Introduction and overview

One of the goals of the Global Trade Analysis Project (GTAP) is to make a versatile, well-documented “consensus” model broadly available. The advantage of such a tool is that it can help focus discussion on the economics of the analysis, rather than the mechanics of model formulation and solution. Although this model is reasonably versatile, no numerical model can be truly all-purpose, and GTAP is no exception. Of particular relevance to this chapter are environmental externalities and abatement costs, which GTAP does not currently incorporate. The goal of the exercises we present in this chapter is to illustrate how GTAP can be used to analyze issues that are not directly accommodated by the model. This work is meant to be illustrative rather than definitive; in other words, we are not arguing that the model we use is the best model; rather, we wish to illustrate how simple adaptations to an existing model structure can permit better insight into environmental policy issues.

This work is also motivated in part by studies cited in the popular press containing statements such as:

1. Carbon taxes would cost the US economy 4% of gross national product (GNP).

2. Environmental regulation would lead to reduced imports because they distort the economy.

Often, the bases of such statements are simulation models, most of which have one or both of the following characteristics:

1. There is no treatment of environmental feedbacks to the economy (particularly benefits of cleanup).

2. There is no abatement technology.