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The impact of the introduction of a carbon tax for Scotland

Allan, Grant and Lecca, Patrizio and McGregor, Peter and Swales, John and Tamba, Marie and Winning, Matthew (2012) The impact of the introduction of a carbon tax for Scotland. Fraser of Allander Economic Commentary. pp. 13-19. ISSN 2046-5378

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Since devolution, the Scottish Government has progressively adopted a distinctive environmental and energy policy (Allan et al, 2008). This is expressed in two forms: first through setting emissions and renewables targets that differ from those set in the rest of the UK, and second by developing specific policies within the nonreserved powers at its discretion. The Climate Change (Scotland) Act includes a target to reduce CO2 emissions to 42% below 1990 levels by 2020. This is stricter than the 34% CO2 emissions reduction adopted by the UK Government. Moreover, the corresponding Scottish Government target for renewable electricity generation in 2020 is equivalent to 100% of electricity consumption in Scotland and preliminary data suggest that the interim 2011 target of 31% was exceeded by 4 percentage points. The powers under the Scottish Government’s control that it can use to affect energy outcomes include the judicious use of the planning system and additional funding for alternative renewable technologies in pre-commercial scales, such as the Wave and Tidal Energy Scheme (WATES), The Saltire Prize, and the Scottish Community and Households Renewables Initiative. Nevertheless, the Committee on Climate Change report into Scottish emissions targets concluded that with current policies and the current cap on emissions under the EU ETS, the Scottish Government’s target of a 42% CO2 reduction will be missed, with emissions only falling by 38% on 1990 levels. It is clear that whilst Scotland has adopted challenging targets, many key policy instruments are reserved to the UK Government (Allan et al, 2008; McGregor et al, 2011). At present the main “green” elements of the tax system remain under Westminster control. This includes fuel duties, air passenger duty and the climate change levy. Also reserved to the UK Government are: the tax-transfer system; powers over the structure of the electricity market; Renewable Obligations Certificates, the Renewable Transport Fuels Obligation and the Renewable Heat Incentive; Climate Change Agreements; and the Carbon Reduction Commitment. Many economists regard a carbon tax as the most efficient way to reduce carbon emissions (Tullock, 1967; Pearce, 1991). It is therefore of interest to consider the possibility of the Scottish Government’s adopting such a tax. This is particularly relevant given the present discussions concerning fiscal autonomy that are taking place around the Scotland Bill and the impending independence referendum in Scotland. In this paper we use an energy-economy environmental model of Scotland to simulate the impact of a Scottish specific tax on carbon emissions. The model quantifies the effect on carbon emissions and the level of aggregate economic activity in Scotland. Section 2 outlines the arguments for a carbon tax and introduces the notion of the double dividend. Section 3 briefly describes the Scottish simulation model that we use. Section 4 gives the specific simulation set up. Section 5 reports the simulation results and Section 6 is a short conclusion.