EU enlargement and environmental policy

computational general equilibrium model (CGE). In the analysis we combine three different
environmental policy scenarios with and without trade liberalization between EU and CEEC.
In the first scenario we consider only the domestic measures taken by ANNEX-B countries in
order to fulfil their commitments. In the second scenario the ANNEX-B countries are allowed
to trade with their carbon allowances. In the last scenario all regions are allowed to participate
in carbon emission trading. In the trade liberalization scenario we consider only tariffs as the
most common trade barriers on imported and exported goods. Trade liberalization is then
modelled as an abolishment of the existing tariffs between EU and CEEC. The trading
conditions with other regions remain unchanged. We compute the effective carbon reduction
requirements, which differ considerably from the agreed targets in 1990 as carbon emissions
change until 2010. The analysis shows, that the carbon abatement policies have a direct
impact on the overall comparative advantage and the international competitiveness of
industries. The strict domestic abatement policy implies the loss of competitiveness in the EU
energy intensive industry with negative implications on production and employment.
Accordingly energy intensive production increases in CEEC. The computed carbon leakage
rates comply with those found in the literature. They are reduced by the introduction of
carbon emission trading. As expected, emission trading provides substantial benefits mainly
to the main seller of permits i.e. the former Soviet Union and the Central and Eastern
European Associates. Those regions also benefit from further trade liberalization. The trade
liberalization itself provides large gains for EEAs while it holds only modest gains for EU
member states. It does not show a significant impact on carbon abatement policies, however it
mitigates welfare losses caused by environmental policies.

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