Tax policies to reduce carbon emissions

Abstract

Carbon taxes or similar pricing instruments could play a crucial role in helping countries decarbonise their economies. No country has a single carbon price that applies to all greenhouse gas emissions. The UK is typical in having adopted a complex patchwork of policies that raise the cost of different polluting activities to different degrees, resulting in implied carbon taxes that vary greatly across sources of emissions. We document and quantify these inconsistencies in the case of the UK, and assess the case for greater uniformity after accounting for considerations of efficiency, distribution, carbon leakage and the use of alternative policy instruments. We argue for greater rationalisation of environmental taxes in the UK and other developed economies.