A Unilateral Versus a Multilateral Carbon Dioxide Tax - A Numerical Analysis with the European Model GEM-E3
Simulation experiments are conducted, comparing the effects of a common reduction of CO2 emissions within the European Union to a Swedish unilateral decicion to reduce CO2 emissions. A numerical general equilibrium model, GEM-E3, has been used as analytical tool. The model covers all European Union countries, with production disaggregated into 18 sectors. The 13 consumption goods included are classified into three consumption categories (durable, non-linked non-durable and linked durable goods) in order to imporve the energy allocation description. In addition, industry exemption of CO2 tax is studied. The results indicate that if Sweden unilaterally decides to increase its carbon dioxide tax, the total European Union carbon dioxide emissions will increase, i.e. there will be a "carbon leakage" effect. Perhaps more surprisingly, a European Union multilateral implementation of a carbon dioxide tax rate will induce a lower welfare (exluding environmental benefits) in Sweden as compared to the situation where the same carbon dioxide tax was introduced unilaterally in Sweden.
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