Efficiency and Equity of the EU Burden Sharing Agreement

In this paper we investigate the EU Burden Sharing Agreement on the distribution of the Kyoto emission reduction target over the EU member states. We use an inverse welfare optimum approach to compute the implicit weights making the Burden Sharing Agreement a welfare optimum for the EU. This methodology enables us to visualise the efficiency-equity trade off which was made by the EU negotiators. We present simulations based on marginal carbon emission abatement cost curves estimated on data generated by the GEM-E3 Europe general equilibrium model. Our simulations reveal that the EU Burden Sharing Agreement improves in terms of cost efficiency upon a uniform reduction assignment but that substantial differences in marginal costs persist. Some poorer EU member states like Portugal and Spain have been allowed by the agreement to increase their emissions considerably but, even if we do not care about distributional justice, their allowances are too low according to the inverse optimum approach. Also Sweden, the Netherlands and Belgium should abate less in order to improve cost efficiency. On the other hand, Germany, the UK, France and Denmark should curb their emissions by more than what has been assigned to them in the EU Burden Sharing Agreement. We show that introducing a measure of inequality aversion reinforces most of these conclusions. We also apply the inverse optimum approach to a scenario in which we allow for emission trading, possibly with market power. Sensitivity analysis shows that results are rather robust with respect to assumptions concerning baseline emissions and cost functions.