The unintended dilemma of China's target-based carbon neutrality policy and provincial economic inequality

Target-based carbon mitigation could be an essential strategy for achieving carbon neutrality. However, how carbon reduction will affect economic balance across different regions remains unclear. Here, with a newly developed dynamic multi-region computable general equilibrium model for China's 31 provincial economies, we examine the regional economic impacts of different carbon quota arrangement schemes. It is found that without fostering new growth engines driven by low-carbon industries, the national stringent carbon restrictions will bring an ‘economic sabotage’ with deteriorated regional equity and polarized the industrial structures, especially in the fossil-fuel reliant north China. Carbon shadow prices and costs play a prominent role and cause rippling effects in this regionally imbalanced recession, depending on energy, industrial structures and endowments. Furthermore, no prevailing carbon quota arrangements, either by historical, intensity, or capacity rules, could resolve the dilemma between equality and effectiveness in our simulation. By contrast, to offset the regionally unbalanced shock of decarbonization, it is important to cultivate low-carbon industries timely to compensate for the potential transition costs in the long run. •A CGE model is used to analyze the uneven impacts of national carbon permit restrictions on China's regional economy.•A multi-stage regression method is used to decompose the cascading effects of carbon policy on shadow prices and industrial activities.•Carbon neutrality restrictions negatively impact macroeconomics, especially in northern China and its energy-intensive production sector.•Sensitivity experiments demonstrate that Total Factor Productivity is the key variable influencing the final results.