Increasing the price of energy

For energy-related CO2 emissions to be reduced, so must the consumption of fossil fuels, and this is typically achieved in models by raising the price of such fuels, often through the imposition of a carbon tax —a tax related to the carbon content of the fuel in question (coal, oil, gas have different carbon contents per unit of energy, in descending order of magnitude).

Increasing the price of energy according to its carbon content can be expected to result in the following effects (over different timescales):

• a reduction in demand for carbon-based fuels;

• substitution between more and less carbon-intensive fuels;

• substitution between carbon-based and non-carbon fuels;

• substitution between energy and other factors of production;

• substitution between more and less carbon-intensive products and processes;

• improvements in the efficiency of fuel use in delivering a particular energy service;

• development of new, less carbon-intensive technologies, products and processes;

• general energy saving by means of more investment in the heat-retention qualities of buildings and in less carbon-intensive forms of transport.

Whether the reduction in demand for carbon-based fuels induced by energy price increases results in reduced output (GDP) depends in the first instance on possibilities for substitution, efficiency improvements and technological development, so that the 'costs' of CO2 abatement will depend very largely on how these factors are modelled.

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