Modelling the health related benefits of environmental policies - a CGE analysis for the eu countries with gem-e3

MODELLING THE HEALTH RELATED BENEFITS OF

ENVIRONMENTAL POLICIES AND THEIR FEEDBACK

EFFECTS

A CGE ANALYSIS FOR THE EU COUNTRIES WITH GEM-E3

5 September 2003

Inge Mayeres^a

Denise Van Regemorter^b

Abstract

A number of recent studies on taxation in the presence of externalities in a second-best
framework consider the implications of taking into account the feedback effects of
environmental quality. This paper explores by means of GEM-E3, a computable general
equilibrium model for the EU countries, the importance of the feedback effects of the health
related benefits from an environmental policy. The modelling framework implemented in GEM-
E3 allows for three channels through which the feedback can occur: a decrease in medical
expenditure, an increase in the consumers’ available time and an increase of labour productivity
in the production sectors. The results show that the explicit modelling of the health related
effect of air pollution on consumers and producers allows for a better evaluation of the impact
of environmental policies on private consumption and employment. However, in terms of global
effect, the impacts of the feedback are small, compared to the standard GEM-E3 model where
the health related benefits are evaluated ex-post.

Keywords:     applied general equilibrium model, non-separable externalities, CO2 tax,

environment, ancillary benefits

JEL-classification:     D58, D62

^a Postdoctoral researcher of the Fund for Scientific Research - Flanders; K.U.Leuven, Centre for
Economic Studies

^b K.U.Leuven, Centre for Economic Studies

Corresponding author: Denise Van Regemorter, C.E.S., K.U.Leuven,
Naamsestraat 69, 3000 Leuven, Belgium.

Tel: +32 16 32 68 12, Fax: +32 16 32 67 96,

E-mail: [email protected]

The authors wish to thank Stef Proost and the participants at the ETE Environmental Economics
Day in Leuven and at the 5^th Conference on Global economic Analysis in Taipei for their useful
comments and suggestions. This research was financed by the European Commission's 5^th
Framework Program and the Fund for Scientific Research - Flanders. All errors remain the
authors' sole responsibility.

ENERGY, TRANSPORT AND ENVIRONMENT

CENTER FOR ECONOMIC STUDIES

Naamsestraat 69 b-3000 leuven
BELGIUM

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