Computable General Equilibrium Model Research Articles

Can Regional Comprehensive Economic Partnership Alter the Direction of Global Textiles and Clothing Trade? A Computable General Equilibrium Analysis

The purpose of the article was to investigate the criticality of Regional Comprehensive Economic Partnership (RCEP) to the direction of the international trade regime of the textiles and clothing (T&C) sector. The reason for selecting this sector is because RCEP block exported 50% of the global share of T&C products in 2019. Besides, this industry has been quite important from an employment generation point of view and a leading earner of foreign exchange for many nations around the world. Given the free trade agreement and an ambitious approach towards removing the majority of tariff lines pertaining to this sector, RCEP can potentially alter the direction of T&C trade and have related spillover benefits and trade-off in the global supply chain. This study undertakes an evaluative investigation through computable general equilibrium modelling. The article tries to analyse the impact of a potential free trade agreement specific to the RCEP block on the member nation’s gross domestic product, exports, industrial production, employment and welfare. The impact on exports is reportedly a mixed bag where countries such as China and Vietnam stand out to gain enormously while a few others are expected to lose. On similar lines, production in this sector appears to rise for RCEP members such as Singapore, Vietnam, South Korea, Japan, China and Cambodia while for other members the same is seen to decline. Also, T&C trade is noticed to divert away from non-RCEP members. An important policy implication for non-member RCEP nations is to ratify individual trade agreements pertaining to T&C trade. The study shows the mitigation of the trade diversion effect of RCEP by taking India’s example and incorporating its free trade agreements in T&C trade with RCEP non-member country like the UK and then with RCEP nation like Australia. The supposed trade agreements of India have been incorporated in the main model along with RCEP.

An Evaluation of Different Tax Reform Proposals in Pakistan using CGE Model

Taxes are an important tool of fiscal policy. However, the taxation system of a country also affects its economic growth and the welfare of the people. Since a change in tax policy has far-reaching consequences for various interconnected economic agents, computable general equilibrium model is used to quantify the impact of changes in direct and indirect tax rate policies on various economic indicators. For this, first a social accounting matrix based on 2017 data is also developed. The results show that in the long run under the unbalanced budget condition, reducing personal income tax rates results in increased consumption, government expenditures, and incomes of various types of labour, but decreased economic growth and exports. However, introducing a flat and low-income tax rate along with decreasing corporate tax, sales tax, and customs duties results in higher economic growth, exports, consumption expenditures, and household income. On the other hand, a balanced budget condition produces better economic results.

Quantitative simulation of ecological compensation approaches in transboundary watersheds of China: A scenario analysis based on a multi-regional CGE model

Watershed ecological compensation is becoming increasingly important as an effective way to achieve transboundary watershed governance. The large regional differences in economic development and watershed governance across China require the implementation of regionally differentiated policies. Previous studies have not systematically examined the potential impacts of ecological compensation approaches at the regional scale in China. As the Beijing-Tianjin-Hebei region is representative of China with severe watershed problems, the establishment of a watershed ecological compensation mechanism in this region has a demonstrated effect on solving regional co-management problems. By establishing a multi-regional dynamic CGE (Computable General Equilibrium) model with water quality and quantity control as constraints, the long-term impacts of different ecological compensation methods on different districts are assessed in terms of economic development, social welfare and water environment management, based on which the preferred compensation methods for the development of the three districts and the whole region are to be identified. The study shows that: Ⅰ) Different compensation approaches have varying impacts on regional ecology and economy, and trade-offs need to be made between the two to choose the appropriate compensation approach to provide a long-term incentive for regional watershed governance and maintenance; Ⅱ) The compensating areas prefer short-term compensation such as financial subsidies, while the compensated areas prefer long-term compensation such as industrial support; Ⅲ) Financial funds can support the development of primary and secondary industries in the short term, and subsidies to enterprises contribute to the overall economic synergy of the region, while industrial support from compensating areas to compensated area requires long-term layout. Accurate measurement of the potential impacts of different ecological compensation approaches can provide a scientific basis for the establishment of a long-term ecological compensation mechanism, and the model can also be applied to other regional policies to provide a reference for solving transboundary governance issues.

Cost-effective energy development pathway considering air quality co-benefits under climate target: A case study of Anhui Province in China

Achieving the national climate targets requires the motivation of local actions. Air quality is still an important environmental issue in China that needs careful consideration in the design of energy development pathways, particularly in locations with a high‑carbon energy system. Using Anhui as a typical example, this study examines the economic costs and air quality synergies of various energy development pathways to achieve its climate goals using the Monte Carlo method and coupling a regional computable general equilibrium model and a reduced-complexity air quality model. The results show that the economic impact of the promoting electrification pathway would be 1.4–4.5% of GDP in 2035, while the loss of GDP from developing the renewable energy pathway would be only 1.1–1.4%. Compared to renewable energy development, promoting higher electrification leads to a larger air quality improvement. Therefore, the cost-effective energy development pathway requests higher electrification when considering air quality co-benefits. Results show that the optimal energy development pathway for Anhui Province in 2035 is a rate of electrification of 25%–35%, with a renewable energy ratio of 15%–25%. The study suggests an appropriate approach for optimizing energy development pathways at the regional level.

Probabilistic Risk Assessment of the Economy‐Wide Impacts From a Changing Wildfire Climate on a Regional Rural Landscape

AbstractA warmer and drier future combined with rising population trends will result in increased wildfire risk. The design of robust mitigation/adaptation strategies requires the assessment of the economy‐wide risks from potentially more frequent large wildfire events under different futures. This study uses a novel interdisciplinary approach by integrating wildfire climate and land‐use forecasts into probabilistic and simulation models of wildfires to estimate direct impacts using damage curves and indirect impacts as lost Gross Domestic Product (GDP) using a computable general equilibrium model. Based on the financial concept of Value at Risk, a probabilistic measure of extreme economy‐wide impacts was developed using GDP as the representative metric, namely “GDP at Risk (G@R),” under various climatic and socio‐economic scenarios. Using the new metric in the Waikato, New Zealand as a case study, due its primary industries' national relevance, it was identified that there is a 5% probability that the region will experience GDP losses greater or equal to NZ$0.1–1.2 billion (similar to the regional GDP growth in 2021) over a 48‐year period from future potential large wildfires affecting vulnerable primary industries. The regional impacts result in larger national GDP losses by a factor of 5 due to the high dependence of downstream sectors on the regional primary industries. While “G@R” estimates are similar across socio‐economic scenarios, there are no discernible patterns when compared across midcentury climate scenarios. The approach developed could be used to assess the consequences from afforestation projects, driven by mitigation policies, and adaptation strategies to reduce wildfire risk.

Optimal allocation of agriculture’s public budget can improve transformation and healthy diets access in Ethiopia

Agriculture is under transformation in sub-Saharan Africa where millions still do not have access to a healthy diet. Policy makers in this region should find ways to accelerate agricultural transformation while increasing access to healthy diets. Optimizing agriculture’s public budget stands out as a handy option. By combining a dynamic computable general equilibrium model and a multi-criteria decision-making technique, and applying them in the context of Ethiopia, this paper points to an important trade-off that policy makers should keep in mind. An optimal allocation of agriculture’s public budget aimed at increasing agri-food output, creating off-farm jobs and reducing rural poverty, which are agricultural transformation objectives, will help to reduce the cost of a healthy diet, allowing around 2 million more Ethiopians to afford it. This number could even be higher should policy makers allocate the budget optimally aiming at only lowering the cost of a healthy diet, but at the cost of reducing household income and slowing down transformation.

Impact of carbon border adjustment mechanism on China's manufacturing sector: A dynamic recursive CGE model based on an evolutionary game

As the global carbon emission problem is getting more and more serious, the European Union has proposed the Carbon Border Adjustment Mechanism (CBAM) to prevent carbon leakage, which will have an impact on China's foreign trade. Based on this background and the problems of current research that ignores factors such as commodity prices, long-term impacts, intertemporal substitution analysis, and changes in national strategies for foreign exports, this paper propose a Computable General Equilibrium (CGE) model based on an evolutionary game as a dynamic recursive basis to study the impact of the CBAM on the Chinese manufacturing industry. For the industries mentioned in the CBAM, 18 affected sectors are collated, and a CGE model containing multiple blocks such as production, trade, and carbon emissions is built. Meanwhile, we establish an evolutionary game model with EU suppliers, manufacturers, and the government, allowing Chinese suppliers to compete with EU suppliers. Based on the above model, the impact of carbon tariff policies from 2020 to 2050 is studied. The results indicate that under the intra-EU competition condition, carbon tariffs will reduce the price of Chinese exports and slightly decrease China's real GDP, as well as the carbon emission intensity of 18 sectors and fossil energy. However, the impact of carbon tariffs on overall carbon emissions is small and is essentially a protective policy. In addition, the evolutionary game-based CGE model takes into account the dynamic strategies of both sides and is therefore less affected by carbon tariff shocks and recovers more quickly and more realistically. Finally, the article argues that the advantage of carbon tariffs for local suppliers is unsustainable and Chinese suppliers will still dominate, and local suppliers need more subsidies from the EU government. On the other hand, the Chinese government needs to implement a stricter carbon tax regime and export subsidies to improve the competitiveness of Chinese products in terms of green levels and price advantages. The purpose of this paper is to examine the quantitative impacts of CBAM on China's related manufacturing industries and strategies to maximize the benefits to both governments.

Indonesian capital city relocation and regional economy's transition toward less carbon-intensive economy: An inter-regional CGE analysis

Transitioning to a low-carbon economy can take various forms, one of which is structural change, particularly tertiarization. When the economic structure shifts from being dominated by sectors that rely heavily on fossil fuels to one that does not, the economy can become less carbon-intensive. The relocation of Indonesia's capital city from Jakarta to East Kalimantan is an example of how a traditionally resource-intensive regional economy may respond to the sudden emergence of a large-scale service sector, in this case, the government sector. This paper investigates how the capital city relocation may affect the destination region's economic structure using an inter-regional computable general equilibrium modeling. The model considers not only how different economic sectors are interconnected but also how sectors within one province are interconnected with sectors in other provinces. According to the findings, the relocation of the capital city increases the Gross Regional Domestic Product (GRDP) of the destination region (KalTim) by a massive amount (22%) while decreasing the GRDP of Jakarta (the old capital) by a moderate amount (7%). However, because the expanding sector is relatively high-skill intensive, it tends to produce skill-biased increases in real wages. As a result, the destination region (Kaltim) undergoes massive structural change as its service sector share increases by 12%, a change historically comparable in two decades. In addition, Kaltim's carbon emission intensity decreases by 18% due to this large-scale tertiarization. The analysis has demonstrated how and to what extent the relocation of Indonesia's capital city may help the province diversify from a natural resource-intensive economy to a more service-oriented and low-carbon economy.

Implication of Renewable Heat Policy on Reducing Carbon Emissions in China: A Dynamic CGE Simulation

In 2020, China pledged to achieve carbon emission peaking before 2030 and carbon emission neutrality before 2060. Renewable heat is a key solution for decarbonizing the heating sector, which is responsible for more than 40% of global CO2 emissions. Policy interventions are necessary for scaling up renewable heat deployment due to both economic and non-economic barriers faced, while the instrument selection should be taken into account carefully. Thus, a dynamic computable general equilibrium (CGE) model was built to evaluate and compare the effects with different renewable heat policy shocks. The scenario analysis method is applied to compare two types of policies relative to baseline scenarios, subsidy, and energy tax. The findings indicate that: first, both subsidy and energy tax have positive effects on CO2 emission reductions while economic factors should also be accounted for. Secondly, the selection of subsidy and energy tax should seek a balance between economic factors and environmental factors as they may also affect economic growth or sectoral output to some degree. The energy tax rate should be moderate to avoid high economic impact. Thirdly, energy tax levying in the medium-long term has a beneficial impact on GHG emissions, while the instruments should be adopted with a careful rate chosen to avoid unnecessary tax burden on sectors that impede the orderly transition of relevant industries. Fourthly, it's reasonable to set a relatively high subsidy rate in the initial stage and gradually reduce the intensity of the renewable heating subsidy rate. For the energy tax rate, it is necessary to connect with the carbon trading market to set a relatively reasonable rate-setting mechanism to meet the dynamic needs of different stages.

Enterprise R&D, manufacturing innovation and macroeconomic impact: An evaluation of China’s Policy

Amidst economic downturn pressures, major countries emphasized the manufacturing industry and increased research and development (R&D) investments to realize innovation in manufacturing. Manufacturing enterprises are the main performers of R&D investments, so it is imperative for policymakers to accurately evaluate the policy effect of different industrial tendency and policy intensity on growth. The impact of the overall R&D expenditure on macroeconomy or the effectiveness of enterprises’ R&D investment on business profit has been reported in a great deal of literature, but so far, the impacts of enterprises’ R&D have little been experimented at the macro level and industrial level. This paper improves the knowledge production function and structured a regional dynamic computable general equilibrium model to simulate the multi-dimensional macroeconomic impact of enterprises’ R&D investment. The results show that enterprises’ R&D investment has a significant role in promoting economic output, residents’ welfare, price control, and international trade, and its impact is declining over time. The impacts of enterprises’ R&D on different industries are heterogeneous; industries with lower knowledge capital are more sensitive to R&D investment. These findings contribute to the effectiveness of R&D policies.

The unintended dilemma of China's target-based carbon neutrality policy and provincial economic inequality

Target-based carbon mitigation could be an essential strategy for achieving carbon neutrality. However, how carbon reduction will affect economic balance across different regions remains unclear. Here, with a newly developed dynamic multi-region computable general equilibrium model for China's 31 provincial economies, we examine the regional economic impacts of different carbon quota arrangement schemes. It is found that without fostering new growth engines driven by low-carbon industries, the national stringent carbon restrictions will bring an ‘economic sabotage’ with deteriorated regional equity and polarized the industrial structures, especially in the fossil-fuel reliant north China. Carbon shadow prices and costs play a prominent role and cause rippling effects in this regionally imbalanced recession, depending on energy, industrial structures and endowments. Furthermore, no prevailing carbon quota arrangements, either by historical, intensity, or capacity rules, could resolve the dilemma between equality and effectiveness in our simulation. By contrast, to offset the regionally unbalanced shock of decarbonization, it is important to cultivate low-carbon industries timely to compensate for the potential transition costs in the long run.

Water–energy nexus: The coupling effects of water and energy policy applied in China based on a computable general equilibrium model

China has implemented a number of national and regional water and energy policies to achieve its goals of carbon emissions (CE) reduction, energy saving, and water conservation. Given its high energy and water resources interdependence, a framework is needed that can provide both a unified and systematic assessment of these. This study investigates the effects of coupling China's energy tax and water fee policies using a recursive dynamic computable general equilibrium model. Several possible scenarios are simulated. The simulation results show that the water fee promotes water conservation, but its effect is limited at China's current water fee level. The energy tax is shown to be more effective in improving water-saving efficiency. Under the maximum energy tax scenario (EH), total energy and industrial water demand fall by 10.45% and 3.82%, respectively, compared with 0.59% and 0.72%, respectively, under the maximum water fee scenario (W8). Furthermore, the energy tax is more conducive to China's energy conservation and CE reduction (CER) targets than the water fee, but raising both energy taxes and water fees can have a significant impact on energy conservation and CER. In the scenario going from a low energy tax (EL) to a high-energy tax (EH), the reduction in primary energy production increases from 8.36% to 19.16%, while CE also drop significantly, going from 5.59% to 16.71%; however, In the scenario going from the low water fee (W2) to the high-water fee (W8), the reduction in primary energy production only changes from 0.24% to 0.43%, and CO2 reduction from 0.35% to 0.61%. Meanwhile, the mixed water-energy scenario shows a spill over effect, with the CE and energy savings management goals requiring less GDP loss than water or energy policies implemented in isolation. Ultimately, the results show that even when combined, relying solely on existing water and energy tax policies will be insufficient to meet China's water-saving targets without other environmental policies. The key to overcoming energy and water constraints is to increase water and energy efficiency year after year. This will enable China to achieve its CER target and the 14th Five-Year Plan water savings target. Thus, the synergistic effect of water conservation and energy saving can be realised simultaneously when the CER and energy consumption structure improve, which is crucial for developing an effective environmental policy strategy.

Impact of Energy Productivity and Industrial Structural Change on Energy Intensity in China: Analysis Based on Provincial Panel Data

Since 2000, China’s energy intensity has shown a fluctuating downward trend. Most existing studies have attributed the decline to technological progress, and only a few studies have recognized the role of industrial structure change. In this paper, a multi-region and multi-sector CGE (computable general equilibrium) model and a numerical simulation method are used to study how technological progress and structural transformation affected the energy intensity of 30 provincial-level regions in China from 2000 to 2019. The results show the following points. (1) The contribution of technological progress to the decline in energy intensity was the highest in the central region, followed by the western region, and was the lowest in the eastern region. (2) The progress of energy technology in the agriculture and industry sectors promoted the transition of energy consumption to the service sector, thereby reducing the overall energy intensity. This effect was the strongest in the eastern region, followed by the central region, and was the weakest in the western region. (3) The progress of energy technology in the service industry promoted the transition of energy consumption to industry and agriculture, thereby enhancing the energy intensity, and this effect was the strongest in the eastern region, followed by the western region, and the weakest in the central region. The conclusion of this paper provides a theoretical basis for realizing regional carbon peaking in sequence in China.

Study on the efficiency of air pollution control and responsibility allocation in the Yangtze River Delta region in China from the perspective of ecological compensation

Ecological compensation is a critical strategy that can be used to promote regional cooperation for the improvement of air pollution control. Overall, this study considers the relationship between air pollution production and economic growth; through this, we incorporate elements such as ecological compensation, technological progress, and PM2.5, into the framework of sustainable development theory. Under the constraints of the air pollution control objectives, a dynamic computable general equilibrium model was constructed to analyze the efficiency of air pollution control and responsibility allocation in the Yangtze River Delta region. Overall, this study yielded several findings. First, with each 10 billion yuan allocated for ecological compensation in the Yangtze River Delta region, there was an annual average carbon emission reduction of approximately 0.26%; this equated to an annual total carbon emission reduction of approximately 8.3 million tons per 10 billion yuan of ecological compensation. Additionally, the annual average PM2.5 concentration was determined to reduce by 0.72 μg/m3 per 10 billion yuan of ecological compensation; this indicated that effective ecological compensation can lead to a significant improvement in air pollution control. Second, the initial allocation of ecological compensation was distributed in the following order, from the highest to lowest burden: Jiangsu, Zhejiang, Anhui, and Shanghai. Third, we calculated the responsibility for air pollution control; this indicated that local contributions to the inter-regional external transmission of air pollution by the Jiangsu, Zhejiang, Shanghai, and Anhui regions were 65%, 62%, 53%, and 84%, respectively; in contrast, the external contributions to their surrounding regions were 35%, 38%, 47%, and 16%, respectively. Overall, Anhui possessed a higher responsibility for internal responsibility transfers among Jiangsu, Zhejiang, and Shanghai, highlighting the role of Anhui in the fossil fuel industry within the Yangtze River Delta region. Finally, the present study established that there were significant variations in the redistribution of ecological compensation among provinces and cities within the Yangtze River Delta region. Redistribution lead to a reduction in ecological compensation by approximately 1/4 in Zhejiang and Shanghai and approximately 4% in Jiangsu; conversely, this redistribution nearly doubled the ecological compensation allocated to Anhui. Overall, the appropriate allocation of responsibility pertaining to internal trade transfers (i.e., fossil fuels trade) in air pollution and inter-regional external transmission (i.e., air spillover) is crucial for effective air pollution control in the Yangtze River Delta region and other parts of China and, therefore, requires immediate attention.

Two currencies – Rethinking energy and the economy

Beginning with the marginalist revolution of the late nineteenth century, neoclassical economic theory developed by borrowing mathematical constructs from physics, but not the physics itself. Several scholars, including early ecological economists, recognized there was a need to incorporate energy and other resources into economic theory. In recent decades there have been attempts to fuse energy into aggregate neoclassical production functions, but these suffer from several challenges: they do not hold at an aggregate level; do not capture the dynamic evolution of the economy; ignore the universal flow of energy through all of the economy; and there is interdependency between variables. These challenges are largely addressed by energy-linked computable general equilibrium models, although their model formulations still understate the role of energy as the lifeblood of economies.Here I argue that the economy can simultaneously be studied in terms of physical units and monetary units. I contrast physical science and social science views on energy in economies, and demonstrate how thermodynamics and value theory can be used harmoniously with an example of the energy basis to capital formation in the United States. When used to study major transformation of energy systems, equations, or metrics, are required for each type of energy carrier in the economy.

The health and economic impacts of emergency measures to combat heavy air pollution

Emergency measures are effective measures that can be quickly taken in response to heavy air pollution. They not only have an obvious impact on slowing down the accumulation of particulate matter but also have a significant impact on public health and socio-economic development. Therefore, to analyze the effectiveness of emergency measures, one must assess their environmental, health and economic impacts. In this paper, we use exposure-response functions and a city-level computable general equilibrium (CGE) model to do so for China's Jing-Jin-Ji region. We find that the emergency measures implemented in 2019 significantly improve the region's air quality and enhance public health by reducing risk associated with acute bronchitis. Moreover, those emergency measures notably benefit the Jing-Jin-Ji region economically by expanding labor supply, most notably in Beijing and Tianjin. It seems Beijing and Tianjin should compensate industrial cities in Hebei, which enabled the Jing-Jin-Ji region's better air quality but encountered far fewer economic benefits. Handan, Baoding, and Cangzhou are among the cities in Hebei that are expanding employment in manufacturing and service sectors. These results can provide scientific guidance and policy suggestions for government while using emergency measures to combat regional heavy air pollution considering its health and economic benefits.

Mapping the Future of Green Hydrogen: Integrated Analysis of Poland and the EU’s Development Pathways to 2050

This article presents the results of a comparative scenario analysis of the “green hydrogen” development pathways in Poland and the EU in the 2050 perspective. We prepared the scenarios by linking three models: two sectoral models for the power and transport sectors, and a Computable General Equilibrium model (d-Place). The basic precondition for the large-scale use of hydrogen, in both Poland and in European Union countries, is the pursuit of ambitious greenhouse gas reduction targets. The EU plans indicate that the main source of hydrogen will be renewable energy (RES). “Green hydrogen” is seen as one of the main methods with which to balance energy supply from intermittent RES, such as solar and wind. The questions that arise concern the amount of hydrogen required to meet the energy needs in Poland and Europe in decarbonized sectors of the economy, and to what extent can demand be covered by internal production. In the article, we estimated the potential of the production of “green hydrogen”, derived from electrolysis, for different scenarios of the development of the electricity sector in Poland and the EU. For 2050, it ranges from 76 to 206 PJ/y (Poland) and from 4449 to 5985 PJ/y (EU+). The role of hydrogen as an energy storage was also emphasized, highlighting its use in the process of stabilizing the electric power system. Hydrogen usage in the energy sector is projected to range from 67 to 76 PJ/y for Poland and from 1066 to 1601 PJ/y for EU+ by 2050. Depending on the scenario, this implies that between 25% and 35% of green hydrogen will be used in the power sector as a long-term energy storage.

Estimating the Socioeconomic Impacts of Flooding on Regional Economies With a Computable General Equilibrium Model

AbstractThe growing number of flood events in urban areas is causing far‐reaching economic losses and social disruptions. To implement suitable flood risk management strategies and measures for flood prevention and mitigation, it is paramount to adequately assess economy‐wide losses associated with potential flood events. The assessment of potential flood damage in the USA relies significantly on the Federal Emergency Management Agency (FEMA) Hazus Flood Model. A primary requirement to reduce uncertainty is to empirically gather user input data. Consequently, there is a need to integrate publicly accessible business data for accurate evaluation of losses in business activities. We present a novel approach for estimating both the direct losses in business activities during a flood and the total economy‐wide impact that arise from these disruptions. First, we integrate the FEMA Hazus Flood Model with Reference Solutions business‐level data to estimate the reduction in business activities (i.e., direct losses) following a 100‐year flood event in New Hanover County, North Carolina. Second, we estimate the broader economy‐wide impact these business activity losses have on total industry output, employment, value‐added and household income using a regional computational general equilibrium model. The advantage of our approach is the easy replicability of the business loss estimation process for US cities and regions of interest, which, when used in a follow‐up economic impact study, leads to estimating the total economy‐wide losses in economic activities. Policy makers relying solely on direct physical and economic damages would, by ignoring indirect losses, underestimate the benefits of investing in flood mitigation and protection.

Is environmental innovation the key to addressing the dual economic and sustainability challenge of the Italian economy?

AbstractThe effects of rising global temperatures are becoming increasingly evident, with observable consequences such as the melting of polar ice caps, the occurrence of cyclones and hurricanes, desertification, and the destruction of ecosystems. The Italian economy is particularly vulnerable to the climate challenge, due to the prolonged slowdown in economic growth and the high unemployment that have plagued this economy over the last decades. Environmental innovation could be the key to tackling climate change, while at the same time promoting growth and employment. A comprehensive assessment of the effects of environmental innovation on growth and employment at the macroeconomic level should consider the compensation mechanisms associated with productivity gains, the substitution effects between more or less polluting goods, and the role of demand and consumer preferences. However, a comprehensive analysis that includes all of these direct and indirect effects of environmental innovation at the macroeconomic level is still lacking. This study aims to bridge this gap, introducing a structuralist computable general equilibrium model to simulate the effects of an increase in productivity and a change in consumer preferences in favour of less polluting industries in the Italian economy over the period 1995–2050. The results of the simulations indicate that a change in consumer preferences in favour of environmentally friendly goods in the Italian context may be more effective than an increase in productivity in stimulating demand, growth, and employment.

Testing competing world trade models against the facts of world trade

We carry out an indirect inference test of two versions of a computable general equilibrium (CGE) model of world trade. One of these, the ‘classical’ model, is well-known as the Heckscher-Ohlin-Samuelson model of world trade, in which countries trade homogeneous products in world markets and produce according to their comparative advantage as determined by their resource endowments. The other, the ‘gravity’ model, assumes products are differentiated by geographical origin, so that trade is determined largely by demand and relative prices differing according to distance; trade in turn affects productivity through technology transfer. These two CGE models of world trade behave in very different ways and predict quite different effects for trade policy, underlining the importance of discovering which best fits the facts of international trade. Our findings here are that the classical model fits these facts fairly well in general, while the gravity model is largely strongly rejected by them.