An integrated IO and CGE approach to analysing changes in environmental trade balances

The application of multi-region environmental input-output (IO) analysis is invaluable in accounting for pollution flows in the single time period that the accounts relate to, it is limited when the focus is on modelling the impacts of any marginal change in activity. This is because a conventional IO model assumes an entirely passive supplyside and is further restricted by the assumption of universal Leontief. Where analysis of marginal changes in activity is required, extension from an IO accounting framework to a more flexible interregional computable general equilibrium approach, where behavioural relationships can be modelled in a more realistic and theory-consistent manner, is appropriate. We introduce a demand stimulus in the UK economy using IO and CGE models. We demonstrate how more theory consistent modelling of both demand and supply side behaviour effects model results, including the impact on the interregional CO2 'trade balance'.