The impact of environmental taxation on the underlying incentives for industrial transformation: evidence from the UK.

This source preferred by Sukanya Ayatakshi Endow

Authors: Webster, A. and Ayatakshi, S.

Start date: 19 October 2011

This paper argues that the underlying supply and demand analysis of energy taxes needs to be re-considered when a country (a) introduces national rather than supra-national l taxes and (b) is open to international trade but only at given world prices. We provide evidence that these conditions is realistic for many sectors in the UK. A key implication is that the effects of energy taxes should not be felt in final good prices, since these are determined in world markets, but in terms of underlying profitability. These changes in underlying profits provide two key incentives for producers – to change to more environmentally friendly production techniques and to switch resources to less environmentally harmful ones. Using input-output techniques we provide evidence for the UK to show how existing energy taxes have affected underlying profitability. The evidence shows quite strong profit incentives to shift resources from a small number of energy intensive industries to others. Finally, we simulate the effects of a series of hypothetical new environmental taxes. This shows that such taxes have the potential to impact on a quite narrow range of economic sectors, thereby providing strong profit incentives for producers to reallocate productive resources accordingly.

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