# **Box 1: CGE Models and Environmental Policy**

Policies aimed at significantly reducing environmental problems such as global warming, acid rain, deforestation, waste disposal or any degradation air, water, or soil quality may imply costs in terms of lower growth of GDP, a reduction in international competitiveness or in employment. The implied change in relative prices will induce general equilibrium effects throughout the economy. For this reason, it is useful to evaluate the effects of environmental policy measures within the framework of a CGE model. Although partial equilibrium models make it possible to estimate the costs of environmental policy measures, taking substitution processes in production and consumption as well as market clearing conditions into account, CGE models additionally allow for adjustments in all sectors, enabling us to consider the interactions between the intermediate input market and markets for other commodities or intermediate inputs, and thereby complete the link between factor incomes and consumer expenditure.

Since the first environmental CGE models appeared (Forsund and Storm, 1988; Dufournaud et al., 1988), the literature has included applications in many major areas, such as: (a) models used to evaluate the effects of trade policies or international trade agreements on the environment (Lucas et al., 1992; Grossman and Krueger, 1993; Madrid-Aris, 1998; Yang, 2001; Beghin et al., 2002) and for diverse applications in the area of the Global Trade Analysis Project (Hertel, 1997); (b) models to evaluate climate change, which are usually focused on the stabilization of CO2, NOx and SOx emissions (Bergman, 1991; Jorgenson and Wilcoxen, 1993; Edwards et al., 2001); (c) models focused on energy issues, which usually apply energy taxation or pricing to evaluate the impacts that changes in the price of energy can have on pollution or costs control (Pigott et al., 1992); (d) natural resource allocation or management models, whose objective is usually the efficient interregional or inter-sectoral allocation of multi-use natural resources—for example, allocation of water resources among agriculture, mining, industry, tourism, human consumption and ecological watersheds (Robinson and Gelhar, 1995; Ianchovichina et al., 2001); and (e) models focused on evaluating the economic impacts of environmental instruments, or of specific environmental regulations, such as the Clean Air Act in the USA (Jorgenson and Wilcoxen, 1990; Hazilla and Koop, 1990).

The CGE modeling in India with environmental links has mainly focused on reduction of carbon emissions and its implications for economic growth (Murthy, Panda and Parikh, 2000; Ohja 2005, 2008).

Source: Conrad (2002) 3. The CGE model used here is based on a framework developed and maintained by the Global Trade Analysis Project (GTAP) network<sup>4</sup> . GTAP model is built on a global trade database and reflects, among other indicators, India‘s performance in terms of export growth, which has increased dramatically during the last decade. With India emerging as a major producer and exporter of goods including pollution intensive commodities, the use of such a model to assess the environmental impacts of the country‘s development path was considered appropriate. The main environmental variable that has been included in the model is emissions of particulate matter of less than ten microns (PM10) as well as particles of sulfates and nitrates). These emissions are recognized among the most important in terms of their health effects. The standard GTAP model has been expanded to include emissions from all the key sectors, including PM10 and other small particles

> 4 <u>https://www.gtap.agecon.purdue.edu/</u> GTAP (1997), T. Hertel Ed., Global Trade Analysis Modeling and Applications, NY, USA.

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