Dynamic Computable General Equilibrium Research Articles

Economic Effect Evaluation on the VAT Rate Reduction and Additional Deduction Policy：Research Based on the Dynamic Computable General Equilibrium Model

The VAT reduction policy is an important part of China’s large-scale tax reduction and fee reduction policy since 2018, which mainly includes two sub-policies: tax rate reduction（tax rate-type preferential policy）and additional deduction（tax amount-type preferential policy）. Quantitative measurement of the tax reduction and economic effect of the two policies will help to provide suggestions for the subsequent reform of China’s VAT system, and fill the gap in quantitative research on the impact of additional deduction policy.Based on China’s input-output table, this paper compiles a social accounting matrix（SAM）, builds a dynamic computable general equilibrium model（DCGE）with a VAT deduction mechanism, and measures the economic effect of VAT rate reduction policy. The study finds that: （1）The reduction of VAT rate as a tax rate-type preferential policy can produce a good overall tax reduction effect, and the VAT burden of most industries has dropped significantly. As a tax amount-type preferential policy, the additional deduction policy has a significant effect of targeted tax reduction. To a certain extent, it has hedged the increase in the tax burden of the production and living service industries. The continuity of the tax reduction effect of the two policies is better.（2）The reduction of VAT rate can reduce the effect of taxation distortion, improve the efficiency of economic operation, and promote the growth of added value of various industries. The tax amount-type preferential policy has little impact on the enterprise’s factor allocation decisions, and has not significantly promoted output growth. From a dynamic point of view, the economic growth effect of the reduction of VAT rate continues to expand.（3）Both tax reduction policies have increased corporate profits and residents’ income. The government’s corporate income tax revenue and personal income tax revenue have increased, but due to the decline in VAT revenue, total tax revenue has declined to a certain extent.The tax rate-type preferential policy can effectively improve the efficiency of resource allocation and promote the growth of added value in various industries. The effect of tax rate reduction policy is obviously better than that of additional deduction policy. Follow-up policy reforms should continue to focus on tax rate reduction, but attention should be paid to the balanced decline of tax burdens in various industries. As the additional deduction policy will expire at the end of 2021, it can be replaced by a tax rate reduction or tax rate merger policy.

Economic and environmental impact of the new Mediterranean Rail Corridor in Andalusia: A dynamic CGE approach

Transport is one the most important sectors in the economy, but it also implies some cost, as it is responsible for an important amount of gas emissions, which favours the greenhouse effect (GHE) and climate change. In Spain, the sector of transport represents the 25% of total greenhouse sources. From this perspective, the impact of transport is important not only from an economic perspective but also in terms of its environmental impact. The transport of cargo is also responsible for an important amount of these emissions, as it represents more than 30% of all modes of transport's GHG emissions. The objective of this paper is to apprise the long-term environmental and economic impact in Andalusia of the new rail infrastructure known as Mediterranean Corridor. It will absorb an important part of the transport of cargo by road from the Port of Algeciras, which is one of the most important in Spain and an important node of this rail corridor. The effect is simulated through the use of a Computational General Equilibrium (CGE) model with a dynamic component, the vector of GHG emissions and calibrated with the Social Accounting Matrix (SAM) of 2013 of Andalusia with the modes of transport disaggregated. The results show how positive is the economic impact of this infrastructure, but also how environmental benefits outweigh economic ones, arising the need of assessing also environmental impacts and not only the economic ones.

The impact of electric vehicle penetration: A recursive dynamic CGE analysis of China

China is now the largest oil importer in the world. In 2018, the external oil dependence of China exceeded 70%. Restrain the oil consumption is important for China's energy security and environmental protection. The electric vehicle is considered to be the main method to solve these problems. This paper adopts a logistic model to depict the growth path of vehicle ownership. Base on the empirical results, a recursive computable general equilibrium model is constructed to predict future oil demand and simulate the impact of electric vehicles on oil demand, macro-economic, and emission. The result reveals that the development of electric vehicles can make China's oil demand peak in 2029. The increase in electric vehicle penetration rate can positively promote the economic output and reduce nitrogen oxide emissions. Though the carbon emissions will increase under the current power structure, the development of electric vehicles may provide enormous CO2 mitigation potential if the non-fossil energy can dominate the electricity structure in the future • China's oil consumption can achieve peak at 2028 with the development of EV. • The growth of EV has a stimulating effect on the domestic economy. • NOx emission will decline but CO2 emission may increase under current structure. • The carbon emissions will increase under current power generation structure. • The adoption of EV and power generators transformation should be simultaneous.

Virtual water and its effect in Huaihe River basin: an analysis using a dynamic multi-region computable general equilibrium model

Abstract A dynamic multi-region computable general equilibrium (CGE) model is used to analyze virtual water and its effect in the Huaihe River basin, which includes Jiangsu, Anhui, Shandong and Henan provinces. The baseline scenario was first constructed to describe the trade situation and virtual water among different regions and sectors from 2009–2020. Then two hypothetical policy scenarios were set to analyze the economic, water consumption and virtual water trade impacts under different policy shocks. The results show that (1) the Huaihe River basin was a net virtual water outflow region, with 13.977 × 109 m3 virtual water transferred outside the river basin in 2009, and 26.653 × 109 m3 VW transferred to outside in 2020. Jiangsu is the largest virtual water outflow province (mainly flows to outside), followed by Anhui. Anhui suffers from severe water shortage, but provides a net virtual water outflow to Henan, Jiangsu and Shandong and outside; (2) reducing Anhui's agricultural output (S1 scenario) and Anhui's agricultural virtual water outflow (S2 scenario) can not only reduce virtual water trade but also save water, but S1 scenario reduced net virtual water outflow by more, and saved more water. S1 had a positive effect on gross domestic product (GDP), but reduced the employment rate.

Impacts of China's Emissions Trading Scheme on the National and Hong Kong Economies: A Dynamic Computable General Equilibrium Analysis

In this study, we estimate the economic impacts of China's official carbon-mitigation targets, in connection with Hong Kong's potential participation in a proposed national emissions trading scheme. We find that moderate intensity-reduction targets emulating China's pledged Paris Agreement commitment would incur much larger policy-compliance costs in Hong Kong (0.1–2.5% of baseline gross domestic product) than in Mainland China (0.1–0.7%) in each of the modeled years 2021 to 2030 when each economy operates its own independent carbon market. By comparison, an integrated carbon market enables Hong Kong to achieve the same reduction goal at up to 78% lower costs compared to an independent market, and this is achieved without significantly affecting the Mainland's economy. These savings in compliance costs for Hong Kong are greater when pre-integration local carbon prices in both economies are subject to a larger gap. Effectively, the cheaper pre-integration carbon prices in the Mainland indirectly subsidize the Hong Kong economy in the initial years of the integration scenario, buffering the policy shock. In sum, an integrated carbon market in China would improve overall efficiency at the national level, but the benefits are biased toward Hong Kong. This finding suggests that it is in the city's interest to play a more active role in cross-border collaboration on climate mitigation and emissions trading.JEL classification: C68, Q42, Q52, Q54

Growth and redistribution impacts of income taxes in the Thai Economy: A dynamic CGE analysis

A reform in the personal income tax (PIT) is helpful in reducing inequality in the distribution of income and consumption in both short and long terms in Thailand. It boosts private consumption, investment, employment, capital stock, exports, imports and GDP. Output, employment and capital stock in every sector grow faster with the reforms in the personal income tax than without reforms. While the revenue from the PIT decreases with a cut in PIT rate, the total revenue of the government still remains at the same level before such cut as increase in revenue from other taxes can compensate for the decrease in revenue from the personal income tax. These conclusions are based on results of the dynamic CGE model of the Thai economy constructed for this paper which was calibrated to the micro-consistent data contained in the most recent Input-Output Table of Thailand obtained from the OECD and the household-quintile data collected from the National Statistical Office in Bangkok. This study makes a unique contribution to the literature on the dynamic CGE model of Thai economy assessing the magnitudes of the complicated and asymmetric economy-wide income and substitution effects from reduction in PIT rates over coming 25 years. This DCGE model could be further applied to study impacts of fiscal or financial, pension or health care policies in Thailand, with some modifications.

Co-benefits of subnationally differentiated carbon pricing policies in China: Alleviation of heavy PM2.5 pollution and improvement in environmental equity

Carbon policies differentiated according to regional disparities have been recognized and recommended. However, the air quality co-benefits of differentiated policies remain unclear. Here we combine a multi-regional dynamic computable general equilibrium (CGE) model and an extend response surface model (ERSM) to investigate the impact of nationally uniform and subnationally differentiated carbon pricing policies on fine particulate matter (PM2.5) concentrations in China. All policies examined lead to the same accumulated national CO2 emissions (2020–2050), with the 2030 emissions attaining China's national abatement target. We find that, when subnational policies differentiated according to provincial PM2.5 concentrations are implemented, the higher-than-average carbon price over more polluted provinces results in twice as much reduction in CO2 and air pollutant emissions in 2050 as the national policy. As a result, the subnational policies cause larger PM2.5 concentration reductions in these provinces (9%–18%) than the national policy (7%–11%). Also, the subnational policies eliminate high PM2.5 exposure of over 45 μg/m3 which 12% people suffer from under the national policy. The subnational policies substantially reduce regional disparity in PM2.5 pollution and hence improve environmental equity. The results suggest that subnationally differentiated carbon policies are a promising instrument to mitigate severe pollution and promote environmental equity.

Economic Impact of Information Industry Development and Investment Strategy for Information Industry

The information industry leads the digital revolution and innovation. With regards to what economic impact the development of the industry will bring about, there has been minimal focus from literature. This paper fills the knowledge gap by using a dynamic computable general equilibrium model. The results show the development will rapidly promote economic development and social welfare, promote the reduction of commodity prices and the rise of output by providing higher social productivity. Finance, public service, and some traditional industry (such as electricity) will benefit more when the information industry develops rapidly. At present, the industry development of the information industry is more directed at the service industry and final consumption. This paper implies the information industry can strengthen R&D investment towards supporting finance, public services and traditional industries, such as industrial control embedded software products, cloud computing technology, and emergency communication for traditional industries to increase the income.

Trade Liberalization and Income Distribution in Vietnam: Dynamic CGE Approach*

This study examines the influence of trade liberalization on income distribution among different household groups in Vietnam using the dynamic computable general equilibrium (CGE) framework. To accomplish this objective, we developed a multi‐sector, multi‐household dynamic CGE model and the corresponding social accounting matrix for Vietnam. Our simulation results show that in the long run, all household groups can enjoy an improvement in their welfare because the increase in the budget for consumption of all groups is large enough to outweigh the negative effect of changes in consumption prices. We also find that while trade liberalization is positively associated with economic growth and national welfare, it also increases the income disparities between rich and poor households, between rural and urban areas, and among rural people as well as among urban people.

Russian Food Import Ban – Impacts on Rural and Regional Development in Finland

Abstract This paper investigates the economic effects of the food import ban that Russia imposed vis-à-vis the European Union in 2014 on the development of two structurally different rural regions in Finland. A detailed, rural-urban dataset was compiled for use with a recursive dynamic computable general equilibrium model. In the medium run, the overall economic effects of the trade ban were negative for both regions, and the value added of agriculture and food industries fell notably. When the rigidities of capital availability were relaxed, regional GDP and employment increased in South Ostrobothnia as, for instance, metal industry and construction accelerated economic growth. In North Karelia, where agriculture and food industry account for a minor share of economy, other industries could not compensate the losses the ban caused. Accordingly, the impacts were dependent on the economic structure of the region.

Structural change in the Chinese economy and changing trade relations with the world

This paper examines the impact of structural change in China, in particular a reduction in the savings rate, an increase in the share of skilled workers, and an increase in productivity in technologically advanced manufacturing sectors targeted by Made in China 2025. Baseline projections until 2040 are generated with the WTO Global Trade Model, a dynamic computable general equilibrium model. With the modelled structural changes, the Chinese economy is projected to reorient its focus increasingly onto the domestic economy, raising the share of private household and government consumption in GDP, turning China's trade surplus into a trade deficit, reducing China's share in global exports, raising the share of services in both production and exports, shifting the destination markets of Chinese exports from developed to developing countries, and changing its pattern of comparative advantage away from sectors like light and heavy manufacturing to electronic and machinery equipment. The large bilateral trade surplus vis-a-vis the United States is projected to fall to almost zero.

The impact of removing cross subsidies in electric power industry in China: Welfare, economy, and CO2 emission

There are cross subsidies in China's power industry and there is a gap between supply cost and the sales price of electricity to residents and enterprises. Enterprises pay for part of residents' electricity bills. As cross subsidies always have been criticized, this paper simulates counterfactual scenarios of removing cross subsidy by applying a dynamic recursive computable general equilibrium model. Based on the scenario analysis, the elimination of cross subsidy will have positive impact on economic performance, but negative on CO2 mitigation, industrial structure, and social welfare. Eliminating cross subsidies can reduce commodity prices, improve the competitiveness of enterprises, especially power-intensive enterprises. However, China is somehow an export-oriented country. Only a part of the benefits of the decrease in the product price is obtained by domestic households. Maybe removing cross subsidies is not a good policy in this kind of countries. However, under the background of power system reform, cross subsidy may not last long, and the price will not be regulated. With the marketization of electricity trading, appropriate imposed environmental tax or carbon tax will be more conducive to China's low-carbon development.

The economic impacts of COVID-19 in Brazil based on an interregional CGE approach.

This study projects the economic impacts of COVID‐19 outbreak on the Brazilian economy using a dynamic interregional computable general equilibrium model. We considered two scenarios. The first scenario has two channels of transmission over the economic system: a negative shock of labour supply due to the rates of morbidity and mortality caused by the pandemic, and a temporary shutdown of nonessential economic activities. The second scenario adds to the first the effects of the government fiscal package adopted to counteract the effects of COVID‐19 on the economy. Furthermore, in both scenarios, a sensitive analysis related to the temporality of the shutdown is considered by assuming 3 and 6 months of shutdown. The results indicate a reduction of 3.78% in the national GDP growth rate in Scenario 1 and a reduction of 0.48% in Scenario 2, in 2020, with 3 months of shutdown. With 6 months, the reduction would be greater, 10.90% and 7.64% in Scenarios 1 and 2, respectively. Thus, the government fiscal stimulus considered in this study partially mitigates the reduction in GDP projected under the COVID‐19 outbreak. The study also presents sectoral projections at the national and state levels. The estimates indicate reductions in the GDP of most of Brazilian states in both scenarios.

CO2emissions, agricultural productivity and welfare in Ethiopia

PurposeClimate change has become one of the most important development challenges worldwide. It affects various sectors, with agriculture the most vulnerable. In Ethiopia, climate change impacts are exacerbated due to the economy’s heavy dependence on agriculture. The Ethiopian Government has started to implement its climate-resilient green economy (CRGE) strategy and reduce CO2emissions. Therefore, the purpose of this study is to examine the impact of CO2emission on agricultural productivity and household welfare.Design/methodology/approachThis study aims to fill these significant research and knowledge gaps using a recursive dynamic computable general equilibrium model to investigate CO2emissions’ impact on agricultural performance and household welfare.FindingsThe results indicate that CO2emissions negatively affect agricultural productivity and household welfare. Compared to the baseline, real agricultural gross domestic product is projected to be 4.5% lower in the 2020s under a no-CRGE scenario. Specifically, CO2emissions lead to a decrease in the production of traded and non-traded crops, but not livestock. Emissions also worsen the welfare of all segments of households, where the most vulnerable groups are the rural-poor households.Originality/valueThe debate in the area is not derived from a rigorous analysis and holistic economy-wide approach. Therefore, the paper fills this gap and is original by value and examines these issues methodically.

Assessing the economic and environmental impact of freight transport sectors in Thailand using computable general equilibrium model

In Thailand, the percentage of energy consumption and greenhouse gas (GHG) emissions in freight transportation sectors keep growing rapidly in the opposite side of GHG reduction target. The objective of this study is to evaluate the impacts on socio-economic status and GHG emissions in Thailand when introducing new greenhouse gas mitigation options in freight transportation sectors according to Thailand National Master Plan. This research constructed the country level dynamic multi-sector computable general equilibrium (CGE) model replicating the input-output table of Thailand in 2010 as a benchmark data. In this analysis the 3 scenarios have been assessed by CGE model. BaU represents the reference scenario that does not limit total GHG emissions. Using Thailand’s Nationally Determined Contribution (NDC) plan as mitigation target, NDC is the scenario that limits total GHG emissions in 2030 to 20% lower than BaU scenario. Then this study introduces mitigation options (S_all scenario) to freight transport sectors including road sector, rail sector and water sector under NDC mitigation target to assess the impact of new mitigation options on economic indicators and GHG emissions. As a result, NDC scenario showed that GDP and consumption in 2030 will drop by 2.1% and 3.5% respectively compared with those in BaU. Introducing mitigation options in freight transport sectors contributed to lower GDP loss and consumption loss by 1.04% and 0.9% respectively compared to NDC. It is also found that under GHG emissions limitation, GHG price will become effective and it will increase the cost of energy intensive goods in both industry and household sectors. Thailand economy may suffer loss from this reduction of energy intensive production; however, introduction of mitigation options in freight transport sectors will help compensate the production loss through the increase of production activities in low carbon energy intensive sectors.

Economic effects of projected decrease in Brazilian agricultural productivity under climate change

This paper aims to analyze the economy-wide and regional effects of climate change-induced productivity decrease in Brazil. Our methodological framework was based on the General Equilibrium Analysis of the Brazilian Economy Project—PAEGDyn, a dynamic CGE model. The results show that the projected falls in agricultural productivity impose reductions in the performance of Brazilian GDP over time. Even with the use by other sectors of the economy of the factors unemployed in agriculture, there is no intersectoral compensation in economic production over time able to bring it back to the reference trajectory. In addition, the impact will be greater in warmer and poor regions, which depend on agriculture and present greater income inequality, accentuated by the free mobility of production factors within the national border. Therefore, the main implication of this study is the need to allocate scarce resources for adaptation and mitigation policies primarily for these regions, including broadly stimulating economic development with more income distribution. This will allow these regions to protect themselves by making investments in new technologies and modern infrastructure for the agricultural sector.

Quantifying international oil price shocks on renewable energy development in China

ABSTRACT It is a common belief that renewable energy is an effective alternative to traditional fossil energy, namely, oil; thus, an international oil price shock is a significant factor affecting renewable energy development. This paper builds a recursive dynamic computable general equilibrium model to explore the effects of rise and fall in international oil price on the investment and outputs of renewable energy industry, as well as the macroeconomy and environment in China. In addition, the role of renewable energy policy is verified through simulating the combination scenario of oil price fluctuation and renewable energy policy. The results reveal that an increasing international oil price can advance the outputs and investment of renewable energy, decrease China’s real GDP and exports, and improve the atmosphere environment, and the influence of a decreasing international oil price is the opposite. Furthermore, renewable energy policy can attenuate the negative effect of a decreasing oil price on renewable energy development and the environment, and strengthen its contribution to GDP.

Supply control vs. demand control: why is resource tax more effective than carbon tax in reducing emissions?

Carbon tax and some other policies are designed to reduce emissions; resource tax can raise the energy price from the supply side to achieve the purpose of emission mitigation. Based on previous studies, this paper abstracts mitigation policies into supply-control (resource tax as an example) and demand-control (carbon tax as an example). The effects of these policies have been divided into the direct and the indirect effects. A dynamic recursive computable general equilibrium model is applied to simulate different impact path of the two policies. The research shows that if there is no foreign trade and the market is completely market-oriented, the effect of the demand control and the supply control may be equivalent. But this is not the real case. Under the same level of CO2 emission, carbon tax can significantly reduce the energy demand of enterprises and restrain energy imports. However, resource tax can significantly increase domestic energy prices firstly, and then enterprises will be more willing to use cheaper imported energy. Regardless of energy security, relatively low energy use costs ease the economic costs of emission mitigation. Therefore, if every country in the world is required to reduce emissions compulsorily, resource tax may be a better policy of reducing emissions while obtaining “excess profits”.

Economic and climate impacts of reducing China's renewable electricity curtailment: A comparison between CGE models with alternative nesting structures of electricity

To mitigate climate change impacts and achieve low-carbon transformation, China has accelerated the development of renewable energy, which is severely challenged by the curtailment of renewable electricity. This study uses a dynamic multi-sectoral CGE model with alternative nesting structures and substitution elasticities for electricity with different power sources to capture the economic and environmental feasibility of reducing renewable electricity curtailment across all economic sectors in China. The reduction of renewable electricity curtailment is simulated during 2021–2030 from the curtailment rates of 2015–2017. We found that the reduction of renewable electricity curtailment would lead to a significant expansion in the output of renewable electricity and a moderate decrease in non-renewable electricity production. Among the renewable electricity, wind power has the most significant output gain (over 9%), with solar power and hydropower outputs rising by over 5% and 1.5%, respectively. However, without the cost-neutrality assumption, the impacts of reducing electricity curtailment would be largely over-estimated with CGE models simulated by improved technology. The disparity between results from the models with alternative nesting constant elasticity of substitution (CES) functions for electricity sectors is highly dependent on the difference between their substitution elasticities. Accompanying the changes in electricity generation, the reduction of renewable electricity curtailment would bring multiple green co-benefits like significantly reducing CO2 and air pollutants emitted from electricity sectors, and improvements in real GDP and employment.

ASSESSING GLOBAL AND NATIONAL ECONOMIC LOSSES FROM CLIMATE CHANGE: A STUDY BASED ON CGEM-IAM IN CHINA

Integrated assessment models (IAMs) have been widely used to inform policymaking on climate change. However, few Chinese IAMs have merely been involved in international model comparison. In this study, we develop an IAM, namely, CGEM-IAM, by coupling a global recursive dynamic CGE model with a simple climate model and establishing a climate impact assessment module based on a system of indirect damage functions. By using the CGEM-IAM, we analyze economic losses due to climate impacts under various scenarios. Results reveal that under the baseline scenario, the global annual loss due to climate change will reach $1628 billion (constant 2011 USD) in 2050, which represents approximately 0.79% of the global GDP in that year. The achievement of current commitments by countries promotes the slight reduction of the annual economic losses to $1398 billion in 2050. Under the 2-degree scenario, approximately 50% of the economic losses could be avoided. Developing countries and regions are vulnerable to the negative impact of climate change and could suffer from 85% of global economic losses, whereas China accounts for approximately 1% of global total climate impacts. Although the climate damage estimated by CGEM-IAM is comparable with the IAMs DICE and FUND models at the aggregate level, they are inconsistent at the sector distribution. Therefore, additional efforts should compare multiple models at the regional and sectoral levels in detail.