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Kurt Kratena and Mark Sommer, Policy implications of resource constraints on the European economy. WWWforEurope Policy Brief No. 6, November 2014

Macroeconomic effects of resource use reduction policies

One of the key questions of the WWWforEurope project is whether it is possible to reduce resource use while at the same time staying on a growth path. Resource use refers to energy use, greenhouse gas emissions (GHG), but also to the input of metals, industrial and construction minerals. As recent work in the WWWforEurope project has clearly shown the reduction of these inputs is necessary if we are serious about sustainability and the socio-ecological transition.

Now, Kurt Kratena and Mark Sommer from WIFO show in the latest policy brief "Policy Implications of Resource Constraints on the European Economy" that it is possible to model such scenarios. Their achievement is to implement biophysical constraints into complex dynamic economic models, namely into a Dynamic New Keynesian (DYNK) model.

Decoupling of resource use and growth has to take account of certain facts: The European consumers are part of the global value chain – whatever they consume has a direct or indirect contribution to global resource use. Europe still "produces" an important part of global emissions, far beyond sustainable levels. And it should be kept in mind that resource use does not only have an environmental dimension: Security of supply and the risks attached to it are further considerations for European resource policy.

Political roadmaps therefore prescribe significant reductions in resource use. But there are two catches in these plans: Firstly, if Europe follows a "go-it-alone" strategy, leakage may result – European producers face higher costs due to environmental taxes or other reduction policies and will therefore relocate energy- and resource-intensive production outside of Europe. In this case global GHG emissions will not decrease as much as the emissions in Europe, while growth and employment in Europe are dampened. Secondly, taxing energy and resource use is highly regressive: Poorer households are burdened disproportionately. To cope with these problems and minimise trade-off problems, Kurt Kratena and Mark Sommer propose two different tax reform schemes and analyse their effects. Both schemes are modelled as revenue-neutral by simultaneously reducing social security contributions in the same amount as the respective tax.

Countries in a good competitive position and with high environmental ambitions could opt for a "Green Tax Reform" – GHG emissions and resources are taxed on the producer level on an increasing scale, starting off with a tax rate of 25 €/t of CO2 equivalent and rising continuously to 250 €/t in 2050. In this scheme, output prices for production rise. The Gross Domestic Product will grow in this scenario, albeit at a slower rate than in the base case – 2050 it would be 5.6 percent below a scenario without a green tax. In return, there is an absolute decoupling process triggered by the green tax: GHG emissions would be 38 percent below the baseline, domestic material consumption per capita is 16 percent lower than without a green tax. A small amount of leakage occurs, increasing GHG emissions outside Europe as well as increasing domestic mineral consumption in Europe.

Countries with lower ambitions in environmental issues and more severely hit by the economic crisis might opt for the "softer" scenario of "Environmental Fiscal Devaluation". In this case the tax is levied not on producers but on consumers, thereby not weakening the international competitiveness of producers. As social security contributions are reduced, producers can lower their export prices – this shift between domestic and export prices mimics a devaluation of currency, hence the name of the scenario. Tax rates are the same as in the "Green Tax" scenario but macroeconomic effects differ: In this scenario growth is boosted and above the baseline. The reason for this is that imports are taxed as well which helps the domestic producers. In this case there is no absolute decoupling – GHG emissions in Europe in 2050 would be 10 percent lower than in the baseline, but they would rise nevertheless. But lower imports also mean less emissions and resource use abroad. Environmental Fiscal Devaluation therefore produces a beneficial leakage effect for global climate.

Both scenarios pose a high burden on consumers, especially low income households. These effects have to be considered and the implementation of green taxes needs to be accompanied by adequate re-distributive compensation schemes.


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