., 2020). Pigou tax is levied on polluters based on the degree of harm caused by pollution, using tax revenue to bridge the gap between the private and social costs of polluters’ production (Mardones, 2022). The polluter pays principle means that all individuals and organizations that discharge pollutants into the environment should pay a certain fee following certain standards to compensate for the losses caused by their polluting behaviors (Tilton, 2016). The imposition of a carbon tax on shipping should also be grounded in these principles: First, the carbon tax internalizes the environmental costs associated with fossil fuel consumption by ships (Angela and Margit, 2022). Second, the administrative costs of implementing a carbon tax are lower than those associated with regulatory or permit approaches. Third, in the long term, the carbon tax can incentivize improvements in energy efficiency or compel ship operators to adopt cleaner alternative energy sources by increasing the cost of traditional high-carbon energy use (Chai et al., 2025). Carbon taxes have transitioned from purely theoretical and policy research to practical implementation, demonstrating the theoretical feasibility of imposing a carbon tax on shipping.

At the 26th Conference of the Parties, the United Nations Climate Change Conference proposed the Glasgow Climate Convention. About 50 developing countries called on IMO member states to impose mandatory emission taxes on Marine fuels. The potential carbon tax revenue is huge, with the total collection expected to be between 1 - 3.7 trillion US dollars by 2050, that is, 40–60 billion US dollars per year (Dominioni et al., 2022). IMO recommends implementing a carbon tax of 100$/t CO₂ on marine fuels starting in 2025 (MEPC, 2021).

In 2007, “China’s National Climate Change Program” explicitly proposed measures to mitigate greenhouse gas emissions and enhance the country’s adaptability to climate change (National Development and Reform Commission, 2007). Concurrently, emphasized the need to accelerate the introduction and implementation of fiscal, pricing, and financial incentive policies conducive to energy conservation and emission reduction. It called for improving the fiscal policy framework for energy conservation and emission reduction, formulating relevant expenditure policies, tax policies, and pricing mechanisms, to phase out outdated production capacity, promoting industrial restructuring, and accelerating the development and industrial application of emission-reduction technologies (Bi et al., 2024). Imposing a carbon tax on shipping aligns with China’s current development objectives of implementing the scientific outlook on development and achieving green shipping, and with this “Program” requirement to establish effective policy mechanisms.

The carbon tax has the advantage of simpler calculation. The tax basis of the carbon tax relies on carbon emissions. As the carbon content of different energy sources remains constant, the CO₂ emissions from ship fuel consumption can be accurately determined. By monitoring fuel consumption and applying fixed carbon coefficients, the real carbon emission data can be easily calculated, making tax base measurement relatively straightforward and technically feasible (C2ES, 2024). Moreover, existing carbon tax policies implemented worldwide provide valuable references for China (Parry, 2019). These international experiences enable them to design appropriate tax levels based on shipping emission characteristics, effectively regulating carbon emissions in the shipping industry while minimizing excessive negative impacts on low-income and low-emission ship operators, thus reducing implementation barriers.

The basic principles of tax law reflect the fundamental attributes of tax activities, serve as the foundation for the establishment of the tax legal system. They are universal legal guidelines that permeate the entire process of tax law legislation, law enforcement, judicial practice, and compliance. To establish a shipping carbon tax policy that suits China’s national conditions, it should be based on the basic principles of China’s existing tax laws, including the principle of tax legality, the principle of tax fairness, the principle of tax efficiency, and the principle of substantive taxation

The design of the fixed carbon tax scheme is relatively simple. The carbon tax liabilities can be calculated based on the carbon tax rate and carbon emissions. The calculation of the fixed carbon tax amount is shown in (Equation 1):

Ctaxfix represents the tax liabilities of the fixed carbon tax; rfix represents the fixed carbon tax rates, which are shown in Table 4; EM represents carbon emissions.

The fixed carbon tax demonstrates significant effectiveness in promoting emission reductions during initial implementation phases, yet proves less conducive to long-term decarbonization objectives. Carbon taxation has disproportionate impacts on lower-income ship owners. Generally, ships with lower carbon emissions also have lower income, and their tax burden capacity naturally cannot be compared with that of shipbuilding enterprises with higher carbon emissions, higher income, and relatively higher tax burden capacity. Consequently, fixed carbon tax exacerbates economic disparities between low- and high-emission ships. Nevertheless, its computational simplicity facilitates implementation during initial policy phases, which can reduce the difficulty of management.

The progressive carbon tax and the fixed carbon tax are set differently. Generally, the higher the carbon emissions of a ship, the higher the income will be. From the perspective of welfare economics, as income increases, its marginal utility decreases accordingly, and the tax liabilities should also be heavier (Layard et al., 2008). Adopting a progressive tax rate is more in line with substantive equality. Progressive taxation reflects the principle of ability-to-pay by imposing differential treatment based on taxpayers’ varying capacities. Typically, high- and low-emission ships exhibit significant economic disparities, differing not only in carbon consumption but also in tax-bearing capacity. Imposing a uniform tax rate disconnects tax capacity from tax capabilities, creating a disparity between nominal equality and substantive inequality. Therefore, it is more appropriate to impose a progressive carbon tax on high- and high-income ship owners, which can be adapted to the carbon consumption and tax burden capacity of taxpayers. The progressive tax can reflect taxpayers’ tax-paying ability dynamically, over the long term, and continuously. With the continuous increase of the taxable objects, it is more reasonable that the growth rate of the tax amount is faster than that of the taxable objects. However, due to the computational complexity of progressive tax, previous studies have rarely applied it, with even fewer examining it in the shipping industry. This gap provides feasible opportunities for further exploration in this study.

The progressive carbon tax design in this paper adopts the excess progressive carbon tax. Firstly, referring to the design of Ding et al (2022), every 5,000 tons is divided into one bracket, and each bracket is increased by $5. In contrast, according to the “polluter pays principle” (Yan et al., 2022), the threshold is set to zero in this paper. Meanwhile, considering the feasibility of collection, the price of the top bracket is set by referring to the relatively high carbon tax prices that have been implemented worldwide at present. The specific settings are as shown in Table 5:

Under the progressive carbon tax scheme, the higher the emissions, the higher the applicable tax rate at the corresponding stage. Then the tax payable in the case of the progressive carbon tax is shown in Equation 2.

Ctaxpro represents the tax liabilities of the progressive carbon tax; rpro represents the tax rate applicable to the current progressive brackets; β represents the quick deduction number for the current progressive bracket.

Based on the previous discussion, this study argues that imposing a fixed carbon tax in the initial stage is simple to calculate and aligns with existing international carbon tax policies. Due to the imperfection of the existing monitoring equipment, it is more convenient to impose taxes on the carbon content of fossil fuels. The taxation could be implemented at the consumption end, effectively leveraging the price mechanism of carbon tax to directly pass cost changes to fossil fuel users (i.e., ship operators). Meanwhile, the carbon tax could be integrated into existing tax categories, building upon China’s current environmental protection tax framework to minimize implementation resistance. Regarding tax administration and revenue usage, it is recommended to designate it as a local tax to enhance collection incentives. The revenue could be returned to taxpayers through measures such as subsidies for ship equipment upgrades or clean energy adoption in the regional shipping sector, thereby improving taxpayer compliance.

In the middle and later stages, the collection method of the carbon tax should be continuously improved. With the continuous upgrading of monitoring equipment, it is more reasonable to change the taxable object to direct carbon emissions. The adoption of a progressive carbon tax collection method can effectively alleviate inequality among different emission groups. At this point, to demonstrate China’s determination to save energy and reduce emissions, it is more appropriate to establish a carbon tax as an independent tax type.