The economic and environmental impact of the introduction of a carbon tax in Scotland: a computable general equilibrium analysis

Since devolution, the Scottish Government has increasingly adopted a distinctive environmental and energy policy. The Scottish Climate Change Act included a target to reduce CO2 emissions to 42% below 1990 levels by 2020. This is stricter than the 34% CO2 emissions reduction adopted by the UK Government in 2010. Moreover, the corresponding Scottish Government target for renewable electricity generation in 2020 is equivalent to 100% of electricity consumption in Scotland and preliminary data suggest that the interim 2011 target of 31% was exceeded by 4 percentage points. However, whilst Scotland has adopted challenging targets, many key policy instruments are reserved to the UK government. At present the main “green” elements of the tax system remain reserved to the UK Government. Many economists regard a carbon tax as the most efficient way to reduce carbon emissions (e.g. Tullock, 1967; Pearce, 1991). It is of therefore of interest, and highly relevant in the context of the more demanding environmental targets set by the Scottish Government and present
discussions around increased fiscal autonomy in Scotland, to consider the effect of a Scottish specific carbon tax. In this paper we therefore use an energy-economy-environmental model of Scotland to simulate the impact of the Scottish Government imposing such a tax on carbon emissions.