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

Noritoshi Ariyoshi Faculty of Environmental StudiesNagasaki University

Itsuo SakumaSchool of EconomicsSenshu University

Akihiko TaniguchiGraduate School of EconomicsSenshu University

International Workshop for Interactive Analysis on Economy and EnvironmentCabinet Office, the Government of Japan4th March 2006

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

1. Introduction

The purpose of this paper is twofold. Concerning (1) Data aspects, we attempt to Construct a DATA ENVIRONMENTAL SAM from Jap

anese NAMEA(*) compiled by ESRI. DATA ENVIRONMENTAL SAM is a SEEA-ver. IV.2 ty

pe 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.

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.

Introduction (continued)

NAMEA

DATA ENVIRONMENTAL SAM

MODEL ENVIRONMENTAL SAM

ENVIRONMENTAL CGE ANALYSIS

1. Introduction (continued):An illustration of a SAM-based CGE

Base Model SAM SAM after anExperiment

Modelling

Calibration,

Replication

Experiment

(Policy Change etc.)

DataEvaluation of the Policy Change etc.

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.

Ac

cum

ula

tio

n t

o e

nv

iro

nm

en

t

Disposal of pollutants

Input of natural assets

Decrease in land use

Em

issi

on

of

po

lluta

nts

Incr

ease

in n

atu

ral a

sets

Incr

ease

in la

nd

use

s

Opening stocks Opening stocks

National accounting matrix(on the monetary basis)

Substances accounts

Hidden material flows

Closing stocks Closing stocks

A

BA-B

Ch

ang

es

in n

atu

ral a

sse

ts

Ch

ang

es

in la

nd

use

Environmental problem accounts

Hid

den

ma

teria

l flo

ws

Po

lluta

nt’s

con

trib

utio

n to

env

iron

men

tal p

robl

ems

C

Environmental indicators

Environmental accounts (on the quantity basis)

Figure 2.1 Sketch of J apanese NAMEA

D

Global

CO

2

Oth

ers

(5)

SO

2

Oth

ers

(2)

T-P

T-N

＆

Was

tew

ater

1 2 3 4 5 6 7 8 9 10a 10b 10c 10d 10e 10f 10g 10h 10i 10j 10k 10l 10m 10n X1 X2 11a 11b 11c 11d 11e 11f 11g 11h 11i 11j 11k 11l

OA 2,885.8 - - - - - 21,371 - - - 4,950 25,370 -

1 434.9 369.8 134.4 55.3

2 941.5 1,017,275 36,609 775 1,889 490 360 424,840

3 369.8 221,424 20 45 143 346 406 35,993

4 468.0 -98.0 0.0

5 370.0 82.6 13.0

6 -0.2 38.7 44.2

7 5.1 44.2 -1.0 -40 40

8 36.4 0 64 0 0 - - - 0 72,841 0 0

9 47.9 0.0 7.4 11.9 - - - - -

CO2 10a 1,238,699 1,238,699 CO2

Others(5) 10b 36,693 94,246

SO2 10c - 820 820 SO2

Others(2) 10d - 2,032 1,422

T-P＆T-N 10e 0 835 466 T-P & T-N

Wastewater 10f 0 766 17

10g 405,319 55,514 55,514

10h 199 16,813 -199 16,813 -199

10i 18,019 81,241 54,822 -81,241 54,822

10j 87,000 0 -87,000 0 -87,000

10k 5,736 5,883 -5,736 -5,883 -5,736

Agricultural land 10l -40 -40

Others (5) 10m 40 40

Hidden material flows 10n 1,095 2,826 -1,095 -2,826 -1,095

R -92.9 1,332,945 2,242 466 17 55,514 -199 54,822 -87,000 -5,736 -40 40 -1,095

CA 2,829.3 - - - - - 21,172 - - - 4,910 25,380 -

1,00

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nnes

-CO

2

1,00

0 t

-N2O

1,00

0 t

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000t

-SO

2

1,00

0 ｔ

1,00

0 ｔ

1,00

0 ｔ

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1,00

0 ｍ3

1 m

illion

ｍ3

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0 ｔ

1,00

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1,00

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illion

ｔonn

es Unit Unit

1,00

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-CO

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illion

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Note) This is a summary table of the attachment#1-3 of New System of Integrated Environmental and Economic Accounting, Department of National Accounts, Economic and Social Research Institute (ESRI), Cabinet Office ofJ apan, 2004 (http://www.esri.cao.go.jp

Val

ue a

dded

(ca

tego

ries)

Dis

trib

utio

n & u

se (se

ctor

s)

Tax

es (ta

x ca

tego

ries)

Cap

ital (

sect

ors)

Accumu. To env.

Land

for

hou

sing

Oth

er la

nds

Changes in natural resources

Ener

gy r

esou

rces

Table 2.1 J apanese NAMEA (2000) - Summary Table -

Res

t of

the

wor

ld

Fore

sts

(vol

ume)

Environmental problems

Hid

den

mat

eria

l flow

s

Changes inland uses

Was

tew

ater

Was

te

Fore

sts

Wat

er

Fish

Gre

enho

use

effec

ts

Regional

Aci

dific

atio

n

Eutr

ophi

catio

n

Air

Greenhouse effects Acidification

Oth

rs (5)

Agr

icul

tura

l lam

d

Wat

er (w

ater

use

)

Fish

ery

reso

urce

s(m

arin

e pr

oduc

ts)

Ener

gy (3)

Acc

umul

atio

n of

sub

stan

ces

to t

he e

nviro

nmen

t

Cha

nges

of na

tura

l res

ourc

esin

RO

W c

ause

d by

impo

rt

Substances

Qualityof water

Hid

den

mat

eria

l flow

s

Pollutants Natural resources

Was

te (2)

Land use

Waste(2)

Pollu

tions

Distribution & use (sectors)

Billion Yen

Reconciliation/indicators

Closing Stocks

Subs

tanc

es

Air

Qualityof water

Acidifi-cation

Energy(3)

Unit

Fishery resources(marine products)

Landuse

Forest (volume)

Natu

ral r

esou

rces

Water resources(wateruse)

Value added (categories)

Green-house

Rest of the world

Taxes (tax categories)

Capital (sectors)Non-financial assets (kinds)

Final consumption (purposes)

Production (activities)

Goods & services (products)

Opening stocks

Fina

l con

sum

ptio

n (p

urpo

se)

Account(classification)

Goo

ds &

ser

vice

s (p

rodu

cts)

Non

-fina

ncia

l ass

ets

(kin

ds)

Pro

duct

ion

(act

iviti

es)

Final disposition of wasteWastewate

Agricultural land

Changes infishery resources

Processing and recycleof pollutants

Exploitation ofdomestic natural

resources

The potential contributions to Global warming, acidification andEutrophication are expressed in GWP, AEQ and EEQ, respectively. Global Warming Potencials (GWP) CO2 1, N2O 310, CH4 21： ： ： Acid Equivalents (AEQ) Nox 0.7, So2 , NH3： ：１ Eutrophication Equivalents (EEQ) P 3.06, N 0.42： ：

Processing of pollutants andexploitationof natural resources

Pressures on natural resources andrestoration of natural resources

Changes in Forests

Chamges inwater esources

Changes innatural

resources

Changes inland use

Contribution to global environmental issues

Contribution to regionalenvironmental issues

Ｂ

Ａ

Nationaleconomy

ROW

Ｃ

Exploitation of ROW'snatural resourcescaused by imports

Hidden material flowsin domestic area

Hidden material flows inROW caused by imports

汚染物質の排出 Changes in land useEmission of pollutants

Restoration of Natural resources

Ａ－Ｂ

Making indicatorsPressures onenvironment

Others

Others

Depletion of energy resources

Others

Hidden material flowsEnvironmental indicators Ｄ

Closing stocks

Opening stocks

Environmental indicators

Monetary flows Material flows : Cells for environmental flow dataareas

: Cells for environmental indicator

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.

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.

Environmentalprotectionfacilities(types)

Otherproduced

assets

Air p

ollut

ions

Quali

tyof

wat

er

Was

te

1 2 3 4 5 6 7 8 9 10 11 12 13 14

1 431040.2 349633.1 6105.5 134225.8 45230.1

2 922938.0

3 349633.2

4 458525.0 -204.2 -88912.7 108.7

5 973.1 33372.6 369345.0130830.9

19372.2

6 4051.6 57549.1 -214.4Environmental protectionfacilities (types) 7 5901.3

Other produced assets (types)8

45313.1

9

Discharge of residuals(CO2, SOX, NOX, SPM etc.) 10

10032.8 -10032.8

Quality of water(T-P, T-N, waste water) 11

6969.8 -6969.8

Waste(final disposition) 12

2240.4 -2240.4

13-19243.0 19243.0

14 38272.4 171.8 15880.6 10171.8 -10386.2Rest of the world

Capit

al ac

coun

ts

accumulation(institutional sectors)

Impu

ted

envir

onm

enta

l cos

ts

Envir

onm

enta

lim

pacts

Eco-margin ((-)sum of imputedenvironmental costs)

Non-produced assets (types)

prod

uced

asse

ts

Production (activities)

Final consumption(purpose)

Inco

me

acco

unts

Generation of income

（items of value added）Use and distribution of income

（institutional sectors）

Non-producedassets(types)

Goods & services (products)

Environmental impacts

Eco-

mar

gin

Generation ofincome

（items ofvalue added）

Use anddistribution of

income

（institutionalsectors）

accumulation

(institutionalsectors)

Table 3.1 a SEEA-type SAM with Monetary Valuation of Environmental Pressures (1995)

Rest ofthe world

Account(classification)

Goods &services

(products)

Production

(activities)

Finalconsumption(purposes)

Income accounts Capital accounts Imputed environmental costsNon-produec assets

Imputed environmental costvaluated bymaintenance costapproach

(-) sum of imputed environmental costs valuatedbymaintenance cost approach

Deterioration of non-producedassets by production activities

(-) sum of deterioration ofnon-produced assets byproduction activities

Industries

Eco-margins(Billion yen)

Distribution of Eco-margin(%)

Distribution of Value Added (%)

Agriculture, forestry and fishing 355.9 1.8 2.0

Mining 161.7 0.8 0.2

Food products and beverages 335.2 1.7 2.8

Textiles 38.0 0.2 0.3

Pulp, paper and paper products 118.1 0.6 0.7

Chemicals 556.9 2.9 2.1

Petroleum and coal products 117.3 0.6 1.2

Non-metallic mineral products 513.6 2.7 1.0

Iron and steel 401.8 2.1 1.3

Non-ferrous metals 60.4 0.3 0.4

Fabricated metal products and Machinery 1141.2 5.9 10.7

Other Manufacturing 409.2 2.1 4.1

Construction 917.3 4.8 8.7

Electricity, gas and water supply 669.0 3.5 2.9

Wholesale and retail trade 1634.5 8.5 16.3

Finance and insurance 640.5 3.3 6.3

Real estate 1257.9 6.5 12.8

Transport and communications 7948.3 41.3 7.6

Service activities 1966.2 10.2 18.8

Total Industries 19243.0 100.0 100.2

Imputed Environmental Cost

by origin of Industries

　 Types of Environmental pressures

Eco-margins

Discharges

Green House Effect

CO2 2498.2

N2O 11.7

CH4 4.5

HFCs 88.2

PFCs 50.7

SF6 73.7

AcidificationNOX 4984.7

SO2 2261.6

　 SPM 59.4

Water Use

T-P 　 3390.2

T-N 　 2552.2

Waste Water 　 1027.4

WastesFinal Disposition 　 2240.4

Total 　 　 19243.0

Imputed Environmental Cost

By type of

environmental

pressures

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.

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.)

MIXEDPROD.FACTOR

ECO-MARGI

N

COBB DOUGLAS

CES

LEONTIEF

CES

Production Part of the Model

CAP LAB

CET

DOM.PROD.

INT.INPUT

COM-POSITEGOODS

IM-PORTS

DOM.GOOD

S2

EX-PORTS

DOM.GOOD

S.1

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.

• MRS between ordinary factors and the environment is determined by maintenance cost

Ordinary factors

The environment

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.

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%)

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%.

industries

% changes in eco-margin due to10% increase in Labour

% changes in eco-margin due to 10% increase in Capital

% changes in eco-margin due to 10% increase in environmental factor price

Agriculture, forestry and fishing -2.0 -8.1 -3.8

Mining -6.5 -1.3 -2.8

Textiles -11.7 2.2 -4.2

Pulp, paper and paper products -6.4 -4.0 -4.1

Chemicals -3.4 -5.3 -3.1

Petroleum and coal products 0.4 -10.3 -4.2

Non-metallic mineral products -7.0 -0.9 -2.9

Iron and steel -11.8 3.7 -3.6

Non-ferrous metals -3.8 -0.4 -0.5

Fabricated metal products and Machinery -7.6 -1.7 -4.1

Construction -11.7 -3.1 -3.7

Electricity, gas and water supply -2.4 -7.0 -3.6

Wholesale and retail trade -10.6 -6.5 -2.7

Finance and insurance -5.3 -4.5 -3.9

Real estate -0.2 -10.1 -4.0

Transport and communications -7.2 0.2 -1.9

Service activities -6.8 -3.3 -3.6

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.

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.

GDP AT FACTOR COST 462,253.0

GDP AT MARKET PRICES 501,938.7

FIXED CAPITAL CONSUMPTION 89,116.9

NDP AT MARKET PRICES 412,821.8

ECO-MARGIN in the model 20,243.5

GREEN GDP 392,578.3

GREENED ECONOMY NDP (CASE 1)

　　　　　　　407,862.4 　 at constant prices

GREENED ECONOMY NDP (CASE 2)

　　　　　　　392,774.6 at constant prices

GREENED ECONOMY NDP (CASE 3)

　　　　　　　400,739.7 　 at constant prices

Green GDP and Greened Economy GDP

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

Billion yen

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.