Development of the Model

Dale W. Jorgenson (Department of Economics and Institute for Quantitative Social Science) and Mun S. Ho (IQSS) have led the longest-running single initiative of the China Project, incrementally building up a general equilibrium model to study economic growth and energy utilization in China, and to consider their effects on environment. CAO Jing (School of Economics and Management, Tsinghua University, formerly of Harvard) now helps to lead this economic research.

The initial effort, with Dwight H. Perkins (Department of Economics), was confined to a projection of Chinese economic growth and carbon emissions, using an aggregate growth model without industry detail (Ho, Jorgenson, and Perkins 1998). Jorgenson and Ho then developed a multi-sector model of Chinese economic growth in collaboration with Richard Garbaccio [then-Harvard Kennedy School of Government (HKS), now U.S. EPA], paying special attention to the dual plan-and-market features of the Chinese economy in the 1990s (Garbaccio, Ho, and Jorgenson 1999a, 1999b). With Karen Fisher-Vanden (then-HKS, now Penn State), this was followed by a version of the model with perfect foresight dynamics (Fisher-Vanden 2003a, 2003b). Much of this work was done in cooperation with the Development Research Center of China’s State Council.

The next version incorporated population projections including the changing demographic structure, projections of productivity growth, enhancements of labor quality, and changes in household spending and savings behavior. In parallel the team analyzed Chinese energy use at the industry level, using data from the 1987 and 1992 input-output tables, informing projections of industry energy use. At this stage the model incorporated a sub-model of local health impacts of SO2 and total suspended particulate (TSP) emissions, using information provided by Gordon Hughes and Kseniya Lvovsky of the World Bank. This version was first used to examine the reduction in local health damages due to a policy to reduce carbon emissions. The subsequent analysis focused on the effects of “green tax” policies, designed to reduce local air pollution damages, on economic growth, on reductions in mortality and morbidity, and on carbon emissions (Ho, Jorgenson, and Di 2002).

Clearing the Air: The Health and Economic Damages of Air Pollution in China

The above model development set the stage for the Clearing the Air study described in a separate link here.  It built new collaborations of the economists with environmental health scientists from the Harvard School of Public Health and environmental engineers from Tsinghua University and the Harvard School of Engineering and Applied Sciences. An update of the economics of the Clearing the Air is reported here in the journal Review of Environmental Economics and Policy, and is also summarized in an article in Harvard Magazine.

U.S.-China Strategic Economic Dialogue

The integrated model developed in Clearing the Air was applied in the macroeconomic component of the environmental research initiative of the U.S.-China Strategic Economic Dialogue (SED) of then-U.S. Treasury Secretary Henry Paulson and China's Vice Premier WANG Qishan. Coordinated by China's State Environmental Protection Administration (Policy Research Center for Economy and Environment) and the U.S. Environmental Protection Agency (Office of Air and Radiation), the first objective of the "Joint Economic Study (JES)" of the SED was to assess the costs and benefits of the China's measures to achieve a 10% SO2 reduction and a 20% energy efficiency improvement under the 11th Five Year Plan (2006-2010). These measures have included, among others, retirement of inefficient small thermal power plants and new mandates in flue gas desulfurization.

The macroeconomic research team included China Project economists Jorgenson and Ho of Harvard and Cao of Tsinghua, along with Richard Garbaccio of U.S. EPA's National Center for Environmental Economics, and YANG Hongwei and colleagues at the Energy Research Institute of the National Development and Reform Commission. Additional participants in the JES included SEPA's Chinese Academy of Environmental Planning, U.S. EPA's Office of Air Quality Planning and Standards, and Tsinghua University's Department of Environmental Science and Engineering. Click here for the Executive Summary of the JES reported at the Third SED in Beijing in December of 2007. The full academic version of the Harvard-Tsinghua economic analysis of the 11th FYP policy is reported here in the journal Review of Environmental Economics and Policy.

Integration with the China Project's Atmospheric Model and Emission Inventories

The economics team is now working with China Project atmospheric scientists, engineers, and health scientists at both Harvard and Tsinghua University to achieve an interdisciplinary breakthrough: linking the economics-engineering-health framework of Clearing the Air with bottom-up emission inventories led by Tsinghua and the Project's GEOS-Chem atmospheric model of China. This major collaborative expansion is described at a separate link here.

Other Recent Developments

The economic modeling framework has been adapted for other applications by Cao Jing (now of Tsinghua, formerly of HKS), with Jorgenson and Ho (Cao 2007). One of her applications integrates the 34-sector “top-down” economic model with an updated, “bottom-up” regional power sector model for China developed in the initial stage of the China Project by Fiona E. S. Murray and Peter P. Rogers of the Harvard School of Engineering and Applied Sciences (Murray 1996; Murray and Rogers 1998). The ongoing Project-wide integration described here is expected to capitalize on this linkage in 2010.

Research is now underway to update and refine the economic model in other respects. These efforts include:

• calibrating the model to the 2005 update to the 2002 benchmark input-output table;
• a partnership with REN Rouen (Beihang University) to develop a time-series input-output table to estimate translog production functions.