What are the Macroeconomic and Household Welfare Trade-offs of Introducing Broad Carbon Taxation?

This is the second of two policy briefs produced by the Centre for Energy Policy aimed at building better policy understanding of what the macroeconomic impacts of introducing greater and broader carbon pricing/taxation may be. In the first brief we established that the main driver of the macroeconomic outcomes of extending carbon pricing to all sectors of the economy, via a carbon tax applied via the supply of (domestically produced and imported) refined oil/petroleum and gas, is the impact on producer costs and competitiveness. There, using an economy-wide scenario simulation framework, we demonstrated how the central drivers of the extent of wider economy contraction are producers’ ability to moderate taxed energy use and wage costs in determining output prices, and export demand responses to higher prices. Here, we present fuller findings of our scenario simulation analyses for the UK, with focus on distributional impacts across different household income groups. We extend to consider the impacts of any attempt to moderate negative impacts on UK producers and consumers through some extent of revenue recycling, while maintaining priority on wider fiscal responsibility.