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Despite broad acceptance of the need to drastically reduce carbon emissions and limit global warming, political debates persist regarding the acceptability of actions to internalise carbon costs given potential impacts on the cost-of-living and income generation. We present fundamental macroeconomic and more complex computable general equilibrium analyses to consider how introducing broad carbon taxation might impact key macroeconomic indicators, taking the UK as an applied example. One key insight is that, with no other policy intervention, such a move introduces contractionary pressure through increases in consumer prices that reduces GDP, employment, and household spending, and erodes government revenue gains. The extent of contraction depends on the degree of resistance in labour markets to real wage rate reductions alongside substitutability away from taxed energy in determining prices, and on consequent export demand responses. A second is that where government prioritises balancing its budget, partial recycling of carbon tax revenues aimed at moderating negative impacts on firm costs and household real spending power can reduce wider economy losses. However, this is limited by wage bargaining and domestic consumption responses in a labour supply constrained and very open economy, with income tax recycling minimising macroeconomic losses at the cost of increasingly regressive outcomes.
- carbon tax
- wage bargaining
- revenue recycling
- labour supply
- energy tax
- computable general equilibrium
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- 2 Finished
Developing new international public policy norms to achieve sustainable and equitable net-zero societies
1/08/21 → 30/04/22
1/09/20 → 30/08/21
- 2 Citations
- 1 Commissioned report
Carbon Tax Impacts on Producer Costs and Competitiveness as the Main Determinant of Macroeconomic OutcomesTurner, K., Alabi, O., Katris, A. & Swales, K., 31 Mar 2023, Glasgow: University of Strathclyde. 7 p.
Research output: Book/Report › Commissioned reportOpen AccessFile11 Downloads (Pure)