National economic impacts of an EU environmental policy: an applied general equilibrium analysis

The objective of this paper is to quantify the economic effects of the introduction of a system of tradable permits in the European Union (EU). For this purpose we use linked applied general equilibrium models (AGE) for eleven EU member countries. This method enables us to measure the change in competitiveness for domestic industries, the impact on growth, employment and inflation in member countries, and the cost and benefits of a cooperative approach to adhere to a EU target of emissions of air pollutants. The results we will present are first results from the SOLVGE/GEM-E3 Projekt. GEM-E3 stands for General Equilibrium Modeling for Energy - Economy - Environment, a joint undertaking of NTUA-Athens (P. Capros, P. Georgakopoulos), CESKULeuven (S. Proost and D. Van Regemorter), Univ. Mannheim and ZEW (K. Conrad and T. Schmidt), GEMME-CEA (N. Ladoux), Univ. Strathclyde (P. MacGregor), CORE-UCL (Y. Smeers), With respect to a policy on greenhouse gases we will quantify the economic impact for the, EU by introducing a EU-wide tradable permit system, free of charge and based on the present energy intensity and energy mix. Under growth there will be a positive market price for permits with demand by countries where the cost of substitution are high and supply by those countries where the cost of substitution are low. We will measure economic performance and trade flows under a noncoordinated CO2 policy where each country limits the emission of CO2 by 10% and will compare the result with a cooperative outcome where the European Union as a decision maker aims at reducing CO2 by 10%. --

Climate change policy and burden sharing in the European Union: applying alternative equity rules to a CGE-framework

The objective of this paper is to present different equity rules that can be applied to the initial allocation of greenhouse gas entitlements and to analyse the potential impacts of these rules EU-wide as well as on the level of member states. The methodological framework used in the empirical part of the paper is based on the GEM-E3 model, a multi-country and multi-sectoral computable general equilibrium model for fourteen EU-member states. The major finding of the paper is that being ex ante favoured with respect to the initial allocation of permits might not hold ex post, i.e. when trade of permits and actual emission reductions are carried out. The reason can be found in two effects. First, the interdependence of the EU economies allows smaller economies not to make full use of the advantages they get through the ability-to-pay allocation: The negative impact on the economic perfomance of the big economies leads to a drop of export demand in the smaller economies, which in turn lowers the expected positive impact on welfare in the latter ones. Second, the way of how a surplus of permits in a particular country is used has considerable impacts on consumer welfare. Selling the surplus of permits on the international market and use the receipts to reduce public deficit is one way, but it has no direct impact on demand. Other, more demand stimulating recycling strategies of the surplus (e.g. a lump-sum transfer to households) might be more promising if welfare losses are to be minimzed. Both effects may outweigh the positive effect realized ex ante in some countries due to a more ?fair? initial allocation of permits. The outcome emphasizes the importance of a consideration of full general equilibrium effects across countries. --

Modelling of foreign trade in applied general equilibrium models: theoretical approaches and sensitivity analysis with the GEM-E3 model

The specification of the world closure, i.e. the way of closing the domestic economy model by incorporating the external sector, is a crucial component for those models in which production and consumption is not specified endogenously for all countries. This paper looks explicitly at the assumptions concerning the trade behaviour of the rest of the world that can be found in literature and in empirical applications, such as the GEM-E3 General Equilibrium Model for the EU. Starting from a description of the closure rule in the actual GEM-E3 model version, two main changes in the foreign trade specification are proposed and tested using an EU-wide ecological tax reform scenario. The first change refers to the rest of the world?s export supply function in which a constant finite price elasticity is introduced. The second change concerns the rest of the world?s import demand function in which an activity variable is incorporated. In summary, the impact in terms of economic welfare and changes in macroeconomic variables is noteworthy for the former case while no substantial changes could be observed for the latter case. Additionally, the sensitivity of the GEM-E3 model to variations in key parameter values such as the upper-level Armington elasticity are analysed. Results indicate that the model can be interpreted as quite robust to parameter changes. --

Double dividend of climate protection and the role of international policy coordination in the EU: an applied general equilibrium analysis with the GEM-E3 model

While there is some hope that the ongoing climate change negotiations will soon come up with concrete, time scheduled and binding emission reduction commitments, the question of how to achieve these targets is still unsolved. The objective of this paper is to analyse alternative settings of an environmental tax reform and its economic and environmental impacts on the EU. The methodological framework used is based on a multi-country and multi-sectoral computable general equilibrium model for eleven EU-member states. The emphasis of the analysis lies on the institutional setting of a carbon dioxide reduction policy and on the specification of the labour market. The institutional settings analysed are related to the degree of environmental policy coordination. As standard neo-classics neglegt the problem of unvoluntary unemployment, we relax this restriction in the second part of the analysis in order to test alternative (more rigid) labour market specifications. The major findings of the paper can be summarized as follows: 1) There is some potential for a double dividend in the EU. 2) Coordination beats not always unilateral actions. 3) Labour market rigidities play a crucial role to both, the double dividend and the coordination issue. --

Tradable SO-2-permits in the European Union: a practicable scheme for public utilities

In this paper, a practicable scheme of SO2-emission permits for European power producers is developed. Background is the second UN-ECE Sulphur Protocol from 1994 (Protocol of Oslo). After discussing some theoretical models of spatially differentiated permit schemes, evaluating the U.S. Acid Rain and RECLAIM Program, and considering the setting in the EU-15 countries, a scheme of locally undifferentiated emission permits is proposed which is distinguished by a high degree of both economic efficiency and market functioning. However, as our model simulations indicate, national deposition targets will be violated in all probability due to the scheme?s missing differentiation regarding the receptors. The risk of hot spots is addressed adequately by a differentiated bundle of countermeasures. The general economic impact of an EU-wide permit scheme is low, and, in terms of change in GDP, lower compared to a non-coordinated SO2 policy. The proposed mode of the initial permit allocation allows for early price signals and guarantees maximum static and dynamic efficiency. Balancing the interests of existing and new emitters, a long-term transition from the grandfathering to the free auction procedure is chosen. --

Double Dividend of Climate Protection and the Role of International Policy Coordination in the EU - An Applied General Equilibrium Analysis with the GEM-E3 Model

While there is some hope that the ongoing climate change negotiations will soon come up with concrete, time scheduled and binding emission reduction commitments, the question of how to achieve these targets is still unsolved. The objective of this paper is to analyse alternative settings of an environmental tax reform and its economic and environmental impacts on the EU. The methodological framework used is based on a multi-country and multi-sectoral computable general equilibrium model for eleven EU-member states. The emphasis of the analysis lies on the institutional setting of a carbon dioxide reduction policy and on the specification of the labour market. The institutional settings analysed are related to the degree of environmental policy coordination. As standard neo-classics neglegt the problem of unvoluntary unemployment, we relax this restriction in the second part of the analysis in order to test alternative (more rigid) labour market specifications. The major findings of the paper can be summarized as follows: 1) There is some potential for a double dividend in the EU. 2) Coordination beats not always unilateral actions. 3) Labour market rigidities play a crucial role to both, the double dividend and the coordination issue

Climate Change Policy and Burden Sharing in the European Union - Applying alternative equity rules to a CGE-framework

The objective of this paper is to present different equity rules that can be applied to the initial allocation of greenhouse gas entitlements and to analyse the potential impacts of these rules EU-wide as well as on the level of member states. The methodological framework used in the empirical part of the paper is based on the GEM-E3 model, a multi-country and multi-sectoral computable general equilibrium model for fourteen EU-member states. The major finding of the paper is that being ex ante favoured with respect to the initial allocation of permits might not hold ex post, i.e. when trade of permits and actual emission reductions are carried out. The reason can be found in two effects. First, the interdependence of the EU economies allows smaller economies not to make full use of the advantages they get through the ability-to-pay allocation: The negative impact on the economic perfomance of the big economies leads to a drop of export demand in the smaller economies, which in turn lowers the expected positive impact on welfare in the latter ones. Second, the way of how a surplus of permits in a particular country is used has considerable impacts on consumer welfare. Selling the surplus of permits on the international market and use the receipts to reduce public deficit is one way, but it has no direct impact on demand. Other, more demand stimulating recycling strategies of the surplus (e.g. a lump-sum transfer to households) might be more promising if welfare losses are to be minimzed. Both effects may outweigh the positive effect realized ex ante in some countries due to a more "fair" initial allocation of permits. The outcome emphasizes the importance of a consideration of full general equilibrium effects across countries

Modelling of Foreign Trade in Applied General Equilibrium Models: Theoretical Approaches and Sensitivity Analysis with the GEM-E3 Model

The specification of the world closure, i.e. the way of closing the domestic economy model by incorporating the external sector, is a crucial component for those models in which production and consumption is not specified endogenously for all countries. This paper looks explicitly at the assumptions concerning the trade behaviour of the rest of the world that can be found in literature and in empirical applications, such as the GEM-E3 General Equilibrium Model for the EU. Starting from a description of the closure rule in the actual GEM-E3 model version, two main changes in the foreign trade specification are proposed and tested using an EU-wide ecological tax reform scenario. The first change refers to the rest of the world's export supply function in which a constant finite price elasticity is introduced. The second change concerns the rest of the world's import demand function in which an activity variable is incorporated. In summary, the impact in terms of economic welfare and changes in macroeconomic variables is noteworthy for the former case while no substantial changes could be observed for the latter case. Additionally, the sensitivity of the GEM-E3 model to variations in key parameter values such as the upper-level Armington elasticity are analysed. Results indicate that the model can be interpreted as quite robust to parameter changes

Technologischer Wandel in AGE-Modellen: Stand der Forschung, Entwicklungsstand und -potential des GEM-E3-Modells

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Tradable SO2-Permits in the European Union: A Practicable Scheme for Public Utilities

In this paper, a practicable scheme of SO2-emission permits for European power producers is developed. Background is the second UN-ECE Sulphur Protocol from 1994 (Protocol of Oslo). After discussing some theoretical models of spatially differentiated permit schemes, evaluating the U.S. Acid Rain and RECLAIM Program, and considering the setting in the EU-15 countries, a scheme of locally undifferentiated emission permits is proposed which is distinguished by a high degree of both economic efficiency and market functioning. However, as our model simulations indicate, national deposition targets will be violated in all probability due to the scheme’s missing differentiation regarding the receptors. The risk of hot spots is addressed adequately by a differentiated bundle of countermeasures. The general economic impact of an EU-wide permit scheme is low, and, in terms of change in GDP, lower compared to a non-coordinated SO2 policy. The proposed mode of the initial permit allocation allows for early price signals and guarantees maximum static and dynamic efficiency. Balancing the interests of existing and new emitters, a long-term transition from the grandfathering to the free auction procedure is chosen