The carbon price: a toothless tool for material efficiency?

Abstract

This article explores whether a carbon price will effectively encourage the more efficient use of greenhouse gas intensive materials such as steel. The article identifies a range of distortions that arise when some of the restrictive assumptions of neoclassical economics are relaxed. Distortions occur due to the sequential nature of decision-making along supply chains, due to imperfect competition and due to government intervention to reduce the risk of carbon leakage. If upstream sectors do not pass on carbon costs, downstream sectors do not have the opportunity to react. Of the distortions identified, compensation mechanisms that reduce the risk of carbon leakage are likely to act as the greatest hinderance to appropriate incentives for the more efficient use of steel in the UK: as things currently stand, unless upstream companies are encouraged to make windfall profits, incentives downstream are weakened. The article concludes by exploring policy options to address the distortions identified, including efforts to reinstate the carbon price downstream and efforts to remove other distortive taxes. This article is part of the themed issue ‘Material demand reduction’.