THE EFFECTS OF LONG-RUN EMISSION TARGETS ON THE FINNISH ECONOMY

This study evaluates the long-run effects in Finland of abatement of greenhouse gases with two applied general equilibrium models. Cutting emissions by 20 per cent would cause GDP to fall by as much as 3.4 per cent in the short run, leading to significant employment effects. In the long run, the labour market may recover, which shifts the burden of adjustment more on the capital markets. It seems likely that energy-intensive industries will contract as a consequence of climate policies. Employment may recover, if the labour markets are flexible enough in the long run. The results highlight the importance of permit prices and CDM prices for the cost of mitigation. Extending participation to flexibility mechanisms would appear very important for the Finnish economy.