A Major Environmental Tax Reform for the UK: Results for the Economy, Employment and the Environment

Abstract

This paper reports the results of a major modelling exercise to gain insights into the possible economic and environmental effects of a large-scale environmental tax reform (ETR) in the UK. ETR involves a shift in the target of taxation away from labour or firms towards pollution or the use of natural resources, in such a way that overall tax revenues are unchanged. It is hoped that such a tax shift will deliver environmental improvements while having a neutral or positive effect on the economy. The modelling was set up to explore the extent to which this would be the case. The paper starts with a brief literature review identifying the theoretical hypotheses relating to ETR and summarising the results of some of the evaluations of ETRs that have been implemented. It then briefly describes the model used for the analysis in this paper. The main body of the paper then describes the scenarios set up to explore the main impacts and the results of modelling these scenarios. These results suggest that substantial reductions in greenhouse gas (GHG) emissions can be achieved with minimal impacts on output and an overall increase in employment, such that ETR emerges as a very attractive policy for GHG emission reduction.