THIS newspaper has long advocated a carbon tax as the best way to deal with a warming climate. This month we asked Cambridge Econometrics, an economic-modelling firm, to assess the impact of a carbon tax on the economy. To keep things simple and allow for gradual adjustment, we proposed that it should raise revenues equal to 1% of GDP by 2020, and that other policies with similar objectives (fuel duty, subsidies for renewable energy, Britain's membership of the European emissions-trading scheme—the ETS—and so forth) would be abolished or cut back.

The results are surprising. A frequent worry about carbon taxes is that they will hurt business and the economy. But in our simulation Britain's economic performance would improve. Despite raising an extra £11 billion in net revenue by 2015 and £18 billion by 2020, our carbon tax (£31 a tonne in 2015) would help economic performance, not hamper it. Output would be 1.2% higher by 2020 than under the current arrangements.

Philip Summerton, of Cambridge Econometrics, explains that, with a general carbon tax replacing specific, expensive subsidies for renewable energy, more gas-fired power stations would be built. Since gas power is cheaper than wind power, for example, that would lower the cost of electricity. That, in turn, would boost production: manufacturing would grow by an extra 2.5% by 2020.

Admittedly, not all the news is good. Britain already depends on gas for around 40% of its electricity, and it is running out of the stuff. The tax would do nothing for security and diversity of supply. Although electricity bills would fall, the price of gas (the most popular home-heating fuel) would rise. Average domestic fuel bills would climb by around 0.5% between 2010 and 2020. And Britain is in fact unlikely to withdraw from the ETS, so the relationship between the ETS price for carbon and the one set by the British taxman (in our test, higher) needs some thought.

Confining the revenues from our tax to 1% of GDP led to greenhouse-gas emissions of 568m tonnes in 2020, around 6% more than they would otherwise have been. This was a bit of a blow. But a higher tax rate could drive emissions down, says Mr Summerton, and, in return for slightly more emissions, Britain gains a significantly bigger economy and a useful revenue stream. This suggests that a carbon tax would be more efficient than the current hotchpotch of policies.

A carbon tax has many more general advantages as a fiscal tool, too. It would be simpler and more predictable than the current jumble of tax breaks, trading schemes and purchasing obligations. The principle—that polluters pay for the damage they cause—is easily grasped, and it is politically attractive to tax “bads” such as pollution instead of “goods” such as work and entrepreneurship. And, by establishing a reliable price for carbon, it could give businessmen the certainty they need to invest in greener technologies. But the effect of that is likely to show up only after 2020.

Note: for more thoughts on a carbon tax, see here





For more discussion of these results, and the advantages and disadvantages of a carbon tax, see www.economist.com/world/britain