Carbon leakage and competitiveness: Socio-economic impacts of greenhouse gas emissions decrease on the European area until 2050

In order to limit global warming on 2°C, the European Council confirmed the objective of reducing greenhouse gas emissions by 80% by 2050, with milestones in 2030 and 2040 to reduce emissions by 40% and 60% respectively, compared to 1990 levels. The reduction requires that sectors of the economy adapt to the new environmental policies in order to remain competitive on the global landscape, specially the energy producing and energy intensive sectors. This work is part of the REEEM project, financed by the European Commission through the Horizon 2020 Research and Innovation program. The objective of the project is to gain comprehensive understanding of the system-wide implications of energy strategies which focus on the transitions to a competitive low-carbon EU energy society, as described by the Strategic Energy Technology (SET) Plan. This paper uses the results obtained from a REEEM pilot analysis to investigate two different pathways for carbon emission reduction: an EU-wide reduction of 80% versus a national reduction of the same amount on each member state of the EU-28 until 2050. The work assesses the significance of energy and CO2 costs for EU energy intensive industries. Through the evaluation of several indicators, such as competitiveness, carbon leakage, GDP growth and others it is possible to quantify the economic impacts of European climate policies in a global context. The idea behind is that policies have direct influence over energy prices and affect directly the energy intensive industries, as energy and electricity in particular make up a large share in manufacturing costs. Furthermore, suboptimal burden sharing within the EU is supposed to raise the electricity price and, thus, reduce the European competitiveness. A recursive-dynamic Computable General Equilibrium (CGE) model with detailed specification of the energy sector is utilized for this analysis as it is capable of simulating and quantifying the macroeconomic effects of energy and environmental policy interventions in terms of economic costs, as well as the interaction of the different actors of the economy on a closed circular flow of income.