Macroeconomic assessment for the EU 'Climate Action and Renewable Energy Package'

This paper propose an assessment for European Commission 'Package of Implementation measures for the EU's objectives on climate change and renewable energy for 2020', that was agreed the 23 January 2008. The policy assessment uses macroeconomic modeling tools: NEMESIS economic macro-econometric model, for which additional developments were needed to be able to implement strictly the directive proposals includes in EU 'Energy and Environment' package. A new module for energy demand and environment was developed to extend from EU-15 to EU-27 NEMESIS set of energy and environment indicators, with also an extension for biomass (including biofuels) and all renewable categories. The focus puts on the economic consequences in 2020 of the joint implementation of the 'EU ETS review', 'non ETS effort-sharing' and 'renewables' directive and decision proposals. Different scenarios are explored depending on the way auctioning revenues are recycled by States, and compared on the basis of economic and environmental efficiency criteria defined by the Commission. In Scenario S1, auctioning revenue is kept by states and is used for decreasing national debt. There is no recycling through public investment or revenue redistribution to private agents. In scenario S2, the revenue of auctioning in the EU ETS sector is recycled through an equivalent reduction, in terms of revenue, of employers' social contribution rate. In scenario S3, auctioning revenue is recycled in two ways: A reduction, as in scenario S2, of employers' social contributions rate, and a general subsidy to private R&D expenditures up to 30 %. The R&D subsidy in calculated first, and only the difference between auctioning revenue and R&D subsidies is used to reduce employers' social contribution rate. The main important results are that the implementation of EU Climate Action and Renewable 1Energy Package should have only a limited cost in terms of GDP for EU-27, or even a negative one, depending the way auctioning revenues are recycled by Member States; important gains could be obtained for consumers if recycling of auctioning revenue is used to increase households' disposable income; employment could also be importantly stimulated if the recycling of revenue, and the stimulation of households' final consumption, passes through a reduction of labor cost and not by an increase in social transfers that could impact negatively on European firms competitiveness; and lastly the application of the community solidarity principle could EU Climate Action and Renewable Energy Package represent an important opportunity for growth and employment in EU countries with GDP below European average like Romania and Poland, that are also very carbon intensive.