The Costs of the EU Energy Package for Finland - a Model-Based Assessment

The European Union has committed to cutting its greenhouse gas emissions by an average of 20 per cent by the year 2020. In addition, there is a commitment to increasing the share of renewable energy within EU to 20 per cent of energy consumption, also by the year 2020. Finally, energy saving is also given a 20 per cent target by 2020. The European Council accepted the Energy and Climate package in December 2008, making the targets binding for all member countries. This study evaluates the long-run effects of the package from the Finnish point of view. The study utilises specific sectoral models and a CGE model to evaluate the effects of the full climate and energy package. The effects of specific policy measures on the choice of fuels and energy saving within industry and the energy sector are based simulations carried out with an engineering model, while the potential for increased domestic stumpage has been evaluated with forestry models and the potential for crop-based feed stocks for biofuel production, in turn, with agricultural models. Estimates on the potential for energy saving stem from several sectoral studies using also micro level data. The effects on the economy are studied with the VATTAGE model, a dynamic CGE model of the Finnish economy based on the MONASH-model. Our sectoral effects indicate that the energy package accelerates structural change towards a more service-based economy. This may prove challenging, unless productivity growth in the service sector is increased, since the service sector is under increasing pressure coping with the demand of an ageing population. Our regional results also point to structural change in regions that are affected by the slower growth of energy-intensive industries. Finally, we find that the distributional effects of the energy package are surprisingly small, contrary to previous studies on the distributional effects of energy taxes. This is due to the energy package encompassing all energy, not just transport fuels whose consumption shares are larger in lower-income groups. The package thus also increases the costs of the non-fuel energy use of wealthy income groups, distributing the costs of the package more evenly.