The Effects of Environmental Fiscal Reform in Germany: A Simulation Study

Abstract

This paper presents the first comprehensive, model-based impact analysis of the German environmental fiscal reform, addressing the effects on CO2 emissions, economic growth, employment, and personal income distribution. Both an econometric input-output model and a dynamic computable general equilibrium model are applied in order to enhance the credibility of our results. The macroeconomic results are linked with a micro-simulation model of the household sector, so that detailed household data can be used to determine the effect of the environmental fiscal reform on personal income distribution. We find a small "double dividend" in that energy consumption and CO2 emissions decrease while employment rises. The impact on economic growth is found to be minimal. The fear that the environmental fiscal reform might interfere with the goals of social and income-distribution policy is found to be largely unjustified.