WELFARE, WEALTH AND WORK – A NEW GROWTH PATH FOR EUROPE
A European research consortium is working on the analytical
foundations for a new socio-ecological growth model
LONG-RUN GROWTH AND ABSOLUTE DECOUPLING
OF RESOURCE USE: MODEL SIMULATIONS FOR
EUROPE
Kurt Kratena, Mark Sommer
“Social and environmental progress: Europe in a Long-Run Perspective”
Brussels, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Europe and global resource use
 The European consumer contributes directly
(domestically) and indirectly (globally) to
resource use and GHG emissions
 GHG emissions/capita and DMC/capita are still
beyond a globally sustainable limit in Europe
 Security of supply is an increasing concern of
European resource policy
 UNEP scenarios (based on ‘planetary
boundaries’)  targets of resource use for
Europe
2| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Europe and global resource use
 The problem of ‘leakage’ in a ‘go-it-alone’
scenario of European resource policy
 Higher costs of European industry  relocation
of energy/resource intensive production 
hurting jobs in Europe & no change or higher
GHG emissions and resource use globally
 Consumer demand in Europe is the
determinant of leakage
3| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Europe and global resource use
 Two ways to overcome the problem of ‘leakage’ in a
‘go-it-alone’ scenario of European resource policy
 1) increase energy/resource/emission productivity
more than proportionally (spurring directed
technical change)
 2) taxing embodied energy/resource/emission in
order to reduce European demand
 Comparing 2) with ‘classical green tax reform’
 1) is further research in the WWWforEurope project
4| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Modelling biophysical constraints: the
DYNK (Dynamic New Keynesian) model
 EU 27 as one economy, 59 industries, five household
income groups, 47 consumption categories
 ‘New Keynesian’: full employment in the long-run,
short-run institutional rigidities (liquidity constraints,
union wage bargaining)
 Public budget constraint (stability programme) as
model closure
 Detailed modelling of production and consumption
activities  link to physical energy/resource/emission
flows
5| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Policy: Pricing GHG emissions and
resources
 Two different taxation schemes: “Green Tax
Reform” and “Environmental Fiscal Devaluation”
 Green Tax Reform: GHG emissions/inputs of
resources are taxed and social security contributions
(employers' and employees') are reduced (ex post
public revenue neutrality)
 Environmental Fiscal Devaluation: GHG
emissions/inputs of resources embodied in private
consumption are taxed at the same rate and
revenue neutrality is also achieved by the same rule
for social security contributions
6| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Policy: Pricing GHG emissions and
resources
 Environmental Fiscal Devaluation: A special
case of fiscal devaluation (price effects of
currency devaluation by rising consumption
taxes and lowering labour taxes)
 Consumption taxes rise due to taxation of
embodied GHG emissions/inputs of resources
in private consumption irrespective of origin (no
conflict with international trade agreements)
 Labour taxes decrease due to lower social
security contributions
7| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Policy: Pricing GHG emissions and
resources
 CO2 tax according to the EU Roadmap for a Low
Carbon Economy: 25 €/t CO2 in 2015
(in € of 2005)  250 €/t CO2 in 2050 (in € of 2005)
 Tax on minerals (for construction, for industry,
and for metal production) according to the
literature: 2 €/t in 2015 and rising by 5% p.a.
 ‘Green Tax Reform’: taxing production and
consumption flows in Europe
 ‘Environmental Fiscal Devaluation’: taxing embodied
flows in European consumption (model simulations
with DYNK model)
8| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Policy: Pricing GHG emissions and
resources
 ‘Environmental Fiscal Devaluation’: model
simulations with the EU 27 DYNK model give
‘implicit’ emission/resource (DMC) coefficients per
unit of private consumption good (59 commodities)
 Leakage: GHG emission coefficients for imports
calculated with a static multi-regional input-output
(MRIO) model, based on the WIOD database
(www.wiod.org)
 Some indirect effects (non EU imports from EU,
embodied in non EU intermediate demand) are not
considered for leakage
9| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Output price effects of "Green Tax
Reform": difference to BASE in %
2020
Recreational, cultural and sporting services
Membership organisation services
Sewage and refuse disposal services, sanitation
Health and social work services
Education services
Public administration and defence services
Air transport services
Land transport; transport via pipeline services
Electrical energy, gas, steam and hot water
Medical, precision and optical instruments
Radio, television and communication equipment
Office machinery and computers
Basic metals
Other non-metallic mineral products
Chemicals, chemical products
Coke, refined petroleum products
Pulp, paper and paper products
TOTAL
-2
0
2
4
6
8
10
12
14
Dif f erence to baseline in %
10| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Macroeconomic effects of "Green Tax
Reform": difference to BASE in %
GDP, const. prices
Private Consumption, const. prices
Capital formation, const. prices
Exports, const. prices
Employment (persons)
Employment (hours)
Unemployment (persons)
Unemployment rate (% points)
GHG emissions, households
GHG emissions, production
GHG emissions, total
GHG emissions, Leakage
DMC/capita
DMC, energy
DMC, minerals
11| Europe in a long-run perspective, February 24th, 2015
2015
-0.03
-0.33
0.00
-0.19
0.31
0.31
-2.21
-0.27
-5.35
-9.81
-8.56
-0.07
-0.12
-0.12
-0.06
2020
-0.54
-1.55
-0.01
-1.12
0.25
0.26
-2.01
-0.22
-7.98
-17.41
-14.79
0.30
-1.44
-4.13
1.22
2030
-2.20
-4.92
-0.04
-3.92
-0.20
-0.17
2.09
0.18
-11.78
-30.03
-25.04
2.31
-3.75
-10.46
8.20
2050
-5.79
-11.13
-0.09
-9.64
-0.84
-0.80
16.93
0.80
-14.80
-43.04
-35.34
11.14
-8.00
-16.68
20.29
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Growth and resource use: "Green Tax
Reform"
200
180
160
140
120
100
80
60
40
20
GDP, constant prices
GDP BASE, constant prices
Final Energy Consumption
GHG emissions, total
DMC/capita
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
0
12| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Macroeconomic effects of "Green Tax
Reform"
 Short-run positive impact on labour, long-run negative on
GDP and labour (0.15% points p.a. less GDP growth):
short-run synergy between full employment and resource
use reduction
 Energy (CO2) is not only a factor of production, but also a
consumption good  price increases  compensation of
labour tax reduction by employee’s wage increases
 GHG emission reduction by more than 40% (absolute
decoupling), ‘Leakage’: 2% in the short run, 31% in
2050
 Total DMC: decrease, but increase in DMC minerals due
to higher imports (‘leakage’)
13| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Effects of "Green Tax Reform" on
households: difference to BASE in %
Durable consumption, const. prices
Nondurable consumption, const. prices
Energy, const. prices
2015
-0.02
-0.48
-4.75
2020
-0.50
-2.08
-7.27
2030
-1.57
-6.59
-11.11
2050
-2.56
-14.72
-14.75
Real disposable income, const. prices
Total
1st quintile
2nd quintile
3rd quintile
4th quintile
5th quintile
2015
-0.11
-0.96
-0.66
-0.39
-0.10
0.24
2020
-1.09
-2.55
-2.10
-1.62
-1.11
-0.47
2030
-4.16
-6.65
-6.02
-5.19
-4.27
-3.02
2050
-10.59
-14.05
-13.26
-12.11
-10.81
-9.00
14| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Effects of "Green Tax Reform" on
households with compensation policy
Durable consumption, const. prices
Nondurable consumption, const. prices
Energy, const. prices
2015
-0.03
-0.48
-4.75
2020
-0.51
-2.08
-7.27
2030
-1.62
-6.62
-11.16
2050
-2.77
-15.03
-15.11
Real disposable income, const. Prices
Total
1st quintile
2nd quintile
3rd quintile
4th quintile
5th quintile
2015
-0.14
-0.57
-0.43
-0.27
-0.14
0.03
2020
-1.18
-1.75
-1.62
-1.38
-1.20
-0.93
2030
-4.42
-5.13
-5.09
-4.74
-4.49
-4.04
2050
-11.35
-11.41
-11.69
-11.42
-11.38
-11.23
15| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Employment effects of "Green Tax
Reform”: difference to BASE in % (I)
2020
Other services
Health and social work services
Education services
Public administration and defence services
Other business services
Research and development services
Financial intermediation services
Post and telecommunication services
Air transport services
Land transport; transport via pipeline services
Hotel and restaurant services
Retail trade services
Electrical energy, gas, steam and hot water
Motor vehicles, trailers and semi-trailers
TOTAL
-2
-1
0
1
2
3
4
5
6
Dif f erence to baseline in %
16| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Employment effects of "Green Tax
Reform”: difference to BASE in % (II)
2020
Medical, precision and optical instruments
Radio, television and communication equipment
Electrical machinery
Office machinery and computers
Machinery and equipment
Fabricated metal products
Basic metals
Other non-metallic mineral products
Chemicals, chemical products
Coke, refined petroleum products
Printed matter and recorded media
Pulp, paper and paper products
Wearing apparel; furs
Textiles
Food products and beverages
TOTAL
-2
-1
0
1
2
3
4
5
6
Dif f erence to baseline in %
17| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Effects of "Green Tax Reform“ on
households and employment
 Regressive impact by household income group, but
can be compensated by redistributive changes in the
transfer system
 Nominal disposable income rises (employment
increase), but consumer prices rise more
 Employment increase in service sectors, except in
public services and transport services, positive
gender impact (50% to 60% female labour share in
services)
 Employment increase in non-energy/material intensive
manufacturing sectors with relatively high female
labour share
18| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Output price effects of "Environmental Fiscal
Devaluation": difference to BASE in %
2020
Recreational, cultural and sporting services
Membership organisation services
Sewage and refuse disposal services, sanitation
Health and social work services
Education services
Public administration and defence services
Air transport services
Land transport; transport via pipeline services
Electrical energy, gas, steam and hot water
Medical, precision and optical instruments
Radio, television and communication equipment
Office machinery and computers
Basic metals
Other non-metallic mineral products
Chemicals, chemical products
Coke, refined petroleum products
Pulp, paper and paper products
TOTAL
-1.8
-1.6
-1.4
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
Dif f erence to baseline in %
19| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Macroeconomic effects of "Environmental
Fiscal Devaluation": difference to BASE,%
GDP, const. prices
Private Consumption, const. prices
Capital formation, const. prices
Exports, const. prices
Employment (persons)
Employment (hours)
Unemployment (persons)
Unemployment rate (% points)
GHG emissions, households
GHG emissions, production
GHG emissions, total
GHG emissions, Leakage
DMC/capita
DMC, energy
DMC, minerals
20| Europe in a long-run perspective, February 24th, 2015
2015
0.67
-0.03
0.00
0.36
0.57
0.55
-4.08
-0.50
-3.60
-0.49
-1.36
-0.40
-0.12
-0.12
-0.04
2020
1.29
-0.74
0.00
0.77
0.91
0.88
-7.44
-0.81
-7.13
-1.65
-3.17
-1.08
-0.60
-1.22
-0.59
2030
2.55
-2.08
0.00
0.78
1.54
1.46
-16.24
-1.41
-10.17
-3.96
-5.66
-2.21
-1.93
-2.88
-1.39
2050
4.45
-3.59
-0.02
-2.93
2.27
1.97
-45.78
-2.16
-8.75
-10.47
-10.00
-2.74
-5.57
-8.50
-1.21
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Growth and resource use: "Environmental
Fiscal Devaluation"
200
180
160
140
120
100
80
60
40
20
GDP, constant prices
GDP BASE, constant prices
Final Energy Consumption
GHG emissions, total
DMC/capita
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
0
21| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Macroeconomic effects of
“Environmental Fiscal Devaluation"
 Short- and log-run positive impact on labour and on
GDP (0.1% points p.a. higher GDP growth), long-run
synergy between full employment and resource use
reduction
 Exports increase (lower output prices) and
consumption decreases (higher consumer prices) 
devaluation effect (decrease of imports!)
 GHG decrease (absolute decoupling), negative
‘leakage’ amounts to ~ 32% throughout the period
 All DMC components decrease compared to the
‘baseline’ due to negative ‘leakage’ and in absolute
terms (absolute decoupling)
22| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Effects of "Environmental Fiscal Devaluation"
on households: difference to BASE in %
Durable consumption, const. prices
Nondurable consumption, const. prices
Energy, const. prices
2015
0.26
-0.11
-2.90
2020
0.55
-1.15
-5.85
2030
1.03
-3.17
-8.19
2050
3.74
-5.44
-5.50
Real disposable income, const. prices
Total
1st quintile
2nd quintile
3rd quintile
4th quintile
5th quintile
2015
0.30
-0.30
-0.03
0.16
0.35
0.49
2020
0.29
-1.52
-0.85
-0.24
0.40
0.94
2030
0.68
-3.75
-2.32
-0.81
0.82
2.39
2050
3.63
-7.12
-4.08
-0.42
3.64
7.91
23| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Employment effects of "Environmental Fiscal
Devaluation": difference to BASE in % (I)
2020
Other services
Health and social work services
Education services
Public administration and defence services
Other business services
Research and development services
Financial intermediation services
Post and telecommunication services
Air transport services
Land transport; transport via pipeline services
Hotel and restaurant services
Retail trade services
Electrical energy, gas, steam and hot water
Motor vehicles, trailers and semi-trailers
TOTAL
-3
-2
-1
0
1
2
3
4
Dif f erence to baseline in %
24| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Employment effects of "Environmental Fiscal
Devaluation": difference to BASE in % (II)
2020
Medical, precision and optical instruments
Radio, television and communication equipment
Electrical machinery
Office machinery and computers
Machinery and equipment
Fabricated metal products
Basic metals
Other non-metallic mineral products
Chemicals, chemical products
Coke, refined petroleum products
Printed matter and recorded media
Pulp, paper and paper products
Wearing apparel; furs
Textiles
Food products and beverages
TOTAL
-3
-2
-1
0
1
2
3
4
Dif f erence to baseline in %
25| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Effects of “Environmental Fiscal
Devaluation”: households/employment
 Significant regressive impact by household income
group (‘energy poverty’): trade-off between
consumer responsibility and distributional equality
 Employment increase in all service sectors, except
in transport services, positive gender impact
 Employment increase in non-energy/material
intensive manufacturing sectors, except the
consumer goods producers, weak positive gender
impact
26| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
GHG emissions, with and without 'leakage'
in both policy options
120
100
80
60
40
20
GHG, Green Tax
GHG, Green Tax, with leakage
GHG, Envir. Devaluation
GHG, Envir. Devaluation, with leakage
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
0
27| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Policy conclusions
 Synergies and trade-offs between different
environmental, economic and social policy goals
 Putting the burden on the European producer &
consumer: strong absolute decoupling, short-run
positive labour market impact, long-run negative for
price-competitiveness  relocation & leakage
 Putting the burden on the European consumer:
weak absolute decoupling, short- and long-run
positive impact on GDP and employment, positive
for price-competitiveness  negative leakage
28| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.
Policy conclusions
 Two different policy options for a heterogeneous
Europe
 Environmental Fiscal Devaluation as the ‘starter
drug’ for socio-ecological transition
 Green Tax Reform in the long-run for all
 Both policy options have severe regressive
impacts on household income distribution 
compensation schemes
 Combine Green Tax Reform with: (i) spurring
technological change, and (ii) consumption
based policies
29| Europe in a long-run perspective, February 24th, 2015
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 290647.