Assessing Macroeconomic Effects of a Carbon Tax as a Tipping Intervention in Economies Undergoing Coal Phase-Out: The Cases of Poland and Greece

The dynamic stochastic general equilibrium Macroeconomic Mitigations Options Model (MEMO), prepared at the Institute for Structural Research (Antosiewicz et al., 2022; Antosiewicz & Kowal, 2016), is used to assess the macroeconomic effects of implementing a carbon tax. The model combines (1) input-output and (2) general equilibrium modelling and is a well-grounded tool in terms of assessing the impact of energy and fiscal policies used in Horizon projects such as Transrisk (Antosiewicz et al., 2020; Nikas et al., 2020) and World Bank works (Antosiewicz et al., 2020; Antosiewicz et al., 2022). The model consists of the household sector, which maximises utility from consumption and leisure; the firm industry, which maximises profits; the government sector, responsible for collecting various taxes and financing public consumption; and a foreign sector, responsible for trade with other countries (Antosiewicz & Kowal, 2016). The model’s main features include the sectoral firm’s division, calibrated to the input-output matrix, search and matching on the labour market to the model transition of workers between industries, and endogenous adaptation of technology related to energy use.

The sectoral structure of the model is calibrated based on the 2015 Polish and Greek activity by activity, input-output matrix from the Eurostat statistics database (Eurostat, 2023), using the NACE Rev. 2 statistical classification of economic activities in the European Community (Eurostat, 2008). In the model, we distinguish (1) agriculture and forestry, (2) mining and quarrying, (3) light manufacturing, (4) energy-intensive manufacturing, (5) advanced manufacturing, (6) refined petroleum products, (7) energy, (8) construction, (9) transport, (10) market services, and (11) public services.

There are several distinct sets of parameters whose values need to be calculated. The main ones are the parameters governing the firm and production side of the model. These parameters can be further specified as those which govern the value-added structure of the sectors, investment, and compensation of employees in each industry, the intermediate use structure, which considers domestically produced and imported goods, and a final use structure, which also considers domestically produced and imported goods (Antosiewicz et al., 2022). Each firm operates a production function which utilises a nested constant elasticity of substitution (CES) specification to combine the factors of production. In the first stage, the firm combines capital and energy; the second stage consists of adding labour. This bundle is combined with materials (intermediate use) in the final step. The material bundle is composed of products of each sector, which are further disaggregated into imported and domestically produced parts. On the use side, the goods produced by each industry are purchased by households for private consumption, by the government for public consumption, by firms as investment, or they can be exported (Antosiewicz et al., 2020).

To calibrate the firm side of the model, the Eurostat database’s input-output (I-O) matrix was used and modified to the scope of this study. In particular, it was necessary to disaggregate some sectors and products shown as a single activity in the I-O matrix to model the effects of energy and environmental policies.

MEMO directly models CO₂ emissions from coal, oil and gas. The volume of CO₂ emissions in a particular sector is modelled as a linear function of the use of these fuels, with coefficients set to match sectoral data regarding emissions (Antosiewicz et al., 2022). Other non-CO₂ emissions, such as those resulting from agriculture or captures in the forestry sector, industrial processes, and waste processing are not directly modelled. Such emissions are treated as indirect in the post-processing phase of the modelling exercises. In the case of a carbon tax simulation, the MEMO agents only react to the fossil fuel emissions, which are modelled directly and do not, for example, reduce output in the agriculture sector to cut non-carbon emissions.

Poland and Greece were selected as case study countries to assess the carbon tax as a potential trigger for the significant qualitative structural change in the decarbonisation pathway, considering (1) the lack of research regarding their potential for carbon tax implementation, (2) the differences between their coal phase-out horizons and economies, and (3) the similarities between carbon-intensive industries in their CCIRs.

Poland and Greece have not been the subject of many empirical studies on carbon tax implementation. For example, relevant analyses for Greece are limited to a couple of studies which assess the impact of a carbon tax on Greek manufacturing (Floros & Vlachou, 2005) and vehicle tax reforms (Adamou et al., 2012). For Poland, the exception is a few studies about the distributional effects of a carbon tax: direct and indirect effects and the employment channel, using macro and microeconomic models (Antosiewicz et al., 2022; Postoiu et al., 2022). These studies emphasised different distributional effects of revenue recycling mechanisms, dependent on the economic policy target. They suggested further research on countries with an existing share of coal in the energy mix (Antosiewicz et al., 2022).

As shown in Table 1, Greece had a slightly larger GDP per capita than Poland in 2020 and much lower emissions per capita in the same year. Poland has one of the most carbon-intensive economies in the EU (Alves Dias et al., 2018), which can be mainly attributed to the contribution of the Polish CCIRs to the national economy (about 87,600 people working in coal mining and 51,200 more in associated industries only in Upper Silesia (Frankowski et al., 2022)). Both countries set different coal exit dates (Poland in 2049 and Greece in 2028) and, consequently, are at different stages of the coal phase-out. Moreover, Poland and Greece experienced other macroeconomic trends and implemented various fiscal and economic policies in the previous decade. After the financial crisis of 2008, Greece implemented many austerity measures, significantly increasing the unemployment rate and reducing wages (Table 1). On the contrary, Poland was the only EU Member State that maintained stable economic growth since 2000 and avoided the economic depression that followed the financial crisis (World Bank, 2023).

Both countries maintain carbon-intensive industries in CCIRs. In Poland, there are three hard coal regions (Upper Silesia, Lesser Poland, and Lubelskie Region) and three lignite regions (Greater Poland, Lower Silesia, Łódzkie); in Greece, there are two lignite areas: Western Macedonia and Megalopolis (Fig. 1). This book chapter examines sectoral transitions in two regions studied within the TIPPING+ project: hard coal mining and coal-based energy sector in Upper Silesia and lignite extraction and lignite-based energy sector in Megalopolis. During the project timeline (2020–2023), authorities in both regions discussed Territorial Just Transition Plans towards new development pathways.

Two maps of the locations of coal basins and power plants in Poland and Greece, with shaded regions. A visual representation of the carbon-intensive industries in both countries is given.

Upper Silesia is Poland’s second most populous region (4.4 million people, according to the most recent national census data from 2021). Most Upper Silesia inhabitants (76.5%) live in cities, and the region has the highest population density in Poland (357 people per km² in 2021; the national average is 122 people per km²). The centre of the region is the Katowice conurbation, historically developed around coal mining and other traditional industry branches. Upper Silesia concentrates 80% of domestic hard coal extraction and the vast majority (89%) of total employment in coal mining (Mazurkiewicz et al., 2023).

Megalopolis is part of the Arcadia regional unit, which is part of the Peloponnese region. According to the most recent census (2021), the municipality of Megalopolis has a population of 8784 people and covers an area of approximately 722.6 km² (Hellenic Statistical Authority, 2011). Megalopolis retained a rural character until 1970, when the Public Power Corporation (PPC) began lignite extraction in its deposit, establishing the region as both an upstream and downstream CCIR. Hence, Megalopolis became an important energy centre due to the abundance of lignite reserves in its basin subsoil. Since then, the dominant activities in Megalopolis have been lignite mining and lignite-based power generation, employing a significant percentage of the local workforce (Independent Power Transmission Operator, 2021). Indicatively, 1600 direct and 3100 indirect jobs are provided from the total lignite value chain, constituting 60% of all Arcadian regional energy sector (Baker et al., 2022).

We consider two carbon tax scenarios representing a rapid (Tax 1) and a moderate (Tax 2) increase trend along the years. The scenarios are based on the Network for Greening the Financial System outputs, generated by state-of-the-art, well-established integrated assessment models (IAMs), namely MESSAGE-GLOBIOM and REMIND-MAgPIE (NGFS, 2021). Both tax scenarios achieve a CO₂ reduction target in Poland and Greece (Table 2), which is in line with the 2 °C Paris Agreement climate mitigation target. Tax 1 is calculated based on the MESSAGE-GLOBIOM, and Tax 2 is based on the REMIND-MAgPIE. In the two scenarios, the values of carbon taxes are identical in both countries, yet they yield different results regarding CO₂ emission reduction. We applied a short-term perspective (until 2032)—considering that a 10-year horizon is, on the one hand, a relevant period to observe some specific macroeconomic shifts and, on the other hand, keep a relevant and understandable policy perspective.

Our findings highlight that countries with more carbon-intensive economies, such as Poland, achieve a lower reduction in GDP carbon intensity than countries with less carbon-intensive economies, like Greece, for the same carbon tax levels. This means that countries with more carbon-intensive economies require higher carbon taxes to follow carbon-intensity trajectories similar to those of less carbon-intensive economies. Therefore, a carbon tax could be considered a tipping intervention for the decarbonisation of the economy. However, the tipping point triggered by the intervention could negatively affect the GDP of carbon-intensive economies. Consequently, such potential adverse effects must be minimised with direct support for economic and social adjustments, such as investment subsidies, employment programmes and direct transfers.

The results of this study confirm more substantial socioeconomic impacts of a carbon tax in terms of GDP and unemployment in the highly industrial and carbon-intensive Polish economy. In Poland, the significant decrease in total employment concerns mining, as a primary sector prone to decarbonisation, construction and also energy-intensive and advanced manufacturing. The potential employment losses suggest that carbon tax would accelerate coal phase-out and cause structural changes in the mining industry. For Upper Silesia, the largest Polish coal region, due to demographic and economic trends and favourable institutional arrangements, the future employment outlook of the coal phase-out is more advantageous and easier to manage than in the past (Sokołowski et al., 2022). The challenge would be salaries and working conditions, as only some companies in coal phase-out regions can meet the expected compensation and security (Christiaensen et al., 2022).

Nevertheless, Polish large-scale companies’ strategies consider the increasing role of climate policy in the global economy and supply chains. These strategies of both state-led and private companies should be treated as early signals for accommodating a more dynamic energy transition pathway in Poland, which can further lead to a tipping point. Regardless of the planned form of carbon pricing, Polish businesses declared adopting cleaner energy technologies to maintain competitiveness in the long run, also considering recent energy price hikes. In 2021, KGHM, a copper company from Lower Silesia and Synthos, a chemical industry from Lesser Poland, announced readiness to invest in small nuclear reactors. ZEPAK, a private lignite mining and energy conglomerate in the region of Greater Poland, switched from lignite-fired power generation to biomass and started investing in photovoltaics and hydrogen technologies, as well as lobbying for locating a second nuclear power plant in the area of previous extraction. Also, state-led energy conglomerates announced their carbon neutrality plans earlier than the Energy Policy of Poland, which finally declared coal phase-out until 2049. Implementation of a carbon tax (or other carbon pricing mechanism) could probably accelerate such moves, seek innovative solutions, and enforce investments.

On the other hand, the carbon tax may cause various tensions, especially in the short run. In Poland, the effects of a carbon tax could be tough to address for vulnerable households that use coal and gas heating (Sokołowski et al., 2023). With a high inflation rate (almost 15% in 2022), the additional burden on the fuel tanked, or the price of coal would lead to social discontent and undermine overall climate policy efforts. Therefore, mitigation redistributive policies are needed to avoid escalating energy poverty, losing jobs, and growing social discontent. Particular attention in terms of national policy, except necessary large-scale energy transition investments, should be paid to mitigate possible new inequalities and provide decent working conditions in the activities that the energy transition will foster.

In Greece, the effect of carbon tax implementation would be more modest and mainly affect the value-added in the service sector. In terms of employment, the carbon tax would mainly affect the services employees, as well as agriculture and construction workers, due to the exposures of these sectors to the price changes and their contributions to the overall employment. Yet, the effect on the energy sector, especially for CCIRs, would not be negligible. According to the new Greek National Energy and Climate Plan proposal, all lignite power plants are planned to be shut down by 2028. A recent analysis of the socioeconomic impacts of the lignite phase-out process at the national level has shown that, in the absence of compensatory measures, the lignite phase-out could reduce the country’s annual GDP by 1.6 billion €, total employment in the country by 19,200 jobs, and income by 425 million € in 2029 compared to 2019. The impacts will mostly affect the local economies of Greek CCIRs in Arcadia, Florina, and Kozani (Maniatis et al., 2020). Furthermore, with this decision, Greece would shut down its only non-renewable, dispatchable generation fleet, which operates with domestic resources. Thus gas would serve as the intermediate fuel towards a RES-dominated energy system. Even with the ambition for accelerated RES investments, a fully RES-based system might take decades to materialize. Therefore, imposing a carbon tax on a country with no alternatives besides renewables could impede employment and economic viability in the short term since it would pose an extra burden to the current regime, which is already stressed. However, in a long time, as renewable capacity increases and given the lessons learnt from relying almost solely on imported fuel for power generation during the energy crisis, a carbon tax could foster quicker decarbonisation efforts and accelerated green power investments, which could also increase the employment opportunities, especially during the construction phase.

The carbon tax will disproportionally affect CCIRs. The sectoral statistics and bottom-up studies allow us to conclude that CCIRs and their inhabitants may face more substantial consequences than people in other country areas. It is noteworthy that the coal industry employees and those indirectly associated with mining will be affected. Studies about Megalopolis and Upper Silesia suggested similar second-tier affected sectors, i.e., manufacturing and trading basic metals, fabricated metal products, machinery and equipment in coal mining (Frankowski et al., 2023; Hellenic Ministry of Environment and Energy, 2021). These industries should be strongly considered in the discussion about decarbonisation in countries conducting coal phase-out, as they soon face the consequences of decreasing demand for their services.

Based on the results of this study, we show that the consequences of a carbon tax adoption would affect both coal regions. However, Upper Silesia possesses relatively higher transformative capacities, such as a dense institutional ecosystem, a clear development vision, relatively favourable economic conditions, and a diversified economy for the gradual pathway towards coal exit. Regarding megatrends in labour supply, Upper Silesia is in a relatively stable market, as the region experiences positive educational and labour market shifts. Through 30 years of transformation, the socio-economic structure is more resilient to external shocks, with various industries and a better-educated and qualified workforce (Sokołowski et al., 2022). Nevertheless, because of the scale of the coal and carbon-intensive activities, Upper Silesia will require financial support and institutional efforts to shift towards modern, advanced industries, such as advanced automotive (e.g. electromobility) or endogenously developed IT services (Micek et al., 2022). Regarding possible effects on households, the regional government proactively decided to prepare coal region citizens to adopt cleaner heating modes. The domestic household transition in Upper Silesia is relatively fast, mainly where the state provides convenient subsidies (Mazurkiewicz et al., 2023). Many people also use coal-based district heating, which ETS-I already covers, so the region—especially in light of the coal shortage in 2022—should smoothly adapt to the new heating modes compared to the more rural, dispersed areas of the country. Upper Silesia also remains the region with the lowest energy poverty rate in Poland, less than 5% in 2021. The issue here is costs, as many people before the Russian aggression in Ukraine preferred to install gas, and still, a lot, including miners, use coal which can be bought directly from the mine. So, in this way, the regional authorities still need to accelerate policies to secure clean and affordable energy services at home.

On the contrary, the economy of the Megalopolis, which is mainly based on the energy and mining sector, will undergo an abrupt pathway towards lignite phase-out (Hellenic Statistical Authority, 2019). At the Megalopolis level, by 2025 (when the lignite-fired units will close), Arcadia’s gross domestic product, employment, and income could fall by 18%, 9%, and 19%, respectively, compared to 2019 levels (Maniatis et al., 2020). These impacts could be particularly severe because they are geographically concentrated in Megalopolis. Given the positive effects of the carbon tax on creating new green jobs in the Greek energy sector and the solar energy potential of Megalopolis, the region could seize this opportunity to reskill the local workforce in green technologies and thus retain its role as an energy hub. However, as mentioned by local stakeholders during the consultation process held in early 2023, renewable energy technologies can absorb a significant workforce during the construction process. Still, during operation, job opportunities would be few. To mention an indicative number, the 100 MW of photovoltaics, currently being constructed in Megalopolis, will temporarily provide jobs for 300 people at the construction stage. When the construction is complete, the job openings for operation and maintenance are not expected to be more than 30. Considering that 400 employees are expected to lose their jobs with the coal phase-out (half of the employees; the other half is at retirement age), Megalopolis needs a more diversified business model for its just energy transition. The plans for establishing a business park in the region are not promising since spatial restrictions (i.e., required distance from train stations, temples, and natural gas networks) hinder its realization.

Decentralised generation and formation of energy communities could be an opportunity for increased job opportunities and actively engaged citizens. In parallel, building energy upgrades could decrease citizen’ energy costs, limiting the effect of wage decreases. Nevertheless, Megalopolis is missing an opportunity for just transition. Through the Just Transition Fund, the installation of gas boilers is underway free of charge for all the households of Megalopolis. While this might look attractive for the citizens, a relevant analysis from the authors highlights that investing in electrification from the beginning instead of using natural gas as a transition fuel yields better economic and environmental benefits in the long term (Katiforis et al., 2022). Therefore, Megalopolis might be headed towards a new fossil fuel lock-in, at least in the household sector. Especially with relevance to the carbon tax implementation, when applied to households (for example, through an expanded ETS to the building sector), investing in natural gas for heating could increase the energy poverty phenomenon of the city.

To some extent, this remains the case in Upper Silesia, where under the rationale of clean air rather than climate policy, many people in 2018–2021 used public subsidies to replace coal sources with gas in most cases (Mazurkiewicz et al., 2023). Although the situation changed in 2022 (Matczak et al., 2023), adapting modern and cleanest domestic technologies remains moderate as the society has not yet been prepared to do the ‘leap frog’ due to economic and cultural reasons.

In September 2022, the European Commission and the European Investment Bank (EIB) agreed on a public-sector loan mechanism (part of the Just Transition Mechanism) which will provide funding of up to 10 billion € in the form of EIB loans, combined with 1.5 billion € in EU budget grants for public investments in CCIRs (European Investment Bank, 2022). This agreement followed announcements made in July 2021 that CCIRs across Western Macedonia and Peloponnese would benefit from new investments of up to 325 million € supported by the European Investment Bank, as well as related grants provided by the European Union in support of the Greek Just Transition Development Plan (European Investment Bank, 2022). In Poland, multiple subregions (e.g., Koniński, Wałbrzski, Rybnicki, Bytomski, Gliwicki, Sosnowiecki, Tyski, Katowicki, Bielski) can count on support from the Just Transition Mechanism which will be channelled in regional operational programmes. The highest amount of JTF funds, almost 2.5 billion €, went to the Silesia region with seven subregions. Hence, the additionality of these funds is also strongly visible against the background of other Polish coal regions’ regional programmes (Fig. 6). However, it does not provide the highest allocation per capita as Lubelskie, a region located in Eastern Poland with one sizeable hard coal mine (Bogdanka) without plans to downscale the production (and JTF allocation), got a first place due to other regional policies focused on levelling the playfields between various areas of Poland.

A stacked bar graph of Euros in billions from 0 to 6 versus the percentage of total energy used by energy sources and Euros per capita. The Silesia region receives the highest amount of funds.

Funds from the Just Transition Mechanism can be a catalyser of potential tipping point triggers. The issue is the appropriate policy operator and political decision, namely who and in what way will manage and redistribute the available funds, as these can be spent on various aims—e.g., direct cash transfers to the households to mitigate the regressive budget effects or subsidies to clean and more efficient technologies. In this way, the Just Transition Mechanism can compensate for the external effects of ambitious climate policy in CCIRs. However, other compensatory mechanisms should also be considered, such as direct transfers with targeted energy support and subsidies for less affluent members of society to enable them to participate in the energy transition, funds recycled from the existing Emissions Trading System (ETS), and compensatory mechanisms in relation to ETS-II, such as the Social Climate Fund which should be operating since 2026 (European Parliament, 2022a, 2022b).

Carbon tax implementation requires policy interventions to mitigate the social costs of the transition. The resources collected from the carbon tax should boost the financial transfer for the transition of CCIRs. Guided by these suggestions, the revenues collected from carbon tax should (1) be earmarked and targeted to avoid transferring revenues for purposes other than mitigation and compensatory policies, (2) boost Territorial Just Transition Plans in CCIRs and sectors particularly vulnerable to decarbonisation (not spatially concentrated), and (3) ensure safety nets and retraining programmes for at-risk employees, and support regional and local institutions such as SMEs and cooperatives to build transformation capacities.

However, one of the most crucial challenges would be establishing a tangible link between the recycling revenues and current policy to make this mechanism understandable to society (Mildenberger et al., 2022). Even though the macroeconomic consequences of a carbon tax in both countries seem manageable, it would be tough to proceed with this tool under the present unstable socio-economic situation, including energy price spikes and very high inflation rates. In that way, there is a need to strengthen the combined narrative of decarbonisation and geopolitics and communicate revenue recycling mechanisms (Sokołowski et al., 2021). With such tools in place, the carbon tax could help accelerate and adapt new energy policies and technology solutions to finally break both countries’ dependence on fossil fuels, challenge a durable regime shift in the energy sector, and enable a positive tipping point towards a more sustainable and less carbon-intensive economy.

The debate about economic interventions in the coal regions could be broader than providing information about existing compensation schemes, such as the Just Transition Fund or the Social Climate Fund. The local societies should know more about the long-term regional policy vision, programme logic, the scale of their compensation, and other nationwide policies at the intersection of social and environmental aims limiting the carbon tax burden. With such information, it could be easier to set ambitious climate policy tools and defeat the climate policy opponents’ arguments, which could eventually lead to a positive tipping point in the region’s development trajectory.

Finally, more long-term structural measures are needed to transform regional socio-economic systems. Further research is required to understand better how other energy and climate policies can offset the socioeconomic consequences of decarbonisation in CCIRs and how different tools, such as carbon tax, can be effectively combined with appropriate mechanisms that can highlight their benefits and limit their costs to foster decarbonisation efforts. Additionally, we observe a need for further regional investigations and sector-specific, granular analysis about the labour market trade-offs in other affected sectors besides mining, such as energy-intensive and advanced industries, which have yet to receive much policy attention so far. Finally, more empirical research is required to dive deeper into the regional and local levels where the socioeconomic impacts of decarbonisation are more visible. To provide a full-system transformation, we need various activities beyond economics and touching the sociocultural and institutional aspects. These will help address non-measurable elements of the energy transition connected with the history, identity, social capital, and sense of place, which are essential but often neglected aspects of regional development.

As always, macroeconomic modelling has limitations, and we would like to focus on three crucial ones for this work. First, the most recent Input-Output (I-O) tables available were from 2015. Moreover, because of the need for more information at the regional and national statistical offices (i.e., regional I-O tables for the Upper Silesia and Megalopolis), we combined insights about decarbonisation challenges at the national level with the regional economic context. Second, I-O tables from 2015, as well as the unavailability of macroeconomic data, do not allow us to introduce the implications of the COVID pandemic (2020), the energy price shock caused by increased global demand after the crisis combined with lower gas supplies and high prices of GHG emission allowances (2021) and the energy crisis stemming from the invasion of Russia to Ukraine (2022), which were undoubtedly essential events in both studied countries. As a result, the values of carbon taxation considered in the modelling might be significantly lower compared to the current reality. If the current situation persists, these findings should be treated as a historical exercise, as they provide relevant findings only regarding the structure rather than a scale. Third, following García-Muros et al. work, the exact numerical values should be treated with great caution, given that many aspects of the labour market and other details are simplified or beneath the level of model aggregation (García-Muros et al., 2021).