In this study a computable general equilibrium (CGE) model that captures both market and non-market values for integrated assessment of climate change in the Susquehanna River Basin (SRB) is developed.

The most important innovative feature of the model is the use of household production (HPF) theory to model consumer behavior. There are sixteen intermediate and final commodities produced by households according to constant elasticity of substitution (CES) functions. The utility function was econometrically estimated using a modified linear expenditure system (LES) that incorporates several non-market variables including socioeconomic and climate indexes. Market goods production in forty-eight industries were modeled using non-separable, nested constant elasticity of substitution (NNCES) cost functions, which allows the same kind of flexible input substitution associated with inherently flexible functional forms. Labor and capital income allocation to nine income brackets also employed realistic distribution mechanisms.

Carbon tax and climate change impacts counterfactual scenarios were simulated. Results of a $25/ton carbon tax show that the overall economic effects are small, but not negligible, with large effects in the energy sectors. Using equivalent variation per benchmark income, welfare burden of the tax fall more heavily on the lower income groups, and may be mildly regressive or progressive in income distribution terms depending on how carbon tax revenues are recycled. Economic effects of the central climate change scenario are several times higher than for the $25/ton carbon tax. As with the carbon tax, the welfare burden of climate change impacts fell more heavily on lower income households. Sensitivity analyses were conducted to test various parameter assumptions of the model and alternative counterfactual scenarios. Results show that the model is structurally sound and robust.