designed on polluting inputs will raise the unit cost of production and, responding to the rise in unit cost of production,<sup>18</sup> the producer will reduce the output or substitute it with a more eco-friendly input. Either of these actions will reduce pollution. It is thus anticipated that the tax in the model will encourage a shift to a greener fuel mix and annual energy efficiency gains over and above the historic trend. In the case of a tax on PM10 for instance we consider a modest tax as a way of reducing particle emissions per unit of coal used. For further reductions in PM the tax has to induce a shift out of coal to cleaner fuel. The scenario outline is summarized in Table 1.

# **_Green Growth Plus Scenario_**

16. The Green Growth Plus Scenario incorporates a more aggressive target of a 30 percent reduction in PM10 and other small particles in the air in 2030 over what could be achieved under the BAU. Here again, targeted small particles emissions reduction is attained through a tax on coal or through a tax on PM10.

17. One important difference between the Green Growth and Green Growth Plus scenarios is that the latter assumes that, as the economy matures, the market realizes the economic benefits of cleaner and more efficient production. Gradually the environmental command-and-control ̳push‘ policies in the initial periods are replaced in the medium to long run by market-driven pull policies to achieve cleaner and more efficient production. For example, the performance of coal technologies improves over time, reflected in their rising plant load factor, and newer plant vintages, with more of the older, less efficient plants getting replaced and in the increased penetration of advanced coal technologies like super-critical pulverized coal and integrated gasification combined cycle which will become competitive over time. While recognizing the limitations of incorporating all these technologies within the CGE framework, they have been modeled through broad alterations in investments and emission coefficients. The idea is that the latest vintage, added to aggregate capital stock, embodies innovation and technological improvement with no additional cost to the producer.<sup>19</sup> 18. The CGE model used in this analysis was limited in terms of formulating different policy scenarios because the current dataset included only five types of energy sources-- coal, crude oil, refined oil and coal products, natural gas and electricity. Based on data availability, the model and study can be expanded in the future to include other energy sources, such as renewable energy and carbon sequestration measures.

# **_Calibrating the Model for the BAU GDP Growth Scenario_**

19. Estimates of growth in population and labor force were based on projections made by national / international sources (e.g. the National Council for Applied Economic Research (NCAER), UN and World Bank). Medium projections were used for measuring population growth in 2007-2030 using UN demographic data. The annual

> 18 Environmental taxes are corrective measures for dealing with the environmental "externality" first studied by Pigou (1932). A Pigouvian approach sets taxes equal to the marginal damage caused to the environment by the production process thereby "internalizing" the full social marginal costs.

> 19 A more formal representation of this can be found in Conrad and Henseler-Under (1986).

11