Incorporating Climate Change Feedbacks into a General Economic Equilibrium Model

To incorporate market and non-market effects of climate change into a computable general equilibrium (CGE) model, we begin with the basic data that supports CGE models, the Social Accounting Matrix (SAM). We identify where environmental damage appears in these accounts, estimate the physical loss, and value the loss within this accounting structure. Our approach is an exercise in environmental accounting, augmenting the standard national income and product accounts to include environmental damage. Examples of applying the approach in two areas are provided: air pollution health effects and economy-atmosphere-land-agriculture interactions. We estimate market and non-market effects of air pollution on human health for the U.S. for the period from 1970 to 2000. The pollutants include tropospheric ozone, nitrogen dioxide, sulfur dioxide, carbon monoxide, and particulate matter. The health effects from exposure to air pollution are integrated into the MIT Emissions Prediction and Policy Analysis (EPPA) model, a computable general equilibrium model of the economy that has been widely used to study climate change policy. Benefits of air pollution regulations in USA rose steadily from 1975 to 2000 from $50 billion to $400 billion (from 2.1% to 7.6% of market consumption). We also estimate the economic burden of uncontrolled levels of air pollution over that period. In another case study, we examine the health-related economic benefits and costs of policy actions for China. We found that economic burden of uncontrolled levels of air pollution is lower that in the U.S. because of lower wage rates but macroeconomic impact is bigger than in the U.S. (in 2000 the economic burden in the USA is 4.7% of market consumption, in China - it is 10% of market consumption). For assessing the impacts of environmental change on vegetation (crop productivity, forest productivity, pasture), we have augmented the EPPA model by further disaggregating the agricultural sector. This allows us to simulate economic effects of changes in yield (i.e., the productivity of cropland) on the regional economies of the world, including impacts on agricultural trade. We examine multiple scenarios where tropospheric ozone precursors are controlled or not, and where greenhouse gas emissions are abated or not. In general, a change in food consumption is smaller than a change in agriculture yield due to resource reallocation from or to the rest of the economy.