October 1, 1998

Economic effects of two variants for reducing CO2 emissions by 2% annually in 2000-2020

This paper presents the economic consequences of two policy packages for reducing CO2 emissions.

In variant 1, the volume of private consumption is, in 2020, 1½% lower compared to the baseline scenario. GDP diminishes by 1%, and labour demand is ½% lower. As a consequence of the gradually increasing government subsidies to finance the extra costs of environmental investments and backstop-options, the negative effects are also increasing gradually. This process will continue also after 2020, because the subsidies will be still growing after the scenario period.

The negative effects of variant 2 in 2020 are about 50% higher than the results for variant 1. Private consumption decreases by 2½%, GDP is 1¾% lower, and employment diminishes by ¾%. More subsidies for backstop-options, a higher increase of the small-user energy tax, and a less positive effect because of less environmental investment (particularly less investment in dwellings), account for the more negative picture in comparison with the results for variant 1.

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