Climate Change Policy in European Countries and its effects on industry

In this paper we discuss the effects ofdifferent climate change policies onindustrial activity and on welfare. Wecompare the effects of carbon taxes andgrandfathered permits and the effects ofexemptions for energy-intensive industries.We survey first the insights from economictheory and from model experiments for theUS. Next we use a general equilibrium modelto assess the effect of different climatechange policies on industrial activity persector and per member country in the EU. Wepay particular attention to the effects ofpolicies where one EU member state exemptsits energy-intensive sectors from abatementefforts. The main findings are that, in theEU, the effects on industrial activity andthe welfare costs of tradable permits orcarbon taxes are small when no industrialsectors are exempted. When one membercountry exempts its energy intensivesector, this will reduce somewhat theimpact on its activity level but willgenerate an extra welfare cost for theEU.