470 J. Xie and S. Saltzman
economy has only one representative household. To reflect the effects of pollution cleaning on social welfare, social welfare func-
tion shown in Equation 54 includes the level of pollution abate- ment TDA
g
for g 5 1, 2, . . . , m. Pollution-abatement services are assumed to be public goods
which are purchased by production sectors under environmental laws or regulations andor the government. Households have no
demand for pollution cleaning services.
12
Finally, nominal GDP GDPVA and real GDP RGDP are defined in Equations 54 and 55. They are used in Equation 7 to
determine the price index.
4. NUMERICAL SPECIFICATION OF THE MODEL
The environmental CGE model presented in Section 3 contains various parameters. Correct estimation of these parameters is
as important as the correct model specification. The calibration approach is adopted in parameter specification of the environmen-
tal CGE model.
13
The social accounting matrix SAM approach has been widely used to provide a consistent data base for calibrating a CGE
model. However, a traditional SAM falls short in representing elements like pollutants, environmental quality and natural re-
sources, and most of their interactions with economic activities in the real world. It cannot satisfy our requirements in model
calibration.
In order to capture the relevant interactions between pollution and economic activities and provide a consistent and integrated
data framework for calibrating the environmental CGE model, the framework of an environmentally extended SAM ESAM is
developed by the authors. It is presented in Table 2. The ESAM provides an integrated data system in which pollution related
information, such as those concerned with pollution abatement sectors, sectoral payments for pollution cleanup, pollution emis-
sion taxes, pollution control subsidies, and environmental invest- ments, are accounted for separately.
12
This kind of assumption has been used by Robinson 1990.
13
See Mansur and Whalley 1984 and Devarajan et al. 1995 for more discussion on the calibration approach.
ENVIRONMENTAL POLICY ANALYSIS 471
Table 2: Framework of an Environmentally Extended Social Accounting Matrix
Continued
More specifically, pollution-abatement activities, i.e., the activi- ties of removing pollution, are separately listed in the activity
account. The intermediate inputs of pollution-abatement sectors are presented in sub-matrix 3,2 in the commodity by activity
matrix, which follows Leontief’s approach illustrated in his envi- ronmental IO tables 1970.
14
Sub-matrix 2,4 in the activity by commodity matrix presents the amount of pollutants that are
abated by pollution abatement sectors. The costs for removing
14
Quite a number of researchers have used Leontief’s approach to describe intermediate flows of pollution abatement activities and pollution abated in IO tables. See, among
others, Idenburg and Steenge 1991.
472 J. Xie and S. Saltzman
Table 2: Continued
SUBPROD 5 subsidies to production sectors; SUBPCTRL 5 subsidies to pollution abatement sectors.
pollution or the payments for pollution cleanup in production sectors are presented in matrix 4,1.
Pollution effluent fees by pollutants are singled out in row 5, the activity entry of which contains the payments of production
sectors for their pollution emissions and the household entry of which contains household payment for its waste disposal. These
fees are paid to government in entry 11,5 and then partially transferred to production sectors as pollution control subsidies in
the pollution control subsidy column 15,11 and partially distrib- uted by government to household as subsidy 9,11. The compensa-
tion of production sectors to household for the damage caused by
ENVIRONMENTAL POLICY ANALYSIS 473
production pollution are presented, together with other enterprise transfers to household, in entry 9,10.
Government efforts in pollution abatement are also reflected in government spending on pollution cleanup in entry 13,11.
Household spending on pollution cleanup, if there is any, can be kept in entry 13,9. Environmental investment is separately
accounted for in the environmental investment column column 17 and row row 17 in order to distinguish environmental invest-
ment from other types of investment and, furthermore, environ- mental investment consumption from other types of consumption.
In addition, pollution generation and resource uses in physical terms are also presented in the last two columns and rows of the
ESAM.
A numerical example of an ESAM using Chinese data is pre- sented in a case study in the next section. A detailed discussion
of how to calibrate a CGE model to a SAM can be found in Devarajan et al. 1994.
5. CHINESE ENVIRONMENTAL POLICY ANALYSIS 5A. Country Background
