Economic effects of the EU’s ‘Fit for 55’ climate mitigation policies: A computable
general equilibrium analysis
This study analyses the economic effects of the EU's ‘Fit for 55’ climate mitigation
policies using the OECD ENV-Linkage model, a dynamic, global Computable General Equilibrium
model. The model projects macroeconomic, sectoral, energy and emission trends for
the EU, and for the five largest EU economies separately, up to 2035. Policy scenarios
combine carbon pricing with regulations to reach the ‘Fit For 55’ emission reduction
target in 2030. Additional scenarios analyse i) harmonised carbon pricing across countries
and sectors, ii) different forms of revenue recycling from carbon pricing, iii) the
effect of the EU’s proposed Carbon Border Adjustment Mechanism on competitiveness,
and iv) the effect of Russia’s war against Ukraine on mitigation costs. Given the
short time horizon of the analysis (until 2035), the model does not assess the positive
economic benefits associated with fewer climate impacts and extreme climate events.
‘Fit for 55’ policies are projected to lead to a loss of GDP per capita of 2.1% in
2035 compared to the reference scenario (pre-‘Fit for 55’ policies), reflecting increasing
production costs on the back of higher carbon pricing. Higher carbon pricing is also
projected to lead to a loss of competitiveness in energy-intensive industries. The
EU’s proposed Carbon Border Adjustment Mechanism may only partly mitigate the loss
of competitiveness of energy-intensive industries. Harmonising carbon pricing across
sectors would help limit the loss to GDP per capita, as a uniform carbon price is
lower and allows for directing emission reduction efforts to sectors and countries
with the lowest abatement costs. Finally, Russia’s war against Ukraine has not substantially
increased the GDP costs of mitigation. Without the war, lower fossil fuel import prices
would have led to higher fossil fuel demand, ultimately requiring more stringent mitigation
action.
Published on November 20, 2023
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