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Little impact on prices from carbon tax, report claims

Researchers argue that a ‘modest’ tax on greenhouse gas emissions across the UK economy would have little impact on consumer prices.

The authors of a report from the Grantham Research Institute on Climate Change and the Environment and the ESRC Centre for Climate Change Economics and Policy looked at all 106 industrial sectors in the UK.

They claim that 94 industries of the 106 would see input costs increase by less than 1% of gross output if a carbon tax of £20 per tonne of carbon dioxide-equivalent was applied to all fuels and costs were fully passed along supply chains.

This is considered an upper level with costs likely to be reduced through behavioural 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.”

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

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 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,” it says.

  • The Grantham Research Institute on Climate Change and the Environment at the LSE is funded by The Grantham Foundation for the Protection of the Environment. The ESRC Centre for Climate Change Economics and Policy is funded by the UK Economic and Social Research Council to advance public and private action on climate change through rigorous, innovative research.

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