Carbon Tax Impacts on Producer Costs and Competitiveness as the Main Determinant of Macroeconomic Outcomes

This is the first of two policy briefs being produced by the Centre for Energy Policy to help build better policy understanding of what the macroeconomic impacts of introducing greater and broader carbon pricing/taxation may be. We use multiple sector economywide computable general equilibrium (CGE) modelling to consider the impacts of a hypothetical tax impacting the price of both domestically supplied and imported fossil fuels (gas and refined oil/petroleum) on a range of key macroeconomic indicators. At this stage we run stripped down scenario simulations focussing solely on the introduction of the carbon tax, with the aim of isolating and explaining the mechanics of what impacts are likely to arise, and how they are affected by different assumptions. The basic finding presented in this first briefing is that, with no further policy intervention, decarbonisation action(s), or change in international trade conditions, the economy should be expected to contract with a sustained increase in the consumer price index (CPI) and losses in producer competitiveness where carbon costs are more fully internalised. The main determinant of the extent of the contraction is what happens to the costs and competitiveness of UK producers.