Dynamic Computable General Equilibrium Research Articles

Measuring the impacts of the two-child policy on industrial structure and economic growth in china using a CGE model

Facing the challenge of population aging and labor force shrinking, the Chinese government has been trying to reform its family planning policy since 2015. This paper analyzes the impacts of China’s Two-child policy on economic growth and industrial structure from 2020 to 2060 using a dynamic Computable general equilibrium (CGE) model. This paper constructs an effective labor input index accounting for changes in educational attainment and labor force participation rates by age and sex to simulate the effects of the demographic changes on labor supply and economic growth, rather than using simple working-age measures. This paper sets two policy scenarios, the One-child policy and the Two-child policy, to simulate the changes in the employment structure, industrial structure, and main macroeconomic indicators under different population policies. The main finding is that under the Two-child policy, the average GDP growth rate is expected to be 0.3% and 1.0% points higher than the One-child policy in the period of 2015–2030, and 2045–2060; the employment growth rates of the manufacturing and service industries are higher than that under the One-child policy; the shift of industrial structure from manufacturing to service industry will be slightly slower than the One-child policy. The positive impacts of the Two-child policy on China’s economic growth are not significant in the short run. From the perspective of the quantity, structure and quality of labor supply, this paper reveals how a more relaxed family planning policy will affect labor supply, and ultimately affect economic structure and growth in a long run.

Analysis of energy policy reform in Iran: Energy and emission intensity changes

The Subsidized energy system of Iran, with its high financial burden, failed to achieve its intended economic goals, resulting in increased energy consumption and pollutant emissions. Energy product subsidies in Iran are among the highest in the world and have important implications for developing countries. This study examines the impact of subsidy removal policy on energy and emission intensities using a Dynamic Computable General Equilibrium model. The findings reveal that after subsidy removal, total output experiences an annual growth of around 1.5%, with output composition changes mainly favoring agriculture and services that are less energy dependent. However, prices soar by at least 10% owing to the higher costs of energy products. The decreasing trend in energy intensity after subsidy reform is accompanied by a decrease in emission intensity. Higher prices of energy after subsidy removal and the corresponding improvement in the efficiency of energy consumption lead to lower emission intensity.

Assessing the compensation and reinvestment plans for fuel subsidy rationalization in Nigeria: A dynamic computable general equilibrium approach

Ending subsidies on fossil fuels is vital for tackling the climate crises and promoting a transition to cleaner energy systems. However, ensuring a successful subsidy reform requires a detailed understanding of its potential impacts and measures to ameliorate those impacts. This study employs a dynamic computable general equilibrium model to examine the impact of fuel subsidy rationalization in Nigeria and evaluate the proposed compensation and reinvestment plans of the government in minimizing welfare losses and reviving economic activities. We found that a complete, one-off removal of fuel subsidies results in severe economic headwinds and significant welfare losses. While the proposed compensation and reinvestment plans of the government brought positive welfare gains and undid many economic headwinds, it was not the optimal policy pathway in terms of resource allocation. Our result showed that a balanced allocation of resources between compensation and reinvestment that implements three-quarters of the total expenditure in 2024 and the remaining one-quarter in 2025 offered better outcomes. We recommend practical measures to implement the proposed plan to minimize fallouts and maximize economic, social, and environmental gains.

Computable general equilibrium analysis of neutral carbon trading scheme and revenue recycling impacts on income distribution in China

Utilizing a dynamic computable general equilibrium (CGE) model, this paper critically assesses the potential distortions and efficacy of various revenue-neutral carbon emission trading schemes (ETSs) in China, through government subsidies and value-added tax (VAT) relief strategies aimed at achieving peak carbon emissions before 2030. The analysis reveals that reallocating market revenues to the production sector, either through government subsidies or VAT reductions, can feasibly attain carbon peaking before 2030, with minimal impact on GDP. Notably, both government subsidies and VAT cuts foster output growth in the oil, gas, and ETS-covered sectors. Moreover, directing carbon market revenue toward ETS-covered industries via VAT relief emerges as the most effective approach to reducing income disparities. In contrast, redistributing carbon market revenue to non-ETS-covered industries via VAT relief is found to be the least effective in promoting social equity. The study emphasizes that the reallocation of carbon market revenues to ETS-covered sectors is paramount. This strategy not only regulates the overall energy consumption effectively but also steers the nation towards a more sustainable and optimized energy consumption pattern. In light of these findings, this paper offers detailed insights and tailored policy recommendations, aiming to assist policymakers in striking a balance between environmental goals and economic and social imperatives.

Distribution of economic damages due to climate-driven sea-level rise across European regions and sectors

Economic costs of climate change are conventionally assessed at the aggregated global and national levels, while adaptation is local. When present, regionalised assessments are confined to direct damages, hindered by both data and models’ limitations. This article goes beyond the aggregated analysis to explore direct and indirect economic consequences of sea level rise (SLR) at regional and sectoral levels in Europe. Using a dynamic computable general equilibrium model and novel datasets, we estimate the distribution of losses and gains across regions and sectors. A comparison of a high-end scenario against a no-climate-impact baseline suggests a GDP loss of 1.26% (€871.8 billion) for the whole EU&UK. Conversely our refined assessments show that some coastal regions lose 9.56–20.84% of GDP, revealing striking regional disparities. Inland regions grow due to the displaced demand from coastal areas, but the GDP gains are small (0–1.13%). While recovery benefits the construction sector, public services and industry face significant downturns. We show that prioritising recovery of critical sectors locally reduces massive regional GDP losses, at negligible costs to the overall European economy. Our analysis traces regional economic restructuring triggered by SLR, underscoring the necessity of region-specific adaptation policies that embrace uneven geographic impacts and unique sectoral profiles to inform resilient strategy design.

Disaggregated effect of construction investments on the Saudi economy: a dynamic computable general equilibrium model of Saudi Arabia

The role of the construction industry in economic growth has been widely discussed in the extant literature, but existing studies have not investigated the disaggregated impact of construction investments on the production and social sectors. This study examines the disaggregated effect of construction investments on the Saudi economy. The study uses a social accounting matrix of Saudi Arabia and constructs a dynamic computable general equilibrium model. The findings reveal that construction investments significantly boosted GDP and aggregate investments in the first two periods; however, the growth declined in the following three periods. This finding underlines the importance of long-term investments in the construction sector and calls for continuous monitoring and updating of the investment policy for sustainable development. This study also presents the disaggregated impact of investments on the value-added by each sector of the economy. The ranking of sectors exhibits that mining and quarry activities underwent a high increase in value-added, second to construction activities. Other economic activities also experienced growth in value-added and some of them changed their ranks within the five years.

How should governments respond to energy price crises? A horse-race between fiscal policies

This paper compares the welfare and distributional implications of fiscal policies aimed at reducing a sudden and significant increase in the price of energy. A dynamic computable general equilibrium model with households disaggregated by income groups is used to compare the effectiveness of five energy price-reducing fiscal policies. The policies are assessed under two financing options, pure government debt and a mix of debt and windfall taxation on energy companies. Results from simulations demonstrate that targeted demand-side policies are more effective at reducing overall energy-driven inflation and increasing welfare. Supply-side policies and mixed demand and supply policies achieve a smaller reduction in the consumer price index but are more expansionary. Financing the policies partly through windfall taxation does not impact the ranking of policies but it delivers better distributional outcomes and higher welfare. The results motivate the use of windfall taxation if governments face high interest rates on debt financing and/ or if households care sufficiently about the provision of public goods. The optimal policy is likely a mix of supply-side measures such as production tax reductions or general price subsidies and either targeted energy price subsidies or targeted income subsidies financed where possible through windfall taxation.

Economic Impacts of Projected White Oak (Quercus alba L.) Timber Supply in Kentucky: A CGE Model Analysis

Demand for high-quality white oak sawlogs in Kentucky has been increasing for decades. Concurrently, Kentucky is witnessing ecological shifts in the historically white oak-dominated forests, mirroring the structural changes in oak forests in the eastern US. This demand–supply dissonance presents a growing concern among stakeholders on the sustainability of white oak and its associated economic implications. In this context, the objective of this study was to assess the potential economic impacts of the projected white oak timber supply following an overall increased supply of white oak sawlogs but reduced supply of high-quality white oak sawlogs in Kentucky. Results generated from a dynamic computable general equilibrium (CGE) model indicate a cumulative present-value GDP reduction of USD 3.66 billion, a USD 0.71 billion decline in consumer welfare, and other sectoral contractions over 40 years (2018–2058). These results can be used to advocate for more proactive forest management practices to stabilize a sustained supply of high-quality white oak timber in Kentucky and beyond.

The impact of carbon tax policy on residents’ welfare of China and its heterogeneity under the carbon neutrality goal: A CGE model-based analysis

Under the background that China will achieve the goal of carbon neutrality by 2060, analyzing the impact of carbon neutral target constraints on the welfare of urban and rural residents is an important part of the design of a carbon emission reduction policy mechanism, in this paper, the dynamic recursive CGE(Computable general equilibrium) model is used to simulate the changes in welfare level, income consumption, and CO2 emissions of residents and their urban-rural heterogeneity under the policy of imposing a carbon tax on the fossil energy industry from 2022 to 2060. The results show that: compared with the BAU scenario, by 2060, first the income and consumption of residents will decrease slightly. Second, the target constraint of carbon neutrality makes the equivalent variation and compensate variation of urban and rural residents' welfare decrease slightly, and the equivalent variation and compensate variation of urban residents decrease more than those of rural residents. The following conclusions are drawn: first, the carbon-neutral target constraint makes the welfare of urban and rural residents decline slightly, but it will not have a strong impact on residents’ income and consumption. Second, this constraint has a greater impact on the income, consumption and savings of urban residents than those of rural residents.

Impact of introducing Chinese certified emission reduction scheme to the carbon market: Promoting renewable energy

The China Certified Emission Reduction scheme (CCER) and the Cap-and-Trade (CaT) mechanisms jointly constitute the Emission Trading Scheme (ETS), which is expected to have a profound impact on China's social and economic decarbonization. However, previous studies have primarily focused on the impact of the CaT mechanism, neglecting the fact that CCERs serve as a carbon offset trading mechanism. This paper focuses on the impact of the CCER mechanism on China's energy economy and environment by constructing a recursive dynamic computable general equilibrium model that couples CaT and CCER mechanisms. Introducing the CCER mechanism based on the CAT mechanism leads to increased output and reduced prices in renewable energy sectors, cascading positive effects across various energy-utilizing sectors to counter the decline in Gross Domestic Product (GDP) and residential welfare. The finding suggests that China's unique CCER mechanism is poised to play a more important role in promoting renewable energy to mitigate global warming, given its potential to transform the structure of energy production and consumption. Finally, targeted policy recommendations are proposed for implementing the CCER mechanism.

A Dynamic CGE Model for Optimization in Business Analytics: Simulating the Impact of Investment Shocks

This study formulates a mathematical dynamic Computable General Equilibrium (CGE) model within a rational expectations framework, adhering to neo-classical principles. It emphasizes the significant role of agents’ expectations in determining the broader economic trajectory over time. The model combines microeconomic and macroeconomic perspectives by merging the concept of intertemporal choice with savings behavior. Its mathematical foundations are derived and calibrated using data from a social accounting matrix to enhance its simulation capabilities. The paper presents a practical simulation investigating the economic implications of a strategic investment impact within an specific European region, Madrid as the case of study. Such demand shock affects sectors such as electronics, food, pharmaceuticals, and education. The study models the long-term effects of heightened investment and persistent demand-side shocks. The research demonstrates the CGE model’s ability to forecast economic shifts toward a new equilibrium after an investment shock, proving its utility for assessing the impacts of extensive environmental policies within a European context. The work’s originality lies in its detailed mathematical formulation, contributing to theoretical discourse and practical application in business analytics.

Economic impacts of reducing methane emissions in British Columbia’s oil and natural gas sectors: Taxes vs technology standards

As countries reduce greenhouse gas emissions to fight the potential impacts of climate change, increasing attention is being paid to methane, which is roughly 34 times more potent than CO2 over a 100-year time span. Governments in many jurisdictions aim to reduce methane by 45–75% in oil and gas sectors by 2030. Methane reductions are often achieved by implementing new technologies and operational techniques, but jurisdictions have discussed the implementation of a methane tax. While several studies have focused on the financial costs of reducing methane emissions through adopting new technologies, little information exists on the economy-wide impacts of these initiatives and the effectiveness of different policy tools. We develop a dynamic computable general equilibrium model for British Columbia, Canada, to evaluate the economy wide impacts of methane technology standards versus taxes. Findings indicate that methane can be reduced by 75% by 2030 using technology standards at a loss of 0.0089% of GDP in 2030. Impacts associated with a methane tax will range from a loss of 0.0071–0.18% in 2030, depending on whether new technologies are assumed to be adopted. If a sufficiently high methane tax incentivizes adoption of new technology, the negative impacts of a tax are lower than that of a standard once the policy is fully implemented. While the overall economy-wide impact of a technology standard is relatively low, we find that it is as much as 65% higher than the direct costs.

The economic impacts of a hypothetical foot and mouth disease outbreak in Australia

AbstractThis study uses a multicountry, dynamic, quarterly CGE model, GlobeTERM, to estimate the economic impacts of a hypothetical foot and mouth disease outbreak in Australia. The national welfare losses arising from the outbreak depend mostly on the duration of trade sanctions by importers of Australian animal products. If an outbreak is contained within several months, and trade sanctions are dropped within a year of the outbreak, the net present value of Australia's welfare losses may be around AUS$10 billion. If all importers restore Australian access within a year, other than China–Hong Kong, which delays by 5 years, welfare losses are around AUS$21 billion. In a less likely scenario, in which trade sanctions persist in all trading partners for 5 years after the disease has been eradicated, contrary to international guidelines, welfare losses may exceed AUS$85 billion. Trading partners also suffer welfare losses due to trade sanctions. These losses are large enough to imply, from a global perspective, that a shift towards vaccinate‐to‐live policies combined with global efforts to eradicate the disease may be cost‐effective.

Impacts of emission trading scheme on technological progress: A case study in China

Despite its significant role in mitigating climate change, technology was usually exogenously treated in evaluating climate policy, particularly emission trading scheme (ETS); such treatment cannot comprehensively reveal how ETS affects technological progress. To narrow this research gap, we attempt to endogenize ETS-induced technological change in this paper. A dynamic recursive Computable General Equilibrium (CGE) model is employed to quantify ETS-induced progress of clean technology (PCT) and efficiency improvement. The Chinese nationwide ETS is taken as a case study. The CGE model results show that PCT negatively affects anthropogenic emissions, while efficiency improvement decreases GDP loss or abatement cost. Simultaneously considering both technological progress increases emission abatement but slightly decreases GDP in the long term. The most interesting finding is that PCT moderates the relationship between efficiency improvement and emission abatement. Hence, PCT is crucial in emission abatement and economic growth under climate policy.

Economic Costs of Work Stoppages Caused by the COVID-19 Outbreak

AbstractThis study explores the economic costs of work stoppages resulting from the COVID-19 pandemic. It utilizes a global multiregional dynamic computable general equilibrium model and finds that the higher the proportion of labor compensation in the initial factor distribution, the greater the economic damage. Macroeconomic loss was characterized by a monotonically increasing function, with developed countries potentially incurring greater losses than developing countries. The COVID-19 pandemic had significant negative impacts on the global labor market, with a decline in labor productivity; the cumulative global economic loss in 2020–2022 surpassed $10.4 trillion, of which the EU, the USA, and China contributed 30.44%, 18.74%, and 15.44%, respectively. Countries’ anti-epidemic responses showed great heterogeneity, with South Korea and China’s actions showing the dual advantages of protecting the economy and lives, whereas the EU failed to protect either lives or the economy. This article argues that it was necessary to adopt strict quarantine measures to control the spread of the virus in the early stages of the epidemic, but with a drop in the case fatality rate and the introduction of vaccinations, strict control measures had to be removed to protect the economy.

The importance of having a more realistic welfare transfer determination rule: A CGE analysis for Ireland

While unemployment benefits constitute a significant share of welfare transfers in developed countries, the computable general equilibrium (CGE) literature ignores the impact of unemployment rate changes on these transfers. This paper investigates the impacts of alternative welfare transfer determination rules by using a dynamic CGE model for Ireland. We find that indexing the nominal welfare transfer budget to the consumer price index (CPI) and the aggregate unemployment rate is superior to the CPI alone. Although both specifications generate similar macroeconomic outcomes, our novel specification improves household welfare as well as income distribution across households. We argue that it is more in line with the behaviour of governments and that the literature ignores the progressivity elements embedded in the welfare system, which will reduce the welfare cost of carbon taxation. The results can be generalised in analysing the impacts of tax reform in countries where unemployment benefits are essential elements of welfare transfers.

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.

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.

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.