An Environmental Computable General Equilibrium (CGE) Model for India

Abstract

The input–output model and social accounting matrix (SAM) models have been widely used in building multisectoral, economy-wide models for development planning and policy analysis (Miller and Blair, Input-Output Analysis: Foundations and Extensions, 1985). Models of this type assume an economy that is linear in costs with exogenous demands and fixed prices. These models might be appropriate for short-run policy analysis, but their assumptions do not appear to apply to most real-world economies, which are either pure market economies or market-based economies with an overarching governmental presence. Even in the latter type of mixed economies, for example, India, a great deal of economic activity is not under direct control of the government, but is governed by price signals of the market. In such a decentralized system, myriad intersectoral and intrasectoral substitutions, mostly nonlinear, take place in production, consumption, and distribution in response to price changes. Moreover, there are important feedbacks arising out of interactions among the various commodity and factor markets. A computable general equilibrium (CGE) model is especially designed to capture these essential features of the market. CGE analysis, in comparison to other available techniques, thus captures a wider set of economic impacts from a shock or the implementation of a policy reform, typically, by building and then comparing alternative policy scenarios. Therefore, in this study, we have used a CGE model to evaluate the greenhouse gas (GHG) emissions abatement policies. This model is a single-country model interacting with the rest-of-the-world (ROW). We use this to address the primary concern of our policy makers to formulate national climate change mitigation policies which protect national interest without harming global concerns on climate-related issues.