CGE modeling with disaggregated pollution treatment sectors for assessing China's environmental tax policies

Abstract

This research involved constructing a computable general equilibrium (CGE) model for assessing China's latest environmental tax policies. Most environmental CGE models link pollutant emissions to the standard CGE model only by pollution coefficients per unit of sectoral output, and the emission reduction process is not included within production structures. We constructed separate pollution treatment sectors for solid waste management, wastewater management, and waste gas management to describe the pollution treatment processes and identify how policies affect production activities. We compiled the satellite accounts of 18 pollutants from the China Environmentally Extended Input-Output (CEEIO) dataset covering primary gas, water, and solid pollutants and disaggregated the electricity sector into six different production technologies: hydroelectricity, coal power, gas electricity, oil electricity, nuclear power, and renewable energies. We drew two primary conclusions from the simulation results. First, the environmental policies examined could help reduce the emissions of most kinds of pollutants, but also negatively affect GDP. GDP loss by 2030 would be 0.03% in the low environmental tax scenario (LowET), 0.06% in the high environmental tax scenario (HighET), 0.16% in the low environmental tax and low carbon tax scenario (LowETC), and 0.34% in the high environmental tax and high carbon tax scenario (HighETC). SO2 emissions would decrease by 17.4%, 21.0%, 19.3% and 24.5%, respectively, and CO2 emissions would reduce by 0.9%, 1.7%, 5.8% and 11.0%. Second, despite the minor changes in the economic impacts, the effectiveness in pollution treatment of environmental tax policies is underestimated if the pollution treatment sectors are disaggregated in the CGE model. Take the SO2 for an example. The calculated SO2 reductions will increase from 8.95% to 24.46% after disaggregating the pollution treatment sectors in HighETC scenarios.