4 A Theoretical Example: CGE Model and Double-Dividend (DD)-Oriented Policies

Abstract

In this section we will present a theoretical non-extensive cross-entropy (NCE) model to estimate parameters of an environmentally extended CGE model to assess impact of the DD hypothesis. The main issue to be underscored remains the rationale for applying the NCE approach in place of the traditional Kullback-Leibler cross-entropy model (Go et al., 2015). The response lies in the statistical properties of power lawrelated NCE. Due to the estimated parameters of constant elasticity of production models, outputs from both techniques must diverge with a higher performance in the case of NCE estimator (see V.5.3 for details). Both solutions will be similar only when the modelled phenomena display Gaussian distribution. As presented earlier in this part of the book, the negative externalities resulting from pollution is one of the economy-distorting factors that prevents reaching a general equilibrium and Pareto optimum. Pearce (1991) proposed a model to generate double positive impact by introducing a tax imposition on pollutant activities. Once again, the first positive impact results in reducing pollutants through the increase of their production cost. If we use income generated by the tax imposition on pollutant goods to reduce tax in other sectors, a DD may result. This section presents a theoretical CGE model in the context of DD hypothesis testing. The proposed model can enable assessing to what extent the carbon tax can be identified as an important factor affecting the size of the DD, identifying the existence of a strong DD in the economy, or highlighting the weight of certain factors in affecting the presence and size of the DD. This CE formulation may be written as follows: