Modelling the health related benefits of environmental policies - a CGE analysis for the eu countries with gem-e3

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The CO2 tax is implemented at country level in the target period 2008-2012 with
the CO2 reduction target for each country given by the last two columns in Table 3,
depending on the model version. Budget neutrality is obtained by using the revenues
generated by the CO2 tax to reduce the social security contributions. We consider only
one policy instrument as our objective is to evaluate the impact of modelling the
feedback effects, rather than to compare policy instruments.

3.2. The Scenario Results

Table 4 presents the domestic CO2 taxes that are required to reach the Kyoto
target. As can be expected, the CO2 tax is higher in the model with feedback for those
countries where the feedback effects imply a higher reduction target in 2010 (cf. Table
3). This reflects the fact that the marginal CO2 abatement costs increase with the
abatement levels. At the EU level the marginal CO2 abatement cost and therefore the
CO2 tax is higher in the model with feedback. Table 4 shows that the social security
contributions can on average be reduced by more in the model with feedback. This is
made possible partly by the higher CO2 tax revenues, but also by other factors which
will be discussed in more detail below. The lower social security contributions play a
role in the increase in the EU average real wage rate which is evident in Table 4.

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