Carbon taxes, consumer demand and carbon dioxide emissions: a simulation analysis for the UK

<p>In this paper we examine the effects of a carbon tax, one of the possible instruments for reducing carbon dioxide (CO₂) emissions. Such taxes are currently being proposed as a means of reducing CO₂ emissions, motivated by concerns about the global greenhouse effect and its potential impact on global climate and sea levels (Cline, 1991) and on global economies (Nordhaus, 1991).</p> <P>We therefore take as our problem the reduction of CO₂ emissions by the UK economy by use of a carbon tax, and the corresponding effect of this tax on the purchasing power and economic behaviour of households. If they were introduced, carbon taxes would affect the price of fossil fuels in the UK, and thus UK consumer prices, both directly for fuels and indirectly for manufactured goods. These price changes would in turn affect the level and structure of UK final demand, and it is this post-tax UK final demand which will determine UK fossil fuel use, and thus CO2 emissions. In particular, we investigate the social effects of a carbon tax, by considering the distribution of the increased tax burden across consumers.</p>