CPB Report 2002/4: Relocation of industries by climate change policies may remain limited

Both effects may remain modest in the coming years, but there are two important conditions: the possibility to trade reductions of greenhouse gases with other countries, for instance within a system of international tradeable emission permits.

Also, sectors have to face the same prices for emission reductions. If some sectors are spared and other sectors are charged more, macroeconomic costs will increase, since cheap possibilities to reduce greenhouse gases are not used. These conditions are especially of great importance for the Netherlands. Since the Netherlands has specialised in energy-intensive sectors and already relies heavily on natural gas, it is vulnerable for increasing energy prices and inefficient climate policy.

This article in CPB Report 2002/4 provides both a qualitative and a quantitative analysis of the consequences of climate change policies for European countries, including the Netherlands.

Theoretical and empirical literature show that climate policy will not immediately cause relocation of industries on a large scale, especially for society at large. The reason is that location decisions are influenced by many other factors than only energy taxes and environmental measures. Besides, with given environmental goals, relocation of economic activities can be a cheaper alternative than reducing the energy intensity of those activities. From a welfare point of view, a negative effect on exports or location choices does not have to be disadvantageous. Nevertheless, for some groups in the society environmental policy is a burden. Especially these groups will alter this policy. The burden will then be reallocated across society.

These conclusions are confirmed by simulations with WorldScan, an applied general equilibrium model, which is especially useful in analysing the effects on international competitiveness and sectoral structure. When the Kyoto protocol is implemented, national income in Western Europe is likely to decrease by a modest 0.2 percent on average. The relocation effects are mainly concentrated in the energy-intensive sectors. In Western Europe employment in these sectors will probably decrease by 0.4 percent on average, but there will be substantial differences between countries.

Important conditions for limited costs are international trade in emission permits and the abundance in emission permits ('hot air') in Eastern Europe and the former Soviet Union. Simulations with WorldScan show that the macroeconomic costs of environmental policy will increase sharply. The costs for Western Europe will more than double if 'hot air' will not be tendered on the international market for emission permits, or if reductions will not be internationally tradeable.

Especially the Netherlands is accessible for changes in intensity and design of the climate change policy. This is caused by a strong specialisation in energy-intensive sectors (mainly chemicals and transport) in the Netherlands and by using relatively much clean natural gas.

If policy not only aims at minimising the total costs of climate change policy, but also at minimising the relocation of energy-intensive industries, countries may face a trade-off between these two objectives. With WorldScan a quantitative analysis has been made in which the internationally operating energy-intensive sectors are spared. Indeed, the relocation effects will be smaller. The burden of climate change policy shifts from energy-intensive sectors to other sectors and consumers. On balance the macroeconomic costs of Kyoto will slightly rise. By a more efficient use of the inefficient taxation system of energy carriers, a trade-off will not emerge.

Also in CPB Report 2002/4
The article as presented above is published in the December 2002 issue of CPB Report. CPB Report is a quarterly, English language magazine, that reviews the most recent forecasts on the national and the international economy and highlights research activities. This issue contains articles on various subjects, including: Improving transparency in health care: a key role for the government; The economic geography of Europe; The cyclically adjusted budget balance: the Brussels' methodology; Ageing, sustainability and the interest rate: the GAMMA model; A new regional labour market model for the Netherlands.

Improving transparency in health care: a key role for the government
The two former Dutch Cabinets aimed to reform the Dutch health care system, and it is expected that the next Cabinet will pursue this reform after the elections of January 2003. Until now, prices and volume of health care have been highly regulated. The objective of the reform is prices and volume becoming outcome of regulated competition. Health insurers will negotiate with providers on prices, volumes and quality of the health care they purchase. Consumers will select their insurers on the price and quality of the insurance product, which includes the quality of the health providers contracted by the insurer. The government sets minimum standards for the quality of health care.

An important aspect that still needs to be worked out is transparency. In a fully transparent market all players have all the information they need on prices and quality of products and services. As transparency is a problem in Dutch health care, competition will be limited. The resigned Cabinet Balkenende puts its trust in information covenants with providers, insurers and consumer/patient organisations. However, the health care market shows several features that reduce the incentive of suppliers to reveal information and increase search costs for consumers. Patients are not able to judge the quality of health care, because the product is too complex. They can only judge quality after consumption. The reputation mechanism works poorly when customers want to choose an insurer or supplier: it often involves tailor-made services and products, which makes it hard to translate one experience to other customers. Another reason for reduced transparency is that the health care market is still in transition, customers are not fully informed yet.

Experiences in the United States indicate that the market itself is able to improve transparency substantially by developing quality indicators. However, there are important drawbacks:

• US market players in health care needed to feel a sense of urgency before starting to work on quality indicators.
• It takes a lot of time to develop quality indicators.
• Improving transparency can become a mixed blessing when one does not anticipate the risk of manipulation with indicator scores, administrative burden and collusion.

Until now, Dutch providers of health care have been unwilling to improve transparency and consumer/patient organisations lack the resources to develop quality output indicators. If the government waits with legal initiatives until things go wrong, there will be a considerable risk that transparency will be lacking for a considerable period. This implies that consumers may pay too high prices and/or receive too little quality, which may create a negative attitude towards regulated competition and diminish the chance that things change for the better after the government uses legal force.

It is important to reduce the potential risks of competition where possible. To be on the safe side, the government could play a key role in improving transparency, instead of waiting for market players to take the initiative. The government could initiate and finance a research project on the development of quality output indicators and commit all market players to participate.