Double Dividend Analysis:
First Results of a General Equilibrium Model
(GEM-E3)1 linking the EU-12 countries
by
P. Capros, P. Georgakopoulos, S. Zografakis (NTUniversity Athens)
S. Proost, D. Van Regemorter (CES/KULeuven)
C. Conrad, T. Schmidt (Univ. of Mannheim)
Y. Smeers, E. Michiels (CORE, UCLeuven)
Paper included in C. Carraro and D. Siniscalco (editors)
"Environmental Fiscal Reform and Unemployment" Kluwer
Academic Publishers
1
3
The GEM-E model was built under the auspices of European Commission (DG-XII, co-ordinator P.Valette)
by a consortium involving CORE, NTUA, KUL, Univ. Mannheim, Univ. Strathclyde and CEA.
Abstract
The paper presents a dynamic general equilibrium model of the European Union economy (the
GEM-E3 model) and its use in the analysis of the "Double Dividend" policy issue. GEM-E3 is
a large-scale computable general equilibrium model that incorporates links of the economy
with the environment and the energy systems. The model can link the 12 member states of
European Union through trade. It represents the simultaneous equilibrium in the markets of
goods (11 sectors), the labour and the capital markets.
The double dividend analysis is defined as the simultaneous imposition of a CO2-related tax
compensated by a reduction of the rate of social security contribution of employers.
Possibilities for a double dividend in environment and employment are analysed with different
model variants. The full model version performs comparative static analysis for the member
states. A model version for Belgium performs dynamic analysis.
The paper examines some of the conditions under which a double dividend could occur. For
that purpose it considers the adaptation flexibility of the labour market and the elasticities of
substitution in production and the energy use and supply. Differential implications for the
member states are also evaluated and "burden sharing" issues are raised. The results should
however be considered as preliminary.
CONTENTS
1. INTRODUCTION ................................................................................................................ 4
1.1 The subject............................................................................................................................ 4
1.2 The approach........................................................................................................................ 4
1.3 Model applications ............................................................................................................... 5
2. THE GEM-E3 MODEL ....................................................................................................... 6
2.1 General presentation of the model ....................................................................................... 6
2.2 Domestic Production ............................................................................................................ 7
2.3 Households final consumption.............................................................................................. 8
2.4 Foreign trade........................................................................................................................ 8
2.5 Income accounts ................................................................................................................. 10
2.6 Equilibrium of the real part................................................................................................ 10
2.7 The Financial/Monetary sector .......................................................................................... 11
2.8 Nomenclature/Dimensions of the model............................................................................. 12
3. A EU-12 APPLICATION................................................................................................... 13
3.1 Assumptions ........................................................................................................................ 13
3.2 Results country by country ................................................................................................. 14
3.3 Sensitivity analysis: conditions for a double dividend ....................................................... 21
3.4 Results of the EU-12 linked system..................................................................................... 23
4. A DYNAMIC APPLICATION FOR BELGIUM ............................................................ 29
4.1 Model Specification and Scenario...................................................................................... 29
4.2 The results........................................................................................................................... 29
5. CONCLUDING REMARKS ............................................................................................. 34
6. REFERENCES ................................................................................................................... 35
1.
Introduction
1.1
The subject
Policy analysis for CO2 emission reduction has accumulated a rich background, world-wide.
Although controversial, the analysis concluded on the advantage of using market-oriented
policy instruments, especially taxation. However, it demonstrated also the adverse
implications for economic growth, employment and competitiveness.
In its early stages, the analysis considered the recycling of CO2-related tax revenues. The
priority domain for recycling depended on the objectives of the analysis. For instance, the
maximisation of effectiveness regarding CO2 emission reduction implied a recycling in the
promotion of energy savings and new energy technologies. A priority to economic and social
problems oriented the recycling issue towards the possibility to reduce the cost of other
production factors, such as labour in Europe and capital in USA.
This raised a more general issue that is of great interest in economics. Is it possible by
internalising externalities to obtain simultaneously benefits in the non-economic and the
economic domains? If yes, we would infer that such a "no-regrets" or "double dividend"
policy corrects market imperfections that prevail independently of the externalities.
The relevant policy issue regards then the conditions under which such a double dividend can
occur. This issue is, at present, in the centre of several research activities, world-wide. As it is
known, the matter gained importance in Europe, after the White Paper of the European
Commission which proposed a recycling of environment-related tax revenues for the
reduction of social security costs of labour. It is expected by this policy, to obtain a double
dividend, that is for environment and for employment, the latter being a critical problem in
European economies.
1.2
The approach
In this paper we provide preliminary results for the "double dividend" issue, by using the
GEM-E3 model of European Union economy. The model is a large-scale computable general
equilibrium framework for all the member states and can link them through endogenous trade.
We present the model in section 2.
In this paper, we define the double dividend issue through the simultaneous imposition of a
CO2-related tax that is exactly compensated by a reduction of the rate of social security
contribution of employers, in all sectors.
To be realistic, we tried to impose the tax that was proposed by the Commission in end 1992.
The tax combined a carbon-oriented and an energy-oriented part, both defined in magnitude at
the order of 10$/barrel of energy equivalent. The carbon part defined a tax level proportional
to CO2 emissions by fuel type, while the energy part was proportional to the energy content.
Electricity was taxed at the level of the fossil fuels used in power generation and as such for
its part produced by hydro and nuclear plants. No exemptions were permitted. The tax took
the form of an excise tax. This has important implications, because the implied percent
changes of prices depend on the pre-existing level of excise tax. For example, fuels used in
transports are mildly affected by such a tax, while the prices of fuels used in heavy industry
increase significantly.
4
In the dynamic analysis for Belgium, we defined a pure carbon tax of 10$/bbl.
An important policy issue concerns also the way to implement the reduction of the rate of
social security contribution of employers by sector, since both the rates and the labour costs
differ by sector. We adopted a uniform reduction by sector, since this seems more realistic in
most countries. Thus, we consider that the compensation of the CO2-tax is obtained globally
and not by sector.
To analyse the distributional effects of such a policy, we should avoid any side effect on the
surplus or deficit of public budget. If we compute ex-ante the rate of social security
contribution necessary to compensate CO2-tax revenues, the surplus or deficit of public
budget may be different in the new equilibrium of the economy. By iterating, we determine
the level of the rate of social security contribution that compensates CO2-tax revenues expost, that is at the new equilibrium of the economy. As we will explain, this issue turns out an
important implementation problem for the policy.
1.3
Model applications
The results presented in this paper should be considered as preliminary, and will be subject of
significant revision in the next future. In this paper, we present two separate applications:
• In section 3, we use the full model version for all member states to analyse the double
dividend issue in a comparative static way. In that section we neglect dynamic effects
coming from capital accumulation, but we emphasise on distributional effects among
sectors and the "burden sharing" issue, regarding countries. We deliberately did not impose
a constant balance of payment in this exercise.
• In section 4, we use a model version for one country, namely Belgium, to analyse the
double dividend issue in dynamic terms. In this application, we impose an unchanged
balance of payments. The model version does not incorporate the IS-LM closure.
We report also on several sensitivity analysis issues that examine the conditions under which a
double dividend can occur.
5
2.
The GEM-E3 model
2.1
General presentation of the model
The GEM-E3 model, is an operational, empirical model, that follows the computable general
equilibrium methodology. The model aims at covering the interactions between the economy,
the energy system and the environment. It clears the market at both the country-specific
(European Union member-states) and the Europe-wide levels.
The general structure of the macroeconomic core of GEM-E3 is illustrated in figure 1.
Goods Market Equilibrium
Exports
Imports
Producers
Consumers
Labour Market Equilibrium
Capital
Rate of return
Investment
Investment
Financing
Revenues
Investment
allocation
PRODUCERS
GOVERNMENT
CONSUMERS
FOREIGN
Income flows and Transfers
SURPLUS OF DEFICIT OF AGENTS
Interest Rate
Interest Rate
IS-LM
Figure 1. The general scheme of the model.
The model has the following features: (i) It represents multiple sectors and multiple countries.
(ii) It clears simultaneously the markets of commodities and primary factors (labour, capital).
It represents energy forms and environmental policy instruments. (iii) The equilibrium prices
for the above markets are explicitly computed, so that the model is able to support policy
6
analysis of taxation and alternative market clearing regimes. (iv)The formulation of
behavioural equations and the closure rule are such that the model simulations cover both the
medium and the long term. (v) Capital stock is fixed within the year, but accumulates over
time through endogenously driven investment. A set of other mechanisms, such as stock-flow
consistency and backward looking anticipation complete the dynamics of GEM-E3.
The model considers simultaneously the European Union countries linked together and with
the rest of the world. The model is constructed as a single system of equations that incorporate
simultaneously the equilibrium markets of all European countries. Endogenous foreign trade
links the countries backward looking. This is formulated in a way to ensure, in all cases:
equality between imports by one country and the corresponding exports of another country (in
volume and value), a condition that corresponds to a trade matrix and zero trade deficit (in
value) at the level of the planet.
The model provides three axes of use in policy analysis: (a) sustainable economic growth
(with respect to the environment); (b) internal European market (for economy and energy);
(c) European perspectives within an evolving international context (for both the economy and
energy).
A major benefit in policy analysis support of using GEM-E3 is the consistent evaluation of
distributional effects, across countries, economic sectors and (in the next future) social groups.
The burden sharing aspects of environmental protection is thus fully analysed, while ensuring
that the European economy remains at general equilibrium conditions.
2.2
Domestic Production
Production functions exhibit a nested separability scheme, involving capital (K), labour (L),
energy (E) and materials (M). Energy is further divided into electricity (El) and other fuels.
Firstly, production splits into two aggregates, one consisting of capital stock and electricity
and the other of the aggregate of labour, materials and other fuels. At the second level, the two
ensuing production functions are further divided in their component parts. The CES
specification is used throughout.
PRODUCTION (OUTPUT)
CAPITAL
ELECTRICITY
CAPITAL
LABOUR
MATERIALS
OTHER FUELS
ELECTRICITY
MATERIALS
LABOUR
OTHER
FUELS
FACTOR DEMAND
INTERM. CONSUMPTION
OF NON-ENERGY GOODS
COAL
OIL
GAS
Figure 2. Domestic production scheme
Figure 2 illustrates the nesting of the production function. The model uses dual unit cost
functions and derives factor demand by means of the Shephard lemma.
7
2.3
Households final consumption
Households' decisions concern, first, consumption and savings through a Hendry's decision
mechanism. Then total consumption splits into demand categories through a Linear
Expenditure System applied for all durables and non durables. The consumers are maximising
their level of utility under budget constraint. The demand for consumption categories is then
transformed in a demand for products by means of a transition matrix with fixed technical
coefficients.
DISPOSABLE INCOME
DURABLE GOODS
CARS
INVESTMENT IN
DWELLINGS
HEATING
SYSTEMS
ELECTRIC
APPLIANCES
NON-DURABLE GOODS
AND LEISURE
9 CONSUMPTION
EXPENDITURE
CATEGORIES
LABOUR SUPPLY
CONSUMPTION OF NON-DURABLES
LINKED WITH THE USE OF A DURABLE
Figure 3. Households final consumption
Households consume a bundle of durables goods (cars, heating systems, electric appliances
and investment in dwellings) and non-durable consumption categories (food, culture etc.).
Durable goods demand the consumption of some non durable goods (e.g. cars consume
gasoline). Therefore non durable goods are linked with the stock of the durables. These goods
are electricity, oil, motor fuels and other fuels. For all durables it is assumed that they use a
fixed proportion of energy sources.
Finally labour demand is also decided within the LES, through the representation of leisure.
Figure 3 presents the general separability scheme of the consumption of households.
2.4
Foreign trade
The model is not covering the whole planet and thus the behaviour of the rest of the world
(ROW) is left exogenous.
The exogenous imports demanded by the ROW are flexibly satisfied by exports originating
from the European Union (EU) countries. The latter however, consider the profitability of
exporting to the ROW, exporting to EU or addressing the goods to their domestic markets.
Via these profitability considerations, the EU countries set their export prices. A modified
export supply function (CET) represents these mechanisms.
8
Imports demanded by the EU countries from the ROW are supplied by the latter flexibly.
However, the EU countries consider the optimal allocation of their total imports over the
countries of origin, according to the relative import prices. The EU countries buy imports at
the prices set by the supplying countries following their export supply behaviour. Of course,
the supplying countries may gain or loose market shares according to their price setting. When
importing, the EU countries compute an index of mean import price according to their optimal
allocation by country of origin. This mean import price is then compared to the domestic
EXPORTER
IMPORTER
ARMINGTON-TYPE MIX
OF IMPORTS BY ORIGIN
THROUGH RELATIVE EXPORT PRICES
TOTAL
IMPORTS
TOTAL EXPORTS
COUNTRY-SPECIFIC
DEMAND BASED ON
RELATIVE PRICES
COMPETITIVENESS EFFECTS
EXPORT PRICES FROM
DOMESTIC PRICES
BY COUNTRY
Figure 4. Trade matrix for EU and the rest of the world
prices in order to allocate demand between imports and domestic production. A nested twolevel Armington function represents this mechanism.
A trade flow from one country to another matches, by construction, the inverse flow. The
model ensures this symmetry in volume, value and deflator. It is obvious, then, that the model
guarantees (in any scenario run) all balance conditions applied to the world trade matrix, as
well as the Walras law at the level of the planet. Of course, all these are validated at the same
currency basis, that is the ECU.
Figure 4 illustrates the trade matrix as described above.
Compared to the single country version of the model, the EU-12 version omits the export
demand function, modifies the CET function and adds a second level at the Armington
function. The model incorporates also a set of new identities that implement the trade matrix
conditions.
9
2.5
Income accounts
The real sector of the model is grouped within the framework of a Social Accounting Matrix SAM (figure 5), which ensures consistency and equilibrium of flows from production to the
agents and back to consumption. The construction of the SAM is the starting point of the
model building work. The definition of the set of prices, ensures the consistency of the SAM,
also in current currency, a fact which is finally reflected in the above condition, which states
that the algebraic sum of net savings over the set of agents is, by construction, equal to zero.
The economic agents are households, firms, government and Rest of the World. The sources
PAYMENTS
SECTORS
SECTORS
AGENTS
INTERMEDIATE
CONSUMPTION
FINAL DEMAND
REVENUES
FROM SECTORS
TRANSFERS
RECEIPTS
AGENTS
SURPLUS OR DEFICIT
BY AGENT
Figure 5. Social Accounting Matrix (SAM)
of income for consumers and producers are labour and capital rewarding. Respectively the
sources of income for government are transfers and taxes. The agents use income for
consumption or investment. Finally the surplus of deficit by agent equals net savings minus
investment.
2.6
Equilibrium of the real part
The equilibrium of the real part is achieved simultaneously in the goods market and in the
labour market. Figure 6 presents the equilibrium of the real part for both markets.
In the goods market a distinction is made between tradable and non tradable goods. For the
tradable goods the equilibrium condition refers to the equality between the supply of the
composite good, related to the Armington equation, and the
D
S
domestic demand for the composite good. This equilibrium
combined with the sales identity, guarantee that total resource and
total use in value for each good are identical. For the non tradable,
p
there is no Armington assumption and so the good is homogeneous.
The equilibrium condition serves then to determine domestic
q
production.
Figure 6. Equilibrium of
the real part
10
For the labour market full employment is postulated. Here the equilibrium condition serves to
compute the wage rate, as the remaining equilibrium price.
The closure rule (as residual) could be the public budget or the balance of payments. It is also
possible to implement other closure rules (for example, fixed balance of payments and
exchange rate endogenous).
Instead, the current model version uses an IS-LM closure. This starts from the financing of
public budget and balance of payments, and determines interest rate of equilibrium in the
financial / monetary sector. Through this closure, all prices are endogenously evaluated and no
numeraire is necessary. The formulation follows the methodology of Branson, de Melo and
Bourguignon.
2.7
The Financial/Monetary sector
The financial behaviour of economic agents is based on a portfolio model which is derived by
maximising expected utility. The model allocates financial wealth among various assets. The
allocation is made using logistic curves to ensure better simulation behaviour [for a general
description see Parkin and Van Herpe]. Such an approach avoids reduced-form models of
financial mechanisms and uses relative interest rates as explanatory variables. Depending on
whether liberalised capital markets are represented in the model, these interest rates can be
derived from the equilibrium of financial supply and demand flows.
Regarding its accounting structure, the model is based on a matrix of flows of funds (Figure
7), involving four financial agents, namely the private, government, banking1 and foreign
sectors.
PRIVATE
BANKS
ASSETS
placement
of assets
supply of
credits and
loans
LIABILITIES
credits and
loans
deposits
GOVERN
MENT
FOREIGN
transfer and
financing of
foreign debt
financing
of deficit
Figure 7. The matrix of flow-of-funds
In the model the foreign and public sectors are represented only with respect to the financing
of their surpluses, while the banking and private sectors are represented following an
"assets-liabilities balance" approach. However, the model fully guarantees stock-flow
consistency for all transactions.
On the assets side of the private sector, total wealth is evaluated, dynamically, by private net
savings, a variable coming from the real part of the model.
The allocation of total wealth of the private sector is described as "risk averse investment
behaviour". Private agents are assumed to maximise the utility of the return from a portfolio.
In this respect future returns are uncertain and the risk aversion is formalised as diminishing
marginal utility. The placement of assets is a function of returns and interest rate. The
optimum portfolio composition, involves cash, time deposits, saving deposits, government
1
The banking system, as defined in this model comprises, beside the central bank, all commercial banks
and specialised credit institutions.
11
bonds, bank bonds and treasury bills. The allocation mainly depends on the relative rates of
return (assimilated to interest rates) from the above assets.
The real sector defines the demand of credit and loans. The supply for credit and loans is
limited by the need to finance government budget deficit.
Domestic borrowing of government is divided into two parts: the treasury bills and the
government bonds. Both can be acquired by the private sector and by commercial banks.
Concerning the private sector, investment in these two assets emanates from portfolio
allocation.
2.8
Nomenclature/Dimensions of the model
The model covers:
• 11 countries (all EU countries except Luxembourg)
• 11 products and sectors: 4 energy branches (electricity, oil, gas and coal); 3 industrial
branches (energy intensive, equipment goods and consumer goods industries); transport,
market services and public services.
• 4 economic agents: households; firms; government; rest of the world.
• 8 government revenue categories: direct, indirect taxes and VAT; subsidies, import
duties and foreign sector transfers; social security and government enterprises.
• 13 consumption expenditure categories: 9 consumption categories (food, culture, health,
electricity, gas, motor fuels, other fuels, transport, house); 3 durables (cars, heating
systems, electrical appliances); investment in dwellings.
• 2 primary production factors: labour; capital.
• Annual time path: The model is solved annually and follows a time-forward path.
12
3.
A EU-12 Application
3.1
Assumptions
As mentioned in the introduction, we used the full version of GEM-E3 to run a double
dividend application for EU-12 member-states. This version is characterised by the following
features:
• It considers full competitive equilibrium in all markets, including goods markets, labour
and capital markets.
• Being within a competitive equilibrium regime, the labour market is influenced by the
slope of labour supply (as decided by households simultaneously with consumption and
leisure). To reflect unemployment that prevails in European countries, we assume that the
real wage rate elasticity of labour supply is relatively high. In other terms, we assume that
additional labour force is available to enter the market with some flexibility, but under
competitive equilibrium conditions. This turns out to be a critical assumption for the
results, as we shall see.
• The model incorporates the IS-LM closure and, thus, determines endogenously an interest
rate of equilibrium and does not need a numeraire.
• It allows for a free variation of the balance of payments, while the exchange rate is kept
fixed; thus, the monetary system closes through the changes of the bank's reserves in
foreign currency.
• In the linked version, the demand for imports by the rest of the world (non EU-12) is
flexible, depending on relative prices; however, the demand for imports by EU-12
addressed to the rest of the world is satisfied by the latter without constraints; thus, we
assume that the balance of payments of EU-12 as a whole may vary, while the exchange
rates remain fixed.
Concerning the CO2-related tax level, we assume the following:
• The CO2-tax pattern follows the proposal of the European Commission of end of 1992. In
that, the tax is a 50-50% mix of carbon and energy tax, globally at the level of 10$/barrel of
oil equivalent. So, the imposition differs by fuel according to the related CO2 emissions
only partially. Electricity taxes applicable directly to electricity sold to users concern only
the fraction of electricity produced from hydro and nuclear plants, so they differ across
countries. Power generation, however, has to deal with taxes imposed to the fossil fuels
burned. The utilities may then reflect those higher costs to end-user electricity prices. This
is left to the model, so the impacts on prices may be lower if utilities can alter the fuel mix.
• The CO2-tax takes the form of an excise tax. Thus, the impact on prices differs according
to the level of pre-existing excise taxes on the energy products. To compute that, we used
detailed information coming from a previous application of the energy model MIDAS to
the analysis of the Commission's CO2-tax. The implied changes of end-user prices of
energy products, if considered in percentage, differ a lot by sector and country.
Regarding the accompanying reduction of the rate of social security contribution of
employers, we note the following:
13
• We consider that this reduction operates uniformly in all sectors, independently of their
relative labour costs or the pre-existing level of the rate.
• We determine ex-post the level of reduction of the rate of social security contribution of
employers that is necessary to compensate exactly the additional revenues from the CO2tax. The model iterates among the possible values of rate reduction and determines the one
needed in the new equilibrium achieved. However, because of technical reasons, we
applied that mechanism only to the analysis by country and not to the linked system. So, in
the linked system, the surplus or deficit of the public budget may vary by country. This is
also an element of the "burden sharing" analysis.
Table 1 presents the exogenous assumptions for the CO2-tax rates, expressed in percentage
change of the corresponding energy end-use prices, and the reduction of the rate of social
security contribution both ex-ante and ex-post.
Table 1: Application Definition
Belgium Germany Denmark
France
Greece
Ireland
Italy
Netherl.
Portugal
Spain
UK
34.8%
(% increase of end-use price)
Industry
- coal
96.4%
27.5%
41.3%
51.9%
74.4%
34.8%
89.3%
59.9%
34.8%
76.7%
- oil
33.9%
42.2%
31.6%
38.7%
32.2%
24.9%
24.2%
30.9%
24.9%
37.0%
24.9%
- gas
20.1%
22.7%
6.2%
30.2%
18.8%
13.5%
23.2%
31.0%
0.0%
15.2%
29.7%
1.4%
5.2%
4.0%
3.6%
- electricity (*)
6.4%
2.4%
0.1%
8.8%
2.9%
1.9%
2.3%
Domestic
- coal
15.0%
17.2%
17.4%
11.5%
0.0%
44.3%
29.4%
9.2%
111.8%
61.4%
28.5%
- oil
14.2%
12.8%
8.2%
12.5%
9.4%
8.9%
7.1%
12.8%
6.9%
11.4%
13.9%
- gas
13.0%
15.3%
7.6%
16.5%
16.8%
8.4%
7.3%
15.7%
0.0%
9.1%
17.8%
- electricity (*)
4.5%
1.6%
0.0%
6.1%
2.0%
1.4%
1.6%
1.0%
3.7%
2.8%
2.5%
T ransport
- oil
3.7%
8.8%
7.5%
8.7%
8.8%
6.9%
6.9%
7.9%
6.9%
7.9%
9.3%
Ex-ante change (in percent diff.)
-5.69% -3.50%
Social Sec. Rate
-2.48%
-3.00%
-4.47%
-3.30%
-3.10%
-3.31%
-4.47%
-5.39%
-5.09%
Ex-post change (in percent diff.)
-3.83% -2.80%
Social Sec. Rate
-2.95%
-2.36%
-2.47%
-2.11%
-1.61%
-2.79%
-3.42%
-2.73%
-4.49%
(*) for electricity the tax concerns the energy part of tax applied to hy dro and nuclear
The above table shows how the implications on energy prices differ across sectors and
countries. Differences depend on: (i) the level of pre-existing excise taxes (e.g. energy
products in Denmark), (ii) the level of ex-factory prices (e.g. coal in Germany), (iii) the parts
of hydro and nuclear (e.g. France for nuclear and Portugal for hydro). The table also illustrates
the fact that generally the ex-post determination of the compensating rate of social security
contribution of employers is lower than the ex-ante one. This is, obviously, an important
implementation problem for this policy. To provide an order of magnitude, the revenues from
the above CO2-tax represent about 1.4 to 1.7% of GDP.
3.2
Results country by country
Tables 2 to 5 present the results of the model runs separately for each country (not linked).
The policy application increases the cost of energy and reduces that of labour. The firms, by
their optimising behaviour, demand more labour and less energy. Within a competitive labour
market regime, the implied shift of the aggregate labour demand curve would imply a re14
evaluation of the real wage rate. The degree of such an increase would then depend on the
slope of the labour supply curve. A rigid labour supply means a resource constraint to the
economy, so a significantly upwards push of the real wage rate, which then triggers the
inflation spiral. On the contrary, a flexible labour supply, interpreted as the availability of
people that could enter the labour market, allows for gains in supply potential of the firms,
that avoids the inflationary pressure.
The above illustrates the main mechanism represented by the model. The assumption about
the slope of the labour supply curve is critical for the sign and hence the qualitative
interpretations of results. This is a major condition for the double dividend to occur.
At the single country level, the surplus or deficit of public budget remains unchanged, by
construction of the simulation run, as defined above. Thus, the policy application does not
alter, in a first approximation, income distribution and does not create additional (conversely
restrictive constraints) to the demand and supply of credits. Income distribution is effected
indirectly, through the re-evaluation of labour compared to other factors and the implied
mechanism of the Social Accounting Matrix of the model. The relatively neutral effects of the
policy to the financial/monetary system is verified in the results, since the real interest rate of
equilibrium changes mildly.
At the single country level, more important implications are effected through the change in
competitiveness and the implications for foreign trade. In all single country tests, the increase
of domestic prices implied by the re-evaluation of the real wage rate, weakens country's
competitiveness. This implies less exports and more imports and a deterioration of the ratio of
current account as a percentage of GDP.
The increase in real wages pushes private income and consumption, which keeps up domestic
demand. Shifts of total demand are then uncertain, since they are positively influenced by
domestic demand and negatively influenced by trade. Domestic supply, however, is rather
relaxed depending on the labour market flexibility, as the stock of capital does not adjust
within the year. This effects downwards pressures to domestic prices.
The combined effects from supply, domestic demand and unit costs of labour (given that the
effects from the interest rates are less important) may compensate each other. As a matter of
fact, we observe small increases of domestic prices and inflation. The positive effects of
demand are found to over-compensate negative effects from trade and thus GDP in factor
prices is slightly progressing (or stays at zero change).
Although constant in nominal terms, the surplus or deficit of public budget as a percentage of
GDP is improving, because of the slightly positive activity. In the financial/monetary sector, a
lower demand for credits coming from the productive sector is compensated by a higher
demand for credits emanated from households, because of their higher income. This preserves
any significant fall of the real interest rate.
Globally, the policy application, under the assumptions stated above, seem to indicate that a
double dividend is possible. Employment is improving in all cases, although in a non
spectacular way. On the contrary, energy demand decrease is more significant, hence CO2
emissions (around -4 to 6%). Fuel switching seems less significant, but this depends a lot on
the country's structure and switching capabilities.
15
Table 2: Macroeconomic Results (change from baseline)
ex-post reduction of
social sec. rate
Real Aggregates
GDP factor
% diff.
prices
GDP market
% diff.
prices
Priv.
% diff.
Investment
France Germany
Italy
UK
Spain
Belgium
Ireland
Country-by-country runs
Netherl. Portugal Greece Denmark
0.16
0.00
0.11
0.29
0.14
0.55
0.00
0.16
0.16
0.02
0.14
1.76
1.63
1.41
3.01
2.24
3.14
1.44
1.92
2.05
1.09
1.33
0.86
0.25
4.63
-0.06
4.63
8.57
0.41
2.12
0.73
4.06
-1.95
T otal Exports % diff.
-0.86
-0.91
-1.46
-0.73
-2.01
-1.11
-0.60
-0.38
-1.18
-1.35
-0.50
T otal Imports % diff.
0.04
-0.04
1.81
-0.17
1.62
0.75
-0.07
0.45
-0.17
2.10
-0.90
% diff.
0.44
0.49
0.20
0.70
0.47
1.35
0.57
0.58
0.64
0.05
0.60
% diff.
1.62
1.84
5.81
0.44
8.15
5.64
1.90
0.71
4.03
6.59
1.14
% diff.
3.19
3.25
6.25
3.36
9.41
6.37
2.75
2.24
4.89
6.21
2.49
% diff.
1.32
1.33
1.07
1.84
1.13
1.40
1.38
2.15
1.42
1.11
1.51
% diff.
4.22
4.31
6.66
6.17
10.59
8.89
3.79
4.82
6.92
6.88
3.76
Priv.
Consumption
Prices
GDP deflator
in factor pr.
Consumer
Price Index
Real Wage
Rate
Nominal
Wage Rate
Real Interest
Rate
Nominal
Interest Rate
Others
Energy
Consumption
Employment
(x1000)
Public Deficit
abs.
diff.
abs.
diff.
% diff.
abs.
diff.
abs.
diff.
abs.
-0.21% -0.47% -0.72% 0.05% -1.25% -0.32% 0.17% -0.34% 0.39% -0.52% 1.50%
0.04
0.04
0.07
0.07
0.10
0.09
0.04
0.05
0.09
0.08
0.05
-4.40
-5.65
-3.47
-7.90
-5.05
-5.70
-5.18
-3.84
-7.19
-3.58
-3.89
91
110
56
149
70
43
4
23
22
12
9
0
0
0
0
0
5
0
0
0
0
0
Current
-16347 -8412 -1311 -1170 -143937 -52970 -117
-557
-31 14758 -4246
diff.
Account
Public Deficit abs.
0.09% 0.04% 0.82% 0.11% 0.65% 0.73% 0.36% 0.12% 0.43% 1.08% 0.05%
diff.
as % of GDP
Curr.
abs.
-0.34% -0.37% -0.21% -0.31% -0.33% -1.02% -0.76% -0.03% -0.82% -0.52% -0.80%
Account as %
diff.
of GDP
16
The distributional results to sectors are quite important. Significant negative implications are
effected for the energy depending sectors, especially the energy intensive industries and in a
lesser degree the equipment goods industry. The reasons are obvious, due to higher cost of
energy and the limited substitution possibilities. The equipment goods industry bears, in
addition, the effects of a slowdown of the demand of equipment goods through the changes of
investment.
Also, households consider simultaneously the propensity to invest more in durable goods
because of higher income, but also the operating costs of durables that become higher because
of higher energy costs. The combination turns out negative for the demand of durables, an
effect to add to the slowdown of the equipment goods industry. For instance for France, the
demand for cars tends to drop by 0.72%, that for electric appliances by 2.78% and for heating
systems by 0.3%.
Transports, although depending on energy, are less affected, since the CO2-tax is increasing
less the level of energy prices because of the high pre-existing excise taxes.
As expected, we observe a general shift towards "lighter" industry and services. The consumer
goods industry and the private services are positively affected by the policy, but the net result
on agriculture is uncertain: perhaps because of the low social security contributions that preexisted in that sector, but also the high degree of exposure to foreign competitiveness (in the
single-country runs).
The above effects are confirmed by examining the changes to the rate of return of capital by
sector, a variable that represents shadow demand for capital, in the model. Because of the
higher costs of the other factors, the shadow demand for capital generally increases, more in
the consumer good industries and services and less in heavy industry (dropping sometimes in
the energy intensive industry because of the drop in activity). The rate of return of capital is
the main force behind investment behaviour of sectors. Thus, the changes in that rate
influence the dynamics of the results. We observe, in general, higher sectoral investment,
except the energy intensive industry. This makes us to anticipate some continuation of
positive double dividend effects in the next years.
Energy demand decreases, as mentioned, more in the sectors that are heavy consumers of
energy (up to -20% in that sector). The indirect effects on electricity prices, because of higher
costs, are rather low of the order of 3-4%. In general, electricity and gas substitute the other
energy forms, as expected. The fuel switching is however moderate in all sectors.
The following tables present the sectoral effects.
17
Table 3: Sectoral Results (change from baseline)
ex-post
reduction of
social
security rate
France Germ any
Italy
UK
Spain
Country-by-country runs
Belgium Ireland Netherl. Portugal Greece Denm ark
Production in volume (% diff.)
Agriculture
Energy
Intensive Ind.
Equipm ent
Goods Ind.
Consum er
Goods Ind.
Transport Com m .
Private
Services
-0.33
-0.45
-0.36
-0.04
-0.20
-0.25
-0.22
-0.25
-0.28
0.03
-0.25
-1.15
-1.06
-1.00
-1.63
-1.54
-0.53
-0.41
-0.62
-1.59
-1.12
-0.61
-0.56
-0.68
0.32
-2.11
-0.45
1.19
-0.20
-0.16
-0.41
-0.23
-1.25
0.14
-0.05
0.46
0.52
0.54
0.79
-0.40
0.24
-0.10
0.93
-0.28
0.04
-0.20
-0.20
-0.55
0.05
0.17
-0.21
-0.15
-0.51
0.27
-0.26
0.08
0.09
0.06
0.09
0.33
0.57
0.19
0.23
0.35
0.06
0.27
Demand Domestic for Composite Good (% diff.)
Agriculture
Energy
Intensive Ind.
Equipm ent
Goods Ind.
Consum er
Goods Ind.
Transport Com m .
Private
Services
0.15
0.29
0.47
0.66
0.58
1.49
0.01
0.38
0.32
0.45
-0.03
-0.21
-0.34
0.09
-0.59
0.09
0.89
0.28
0.13
0.01
0.09
0.02
-0.07
-0.32
2.01
-2.30
1.28
2.98
-0.05
0.22
0.13
0.20
-1.72
0.52
0.41
1.16
1.09
1.21
2.82
0.51
0.98
0.48
1.69
0.07
0.23
0.17
0.02
-0.31
0.71
1.37
0.34
0.29
0.53
0.75
-0.17
0.13
0.16
0.20
0.22
0.47
1.08
0.28
0.39
0.43
0.09
0.37
Imports in volume (% diff.)
Agriculture
Energy
Intensive Ind.
Equipm ent
Goods Ind.
Consum er
Goods Ind.
Transport Com m .
Private
Services
1.99
1.57
3.28
2.65
4.99
2.81
1.16
0.97
1.95
4.45
0.72
1.65
1.49
3.11
1.61
4.46
-0.05
0.34
0.20
2.32
2.55
0.58
0.67
0.28
4.69
-1.88
3.03
1.57
-0.14
0.16
0.27
0.47
-1.46
1.87
1.89
4.17
3.02
6.54
2.97
1.81
1.80
2.90
5.36
0.84
0.67
1.47
1.15
0.36
5.41
1.98
1.20
1.61
2.58
3.57
0.89
0.96
1.04
2.13
1.13
3.33
2.94
0.98
1.07
2.19
1.95
1.08
Exports in volume (% diff.)
Agriculture
Energy
Intensive Ind.
Equipm ent
Goods Ind.
Consum er
Goods Ind.
Transport Com m .
Private
Services
-1.00
-0.98
-1.61
-1.13
-2.16
-1.24
-0.63
-0.49
-1.03
-1.83
-0.46
-1.51
-1.40
-2.00
-1.90
-2.83
-1.73
-0.76
-0.91
-2.10
-1.90
-0.70
-0.72
-0.85
-1.49
-1.29
-2.10
-0.61
-0.29
-0.34
-0.88
-0.97
-0.57
-0.77
-0.80
-1.53
-0.84
-2.23
-1.12
-0.91
-0.38
-1.14
-1.47
-0.52
-0.41
-0.45
-0.97
-0.37
-1.26
-0.69
-0.38
-0.40
-0.78
-0.75
-0.34
-0.47
-0.50
-1.11
-0.62
-1.57
-1.13
-0.48
-0.37
-0.95
-1.21
-0.37
18
Table 4: Sectoral Results (change from baseline)
ex-post
reduction of
social
security rate France Germ any Italy
Investment by branch in volume (% diff.)
Agriculture
Energy
Intensive Ind.
Equipm ent
Goods Ind.
Consum er
Goods Ind.
Transport Com m .
Private
Services
UK
Spain
Country-by-country runs
Belgium Ireland Netherl. Portugal Greece Denm ark
1.34
1.12
3.48
0.72
4.41
2.94
-0.67
1.06
-0.69
4.04
-2.93
-1.23
-0.03
2.57
-2.02
0.38
4.26
-0.28
1.17
-3.04
-0.55
-4.12
-0.96
0.22
5.29
-4.43
2.74
12.46
-0.61
1.07
-1.35
1.45
-5.29
2.12
1.61
5.40
1.36
5.59
11.46
-0.58
1.89
-0.54
3.87
-3.24
1.29
0.75
3.58
-2.09
2.94
4.76
-0.39
0.99
-0.96
2.38
-2.02
1.10
1.13
4.29
0.31
3.21
10.42
0.22
1.46
0.51
1.98
-1.14
-0.30
1.08
-0.71
1.67
-0.47
0.54
0.46
0.27
0.63
-0.17
0.45
0.90
0.48
0.26
0.73
-0.04
2.19
0.58
0.87
0.24
-0.03
0.09
0.06
-0.28
0.88
-1.83
-0.21
1.66
-0.35
0.03
-0.36
0.75
-1.27
0.77
0.63
0.64
1.47
1.45
1.40
0.22
0.80
0.25
1.53
0.11
0.79
0.35
-0.20
-0.35
0.65
0.46
0.03
0.57
-0.03
1.01
0.31
0.45
0.77
0.21
0.76
1.70
1.75
0.52
0.53
1.32
0.14
0.85
-10.85
-11.66
-5.79
-13.85
-9.35
-10.35
-10.71
-8.32
-9.27
-6.34
-10.63
-14.05
-12.53
-11.59
-20.54
-17.09
-17.78
-11.51
-11.00
-15.08
-16.09
-13.19
-14.03
-13.79
-7.38
-19.43
-13.72
-10.65
-10.33
-10.68
-13.20
-10.45
-13.64
-10.89
-11.46
-5.43
-15.78
-9.44
-9.17
-10.94
-8.99
-10.42
-6.52
-10.95
-2.03
-2.26
0.00
-0.91
0.34
0.99
-2.05
-2.31
-1.45
-1.01
-1.50
-10.98
-11.68
-5.64
-12.34
-9.11
-8.97
-9.97
-7.48
-8.65
-7.35
-9.93
Labour demand (% diff.)
Agriculture
Energy
Intensive Ind.
Equipm ent
Goods Ind.
Consum er
Goods Ind.
Transport Com m .
Private
Services
Energy demand (% diff.)
Agriculture
Energy
Intensive Ind.
Equipm ent
Goods Ind.
Consum er
Goods Ind.
Transport Com m .
Private
Services
19
Table 5: Sectoral Results (change from baseline)
ex-post
reduction of
social
security rate France Germ any Italy
Production Deflator domestic (% diff.)
Agriculture
Energy
Intensive Ind.
Equipm ent
Goods Ind.
Consum er
Goods Ind.
Transport Com m .
Private
Services
UK
Spain
Country-by-country runs
Belgium Ireland Netherl. Portugal Greece Denm ark
4.17
3.95
7.05
5.14
9.96
4.93
2.62
1.90
4.39
8.62
1.77
4.30
3.96
6.36
5.23
9.02
8.44
3.15
3.55
6.05
5.84
1.86
1.76
2.04
5.49
1.88
6.95
4.71
1.33
1.46
3.36
4.68
0.56
3.00
2.89
6.27
3.68
9.15
5.18
2.90
1.64
4.11
6.57
1.57
2.44
2.49
5.70
1.71
7.75
4.53
2.08
2.26
4.21
4.72
1.76
2.84
3.06
6.79
3.20
9.99
7.29
2.45
2.40
6.04
6.38
2.43
3.71
2.57
5.68
4.00
8.96
2.60
2.31
1.18
3.27
8.13
1.50
3.13
3.09
5.08
3.73
7.38
5.64
2.00
2.19
3.88
4.13
0.94
1.29
1.68
4.97
0.89
5.39
3.19
0.71
0.72
1.95
2.21
-0.09
2.71
2.48
6.03
3.20
8.94
3.80
2.17
1.34
4.04
6.07
1.28
2.24
2.18
5.74
1.13
7.90
4.01
1.44
2.20
3.43
4.70
1.78
2.78
2.96
6.57
3.06
9.81
7.06
2.35
2.25
5.97
6.31
2.36
Absorption Price (% diff.)
Agriculture
Energy
Intensive Ind.
Equipm ent
Goods Ind.
Consum er
Goods Ind.
Transport Com m .
Private
Services
Labour Productivity (% diff.)
Agriculture
Energy
Intensive Ind.
Equipm ent
Goods Ind.
Consum er
Goods Ind.
Transport Com m .
Private
Services
-0.03
-1.51
0.35
-1.69
0.27
-0.78
-0.67
-0.52
-0.90
0.20
-0.69
-2.03
-1.53
-1.26
-2.34
-1.50
-2.66
-0.99
-1.48
-1.83
-1.09
-0.70
-0.61
-0.39
-0.56
-0.29
-0.24
-0.46
0.15
-0.20
-0.05
-0.97
0.02
-0.63
-0.68
-0.18
-0.94
-0.90
-0.61
-0.62
-0.56
-0.35
-0.59
-0.40
-0.74
-0.55
0.00
-0.20
-0.59
-0.29
-0.24
-0.72
-0.47
-0.74
-0.57
-0.37
-0.67
-0.15
-0.67
-1.35
-1.17
-0.33
-0.30
-0.96
-0.08
-0.58
Rate of Return of Capital (% diff.)
Agriculture
Energy
Intensive Ind.
Equipm ent
Goods Ind.
Consum er
Goods Ind.
Transport Com m .
Private
Services
2.28
1.40
4.87
4.62
8.69
3.39
1.43
0.48
2.94
8.67
0.31
-1.35
-1.59
0.94
-2.59
-0.35
3.64
1.18
0.70
-1.65
-3.32
-1.47
-0.93
-0.98
6.11
-8.01
3.74
7.96
0.46
0.50
1.42
1.17
-4.70
2.89
2.30
7.51
4.77
10.53
7.42
0.58
2.16
3.27
9.53
-0.06
2.58
1.13
4.51
-1.51
7.73
5.14
0.89
1.32
1.16
6.06
0.37
3.05
3.44
6.98
3.22
11.50
10.25
3.19
3.51
7.73
6.59
3.60
20
The effects differ significantly by country. This is attributed to the different structure of the
economies, mainly regarding:
• the flexibility of the labour market (demand and supply)
• the degree of exposure of sectors to foreign trade and the dependence of the economy on
sectors that are affected by the policy
• the pre-existing level of energy-related excise taxes
• the flexibility of the energy supply system (mainly power generation) to adapt and the
possibilities for fuel switching (in particular for natural gas).
Following the model results (single-country runs), we may classify the countries in the
following groups:
. UK and Netherlands that present the more positive double dividend results with minimal
adverse effects. It seems that this due to their sectoral structure and not to any labour
supply flexibility.
. France, Germany, Ireland and Denmark that behave fairly well, but still suffer from some
inflationary effects. The first two countries bear adverse sectoral effects, as explained
above but they have important adaptation flexibility in their energy system. Ireland and
Denmark suffer less because of their industrial structure and the high pre-existing taxes.
. Italy, Belgium, Greece, Portugal and Spain that bear inflationary pressures and obtain the
lowest double dividends, although still positive. In the case of Belgium and Spain, it seems
that this is due to the importance of the tax change. For Italy and especially Greece and
Portugal, the results should be attributed to the low degree of adaptability of their
productive and energy systems.
Since the results are preliminary, we are further examining the causes of these differences.
Sensitivity analysis, however, confirmed that the differences are rather due to the structure of
the economy of the countries, than to the values of the elasticities. In any case, the
distributional effects to countries are not neutral, so they must be seriously considered if the
policy is to be implemented at the European Union level.
3.3
Sensitivity analysis: conditions for a double dividend
Table 6 presents a sensitivity analysis of the single-country results. the table presents the
results only for France. The analysis aims at examining the conditions under which a positive
double dividend can occur and its importance. The analysis considered the following key
postulates of the model:
. Degree of flexibility of labour supply, with respect to the real wage rate.
. Substitution possibilities among fuels in the industrial sectors.
. Degree of exposure of country's exports to foreign competition.
. Substitution possibility at the first separability level of the production functions, that is
between the bulk capital-electricity and the bulk labour-materials-fuels.
21
Table 6: Sensitivity Analysis (performed for France)
ex-post reduction of social sec. rate
Real Aggregates
GDP in factor prices
GDP in market prices
Private Investment
T otal Exports
T otal Imports
T otal Private Consumption
Prices
GDP deflator in factor pr.
Consumer Price Index
Real Wage Rate
Nominal Wage Rate
Real Interest Rate
Nominal Interest Rate
Others
Energy Consumption
Employment (x1000)
Public Deficit
Current Account
Public Deficit as % of GDP
Current Account as % of
GDP
% diff.
% diff.
% diff.
% diff.
% diff.
% diff.
Base Run
(1)
(2)
(3)
(4)
(5)
(6)
(7)
0.16
1.76
0.86
-0.86
0.04
0.44
-0.14
1.49
0.38
-1.30
0.40
0.42
0.16
1.76
0.86
-0.86
0.04
0.44
0.07
1.79
0.53
-0.41
0.05
0.19
0.18
1.70
1.02
-1.13
0.06
0.55
0.05
1.62
0.01
-1.06
-0.68
0.24
0.16
1.76
0.81
-0.83
0.01
0.43
0.05
1.62
0.02
-1.06
-0.67
0.24
% diff.
1.62
3.19
% diff.
1.32
% diff.
4.22
abs. diff. -0.21%
abs. diff.
0.04
% diff.
% diff.
3.42
1.62 -0.54
2.99
0.23
1.57
0.23
4.50
3.19
1.75
4.13
2.15
3.16
2.16
1.40
1.32
1.21
1.32
1.35
1.32
1.35
6.31
4.22
2.11
5.44
2.90
4.18
2.91
-0.15% -0.22% -0.08% -0.28% -0.16% -0.22% -0.16%
0.07
0.04
0.02
0.05
0.03
0.04
0.03
-4.40
91
abs. diff.
0
abs. diff. -16347
abs. diff. 0.09%
-4.25
-4.39 -1.21
0
92
33
0
0
0
-20630 -16371 -7476
0.13% 0.09% 0.04%
abs. diff.
-0.42% -0.34% -0.16% -0.44% -0.20% -0.33% -0.20%
abs. diff.
-0.34%
-6.42
-4.70 -4.40 -4.70
116
68
90
68
0
0
0
0
-21548 -9700 -16136 -9657
0.13% 0.05% 0.09% 0.05%
Cases
(1) Low flexibility of labour supply
(2) Lower substitution possibilities between fuels
(3) Low elasticities of substitution between labour, materials and fuels
(4) High elasticities of substitution between labour, materials and fuels
(5) High exposure to competition in the export market
(6) Low elasticity of substitution in the first level of the production function
(7) High elasticity of substitution in the first level of the production function
It is clear from the above results that the key parameter is the degree of flexibility of labour
supply. Resource constraints in the labour market will provoke adverse effects for double
dividend by creating inflationary pressures, losses of competitiveness and then loss of growth
potential. The loss of dividend occurs, obviously, in employment.
The elasticity of substitution between labour, materials and fuels (cases 3 and 4) seems also
important. A low value would provoke less adaptation flexibility and a significant loss of
gains from the policy. However, the gains in employment when this elasticity is high are
accompanied by inflationary pressures. In this case also, we obtain the highest drop of energy
consumption.
The other elasticities of substitution in the production functions seem to play a secondary role
regarding the double dividend analysis. However, this depends also on the particular algebraic
form of the production function and the separability scheme adopted. So, a general conclusion
cannot be drawn in this matter.
A higher degree of exposure to foreign trade (in exports) is likely to lessen the positive
activity effects but also the inflationary pressures. A double dividend is still positive.
22
3.4
Results of the EU-12 linked system
The results from the Europe-12 system, are presented in tables 7 to 11. The results confirm the
analysis and the concluding remarks mentioned above in the country-by-country runs. The
following additional points should be emphasised :
The ex-post exact compensation of tax revenues by the reduction of social security rates is
extremely difficult to accomplish because of the interaction between countries. See for
example the results for Greece and Spain. We must notice that in the linked system runs,
we used the social security rates that were computed ex-post in the country-by-country
simulations.
In general the macroeconomic effects are smaller than in the country-by-country runs, both
for those that were positive, as for those that were negative. We further observe some
alignment of results among countries.
. The positive double dividend result, is achieved everywhere. We obtain more employment
(although small in magnitude), and significantly less energy consumption, hence fewer CO2
emissions.
. The adverse effects on competitiveness are generally alleviated through the endogenous
trade. The negative effects on the current account as a percentage of GDP are improving in
all cases.
. The difference in the behaviour of the countries is also confirmed, as stated previously. For
instance the flexibility of UK and Netherlands permits the achievement of the maximum
benefits. The vulnerability of Spain, Italy, Greece and Portugal remains significant.
. The total volume of international trade decreases. The European Union as a whole loses
competitiveness to the rest of the world, but less compared to the country by country
results.
. Production, investment and profitability are re-oriented towards the consumer goods
industry and services, while shifting away from energy intensive industries and, in a lower
degree, from equipment goods industries. This is an important structural effect that has not
neutral implications for future technical progress and at the planet level for CO2 emissions.
. The labour productivity is diminishing in all sectors and countries. It is generally admitted
that such a slowdown may have negative long term implications for growth. Points 7 and 8
were not further investigated in this paper. They may play an important role in concluding
about a sustainable double dividend.
23
Table 7: Macroeconomic Results from EU-12 linked system (change from baseline)
ex-post reduction of social sec. rate
Real Aggregates
GDP in factor prices
GDP in market prices
Private Investment
Total Exports
Total Imports
Total Private Consumption
Prices
GDP deflator in factor pr.
Consumer Price Index
Real Wage Rate
Nominal Wage Rate
Real Interest Rate
Nominal Interest Rate
Others
Energy Consumption
Employment (x1000)
Public Deficit
Current Account
Public Deficit as % of GDP
Current Account as % of GDP
% diff.
% diff.
% diff.
% diff.
% diff.
% diff.
% diff.
% diff.
% diff.
% diff.
abs . diff.
abs . diff.
% diff.
abs . diff.
abs . diff.
abs . diff.
abs . diff.
abs . diff.
France
Ge rm any
Italy
Unite d
Kingdom
Spain
Be lgium
Ire land
Ne the rl.
Portugal
Gre e ce
De nm ark
0.17
1.78
0.14
-0.94
-0.52
0.42
0.04
1.72
0.04
-1.07
-0.40
0.50
0.06
1.36
3.46
-1.60
0.70
0.06
0.30
3.07
-1.26
-0.88
-1.36
0.50
0.14
2.24
3.40
-2.33
-0.09
0.29
0.62
3.27
5.30
-1.23
-0.24
1.08
0.06
1.68
-0.97
-0.69
-0.50
0.63
0.17
1.92
0.89
-0.56
-0.20
0.47
0.14
2.03
-0.06
-1.37
-0.88
0.47
0.22
1.22
2.01
-1.07
-0.48
-0.19
0.14
1.34
-3.39
-0.69
-1.71
0.54
1.90
3.55
1.29
4.58
-0.10%
0.05
2.14
3.56
1.32
4.69
-0.43%
0.05
4.87
5.62
1.06
5.94
-0.60%
0.06
-1.27
2.25
2.14
4.81
0.07%
0.05
5.67
7.41
1.13
8.38
-1.05%
0.08
3.07
4.72
1.37
6.48
-0.27%
0.06
2.20
3.00
1.37
4.12
0.24%
0.05
0.50
2.41
1.96
4.72
-0.14%
0.05
3.75
4.89
1.41
6.90
0.32%
0.09
2.92
3.76
0.83
3.11
-0.28%
0.03
1.09
2.67
1.47
3.92
1.83%
0.06
-4.03
91
-1951
-16772
0.06%
-0.34%
-5.12
116
-819
-7952
0.00%
-0.33%
-3.54
44
495
-447
0.77%
-0.10%
-7.72
137
-352
-143
-0.04%
-0.03%
-5.43
59
30366
-92820
0.61%
-0.20%
-5.62
31
-3392
-39027
0.47%
-0.77%
-3.49
4
-24
-129
0.26%
-0.84%
-3.57
21
-576
98
-0.03%
0.11%
-7.03
21
-2
-28
0.35%
-0.76%
-4.04
-12
9697
20336
0.71%
-0.17%
-3.36
9
-708
-3718
-0.06%
-0.71%
24
T able 8: Sectoral Results from EU-12 linked system (change from baseline)
ex-post reduction of social sec.
rate
France
Germ any
Italy
Unite d
Kingdom
Spain
Belgium
Ireland
Netherl.
Portugal
Greece
Denm ark
-0.21
-0.97
-0.69
0.10
-0.01
0.02
-0.37
-1.00
-0.73
-0.02
-0.29
0.07
-0.35
-1.00
0.11
0.29
-0.41
-0.08
-0.05
-1.41
-2.20
0.36
-0.60
-0.09
-0.25
-1.47
-0.56
0.34
-0.29
0.20
-0.10
-0.69
0.42
0.67
0.11
0.42
-0.15
-0.50
-0.47
-0.31
-0.33
0.22
-0.03
-0.58
-0.44
0.40
-0.31
0.13
-0.30
-1.54
-0.65
-0.20
-1.06
0.19
0.14
-0.75
-1.06
0.86
0.26
-0.01
-0.21
-0.48
-1.52
-0.30
-0.39
0.15
0.08
-0.50
-0.32
0.28
0.27
0.10
0.12
-0.56
-0.36
0.27
0.19
0.17
0.23
-0.33
1.43
0.79
-0.06
0.08
0.33
-1.01
-2.81
0.61
-0.76
0.01
0.32
-0.39
0.61
0.78
0.45
0.35
0.83
0.12
1.37
1.86
1.09
0.92
-0.13
-0.28
-0.17
0.01
0.23
0.39
0.32
-0.31
-0.24
0.55
0.22
0.32
0.22
-0.51
-0.20
0.17
0.28
0.29
0.34
-0.63
-0.98
1.02
0.58
0.01
-0.16
-0.43
-2.04
-0.58
-0.26
0.28
1.42
0.29
0.26
0.95
0.67
0.96
0.93
0.41
0.18
1.28
1.29
1.08
2.14
1.38
3.41
2.76
0.88
1.73
1.40
-0.12
-2.70
1.39
-0.79
0.45
3.47
2.14
1.77
3.73
3.84
2.50
1.50
-0.41
0.61
1.91
1.20
1.98
0.13
-0.38
-0.40
0.50
0.84
1.13
0.77
-0.29
-0.26
0.77
1.23
0.91
1.62
0.84
-0.07
1.94
2.16
1.92
2.27
-0.46
-0.88
1.23
1.68
0.84
0.16
-0.41
-1.79
-1.32
0.25
0.90
-0.46
-1.28
-0.80
-0.29
-0.80
-1.04
-1.05
-1.33
-0.95
-0.46
-0.87
-1.11
-1.43
-1.80
-1.39
-1.22
-1.73
-1.99
-0.70
-1.45
-0.98
-0.33
-0.24
-0.76
-1.75
-2.57
-1.67
-1.71
-1.93
-2.43
-0.70
-1.37
-0.54
-0.49
-0.74
-1.48
-0.06
-0.75
-0.68
-0.45
-0.69
-1.28
-0.05
-0.70
-0.52
0.31
-0.66
-0.67
-0.91
-2.04
-1.04
-0.77
-1.58
-1.84
-0.83
-1.02
-0.78
-0.22
-0.57
-1.34
-0.13
-0.54
-0.81
-0.22
-0.53
-0.76
Production in volume (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
Demand Domestic for Composite Good (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
Imports in volume (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
Exports in volume (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
25
T able 9: Sectoral Results from EU-12 linked system (change from baseline)
ex-post reduction of social sec.
rate
France
Germ any
Italy
Unite d
Kingdom
Spain
Belgium
Ireland
Netherl.
Portugal
Greece
Denm ark
1.28
-1.12
-2.03
1.37
0.29
0.39
1.18
0.04
-0.02
1.56
0.30
0.93
2.79
1.80
3.95
4.27
2.32
3.21
0.67
-1.58
-4.65
0.93
-1.80
-0.22
3.43
0.03
1.77
4.35
1.65
2.36
4.10
1.82
4.06
9.29
1.70
6.07
-0.77
-0.75
-1.31
-0.58
-0.98
0.05
1.18
0.43
-0.42
1.41
-0.17
0.61
-0.74
-2.59
-1.54
-0.64
-2.00
0.23
2.57
-1.19
-1.72
2.39
1.16
0.71
-3.44
-4.63
-6.45
-3.90
-2.99
-1.86
-0.09
1.29
0.02
0.82
0.54
0.37
1.23
0.73
-0.27
0.78
0.02
0.73
-0.59
0.54
0.80
0.60
-0.46
0.04
1.97
1.36
-1.66
1.56
-0.47
0.57
-0.29
0.65
0.11
1.49
0.38
1.55
1.65
2.94
1.47
2.05
0.50
1.64
0.68
0.58
-0.50
0.41
-0.44
0.55
0.99
1.34
-0.02
1.35
0.27
0.46
0.71
0.72
-0.26
0.32
-0.72
1.09
0.24
1.30
0.58
2.04
1.45
0.32
0.72
0.57
-1.40
0.31
-0.13
0.72
-9.81
-13.08
-13.35
-10.11
-1.15
-10.31
-10.45
-11.62
-12.84
-10.38
-1.09
-10.69
-5.70
-11.47
-7.52
-5.50
-0.24
-5.83
-13.36
-19.91
-19.13
-15.58
-0.37
-12.28
-9.81
-17.17
-14.13
-10.02
-0.54
-9.87
-9.52
-17.41
-10.60
-8.66
1.03
-9.12
-7.27
-8.88
-6.88
-7.72
1.78
-6.80
-7.33
-10.17
-10.30
-8.09
-1.90
-7.26
-8.93
-14.43
-12.83
-10.12
-1.79
-8.59
-7.32
-16.32
-12.14
-7.42
-1.98
-8.54
-9.37
-11.75
-12.60
-9.84
-0.54
-8.99
Investment by branch in volume (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
Labour demand (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
Energy demand (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
26
T able 10: Sectoral Results from EU-12 linked system (change from baseline)
ex-post reduction of social sec.
rate
France
Germ any
Italy
Unite d
Kingdom
Spain
Belgium
Ireland
Netherl.
Portugal
Greece
Denm ark
4.75
5.05
2.25
3.53
2.34
3.10
4.58
4.67
2.52
3.50
2.29
3.34
6.57
6.14
4.94
5.79
4.76
5.84
4.41
4.64
1.01
2.82
0.25
1.64
8.15
7.97
5.54
7.41
5.45
7.44
4.84
7.57
3.26
4.38
2.35
4.59
3.39
3.57
1.75
3.41
1.65
2.78
3.18
4.21
1.70
2.37
1.77
2.22
4.51
6.79
3.86
4.40
3.73
5.64
5.49
3.80
2.05
3.97
1.90
2.89
2.47
2.63
0.91
2.16
1.19
2.36
4.35
4.63
1.88
3.37
2.28
3.06
3.75
4.28
2.23
3.21
2.18
3.26
5.66
5.46
4.63
5.68
4.94
5.69
3.81
4.00
0.37
2.65
0.15
1.57
7.46
7.16
4.50
7.36
5.79
7.34
3.67
6.07
2.63
3.66
2.38
4.58
3.30
3.84
1.44
3.10
1.33
2.67
2.50
3.83
1.27
2.24
1.88
2.11
3.55
5.61
2.66
4.28
3.34
5.59
5.27
3.74
1.33
4.07
2.00
2.86
2.31
2.66
0.41
2.52
1.27
2.32
-0.12
-2.24
-0.71
-0.72
-0.55
-0.35
-1.58
-1.72
-0.47
-0.79
-0.31
-0.65
0.24
-1.53
-0.69
-0.31
0.05
-0.11
-1.99
-2.73
-0.55
-1.18
-0.13
-0.66
0.04
-2.11
-0.67
-1.13
-0.67
-1.33
-1.72
-3.52
-1.03
-1.35
-0.38
-1.20
-0.83
-1.08
0.03
-0.71
0.12
-0.33
-1.00
-1.90
-0.42
-0.95
-0.58
-0.33
-1.00
-2.24
-0.39
-0.51
-0.34
-0.90
-0.11
-2.03
-1.63
-1.16
-1.18
-0.32
-0.93
-1.04
-0.13
-0.61
-0.26
-0.56
3.48
0.08
-0.91
3.27
2.20
3.01
2.41
-0.60
-0.71
3.02
0.42
3.54
4.45
0.69
4.76
6.37
2.44
5.22
3.85
-2.28
-9.09
3.34
-3.18
0.71
6.60
-0.94
1.96
7.99
3.55
8.09
4.03
2.21
3.36
6.08
2.59
6.32
2.56
1.40
0.00
1.76
-0.09
3.75
2.87
1.39
-0.32
3.38
0.01
2.68
2.96
-0.65
1.12
3.23
-2.30
6.49
5.98
-3.54
-4.82
6.49
3.04
2.43
1.20
-0.19
-5.25
0.49
-0.87
2.87
Production Deflator domestic (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
Absorption Price (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
Labour Productivity (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
Rate of Return of Capital (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
27
Table 11: Changes in the trade matrix in volume (in % diff. from baseline)
EXPORTER
IMPORTER
BE
DK
0.43%
Belgium
Denma rk
-1.98%
France
-0.76%
0.23%
Germa ny
-1.52%
-0.16%
FR
DE
IT
NL
SP
UK
-0.60%
-1.32%
-1.94%
0.24%
-0.83%
-1.00%
-2.66%
-2.84%
-0.69%
0.53%
-1.63% gain
-1.97%
-2.03%
-1.22%
-1.59%
-2.12%
-1.47%
-1.98%
-3.32%
-1.43%
-1.57%
-2.20% gain
-0.80%
-0.96%
Greece
-0.44%
0.84%
-0.47%
-0.09%
Irela nd
-1.29%
-0.96%
-1.09%
-1.05%
GR
IR
PO
-2.50%
0.10%
-1.22%
-0.09%
-0.79%
-1.70%
-0.49%
-0.33%
-1.26% gain
0.00%
-1.23%
-1.29%
-1.06%
-2.42%
-1.40%
0.09%
-1.37% gain
0.37%
-0.24%
-0.89%
0.83%
-0.93%
-1.79%
-0.64%
-0.74%
-0.84% gain
-1.80%
-0.42%
-0.87%
-2.05%
-1.32%
0.34%
-1.17% gain
0.53%
0.15%
1.12%
0.55%
0.44% loss
-2.42%
-1.10%
0.39%
-1.19% gain
-2.89%
-1.00%
-0.68%
-2.49% gain
0.87%
-0.47%
0.60% loss
-0.98%
-3.36% gain
0.93%
1.64%
0.82%
1.30%
-0.27%
1.82%
-0.99%
-0.66%
-1.09%
-1.00%
-0.96%
-0.30%
-1.21%
Portugal
-0.69%
0.02%
-1.19%
-0.27%
0.13%
0.21%
-1.49%
-0.04%
Spai n
1.35%
2.16%
0.17%
1.12%
1.23%
1.95%
0.27%
1.84%
1.13%
UK
-2.81%
-1.74%
-1.89%
-2.38%
-3.15%
-1.03%
-2.45%
-1.42%
-1.33%
-4.59%
Rest of Worl d
-1.34%
-0.79%
-1.13%
-1.18%
-1.05%
-0.93%
-1.72%
-0.36%
-1.61%
-2.26%
-1.23%
-0.69%
gain
-0.94%
gain
-1.07%
gain
-1.07%
gain
-0.69%
gain
1.40%
-1.57%
Ita ly
gain
TOTAL
-0.07%
Netherl.
TOTAL
RW
-1.60%
gain
28
-0.56%
gain
-1.37%
gain
-2.33%
loss
-1.73% gain
-0.95%
-0.88%
gain
-0.14%
gain
-1.62%
4.
A Dynamic Application for Belgium
4.1
Model Specification and Scenario
The dynamic model for Belgium, though following the same structure as the general model
described above, differs from it on a few aspects :
• The IS-LM module has not been implemented and therefore only the relative prices are
relevant. The investment function is derived from the desired capital demand with a fixed
adjustment parameter.
• Equilibrium of the trade balance is imposed in each year.
The scenario considered is the following :
• A carbon tax of 10$/bbl is imposed from the first period on.
• The employer's social security contribution is decreased to attain ex-post public budget
neutrality.
4.2
The results
At this stage of the development of the model, these first results are more intended to
understand the functioning of the model and do not yet allow to draw any conclusions about
the double dividend propositions.
General Evolution
After the adjustment to the new conditions after the first year of the simulation period, the
economy stabilises at a slightly increased level of GDP (+0.2%) and of private consumption
(+1%), with a production and consumption structure less oriented towards energy intensive
sectors. In 3 to 4 years the economy is adjusted to a new equilibrium and follows from thereon
a development path parallel to the reference.
The Demand
The domestic demand for all goods, except for energy intensive goods is increasing, satisfied
by national production and imports.
Production Structure and Technology
The energy intensive sectors are the main losers, their market both at national level and at
international level is decreasing and the sector of private services is the main winner. The
sectors are more oriented towards the domestic market. This shift is realised although the
trade balance equilibrium is imposed, because of an increase in the terms of trade.
Labour intensities are increasing and capital intensity has also slightly increased because of
the evolution of the relative prices. This allows for a very small increase in employment.
Income Allocation
The labour income benefits from the increase in the real wage rate and in employment. The
burden of the carbon tax is partially transferred to the rest of the world and to the capital
owners. This allows for a positive impact (though very small) on the economy and on the
employment of the carbon tax.
29
Table 12 : Dynamic Simulation for Belgium. Macroeconomic Results (Change from Baseline)
ex-post reduction of social sec. rate
t
t+1
t+2
t+3
t+4
t+5
t+6
t+7
t+8
t+9
Real Aggregates
GDP in factor prices
% diff.
0.05
0.13
0.09
0.12
0.14
0.17
0.19
0.21
0.22
0.25
Private Investment
% diff.
2.69
2.62
1.90
1.71
1.47
1.62
1.48
1.38
0.95
1.25
Total Exports
% diff.
-0.82
-0.88
-1.08
-1.10
-1.11
-1.10
-1.07
-1.05
-1.01
-0.99
Total Imports
% diff.
-0.14
-0.07
-0.23
-0.23
-0.26
-0.21
-0.21
-0.21
-0.27
-0.20
Total Private Consumption
% diff.
0.39
0.67
0.84
0.94
1.00
1.04
1.07
1.08
1.06
1.07
Real W age cost
% diff.
-1.14
-1.11
-0.83
-0.73
-0.68
-0.65
-0.61
-0.57
-0.55
-0.53
Netto Real W age Rate
% diff.
1.84
1.87
2.16
2.26
2.31
2.35
2.38
2.42
2.44
2.47
Real Interest Rate
abs . diff.
0.96
-1.20
0.24
-0.46
-0.30
-0.54
-0.51
-0.62
-0.63
-0.85
Energy Consumption
% diff.
-2.06
-2.43
-2.75
-2.92
-3.05
-3.13
-3.20
-3.24
-3.28
-3.31
Employment (x1000)
abs . diff.
6.7
6.7
7.8
8.2
8.4
8.5
8.6
8.7
8.8
8.9
Public Deficit as % of GDP
abs . diff.
0.03
0.04
0.03
0.04
0.06
0.06
0.07
0.05
0.06
0.06
Current Account as % of GDP
abs . diff.
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Relative Prices
Others
30
Table 12 : Dynamic Simulation for Belgium. Sectoral Results (Change from Baseline)
ex-post reduction of social sec.
rate
t
t+1
t+2
t+3
t+4
t+5
t+6
t+7
t+8
t+9
-0.08
-1.28
0.12
0.05
-0.34
0.14
-0.04
-1.27
0.12
0.10
-0.29
0.30
-0.05
-1.64
-0.05
-0.01
-0.41
0.36
-0.04
-1.68
-0.09
0.01
-0.40
0.44
-0.03
-1.73
-0.12
0.01
-0.42
0.49
-0.01
-1.71
-0.08
0.05
-0.40
0.54
0.01
-1.70
-0.08
0.06
-0.38
0.57
0.03
-1.67
-0.08
0.07
-0.36
0.59
0.05
-1.64
-0.14
0.05
-0.35
0.59
0.07
-1.60
-0.07
0.10
-0.32
0.62
0.15
-0.45
0.84
0.72
0.06
0.28
0.26
-0.39
0.87
0.88
0.22
0.50
0.19
-0.59
0.68
0.74
0.19
0.58
0.23
-0.58
0.60
0.78
0.23
0.66
0.23
-0.60
0.55
0.74
0.25
0.70
0.27
-0.56
0.63
0.80
0.29
0.75
0.28
-0.54
0.60
0.79
0.30
0.77
0.30
-0.52
0.57
0.78
0.31
0.79
0.28
-0.53
0.40
0.69
0.29
0.77
0.32
-0.48
0.53
0.77
0.33
0.80
0.20
-0.82
0.50
0.77
0.16
0.38
0.32
-0.78
0.52
0.94
0.33
0.63
0.25
-1.05
0.34
0.80
0.33
0.71
0.29
-1.07
0.28
0.84
0.38
0.78
0.29
-1.10
0.24
0.80
0.39
0.81
0.34
-1.07
0.30
0.87
0.43
0.85
0.35
-1.05
0.28
0.85
0.45
0.87
0.36
-1.03
0.27
0.85
0.46
0.87
0.33
-1.02
0.15
0.75
0.43
0.84
0.38
-0.98
0.26
0.83
0.47
0.87
-0.47
-1.81
-0.33
-0.56
-0.66
-0.45
-0.57
-1.84
-0.38
-0.62
-0.70
-0.57
-0.48
-2.32
-0.51
-0.69
-0.90
-0.57
-0.53
-2.38
-0.54
-0.69
-0.92
-0.53
-0.50
-2.46
-0.55
-0.68
-0.95
-0.44
-0.53
-2.45
-0.53
-0.67
-0.95
-0.39
-0.51
-2.44
-0.52
-0.64
-0.94
-0.34
-0.49
-2.41
-0.50
-0.62
-0.92
-0.30
-0.41
-2.36
-0.48
-0.56
-0.88
-0.23
-0.44
-2.34
-0.46
-0.56
-0.87
-0.22
Production in volume (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
Domestic Demand for Composite Good (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
Imports in volume (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
Exports in volume (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
31
Table 13 : Dynamic Simulation for Belgium. Sectoral Results (Change from Baseline)
ex-post reduction of social sec.
rate
t
t+1
t+2
t+3
t+4
t+5
t+6
t+7
t+8
t+9
-0.12
6.52
-1.72
-0.15
1.23
1.38
2.62
-30.21
15.43
8.54
-3.56
9.60
-0.80
-8.38
-3.56
0.48
-0.91
4.23
0.75
-9.15
-1.69
0.84
-1.91
4.99
0.35
-3.43
-2.10
0.34
-0.35
2.99
1.11
-1.41
0.41
1.06
-0.05
2.96
1.05
-0.32
1.27
1.26
0.37
2.26
1.21
0.37
0.91
1.33
0.50
2.07
0.94
0.24
0.22
0.93
0.35
1.40
1.43
1.60
-0.13
1.26
0.84
1.66
0.03
-0.72
0.28
0.29
-0.19
0.46
0.08
-0.75
0.26
0.33
-0.14
0.69
-0.01
-1.09
0.00
0.10
-0.26
0.62
0.01
-1.11
-0.05
0.13
-0.25
0.66
0.02
-1.12
-0.07
0.12
-0.25
0.66
0.06
-1.09
-0.02
0.17
-0.22
0.69
0.07
-1.07
-0.02
0.17
-0.21
0.69
0.09
-1.05
-0.02
0.18
-0.19
0.68
0.09
-1.01
-0.08
0.16
-0.18
0.65
0.13
-0.99
-0.01
0.21
-0.16
0.67
-1.28
-4.95
-2.28
-2.84
-1.39
-2.35
-1.19
-5.02
-2.22
-2.67
-1.30
-2.09
-1.32
-5.57
-2.78
-3.07
-1.43
-2.28
-1.28
-5.60
-2.79
-3.01
-1.41
-2.23
-1.29
-5.70
-2.90
-3.08
-1.42
-2.29
-1.25
-5.67
-2.84
-3.02
-1.39
-2.26
-1.24
-5.66
-2.86
-3.03
-1.38
-2.27
-1.23
-5.63
-2.85
-3.01
-1.37
-2.27
-1.23
-5.60
-2.92
-3.04
-1.36
-2.32
-1.19
-5.54
-2.83
-2.98
-1.34
-2.28
Investment by branch in volume (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
Labour demand (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
Energy demand (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
32
Table 14 : Dynamic Simulation for Belgium. Sectoral Results (Change from Baseline)
ex-post reduction of social sec.
rate
t
t+1
t+2
t+3
t+4
t+5
t+6
t+7
t+8
t+9
-0.11
-0.57
-0.16
-0.23
-0.15
-0.31
-0.12
-0.52
-0.14
-0.23
-0.15
-0.38
-0.05
-0.56
-0.05
-0.11
-0.15
-0.26
-0.06
-0.58
-0.05
-0.11
-0.16
-0.22
-0.05
-0.62
-0.05
-0.11
-0.17
-0.17
-0.07
-0.62
-0.06
-0.12
-0.17
-0.15
-0.06
-0.63
-0.06
-0.11
-0.17
-0.11
-0.06
-0.62
-0.05
-0.11
-0.17
-0.09
-0.05
-0.63
-0.06
-0.10
-0.17
-0.06
-0.06
-0.62
-0.06
-0.10
-0.17
-0.05
-0.70
-1.41
-0.39
-0.59
-1.01
-0.78
-0.81
-1.31
-0.35
-0.57
-1.00
-0.97
-0.30
-1.39
-0.11
-0.27
-1.01
-0.63
-0.38
-1.44
-0.11
-0.28
-1.04
-0.56
-0.36
-1.53
-0.13
-0.27
-1.12
-0.42
-0.43
-1.55
-0.15
-0.29
-1.15
-0.36
-0.42
-1.56
-0.15
-0.28
-1.15
-0.28
-0.39
-1.55
-0.13
-0.26
-1.14
-0.22
-0.33
-1.58
-0.14
-0.25
-1.13
-0.14
-0.37
-1.55
-0.14
-0.26
-1.12
-0.13
-0.50
-3.17
0.31
0.12
-2.23
0.36
-0.24
-3.80
0.48
0.26
-2.23
0.67
-0.63
-2.93
-0.92
-0.51
-2.04
0.21
-0.48
-2.53
-0.72
-0.48
-1.82
0.11
-0.47
-2.11
-0.65
-0.53
-1.51
-0.09
-0.36
-1.90
-0.38
-0.45
-1.34
-0.15
-0.36
-1.83
-0.41
-0.48
-1.28
-0.25
-0.36
-1.82
-0.50
-0.51
-1.28
-0.33
-0.42
-1.83
-0.70
-0.63
-1.31
-0.44
-0.36
-1.81
-0.53
-0.56
-1.26
-0.43
-3.89
-2.93
-5.29
-3.87
-2.83
-5.29
-4.01
-2.88
-5.32
-4.01
-2.86
-5.34
-4.03
-2.86
-5.34
-4.01
-2.84
-5.33
-4.00
-2.83
-5.32
-3.99
-2.83
-5.31
-3.99
-2.85
-5.33
-3.95
-2.82
-5.30
Labour Productivity (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
Relative Price of Labour (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
Relative Rate of Return of Capital (% diff.)
Agriculture
Energy Intensive Industries
Equipment Goods Industries
Consumer Goods Industries
Transport - Communications
Private Services
Environmental Indicators (% diff.)
CO2 Emissions
NOX Emissions
SO2 Emissions
33
5.
Concluding Remarks
The analysis presented above, confirms the potential contribution of GEM-E3 to the double
dividend discussion.
Through the country-specific features of GEM-E3, sensitivity studies on the influence of the
different substitution parameters can be performed, while keeping the balance of payments
and the government deficit unchanged (this is a typical problem in many evaluations with
traditional macro-economic models). Moreover the model contains alternative instruments to
limit CO2 emissions (tradable permits, standards) so that the merits of a carbon tax can be
compared with the merits of other instruments proposed by industry and all this for a given
overall emission goal.
GEM-E3 is also a set of dynamic general equilibrium country models that are linked via trade
flows and via environmental effects. Through this linkage a variety of topics can be covered.
More specifically, through GEM-E3 the full effects of a Europe-wide carbon-energy tax can
be consistently evaluated. These will be different from the sum of the country models.
Furthermore, the effects on the distribution of welfare between member countries can be
studied. These effects are transmitted via both trade flows and transfrontier transport of
pollutants. Other issues that can be discussed with GEM-E3 include the merits of the coordination of tax recycling strategies and the evaluation of equilibria where environmental
taxes are voluntarily chosen by each member state (tax competition aspects).
Going back to the double dividend issue, the general outcome of the analysis performed with
GEM-E3, confirms that some positive dividend in employment occurs, provided that the
degree of labour supply flexibility is significant. This can be interpreted as the existence of
unemployed labour force. If such a condition is not verified in the baseline, then a positive
dividend is only obtained for the environment. This latter case, which is the full employment
postulation, is empirically confirmed and complies with similar theoretical results (see
Bovenberg and Goulder).
In any case the distributional effects by country and by sector are also important to consider.
They may not be neutral in the longer term.
As already mentioned the results presented in this paper can be considered as preliminary,
since further development of GEM-E3 is under way.
34
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