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Industry-Level Emission Trading in the EU

15


When we focus on the economic implications at the EU country level, we observe that
some countries may gain rather than lose from carbon abatement. Again, the differences in
reduction requirements and terms-of-trade effects account for this result: Due to low
effective reduction targets, AUT, DEU, and FRA face low marginal abatement costs. As
compared to other EU trading partners they can levy much lower carbon taxes and
therefore experience a cost advantage in energy-intensive production. Table 9 illustrates
the induced shift in comparative advantage for energy-intensive goods. While average EU
production in energy-intensive goods declines, AUT, DEU, and FRA, significantly
increase their production.

The cost advantage for low tax countries AUT, DEU, and FRA, more than offsets their
costs from domestic emission abatement. DNK, FIN, GRC, NET, and PRT, at the other
end, face rather high effective reduction targets accompanied by substantial adjustment
costs.

Full emission trading within the EU bubble cuts down compliance costs by nearly 40%,
while the spillovers of this regime change outside the EU are negligible. Permit trade
within the EU has important implications not only for the total costs of EU abatement, but
also for the implied changes in the distribution of costs as compared to the
NTR case. First
of all, the range in burden across EU countries shrink. In other words: The allocation of
efficiency gains via the market supports a more "equitable" outcome in terms of percentage
welfare loss (see Table 5). Countries like DNK, FIN, GRC, IRE, PRT, IRE, and NET can
significantly reduce their compliance costs by buying cheaper abatement from abroad. Due



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