Distributional impacts of a carbon tax in the UK

The UK government should consider a broader-based carbon tax that is distributionally fair and consistent with net-zero greenhouse gas emissions as the current economic framework for decarbonisation in the UK is inefficient and uneven, finds two new reports published today (9th March 2020).

The reports by Vivid Economics, the Grantham Research Institute on Climate Change and the Environment, the ESRC Centre for Climate Change Economics and Policy, and the University of Leeds, examine, for the first time, the distributional impacts on households of a UK carbon tax that is consistent with the target of net zero greenhouse gas emissions by 2050. Economists recommend a carbon tax or emissions trading, in line with the polluter pays principle, which corrects a market failure arising from the fact that the costs associated with the impacts of climate change are not reflected in the prices paid for goods and services that emit greenhouse gas emissions. People on lower incomes are often more vulnerable to the impacts of climate change because they cannot afford to adapt as well.

Analysing the effect of a carbon tax of £50 per tonne of carbon-dioxide-equivalent in 2020, rising to £75 in 2030, on five different types of household, the first report find that revenues of £57 billion would be generated over the next decade, £18.8 billion of which could be used to compensate fuel-poor households, ensuring the net impact of the carbon tax is zero. Fuel-poor households are defined as those with reduced purchasing power combined with low income and high bills that prevent them meeting their energy needs.

According to the second report, an economy-wide carbon price will generate significant revenues to fund the net-zero transition and to ensure it is equitable.

Report 1. analysis by household type

Report 2. analysis by income decile

Date: March 2020