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International Monetary Fund. European Dept.
This paper focuses on the convergence performance of euro area countries before and after euro introduction. The analysis compares per capita incomes across countries, both for the initial group of twelve countries that adopted the euro before 2002 (the so-called EA-12) as well as the current group of 19 euro area members (EA-19). The convergence process has stalled since the introduction of the euro, except for new euro area members which reduced their income gaps vis-à-vis the founding members until their adoption of the common currency. The convergence of income levels is not a prerequisite for a functioning monetary union, but has been considered an important objective of the European economic integration process. Lagging productivity growth in countries with lower initial GDP per capita is found to be the main explanation for the lack of convergence, suggesting that structural reforms can help to restart the convergence process.
International Monetary Fund. European Dept.
This Selected Issues paper analyzes the wage moderation in the Netherlands. Wage growth has been subdued in the Netherlands despite tighter labor market conditions in recent years. Besides various cyclical factors, rising labor market flexibility may have contributed to the wage moderation in the Netherlands. Like other advanced economies, slower productivity growth and lower expected inflation are important drivers to the wage moderation in the recent years. In addition to that, remaining slack in the labor market also weighed on wage growth. Going forward, wages are expected to grow faster given higher expected inflation, foreign wage spillovers, and tightening labor market.
Mr. Jiaqian Chen, Maksym Chepeliev, Mr. Daniel Garcia-Macia, Ms. Dora M Iakova, Mr. James Roaf, Ms. Anna Shabunina, Dominique van der Mensbrugghe, and Mr. Philippe Wingender

energy prices. In fact, some EU countries already have—or are planning to raise—carbon prices well above the ETS price. If increasing carbon prices beyond a certain point proves to be politically difficult, policymakers could consider complementary tools such as feebates, subsidies, or regulations. These instruments reduce the explicit carbon price necessary to achieve climate goals but tend to be less economically efficient as they operate through only a subset of mitigation channels and do not generate fiscal revenue. The transition to a low-emission world will

Mr. Jiaqian Chen, Maksym Chepeliev, Mr. Daniel Garcia-Macia, Ms. Dora M Iakova, Mr. James Roaf, Ms. Anna Shabunina, Dominique van der Mensbrugghe, and Mr. Philippe Wingender
This paper aims to contribute to the debate on the choice of policies to reach the more ambitious 2030 emission reduction goals currently under consideration. It provides an analysis of the macroeconomic and distributional impacts of different options to scale up the mitigation effort, and proposes enhancements to the existing EU policies. A key finding is that a well-designed package, consisting of more extensive carbon pricing across EU countries and sectors, combined with cuts in distortionary taxes and targeted green investment support, would allow the EU to reach the emission goals with practically no effects on aggregate income. To enhance the social and political acceptance of climate policies, part of the revenue from carbon pricing should be used to compensate the most vulnerable households and to support the transition of workers to greener jobs. A carbon border adjustment mechanism could complement the package to avoid an increase in emissions outside the EU due to higher carbon prices in the EU (“carbon leakage”). From a risk-reward perspective, the benefits of reducing the risk of extreme life-threatening climate events and the health benefits from lower air pollution clearly outweigh the costs of mitigation policies.
Mr. Jiaqian Chen, Maksym Chepeliev, Mr. Daniel Garcia-Macia, Ms. Dora M Iakova, Mr. James Roaf, Ms. Anna Shabunina, Dominique van der Mensbrugghe, and Mr. Philippe Wingender

weighted average of the current EU ETS price and non-ETS carbon prices). In the baseline, the associated fiscal revenue is transferred as a lump sum to households. GDP and population growth forecasts are from the IMF April 2020 World Economic Outlook , whereas energy efficiency is assumed to improve by 1.5 percent annually, in line with gains in the previous two decades. 7 Electrification increases by 50 percent by 2030 (in proportion to the 2014 electrification rate) in all sectors except transportation, which sees a 75 percent rise. Modest renewable energy share

Mr. Jiaqian Chen, Maksym Chepeliev, Mr. Daniel Garcia-Macia, Ms. Dora M Iakova, Mr. James Roaf, Ms. Anna Shabunina, Dominique van der Mensbrugghe, and Mr. Philippe Wingender

for renewable technologies and infrastructure) and improvements in energy efficiency fueled surpluses by reducing the demand for allowances ( Perino, Ritz, and Van Benthem 2019 ). A Market Stability Reserve (MSR) was introduced in January 2019 to reduce the volatility of ETS prices. A large accumulated surplus of allowances weakens the carbon price signal. The MSR puts a fraction of surplus allowances into a reserve when the surplus exceeds a certain threshold. Following the announcement of the MSR, the ETS price has strengthened. However, some academics argue

International Monetary Fund. European Dept.

Sectors in Total GHG Emission, 2019 9. Electricity Production by Sources of Energy, 2019 10. ETS Prices, 2008–2022 11. GHG Emissions Projections, 2020–30 12. GHG Emissions Projection for Transport, 2019–30 13. Environment Tax Revenues, 2019 14. Carbon Price Assessment Tool Simulation Results for EUR50 per ton of C02 eq. Carbon Tax by 2027, 2020–35 15. Relative Mean Consumption Effect of EUR30 per ton C02 Eq. Carbon Tax, 2025 APPENDIX I. Alternative Estimate of Distributional Impact of Carbon Tax References

International Monetary Fund. European Dept.

small industry such that national level targets for non-ETS emissions in 2030 are met; ETS Price raises the ETS emissions price in 2030 to limit EU ETS emissions to 43 percent below 2005 levels. 7. Average costs per ton of CO2 reduced are high for vehicle emissions standards and energy efficiency regulations for the power sector and non-ETS sector . Combined total economic costs from all envisioned policies are 1.9 percent of EU GDP (€380 billion) in 2030 or €273 per ton of CO2 reduced ( Figure 1c and d ). The average cost of vehicle standards exceeds €600 per