Short-run impact of the EU Climate and Energy Package on the Polish Economy

The EU Climate and Energy Package has recently became a hot topic in Poland due to the fact that the first important emission reductions will be introduced in 2013. Moreover, Polish economy is relatively CO2 intensive, as most of the electricity and heat generation is based on coal and some of the important industries (such as metal or mineral industries) are large emitters on their own. The aim of the study is to analyze the short run impact of the EU Climate and Energy Package on the Polish economy. Most of the available studies, are focused on long term reallocation of resources due to a deep change in production technologies. Our approach purposedly focuses on the short-run reaction of the economy to the shock, before the persistent structural change takes place, thereby allowing for short-term policy conclusions (such as the case for easing the economy response through active social and labour market policy). We use a highly dissagregated computable general equilibrium model with 39 producing sectors and 10 households. We base our estimate of CO2 emission for 2013 and 2014 on the projected industry output levels. We impose a cost shock on firms as a proxy for the required purchase of the tradeable emission permits. Some of the revenues from theirs sales are channeled to the government budget.The results show a relatively mild response of the economy to a seemingly significant shock in the costs of production. GDP falls by 0,1% in the baseline scenario in 2013 and 2014 and up to 0,3% and 0,4% respectively in a scenario with relatively high prices of the tradeable emission permits. There is a considerable negative effect on private consumption which drops by 0,4% in both 2013 and 2014, due to both increased prices and a drop of disposable income. While the reaction of the economy depends on the flexibility of the labour market and the response of the investment demand, we observe that while budget-neutral transfers to the households provide dampen the private consumption response, lowering of labour costs boosts economic activity, leading to some degree of the so-called “double dividend”.