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The macroeconomic impacts of EU climate policy implemented by the emission trading system in the third emission trading period 2013-2020 are evaluated by model simulations. The main purpose of the study is to compare the macroeconomic impacts of EU climate policy on the Finnish and the EU economies.
Modelling the demand for electricity is crucial for the analysis of the economic impacts of climate policy since electricity production is responsible for the vast majority of the carbon dioxide emissions of the EU emission trading sector. Air temperature influences the consumption of electricity in addition to the economic determinants of electricity demand. One aim of the study is to include both of these main determinants of electricity consumption in the econometric demand model of electricity. This will be done by estimating the electricity demand function from a panel data of EU countries. Likewise, EU panel data is used to estimate the price elasticity of the demand for electricity.
The price elasticity of the demand for electricity is crucial for the macroeconomic impacts of climate policy. If the price elasticity is very high, most of the adjustment to decreasing emission allowances takes place through decreasing electricity consumption. If the price elasticity of the demand for electricity is very low, most of the adjustment to climate policy takes place through decreasing economic activity.
The macroeconomic impacts of EU climate policy are analysed by simulations of the macroeconomic model of the EU economy and the Finnish economy. The main result of the simulations is that the reduction of the emission allowances of the EU emission trading sector in 2013-2020 will have more negative impacts in the Finnish economy than elsewhere in the EU area. The main reasons for this are the cold climate in Finland, the openness of the Finnish economy and the energy intensity of the Finnish industry.
A special issue in the macroeconomic analysis of climate policy is the impact of the shutdown of nuclear power plants in Germany by 2022. It turns out that the macroeconomic consequences of this decision will be more severe in Finland than in the rest of the EU area.
Researcher: Research Advisor Dr. Olavi Rantala.
