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Modelling the Health Related Benefits of Environmental Policies and Their Feedback Effects: A CGE Analysis for the EU Countries with GEM-E3

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 more precise evaluation of the impact of environmental policies on private consumption and employment. Relative to the included benefits the feedback effects are large. 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.

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Energy Specializations: Energy Modeling – Other; Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Environmental Market Design; Energy and the Environment – Policy and Regulation

JEL Codes:
C59 - Econometric Modeling: Other
Q54 - Climate; Natural Disasters and Their Management; Global Warming
Q56 - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Applied CGE model, non-separable externalities, CO2 tax, environment, ancillary benefits, GEM-E3

DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No1-6

Published in Volume 29, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.