Modest carbon tax on all UK fuels would have little impact on consumer prices

Posted on 11 Jan 2016 in

The UK government could apply a modest uniform tax on greenhouse gas emissions across the whole economy and have little impact on consumer prices, according to a paper published today (Monday 11 January) by the Grantham Research Institute on Climate Change and the Environment and the ESRC Centre for Climate Change Economics and Policy at London School of Economics and Political Science.

The authors – David Grover, Ganga Shreedhar and Dimitri Zenghelis – found that a carbon tax of £20 per tonne of carbon-dioxide-equivalent applied to all fuels could increase UK consumer prices by up to just 0.9 per cent, assuming all costs were passed along supply chains fully.

However, the paper’s estimates are at the “upper bounds” of the actual costs expected for consumers. Costs would likely be reduced through behavioral change and business innovation, and as a result of tax revenues from carbon pricing being recycled back into the economy.

The paper states: “In reality this impact would likely be still smaller than these estimates suggest because our analysis has not allowed for any of the input substitution, innovation, production method change, or new investment behaviour that industries would exhibit to avoid the cost of carbon pricing.”

The paper finds that only a small number of industries – including the oil refinement, coal, iron and cement sectors – that account for around 2 per cent of UK GDP, are likely to face production cost increases that put them under pressure from competition abroad.

It states that “carbon policies will provide incentives to increase energy efficiency and resource productivity which could afford UK producers a competitive advantage in the long term, in a world where fossil fuel prices could rise and carbon reduction policies are likely to become more widespread and ambitious.”

The paper concludes that policies are needed to help sectors that emit high levels of greenhouse gases and are exposed the international trade – such as the cement, mining and petroleum refinement industries – adapt to changing economic conditions resulting from a uniform carbon tax.

The paper states: “The correct policy response is not to resist this change but to identify vulnerable sectors and buffer labour market participants against its sharpest effects. Countries and firms that resist enduring change and innovation may not be acting in their long-term interests.”

For more information about this media release, and to obtain copies of ‘The competitiveness impact of a UK carbon price: what do the data say?, please contact Ben Parfitt on b.parfitt@lse.ac.uk, or Bob Ward r.e.ward@lse.ac.uk.

 

NOTES FOR EDITORS

  1. The Grantham Research Institute on Climate Change and the Environment (http://www.lse.ac.uk/grantham) was launched at the London School of Economics and Political Science in October 2008. It is funded by The Grantham Foundation for the Protection of the Environment (http://www.granthamfoundation.org/).
  2. The ESRC Centre for Climate Change Economics and Policy (https://www.cccep.ac.uk/) is hosted by the University of Leeds and the London School of Economics and Political Science. It is funded by the UK Economic and Social Research Council (http://www.esrc.ac.uk/). The Centre’s mission is to advance public and private action on climate change through rigorous, innovative research.