trade in different sectors of the economy, a computable general equilibrium (CGE) approach seems appropriate (Kehoe et. al., 2005).

The quantitative results presented in this paper rely on a specific CGE model that has been developed at the World Bank, known as the Environmental Impact and Sustainability Applied General Equilibrium Model, or the ENVISAGE model.<sup>10</sup> The primary purpose of the ENVISAGE model is to assess the growth and structural impacts for developing countries from climate change itself and policies to address climate change—either unilaterally or in an international agreement.

Any quantitative analysis in this field will be conditional on assumptions regarding exogenous developments (for example the future cost of alternative technologies), key parameter values (for example intra-fuel substitution elasticities) and model specification (for example carbon tax revenue recycling). Our quantitative exercise is meant to be illustrative of the signs and broad magnitudes of effects, rather than be taken as definitive in any way. The reader should nonetheless keep in mind certain caveats regarding the model and its results.

First, and foremost, the model is not equipped to quantify any of the welfare benefits from emissions reductions per se and does not take account of emissions related to forestry.

Second, the modeling does not take into account any pre-existing subsidies or other distortions in developing country energy markets whose elimination could provide opportunities for emission abatement. The OECD (2009) has calculated the fuel subsidies in a number of developing economies. Most of these are consumption rather than production subsidies and, although they vary across fuel types and income groups, their average value is relatively low (for example, less than 3 percent for China). This suggests that eliminating these subsidies will have positive welfare consequences that our results do not incorporate. However, the fact that the magnitudes are low would suggest that our results relating to compositional changes may not be significantly affected.

Third, the model is not able to represent the full range of available alternative technologies, and so may tend to exaggerate the output and trade responses as energy prices rise with emission limits. But some features of the model may limit the biases on this score. We allow for exogenous improvements in manufacturing energy efficiency through the accumulation of more advanced capital stock. Also, the current version of the ENVISAGE model does allow for limited substitution between technologies. For example, it allows for switching to alternative (and cleaner) technologies in the power sector, albeit in limited fashion.<sup>11</sup> The model also allows

> 10 The model has several distinguishing features: a focus on developing countries and significant sectoral disaggregation; an integrated climate module that generates changes in global mean temperature based on emissions of four greenhouse gases; and economic damage functions linked to changes in temperature. A summary description of the model and the key assumptions are provided in the Technical Appendix and van der Mensbrugghe (2009) provides a full description of the model.

> 11 The current electricity technologies include five activities—coal, oil and gas, hydro, nuclear and other (essentially renewable). The five activities are aggregated together to ‘generate’ a single electricity commodity distributed to

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