Introducing a modest tax on greenhouse gas emissions across the whole economy would have little impact on consumer prices, according to the London School of Economics.

In a policy paper written in partnership with the Grantham Research Institute on Climate Change, the economists estimated that a carbon tax of £20 per tonne of carbon-dioxide-equivalent applied to all fuels could increase UK consumer prices by up to just 0.9%, assuming that all of the costs were passed along supply chains fully.

Costs would likely be reduced through behavioural change and business innovation, and as a result of tax revenues from carbon pricing being recycled back into the economy, the study found.

The paper said: “In reality this impact would likely be still smaller than these estimates suggest because our analysis has not allowed for any of the input substitution, innovation, production method change, or new investment behaviour that industries would exhibit to avoid the cost of carbon pricing.”

Longer-term advantages

Only a small number of industries – including the oil refinement, coal, iron and cement sectors – that together account for around 2% of the UK’s gross domestic product (GDP) are likely to face production cost increases that put them under pressure from competition abroad, the authors said.

The paper added: “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 correct policy response is not to resist this change but to identify vulnerable sectors and buffer labour market participants against its sharpest effects. Countries and firms that resist enduring change and innovation may not be acting in their long-term interests.”

> Download the policy paper