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Carbon taxes are likely to play a key role in meeting greenhouse gas emission targets that are consistent with the Paris Agreement. In this article, we assess the macroeconomic effects of a carbon tax on the global economy, paying particular attention to the terms-of-trade implications for importers and exporters of fossil fuels. We use a modified version of the National Institute’s Global Econometric Model, NiGEM. In the stylized scenarios, all countries and regions impose a permanent and uniform carbon tax immediately. Our simulations show that demand for fossil fuels falls substantially in response to the tax, global (pre-tax) prices of fossil fuels decline, and the tax can raise substantial revenue for the government. The overall impact on GDP growth and inflation in each country depends on the fossil fuel intensity of output, the net losses/gains in terms of trade and the macroeconomic policy reaction.

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1 We would like to thank Jagjit Chadha, Hande Küçük, Paul Mortimer-Lee and Philip Turner for helpful comments and Patricia Sanchez Juanino for preparing the charts and the database underlying the forecast. The forecast was completed on 16 July 2021. Exchange rate, interest rate and equity price assumptions are based on information available to 9 July 2021. Unless otherwise specified, the source of all data reported in tables and figures is the NiGEM database and NIESR forecast baseline. All questions and comments related to the forecast and its underlying assumptions should be addressed to Iana Liadze (i.liadze@niesr.ac.uk). Economic background and news

Despite the devastating human toll of the second wave of the pandemic, the global economy has continued to grow The second wave of the virus and the lockdown restrictions that have been imposed have not had as severe an effect on economic activity as those in the first wave This experience, combined with the rollout of vaccines and the huge fiscal stimulus in the US offers the prospect of global economic growth continuing and strengthening Our upward forecast revisions to global GDP growth this year and next reflect these factors Into the medium and long term, an important issue concerns the extent to which the adverse effects may lead to slower global economic growth ‘Scarring’ effects on human capital from high unemployment, as well as the adverse health effects from ‘long Covid’, and the period of lost investment to boost the capital stock could lead to slower global GDP growth than would have been the case had the pandemic not occurred The extent of any such scarring will, however, only become clearer once the immediate threat of the pandemic has reduced and the path of global economic growth has returned in a sustainable manner

An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

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*All questions and comments related to the forecast and its underlying assumptions should be addressed to Iana Liadze (i.liadze@niesr.ac.uk). We would like to thank Jagjit Chadha and Garry Young for helpful comments and Nathaniel Butler-Blondel for preparing the charts and compiling the database underlying the forecast. The forecast was completed on 15 July 2019. Exchange rate, interest rate and equity price assumptions are based on information available to 5 July 2019. Unless otherwise specified, the source of all data reported in tables and figures is the NiGEM database and NIESR forecast baseline. Overview After a period of relatively strong GDP growth in 2017 and early 2018, global output growth has slowed. In particular, growth in industrial production and world trade has stalled since the third quarter of last year, raising worries that this will lead to a widespread and significant slowing in economic growth. Tariffs, increased uncertainty over future trade policy and reduced business confidence have all played some part in this stalling in industrial activity as industrial production is the area of economic activity most heavily involved in international trade. While industry accounts for only around 25 per cent of global value-added, the prospect of slower growth here and increased uncertainty has led to lower long-term bond yields and leading central banks announcing a more accommodative policy bias.

An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We model the long-term implications of leaving the EU for the UK economy using NiGEM, the National Institute's large scale structural global econometric model. We examine a scenario in which the UK has no free trade agreement with the EU, focusing on four key shocks: a permanent reduction in the size of the UK's export market share in EU member countries, an increase in tariffs, a permanent reduction in inward FDI flows and the repatriation of the UK's projected net contributions to the EU budget. We calibrate the size of the shocks on a synthesis of the academic evidence. We explain how each of these four shocks is implemented in NiGEM, as well as examining the key mechanisms by which they are propagated through the model. The export market share channel is the main mechanism by which leaving the EU leads to declines in GDP and consumption relative to the long-run baseline, accounting for a long-run decline in GDP of 2.1% relative to the baseline value, out of a total projected reduction in GDP relative to the baseline of 2.7%.