The Effects of Environmental Tax Reform on International Competitiveness in the European Union: Modelling with E3ME

Abstract

Abstract This chapter assesses the macroeconomic effects of carbon‐energy taxation introduced under unilateral environmental tax reform (ETR) in the 1990s undertaken in six member states of the European Union: Denmark, Finland, Germany, the Netherlands, Sweden, and the UK. The effects are estimated using the large‐scale Energy–Environment–Economy (E3) model for Europe, E3ME, which covers the countries involved, as well as the complete single market, so that the effects on other economies can be considered, along with any effects on competitiveness. The method is to identify the key characteristics of the green tax reform packages and include these in the modelling of the price and non‐price effects of the ETR on energy use and international trade in E3ME. The effects are then compared with a ‘reference case’ (i.e. a counterfactual case) generated by E3ME over the period 1995–2012 including current and expected developments in the EU economy, e.g. the impact of the EU Emission Trading Scheme, but without the ETR. The ETRs caused a modest reduction in fuel use and greenhouse gas emissions in all six of countries and a very small increase in employment and GDP. All the ETRs were assumed to be revenue‐neutral. The revenue recycling meant that the cost of ETR to the economy was significantly reduced and in several cases resulted in an increase in GDP. The method for revenue recycling strongly affects the results, as does the scale of exemptions offered to certain fuel user groups.