Policy Implications of Resource Constraints on the European Economy. WWWforEurope Policy Brief No. 6

It is expected that binding biophysical constraints have the potential to slow growth and impede the improvement of other key macroeconomic variables. Using a DYNK (Dynamic New Keynesian) model of the EU 27, we study two different environmental policy options and evaluate their impact on environmental as well as socio-economic targets (equity and employment). For Europe the reduction of resource use is linked to different policy goals. First of all, the European consumer is embedded into global value chains and thereby directly and indirectly contributes to global resource use. Greenhouse gas emissions of Europe are still an important part of global emissions and emissions per capita are far beyond a sustainable global level. Security of supply and the risks attached to that are a further issue for a European resource policy. The political targets, formulated in roadmaps for greenhouse gas emission reduction and resource efficiency therefore describe significant reductions in resource use linked to domestic production (greenhouse gas emissions), as well as to domestic consumption (domestic material consumption, DMC). The main instrument discussed in this context is the introduction of prices or taxes for greenhouse gas emissions and for resources like construction minerals and metal ores. At the same time, the problem of "leakage" is identified in a scenario of an isolated European policy. Higher costs for European producers due to these taxes may lead to relocation of energy and material intensive production. This in turn can hurt labour in Europe and on a global scale lead to the same or even higher resource use and greenhouse gas emissions. In the end, the genuine source of leakage is the consumers' demand in Europe. Given this demand, producers outside Europe increase their resource use, if the European producer of energy and material intensive products is not competitive. The socio-economic impact of two alternative policies ("classical green tax" reform, "environmental fiscal devaluation") is analysed and compared.