Carbon Fiscal Policies and UK Economy —Evidence from Small Open Economy DSGE

Unofficial AI-generated summary based on the public title and abstract. Not an official translation.

🔬研究者:A rigorous empirical DSGE model for carbon policy analysis, demonstrating integration of environmental and macroeconomic channels with Bayesian estimation.

🏢実務担当者:Provides quantitative evidence on how carbon pricing affects inflation, output, and competitiveness, useful for corporate scenario planning and sustainability strategy.

🏛政策担当者:Offers insights for designing carbon tax and subsidy schemes that minimize transitional costs while achieving emission targets, with applications to other open economies.

Through legislated carbon budgets and a legally binding Net Zero target for 2050, the UK has institutionalised emission reduction as a central macro-fiscal priority. However, market forces alone are unlikely to deliver the speed and scale of decarbonisation required. Government intervention remains essential, and the policy challenge lies in balancing environmental urgency with economic stability. The UK’s carbon policy architecture reflects a sequenced design: the Climate Change Levy (2001), the Carbon Price Support (2013), and the UK Emissions Trading Scheme (2021) on the pricing side; and, on the subsidy side, support for renewable deployment beginning with Feed-in Tariffs in 2010 and evolving into broader grant and risk-sharing programmes. While empirical studies have documented important micro-level effects—including reductions in energy intensity (Martin et al., 2014), lifestyle-based differences in household carbon footprints (Druckman & Jackson, 2009), and institutional barriers to firm-level abatement (Renukappa et al., 2013): the macroeconomic transmission of UK carbon policy remains insufficiently understood. Recent UK-focused macro models show that carbon taxes and fossil-fuel bans reduce emissions but may raise inflation and impose transitional output losses (Batten & Millard, 2024). Yet a comprehensive, UK-calibrated small open-economy DSGE framework that jointly models carbon taxation, revenue recycling, exchange-rate dynamics, and external balance has been missing.We address this gap by developing and estimating a small open-economy environmental DSGE (E-DSGE) model tailored to the UK. The model incorporates explicit carbon externalities, Armington (1969) trade structure, and firm-level abatement behaviour. The government levies a carbon tax, recycles the revenues through targeted green subsidies, and influences firms’ incentives to invest in low-carbon technologies. The model integrates environmental and macroeconomic channels in a unified structure that captures relative price dynamics, competitiveness effects, and external adjustment. To ensure empirical discipline, we estimate the model with Bayesian methods using quarterly data from 2000Q1 to 2024Q4. This provides a robust platform for studying the macroeconomic, environmental, and external-balance consequences of alternative carbon-policy paths.

• openalex https://doi.org/10.25401/cardiffmet.32324244.v1first seen 2026-06-07 04:40:56