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

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Table 5:     The impact of the domestic CO2 tax on local pollutant emissions

(% change in 2010 w.r.t. the baseline)

The feedback effect of the changes in the local air pollutants, as modelled in this
paper, goes through three main channels:

- a decrease in medical expenditure: the reduction in the emissions of local air
pollutants induces a shift of consumption towards other goods and leisure, and eases
the budget constraint of the government;

- an increase in the consumers’ available time: this induces an increase in both labour
supply and leisure demand through the generalized income effect;

- an increase of labour productivity in the production sectors: this limits the price
increase due to the CO2 tax, which reinforces the beneficial revenue recycling effect
of the tax.

Table 6 provides more insight in the importance of these effects. It shows that
the macro-economic impacts of the domestic CO2 taxes do not change a lot if the
feedback effect of air pollution is modelled. This can be explained by two factors. First
of all, the local benefits of the CO2 taxes are already very limited in the GEM-E3 model
without feedback. Secondly, only approximately 30% of the external air pollution costs
of the main local air pollutants (PM2.5, PM10, sulphates and nitrates) is associated with a
feedback effect in our set-up.

The benefits of the feedback effect are translated principally in terms of an
increase in private consumption, whereas the final impact on the labour market remains
similar in both model versions. However, while there is no differential impact on

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