The Use of Computable General Equilibrium Models in Evaluating Environmental Policy

Abstract

This article reviews recent developments in utilizing computable general equilibrium (CGE) models to analyse environmental policy. The models are classified along several dimensions, including the scope of the model (single country vs. global), the time horizon of the model (static vs. dynamic), and the policies under study. The use of such models in environmental economics is a relatively new phenomenon, despite the fact that they are eminently suitable for analysing environmental issues. Indeed, they are the only models which can give an accurate assessment of both costs and benefits of policy changes. There is a basic trade-off between the institutional realism of the model and its mathematical tractability. Given this trade-off, it is more important to make the models reflect the actual economy under study, even if it has to be done at the expense of theoretical purity. Unfortunately, most of the models developed to date have concentrated on the costs of environmental improvements while neglecting the benefits.