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Carbon taxes, CO2 emissions, and the economy: The effects of fuel taxation in the UK

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  • Bretschger, Lucas
  • Grieg, Elise

Abstract

Carbon taxes remain economists’ preferred policy tool to curb emissions, but they are often criticized by the wider public as ineffective and damaging to the economy. This paper provides new evidence of the effectiveness of carbon taxation through empirical ex-post analysis, using the synthetic control method. We base our quantitative work on a theoretical general equilibrium model with dirty and clean transportation. We take the predictions of the model to data on the UK Fuel Tax Escalator, and estimate the impact of the tax on CO2 emissions, GDP, and transport behaviour. With a potential control pool of OECD countries, we estimate the difference between the observed outcome in the UK and a synthetic counterfactual UK. We find that the tax has a large and significant impact on CO2 emissions from traffic, while there is no discernible impact on GDP or growth. We do not find large changes in driving behaviours, but the available evidence points to a possible switch to rail travel from road travel. Our results are relevant for energy policy makers as they show how a suitable pricing system can effectively reduce climate-damaging emissions without causing macroeconomic damage.

Suggested Citation

  • Bretschger, Lucas & Grieg, Elise, 2024. "Carbon taxes, CO2 emissions, and the economy: The effects of fuel taxation in the UK," Energy Policy, Elsevier, vol. 195(C).
  • Handle: RePEc:eee:enepol:v:195:y:2024:i:c:s0301421524003793
    DOI: 10.1016/j.enpol.2024.114359
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    More about this item

    Keywords

    Fuel tax; Synthetic control method; Climate policy; Transport; Level and growth effects;
    All these keywords.

    JEL classification:

    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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