EU enlargement and environmental policy

of integration are much higher for the CEA than for EUR. This result confirms the
calculations of e.g. Baldwin, Francois and Portes 1997, Gasiorek, Smith and Venables 1997.
The welfare implications of environmental action are ambiguous due to spillover effects (see
Bohringer and Rutherford 2000, Bohringer and Loschel 2002). The spillover effects might
harm the FSU and ROW.

Table 6 Marginal abatement costs (in USD per ton CO2) and welfare effects (in %)

Comparative advantage and trade patterns

Carbon abatement policies have a direct impact on the overall comparative advantage
and the international competitiveness of industries. The CEA countries possess a comparative
advantage in the heavy industry, which has a long tradition in the transition economies due to
the low cost of mostly subsidized energy. The strict domestic abatement policy implies the
loss of the competitiveness in the EU energy intensive industry with negative implications on
production and employment. Accordingly, energy intensive production rises in CEA and falls
in EUR. With lower carbon prices under Annex-B trading and global trading the comparative
advantage of the CEA energy intensive industries disappears and the effects on production
effects are reversed. Trade liberalization deepens these detrimental effects of environmental
policy (Table 7). Domestic environmental policy in all countries leads to a slight decrease in
output of almost all sectors in the CEA with exception to the energy intensive goods and
electricity production. This might be explained as a consequence of the increase in imports of
the EU due to the increased competitiveness of energy intensive industries in CEA (Table 8).
The cooperative environmental policy (i.e. Annex B and global carbon permit trading) leads
to a substantial decrease in energy intensive production especially in the coal and surprisingly

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