An Environmental SAM and SAM-based CGE Modelling for Environmental Policy Problems

1. An Environmental SAM andSAM-based CGE Modelling for Environmental Policy Problems Noritoshi Ariyoshi Faculty of Environmental Studies Nagasaki University Itsuo Sakuma School of Economics Senshu University Akihiko Taniguchi Graduate School of Economics Senshu University International Workshop for Interactive Analysis on Economy and Environment Cabinet Office, the Government of Japan 4th March 2006

2. CONTENTS • 1. Introduction • 2. A general explanation of Japanese NAMEA (Hybrid Accounts) • 3. From NAMEA to a SEEA-type SAM with monetary valuation of environmental pressures • 4. A CGE analysis • 5. Concluding remarks

3. 1. Introduction • The purpose of this paper is twofold. Concerning • (1) Data aspects, we attempt to • Construct a DATA ENVIRONMENTAL SAM from Japanese NAMEA(*) compiled by ESRI. • DATA ENVIRONMENTAL SAM is a SEEA-ver. IV.2 type SAM(**), which includes monetary valuation of environmental pressures, in particular, the estimation of imputed environmental cost. (*)”NAMEA” is an acronym for National Accounting Matrix Including Environmental Accounts. (**)”SEEA” is an acronym for System for Integrated Environmental and Economic Accounting.

4. 1. Introduction(continued) • Concerning (2) Modelling aspects, we attempt to • Conduct SAM-based CGE analyses. • To do this, MODEL ENVIRONMENTAL SAM will be created to accommodate a specific general equilibrium modelling structure. • Using this SAM as a base equilibrium data, various simulation (comparative static analyses) will be conducted so as to evaluate policy changes etc. involved.

5. Introduction (continued) • NAMEA • DATA ENVIRONMENTAL SAM • MODEL ENVIRONMENTAL SAM • ENVIRONMENTAL CGE ANALYSIS

6. 1. Introduction (continued):An illustration of a SAM-based CGE Evaluation of the Policy Change etc. Data Modelling Calibration, Replication SAM after an Experiment Base Model SAM Experiment (Policy Change etc.)

7. 2. A General Explanation of Japanese NAMEA (Hybrid Accounts) 1) It is based on the original NAMEA* by the Netherlands, and estimates for 90, 95, and 00 2) Twofold parallel structure: national accounting matrix (NAM) at monetary term and environmental accounts (EA) at physical term. 3) Twofold structure of EA : substance accounts and environmental problem accounts.

10. 3. From NAMEA to a SEEA-type SAM with Monetary Valuation of Environmental pressures • The estimation of imputed environmental cost (maintenance cost in 93SEEA ver. IV.2) should be considered to be highly important because it can clarify what the government should do for the environment. • Only imputed environmental costs the origin of which is industries (=market producers) are considered. Because it may be necessary to take the extension of production boundary into consideration in order to deal with the consumption-related costs.

11. The Estimation of Imputed Environmental Cost • Except for CO 2 , the assumption of “zero-emission” is posited in order to calculate imputed environmental cost about each environmental pressure category. • Concerning CO 2 , the emission level 6% below that in 1990 is assumed according to the Kyoto Protocol. • Two summary tables are on two slides below, giving imputed environmental cost by sources and by environmental pressure types.

13. Imputed Environmental Cost by origin of Industries

14. Imputed Environmental Cost By type of environmental pressures

15. 4. A CGE Analysis: AGE and CGE • CGE (Computable General Equilibrium) - has been developed in the history of World Bank’s development modelling, - was an extension of SAM multiplier analyses, and naturally - has been SAM-based. • AGE (Applied General Equilibrium) - has been developed mainly by Scarf and his successors.

16. 4. A CGE Analysis: Main Model • Main feature: the environment is a production factor. • In our model, the environment will be considered as a sink of a sort. • To use it, industries (not household) have to pay a sum (emission permit). • The payment flow may be treated as if it is part of the payment to capital factor in the base SAM. • The production part of the model is about the same as that of typical world bank models except for the treatment of environment. (See the next slide.)

17. CAP COBB DOUGLAS LAB MIXEDPROD.FACTOR ECO-MARGIN CES DOM.PROD. INT.INPUT LEONTIEF DOM.GOODS.1 Production Part of the Model EX- PORTS DOM.GOODS2 CES IM-PORTS CET COM-POSITE GOODS

18. A thought behind the treatment • The domestic equilibrium price of the permit will be determined at the level of imputed environmental cost, estimated according to the concept of “maintenance cost.” • Because firms do not pay for the permit if they can reduce the emission by spending actual environmental protection cost which equals to maintenance cost and is less than the permit value.

19. MRS between ordinary factors and the environment is determined by maintenance cost The environment Ordinary factors

20. Results(1) • The increase in the endowments of capital or labour leads to the decrease in imputed environmental cost (eco-margin). In one sense, the environment is ill-used just to save other factors. • But size of pressure of the 10% increase in each factor endowment to the industries is different industry by industry. Concerning labour, a large decrease in eco-margin is found in steel, textiles, construction, etc.

21. Results(2) • Concerning 10% increase in capital , a large decrease in eco-margin is found in Petroleum and coal products, etc. • The 10% increase in labour endowment has a larger effect on the reduction of eco-margin than the same proportional increase in capital endowment.(7.6% vs 3.1%)

22. Results(3) • The 10% increase in indirect tax rate will reduce eco-margins of all industries, by 0.9%-1.4%. • The 10% increase in the price of environment (tradable permit) will reduce eco-margins by 0.5%-4.2%.

24. A Model for an Ordinary Economy • In addition to the main model, an alternative model is formulated to analyse an ordinary or actual economy without environmental imputation. • Policy makers may be inclined to think that it is necessary to introduce direct rather than indirect regulation measures in order to reduce the imputed environmental cost known quite immediately to zero. • In other words, the imputed cost in the main model needs to be borne actually by the producers of the alternative model. Thus, they must spend some additional cost for the environmental protection instead of discharging residuals.

25. Greened Economy GDP • On this assumption, the working of the economy will be simulated. • Additionally, “greened economy GDP(NDP)” will be calculated although “greened economy SAM” may be a more meaningful concept. • The concept of “green GDP” is criticised in that it does not take it into account that incurring additional cost (maintenance cost) could lead to various percussions and repercussions, so the concept does not reflect the real situation. • Greened economy NDP may be equal to or greater than green GDP depending on the assumptions made.

26. Green GDP and Greened Economy GDP Billion yen CASE 1: Imputed environmental cost replaced by INTERMEDIATE INPUT CASE 2: Imputed environmental cost replaced by FACTOR INPUT CASE 3: Imputed environmental cost replaced by Mixed INTERMEDIATE and FACTOR INPUT

27. Concluding Remarks • A controversial problem over “direct” vs. “indirect” regulations will be spotlighted by this sort of modelling. • Whether any switch of techniques as well as shift in industrial structure is triggered by the policy change may be the key to the problem. • More disaggregated treatment about environmental pressure categories may be necessary.