Topic Videos

Synoptic Revision - Micro & Macro Effects of a Carbon Tax

Level:
A-Level
Board:
Edexcel

Last updated 9 Jun 2022

This revision video look synoptically at some possible micro and macroeconomic effects of a carbon tax.

Synoptic Revision - Micro & Macro Effects of a Carbon Tax

Under a scheme proposed by the IMF in2022, companies with high greenhouse gas emissions, in high-income countries, would be subject to a carbon price of $75 for every tonne of carbon dioxide emitted. This would fall to $50 a tonne for polluters in middle-income countries, and $25 a tonne for low-income countries.

Microeconomic effects of a $75 per tonne carbon tax introduced in high-income countries

  • Higher supply costs for firms that emit a lot of carbon – increased VC and MC might lower profits – possible reduction in export sales for industries affected
  • Firms may pass on environmental taxes onto consumers – higher prices might then hit lower income families harder – leading to lower real incomes and less saving
  • Likely increased demand and profits for low-carbon products such as electric vehicles, off-grid renewables

Macroeconomic effects of a $75 per tonne carbon tax introduced in high-income countries

  • Short run increase in cost-push inflation as a carbon tax causes an inward shift of SRAS – a “supply-shock”
  • Might increase aggregate investment (I) in low carbon technologies although other industries might see a fall in their planned investment
  • Rise in government tax revenues from a carbon tax – improves the budget balance - might be used to fund research or invested into other areas of public spending

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