ABSTRACT
As Chapter 3 made clear, comprehensively modelling the macroeconomic effects of carbon taxes is a complex task because fossil fuel based energy, though only a small component of the economy by cost, is used in all productive sectors and also as a direct consumption good. As energy taxes are raised, and energy use declines, there will be long term structural changes in the mix of inputs to production, types of energy goods consumed, total output of the economy and the prices of traded goods. It should also be expected that the large shifts in relative prices and sources of taxation revenue will cause short to medium term inflationary, monetary and fiscal effects. When considering the political economy of carbon taxes (as opposed to the long run economic equilibrium) the magnitude of these short term effects has important policy implications.
