General Equilibrium Costs and Benefits of Environmental Policies

Abstract

Policies aimed at eliminating or significantly reducing serious environmental problems almost by definition imply significant, or even dramatic, emission reductions. But large emission reductions tend to have a large impact on costs in one or several sectors of the economy, and these shifts in relative costs are likely to induce general equilibrium effects throughout the whole economy. For this reason it is often useful to evaluate major environmental policy measures within the frame of a computable general equilibrium (CGE) model. More precisely a CGE model makes it possible to estimate the costs of environmental policy measures, taking substitution mechanisms in production and consumption as well as market clearing conditions into account. Thus, policy evaluations based on CGE models can provide insights often neglected when more partial methods are used.