Environmental policy after Brexit : how does the introduction of a fossil-energy tax affect the british economy?

Abstract: As the United Kingdom (UK) is set to leave the European Union (EU) in 2019, it faces large uncertainties especially with respect to international policy such as climate policies. The UK still has to meet previously agreed upon climate targets but it now has the possibility to abolish EU climate policies and implement different strategies on a national level. These chosen national strategies could be more beneficial to the UK as they are set according to its country-specific characteristics. A proposed strategy is the introduction of a carbon tax on energy sectors. Thus, this study analyses the effect of an ad valorem uniform fossil-energy tax on British energy sectors using a computable general equilibrium model. The envisioned tax is applied at two different levels: production and consumption. The differentiation of a tax according to channels allows to determine where an implementation of the tax would be least distortive to the economy and induce smaller welfare losses. The results found in the analysis confirm the hypothesis by the literature that a tax on producers leads to larger sectoral contractions in total and a larger decrease in welfare. Based on the outcomes, rough policy recommendations can be made. If the British government wants to support the production of green energy it should tax consumers rather than producers as producers might switch to cheaper inputs (i.efossilfuels)if production costs increase through the introduction of a tax. Moreover, if the British government is interested in preventing welfare losses in form of negative % changes in value of GDP it should implement the tax on a consumer level as well.