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

Lucas Bretschger and Elise Grieg

Energy Policy, 2024, vol. 195, issue C

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.

Keywords: Fuel tax; Synthetic control method; Climate policy; Transport; Level and growth effects (search for similar items in EconPapers)
JEL-codes: O41 O47 Q43 Q56 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:195:y:2024:i:c:s0301421524003793

DOI: 10.1016/j.enpol.2024.114359

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