Applied General Equilibrium Modeling for Environmental Policy Analysis

Abstract

Given the challenge to more restrictive environmental regulation by groups in society, it is becoming more and more important to quantify the costs of such a policy. Applied general equilibrium (AGE) modeling is becoming a widely used tool for this purpose. The objective of this paper is to present the conceptual framework for modeling the effects of unilateral environmental control policies on a country’s economy. Especially unilateral actions, e.g. a CO2 control by a small country, will cause a loss of international sector competitiveness in energy intensive industries. AGE models for assessing these effects become more and more sophisticated. From a scientific point of view, research to attenuate some of its unrealistic assumptions is desirable. From a pragmatic point of view, the variety of conceptual approaches makes it more and more difficult to understand, why a certain target for CO2 emissions, e.g., calls for a tax rate of $20 by one model builder and $300 by another one. In this paper we will survey some technical details in setting up AGE models. We will also present some results from introducing a cost-effective environmental policy in air pollution or from introducing a CO2 tax. We will not, however, present a complete survey of the state of art in AGE modeling for environmental policy analysis.