ENVIRONMENTAL POLICY ANALYSIS 455
This article consists of six sections. Following this introductory section, Section 2 reviews the literature in environmental CGE
models. Section 3 develops an environmental CGE model. It be- gins with an introduction to the interactions between production
and pollution. The theoretical framework of a multi-sector envi- ronmental CGE model is then developed in this section. Section
4 introduces the framework of an environmentally extended social accounting matrix ESAM. The ESAM serves as a consistent
equilibrium data set for parameter calibration of the environmen- tal CGE model.
The application of the environmental CGE model to China using 1990 Chinese data is presented in Sections 5. Several Chinese
environmental policy alternatives are simulated in this section, and the major findings from these policy simulations are discussed.
Section 6 contains concluding remarks.
2. CGE MODELING FOR ENVIRONMENTAL POLICY ANALYSIS: THE LITERATURE
Due to its salient features mentioned in introduction section, CGE modeling emerged in 1960 Johansen, 1960, and since the
1980s it has become a leading tool in the multi-sector, economy- wide modeling for policy analysis.
Studies on incorporating environmental components into a CGE framework emerged in the late 1980s. Forsund and Strom
1988, Dufournaud et al. 1988, Bergman 1988, Hazilla and Kopp 1990, Robinson 1990, and Jorgenson and Wilcoxen
1990 contributed to the early development of environmental CGE models. So far, about twenty stylized or applied environmen-
tal CGE models have been described in the literature. These models, in one way or another, endogenize pollution effects into
production or utility functions. These models have been applied mainly to environmental and economic impact assessments of
various public policies, such as tax and government spending.
More recently, we have seen the rapid growth of CGE applica- tions in the arena of environmental policy analysis.
1
These CGE
1
Here, we give only a rough list of the recent papers on CGE modeling for environmental issues: Boyd and Uri 1991, Glomsrod et al. 1992, Conrad and Schroder 1993, Blitzer
et al. 1992, Lee and Roland-Holst 1993, Robinson et al. 1993, Lewis 1993, Azis 1993, Beghin et al. 1994, Copeland and Taylor 1994, Persson 1994, Dowlatabadi
et al. 1994, Nestor and Pasurka 1995, Yeldan and Roe 1994, Gruver and Zeager 1994, and Espinosa and Smith 1994.
456 J. Xie and S. Saltzman
models are distinct from each other in terms of the ways they integrate environmental components with economic activities in
their CGE models. Environmental CGE models can be divided into several types according to the level of pollution-related activi-
ties integrated into them. The first type of models is not very different from a standard CGE model.
2
They actually are extended applications of standard CGE models. These extensions to stan-
dard CGE models include either estimating pollution emissions using fixed pollution coefficients per unit of sectoral outputs or
intermediate inputs,
3
or exogenously changing prices or taxes con- cerning environmental regulations without any changes in model
structure.
4
To extend the applications of a standard CGE model in such ways do not affect the behavioral specification of a standard
CGE model, but only provide more detailed description of produc- tion results from the environmental prospective.
The second type of environmental CGE models, however, be- gins to introduce environmental feedback into economic systems.
The models of this group, represented by Jorgenson and Wil- coxen’s 1990 model, have pollution control costs specified in
production functions. A further extension of production specifica- tion is to consider the effects of environmental quality on produc-
tivity.
5
To represent the effects of pollution emission and abate- ment activities on consumption, a number of models have
environmental effects incorporated in utility functions.
6
Besides these modifications to production and consumption functions, a few models specify the production functions of pollu-
tion abatement activities or pollution abatement technologies. Robinson 1990 uses a Cobb–Douglas production function to
represent a pollution cleaning activity. Nestor and Pasurka 1995 model air pollution abatement processes and abatement tax rates
based on an augmented input–output table which represents the inputs purchased for air pollution abatement activities. Robinson
2
The word “standard” is somewhat vague. However, it is used in the literature. A standard CGE model pretty much means the type of CGE models developed by the World
Bank for developing countries to study structural change and international trades.
3
The models of Blitzer et al. 1993, Lee and Roland-Holst 1993, and, Beghin et al. 1994 belong to this group.
4
See, for example, Boyd and Uri 1991.
5
See Bergman 1993, and Gruver and Zeager 1994.
6
See Robinson 1990, Piggott et al. 1992, and Bergman 1993.
ENVIRONMENTAL POLICY ANALYSIS 457
et al. 1993 identify polluting production processes and abatement technologies of each process.
7
Although there are diverse CGE models being applied to envi- ronmental policy analysis, environmental CGE modeling is still
in its early stages. This is due to two reasons. The first is a relatively incomplete and unsophisticated specification of models of eco-
nomic and environmental interactions. In many models, environ- mental externalities are weakly defined under rigid assumptions
or exogenously determined, which undermines the effectiveness and comprehensiveness of an environmental CGE model. The
second reason is a lack of a well-defined environmental data frame- work which can provide a solid basis for numerical specification
of an environmental CGE model. In addition, most of the existing environmental CGE models are still stylized and ad hoc in nature.
Even though a few models are applied to environmental issues in the real world, these models have mostly been built for developed
countries. Few models aim at environmental issues of developing countries.
3. INTEGRATING ENVIRONMENTAL ACTIVITIES INTO A GENERAL EQUILIBRIUM FRAMEWORK:
