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New research on carbon pricing: do carbon taxes reduce CO2 emissions?

A drastic decrease in greenhouse gas emissions is needed to tackle climate change. Carbon pricing, in the form of a carbon tax or a carbon market, is considered by economists as the most cost-effective way to reduce emissions. Yet, there is currently little evidence on the impact of existing carbon price instruments on emissions. Recently published research by Misum Affiliate Marion Leroutier investigates the impact of carbon taxes on the UK power sector emissions.

In a new paper published in the Journal of Environmental Economics and Management (JEEM), Misum researcher Marion Leroutier looks at the impact of a carbon tax on the UK power sector emissions. In 2013, the UK introduced a carbon tax in its power sector, the Carbon Price Support (CPS). The tax rate increased from €5.9 per ton of CO2 in 2013 to €26 in 2017. The UK power sector experienced a remarkable transition since then: between 2012 and 2017, the share of coal in electricity generation decreased from 40% to 7%, and power sector emissions by 57%. It is estimated that the CPS reduced carbon emissions by 20% to 26% per year on average between 2013 and 2017, marking its significance in the rapid decarbonization of the UK power sector.

One of the variables monitored was “carbon leakage”, that is, the potential increase in emissions in the rest of Europe due to the higher carbon price prevailing in the UK, but this turned out to be negligible. Three factors enabled this high reduction with a limited leakage:

  • the UK had a relatively high potential for fuel switching,
  • the UK has limited physical capacity to trade electricity; therefore, it was not possible to fully compensate the increase in the UK carbon price by simply importing cheaper and potentially dirtier electricity from neighboring European countries
  • the interaction between the carbon price and pre-existing European air quality regulation accelerated the closure of high-emission coal plants

These factors ought to be kept in mind thinking about how generalizable the results are for other European countries. Several countries meet these criteria and could be good candidates to replicate the UK experience. Many European countries have sufficient idle gas capacity to eliminate coal via fuel switching. Additionally, regional carbon pricing can be a solution to avoid carbon leakage for strongly interconnected countries and lastly, increasingly stringent environmental regulations make coal less competitive in several other countries, such that a moderate price signal may be sufficient to drive high-emitting plants out of the market.

“Tackling power sector emissions is a low-hanging fruit for climate policy, given the availability of relatively cheap low-carbon substitutes to fossil fuels. My paper shows that carefully designed carbon taxes can be a powerful instrument to accelerate the transition to cleaner energy sources.“

- Marion Leroutier

Read the full research article here.

About the Researcher

Marion Leroutier joined Misum as a postdoc fellow in the fall of 2021. Marion holds a PhD in economics from the Paris School of Economics (PSE) and CIRED. She is an applied environmental economist focusing on two major environmental issues; ambient air pollution and climate change. She is an affiliated researcher to the Human Capital and Sustainable Development research platform, as well as an affiliated researcher to the Department of Economics at SSE.


Image from NickyPe from Pixabay