Economic Effects of an Uncoordinated Versus a Coordinated Carbon Dioxide Policy in the European Union: An Applied General Equilibrium Analysis

Abstract

The objective of this paper is to quantify the economic effects of introducing carbon-reduction policies in the European Union (EU). For this purpose, we use linked applied general equilibrium (AGE) models for 11 EU member countries. This method enables us to measure the change in competitiveness for domestic industries; the effect on growth, employment and inflation in member countries; and the costs and benefits of a coordinated versus an uncoordinated approach to adhere to an EU target of carbon dioxide (CO2) emissions. Unemployment is high in the EU, and many economists believe that this problem as well as global warming can be solved by a CO2 tax, where tax revenues are used to reduce employers’ contributions to social insurance. Then, hopefully, a'double dividend will result for the environment as well as for the labor market. In one simulation, each country implements a CO2 tax to limit CO2 emissions by 10%. As an alternative to this uncoordinated approach, we calculated an overall CO2 tax for the EU to limit the CO2 emissions of the EU by 10%. We will measure the effects on the labor market, on economic performance and on trade flows under the uncoordinated CO2 policy, and will compare the results with the coordinated CO2 policy of an overall CO2 reduction for the EU.