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