Carbon tax impact on industry limited

11th January 2016

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Natalie Makin

Only a small number of industries would incur increases in production costs that could damage their competitiveness if a carbon tax was introduced in the UK, according to a new report.

The study was carried out by climate change researchers at the London School of Economics and Political Science. It considered the impact on industries and consumers of introducing a carbon tax on all fuels equal to £20 a tonne of carbon dioxide equivalent.

Taxing energy consumption on this scale would mainly affect the oil refinement, coal, iron and cement sectors, the researchers found. These industries account for around 2% of UK GDP, they estimated.

Consumer prices would rise by up to 0.9%, assuming all costs were fully passed along the supply chain, according to the report. However, the authors believe cost increases are likely be lower as the introduction of the tax would lead to behavioural change and business innovation, while tax revenues from carbon pricing would be recycled back into the economy.

“Carbon policies will provide incentives to increase energy efficiency and resource productivity which could afford UK producers a competitive advantage in the long term, in a world where fossil fuel prices could rise and carbon reduction policies are likely to become more widespread and ambitious,” the report states.

The researchers conclude that, instead of resisting a carbon tax, the government should introduce policies to protect vulnerable sectors, such as those that emit high levels of greenhouse gases and are exposed to international trade. “Countries and firms that resist enduring change and innovation may not be acting in their long-term interests,” the report states.

Richard Warren, senior energy and environment policy adviser at manufacturing trade body EEF, said sectors exposed to international competition, such as steel and paper, are unable to pass the costs of a carbon tax along the supply chain and would therefore lose out.

“Reducing emissions from industry is a highly complex challenge and, as the report notes, tailored policies need to be in place to both protect competitiveness and help address the commercial and technological barriers to decarbonisation,” he said.

Industrial decarbonisation strategies being produced by the energy and climate department (Decc) would hopefully help companies improve efficiency and reduce greenhouse gas emissions, he said.

Many firms already face carbon prices at least as high as that considered by the report as a result of UK and EU government policy. “If the desired pace of change is not being achieved, we must look beyond the use of rather blunt price signals to more complementary measures that can more effectively help bridge the so-called energy efficiency gap,” Warren added.


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