shifting the production to other regions. This is called the spatial effect. Finally, trade
liberalization alters the allocation of the resources between the production sectors, the so-
called composition effect (Bommer 1998, Nordstrom and Vaughan 1999).
4. Description of the CGE Model
Computable general equilibrium modeling provides a useful and widely used tool for
applied policy analysis and is particularly suited to the analysis of tax and trade policy issues.
There is a need for such a tool, especially in transition economies, which are currently
designing their new economic policies. This section presents the main characteristics of a
comparative-static multi-sector computable general equilibrium model of the world economy
designed for the medium-run economic analysis of environmental constraints and trade policy
(see Appendix for the algebraic model formulation). The analysis covers 7 sectors and 5
regions as described in Table 4. The regional aggregation covers beside the EU-15 (EUR) and
the Central European Associates (CEA), that is Bulgaria, Czech Republic, Hungary, Poland,
Romania, Slovakia and Slovenia, the most important regions of the Kyoto protocol, i.e. the
other Annex-B countries (RAB) taking on legally binding commitments on greenhouse gas
emissions, particularly Australia, Canada, Japan, Indonesia and the US, the Former Soviet
Union (FSU) as a main supplier of “hot air”, and other countries without carbon abatement
requirements (ROW) such as Brazil, China, India. The regional aggregation follows the
aggregation of the GTAP4 database. However, it should be kept in mind that the costs and
benefits of enlargement are unevenly distributed across present EU member countries as well
as across different central and eastern European countries depending on the respective trade
share that is exposed to potential competition (see Breuss and Schebeck 1999). With respect
to environmental policy, the EU has done a reallocation of the EU bubble target among the
member states of the bubble in 1998 leading again to a very uneven distribution of emission
reduction requirements (Michaelowa and Betz 2000). The sectoral aggregation captures key
dimensions in the analysis of greenhouse gas abatement such as differences in carbon
intensities and the degree of substitutability across energy goods and carbon-intensive non-
energy goods. The energy goods identified in the model are coal (COL), natural gas (GAS),
crude oil (CRU), refined oil products (OIL) and electricity (ELE). The non-energy sectors
include important carbon-intensive and energy-intensive industries (EIS), which are
potentially most affected by carbon abatement policies and other, non-energy intensive
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