Abstract
This paper analyzes and compares the effects of a common reduction of C02 emissions within the European Union to a Swedish unilateral decision to reduce CO2 emissions. For this purpose, a numerical general equilibrium model, GEM-E3, has been used as the analytical tool. The model covers all European Union countries, with production disaggregated into 18 sectors. The 13 consumption goods included are classified into three consumption categories (durable, non-linked non-durable and linked durable goods) to improve the energy allocation description. In addition, the industry exemption of C02 tax is studied. The results indicate that if Sweden unilaterally decides to increase its carbon dioxide tax, the total European Union carbon dioxide emissions will increase, i.e. there will be a "carbon leakage effect". Perhaps more surprising, a European Union multilateral implementation of a carbon dioxide tax rate will induce lower welfare (excluding environmental benefits) in Sweden, as compared to the situation where the same carbon dioxide tax is unilaterally introduced.