Environmental Modeling & Assessment

, Volume 8, Issue 3, pp 187–197 | Cite as

Assessing the Impact of Carbon Tax Differentiation in the European Union

  • Mustafa H. Babiker
  • Patrick Criqui
  • A. Denny Ellerman
  • John M. Reilly
  • Laurent L. Viguier
Article

Abstract

To what extent do the welfare costs associated with the implementation of the Burden Sharing Agreement in the European Union depend on sectoral allocation of emissions rights? What are the prospects for strategic climate policy to favor domestic production? This paper attempts to answer those questions using a CGE model featuring a detailed representation of the European economies. First, numerical simulations show that equalizing marginal abatement costs across domestic sectors greatly reduces the burden of the emissions constraint but also that other allocations may be preferable for some countries because of pre-existing tax distortions. Second, we show that the effect of a single country's attempt to undertake a strategic policy to limit impacts on its domestic energy-intensive industries has mixed effects. Exempting energy-intensive industries from the reduction program is a costly solution to maintain the international competitiveness of these industries; a tax-cum-subsidy approach is shown to be better than exemption policy to sustain exports. The welfare impact either policy – exemption or subsidy – on other European countries is likely to be small because of general equilibrium effects.

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Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  • Mustafa H. Babiker
    • 1
  • Patrick Criqui
    • 2
  • A. Denny Ellerman
    • 1
  • John M. Reilly
    • 1
  • Laurent L. Viguier
    • 3
  1. 1.Massachusetts Institute of Technology, Joint Program on the Science and Policy of Global Change, USA, Arab Planning InstituteKuwait
  2. 2.Institute of Economic Policy and Economics (IEPE-CNRS)France
  3. 3.Faculty of Economics and Social SciencesUniversity of GenevaSwitzerland

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