Macroeconomic Impact of Air Pollution Reduction evaluation with the general equilibrium model GEM-E3

The GEM-E3 model As a macroeconomic model it allows evaluating the full effect of a policy on the economy (GDP, employment, income, trade) it covers 22 EU countries follows the general equilibrium methodology, demand and supply functions derived from microeconomic behaviour of economic agents (optimisation of their objective) markets clear through prices and prices are such that at equilibrium all agents optimise their behaviour (agriculture is treated as the other sectors) covers the entire economic activity within a country simultaneously multinational (EU) and specific for each country, markets clear at country level or Europe wide, where appropriate

Assumptions for the policy scenarios The reduction targets are derived from RAINS The reference scenario includes a climate policy A ‘command and control’ type of policy instrument is assumed Public budget constant relative to GDP compared to reference (through flexible employer’s social security contribution) Only the EU adopt an air pollution control policy

Macroeconomic impact at EU level

Macroeconomic impact at EU level Macroeconomic impact remains small Employment effect is negligible at EU level With the ‘command and control’ policy instrument, the burden falls mostly on households The competitiveness of the EU economy is not really affected because of small price effect The sectors delivering abatement equipment benefit from the policy