Work Package 1: Foundations

Description

In Work Package 1, the database for the models was developed and information on the policy frameworks relevant for the simulations was compiled.

Development / update of model database

For the combined model ADAGIO-DYNK used for the simulations of CO₂ taxes and recycling mechanisms (see Work Package 3) a harmonized database was developed in this task. The multiregional databases from the ADAGIO model (see Work Package 2) were updated to 2014 with data from the WIOD-database (World Input-Output Database). Also, for the feature from the DYNK model (see Work Package 2) relevant data (income, consumption, emissions, energy ...) mainly taken from Eurostat were updated to 2014.

Analysis of energy and carbon taxation in the EU Member States

In this task, a cross-country comparison of energy taxes was performed. Energy tax rates by fuel and application area were reviewed based on the European Commission's taxation reports. In addition, for the countries having introduced carbon taxes the carbon component of the taxes was assessed, and implicit carbon tax rates were calculated for all Member States. Thereby, the WIFO database on energy tax rates in the EU has been extended, so it is now available for the years 1995 and 2000-2023.

Analysis of the policy framework in the case study countries

In this task we reviewed and summarized climate policy and related policy areas (e.g. energy policy, transport policy) in the case study countries Austria and Poland. Another aspect to be included was the discussion of the social acceptability of carbon pricing in general and the specific findings regarding the public opinion on climate change and climate policy (e.g. from Eurobarometer surveys) in the two countries. Moreover, we assessed the existing tax systems, with a focus on the distribution between taxes on labour and the environment on the one hand and the financing of the social security system on the other. Finally, we described the status quo regarding the industry structures and distribution of employment as well as disaggregated greenhouse gas emissions. This yielded indications of the sectors that are emission-intensive and / or labour-intensive and are likely to gain or lose from the chosen revenue recycling mechanisms.

The findings from this task provide the background information for the interpretation of modelling results in Work Package 4.

Development of taxation and recycling scenarios

The policy scenarios to be simulated in Work Package 3 were specified in this task. Different pathways for the implementation of an EU-wide CO₂ price were developed. In our main carbon pricing scenario, the initial price of EUR 45 per t CO₂ remains constant until 2036, which is the target price for ETS 2 until 2030. For those EU member states already having implemented a national CO₂ price, the price paths were converted into country-specific mark-ups with the respective changes in carbon prices depending on the 2019 carbon price level in the countries. In addition, sensitivity scenarios with higher carbon prices were developed. For sectors covered by the EU ETS, we assume that the carbon price increases from EUR 60 per t CO₂ in 2027 to EUR 120 per t CO₂ in 2036 in all scenarios.

In addition to assumptions regarding the CO₂ price paths, six options for revenue recycling and mitigating adverse macroeconomic and distributional impacts were investigated:

• PCI: Revenues are used for public consumption. This is the 'default option' in the model, which is closed via endogenous public consumption given a pre-defined budget deficit. Ceteris paribus, public consumption will increase.
• CDP: Recycling of carbon tax revenues via lump-sum transfers to households, i.e., climate dividend payments. The payments are distributed on a per capita basis, with children up to 14 years obtaining a reduced amount of 40%.
• LCR: Non-wage labour costs are reduced by lowering employers' social security contributions. This is the only option with positive direct impacts on competitiveness.
• SSCw: Reductions in workers' social security contributions. Contrary to the LCR option, it has no direct (positive) impact on competitiveness.
• ITR: Reduction in workers' income taxes, which is similar to the SSCw option. Like CDP and SSCw, it implies a c.p. increase in disposable income.
• VTR: Reduction of the standard value added tax rate on goods and services, except for energy goods. Indirectly, via reduced inflation, this option influences the wage rate and thus competitiveness.

The selection of both CO₂ price scenarios and the scenarios for revenue recycling was based on a survey with researchers and stakeholders from policy, interest groups and NGOs.