The application of policy instruments

Figure 1: The pound's value against the US dollar fell from $1.40 in mid-2021 to $1.22 in mid-2023. UK goods exports grew slowly while import prices rose. Extract 1: In theory a depreciation should improve the current account by making exports cheaper and imports dearer. However, many UK exports are services and high-value manufactured goods whose demand depends more on quality than price. In the short run, contracts are fixed and volumes adjust slowly, so the deficit can first get worse (the J-curve). Extract 2: The depreciation added to UK inflation by raising the price of imported food, energy and components. The Bank of England had to consider this when setting interest rates. Meanwhile, new trade barriers with the EU have increased costs for some exporters.

Extract 1: The UK Emissions Trading Scheme (UK ETS) caps total emissions from power, heavy industry and aviation. Firms must hold an allowance for each tonne of CO₂ they emit; allowances can be bought and sold. The carbon price in the UK ETS fell from about £80 per tonne in 2022 to around £35 per tonne in 2024. Extract 2: The cap is reduced each year. A firm emitting 200 000 tonnes of CO₂ but holding free allowances for 150 000 tonnes must buy the rest. Some heavy industries argue that high carbon prices make them uncompetitive against producers in countries without carbon pricing, and could move production abroad ('carbon leakage'). The UK plans a carbon border adjustment mechanism from 2027. Extract 3: Economists estimate the social cost of carbon at well above £35 per tonne. Some argue for a simple carbon tax instead of trading, or for more direct regulation and subsidies for green technology.