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Research Report / Climate

The Impact of Climate and Energy Policies on the Public Budget of EU Member States (THINK Topic 4)

Author(s): OLMOS Luis, RANCI Pippo, PAZIENZA Maria Grazia, RUESTER Sophia, SARTORI Martina, GALEOTTI Marzio, GLACHANT Jean-Michel

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ABSTRACT

This report was produced as part of the THINK project. In March 2007, the European Council decided on a new integrated climate and energy policy designed to combat climate change, reduce import dependence and increase the competitiveness of the internal energy market. Two years later, a set of Directives, which are part of the by now well-known “20-20-20 Package” entailing the reduction in greenhouse gas emissions, increasing renewable energy and decreasing energy consumption through energy efficiency measures by 20% by the year 2020, was approved. In the current context where public budgets are overstretched due to the economic crisis, there is a need to understand the effect of new climate policies on public revenues and expenses. The transition to a low-carbon energy system can create new sources of public funds (i.e. carbon pricing) but at the same time will imply an increase in certain State expenses (e.g. support to RD&D). It will also affect existing revenue streams such as a reduction in excise taxes from fossil fuels, whose size is not negligible in various Member States. Besides, climate policies generally impose a constraint on production and consumption decisions in the economy, which may well create efficiency costs. Therefore, a depressing impact on economic growth might be expected in the short-term, which may overshadow the stimulating effect of the increase in innovation subsidies. The net effect of any such simultaneous changes on main macroeconomic variables is, in any case, highly conjectural. We estimate the impact of new policies targeting EU 2020 climate objectives on the fiscal balance of Member States in the year 2020. The policies whose effect we consider are those whose implementation has been decided from the year 2009 onward, i.e. carbon taxes applied in non-ETS sectors and additional support payments and energy efficiency regulations increasing the penetration and development of clean technologies. Through back-of-the-envelope calculations, we determine the effect of the application of these policies on public budgets by computing and comparing public revenues and expenses under a Baseline and an Enhanced Policy package. We investigate the level of both direct effects of new climate policies on public budgets and, in an approximate way, indirect effects resulting from changes in the use of resources triggered by these policies.

THINK Topic 4 was led by Pippo Ranci