EU enlargement and environmental policy

Table 4 Regions and sectoral aggregation

Private and government demand

Private demand for goods and services is derived from utility maximization of a
representative household subject to a budget constraint. Total income of the representative
household consists of factor income and transfers. In our comparative-static framework,
overall investment demand is fixed at the reference level. Utility is derived from
consumption. Final demand of the representative agent is given as a CES composite of energy
aggregate and non-energy consumption composite. Substitution patterns within the energy
aggregate and the non-energy consumption bundle are reflected via Cobb-Douglas functions.

The government distributes transfers and provides a public good (including public
investment), which is produced with commodities purchased at market prices. In all
simulations, we impose revenue-neutrality in the sense that the level of public provision is
fixed. Subject to this equal-yield constraint, additional revenues from environmental taxes get
recycled through cuts in labor costs (social insurance payments).

International trade

All goods are traded in the world markets. Following Armington (1969), foreign trade
modeling involves international product differentiation in the sense that imported and
domestically produced goods of the same kind are treated as incomplete substitutes. The
aggregate amount of each good is divided among imports and domestic production.
Intermediate as well as final demands are (nested CES) Armington composites of domestic

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