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

There are two versions of GEM-E3, GEM-E3 Europe and GEM-E3 World. They
differ in their geographical and sectoral coverage, but the model specification is the
same. This paper uses the GEM-E3 Europe model. The European version covers 14 EU
countries (all EU countries except Luxemburg) and the rest of the world (in a reduced
form) and is based on the EUROSTAT database (Input-Output tables and National
Accounts data). The base year is 1995.

The standard version of GEM-E3 takes into account both the costs and benefits
of environmental policy proposals. It includes an environmental quality function that
depends on the emissions and that has an impact on welfare through the utility function.
It is assumed that environmental quality provides a separable contribution to the
consumers’ welfare.

Here we present an extension of the standard GEM-E3 model. For some effects
of air pollution, the feedback effect on the behaviour of the economic agents is
incorporated. We focus on the feedback effects related to the health impacts of air
pollution. The impact of the change in health on the consumers, production sectors and
the government is modelled more realistically. Sections 2.2 to 2.5 describe how this is
implemented. The non-health related effects and the mortality impacts continue to be
modelled in the same way as in the standard GEM-E3 model.

2.2. The health impacts of air pollution on the consumers

In order to introduce the health related feedback effect on consumption we base
ourselves on the health production function approach (for an overview of the relevant
literature, see Freeman (2003)). The health production function relates a continuous

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