Environmental Policy in the F.R.G.: its Economic Costs and the Sectorial Impact

This paper extends and applies input-output techniques to quantify the impact of environmental targets pursued within the Federal Republic of Germany. In particular, the simultaneous adaptations of consumers and producers to the structural changes and induced shifts in relative prices due to abatement efforts are investigated within a general equilibrium framework. Assuming an efficient environmental policy, i.e. internalizing the external costs, the following empirical results are obtained: current environmental targets will induce a comparatively minor loss of the gross domestic product; hence a welfare gain may result from such a policy (although the positive aspects itself have not been quantified). This positive result masks some problems at a more disaggregated level. In particular, some sectors may face significant reduction in economic activity. Since these sectors are similar to the ones already hurt by the hikes in energy prices and other structural changes, environmental considerations will accelerate the structural changes. This process may create and aggravate already existing economic and political tensions.