Environment and Planning B: Planning and Design 2001, volume 28, pages 581 ^ 594

DOI:10.1068/b2766

An economic ^ environmental input ^ output model and its

application to regional economic ^ environmental impact
analysis

Xu Li, Saburo Ikeda

Institute of Policy and Planning Science, University of Tsukuba 305-8573, 1-1-1, Tennou-dai,
Tsukuba, Ibaraki, Japan; e-mail: li@ecopolis.sk.tsukuba.ac.jp, ikeda@sk.tsukuba.ac.jp
Received 20 September 2000; in revised form 2 January 2001

Abstract. In this paper we develop a new form of economic ^ environmental input ^ output model to
analyze the complicated interactions among economic sectors and environmental sectors. This model
deals with both traditional economic sectors and the pollution elimination sector in terms of volume
and value. The model also introduces policy parameters associated with pollution elimination into the
framework to discuss its policy implication and to perform policy sensitivity analysis. Finally, this
input ^ output model is applied to a specific area located in the northeast region of China to show how
it works.

1 Introduction
Input ^ output analysis can be extended to a complex system with economic and environ-
mental factors to describe interdependency among economic sectors and environmental
sectors. Such models were developed by Ayres and Kneese (1969), Cumberland (1966),
Daly (1968), Isard (1968), Leontief (1970), and Victor (1972) in different forms and for
various applications. The environmental input ^ output models developed so far can be
classified into three categories (Huang et al, 1994).
First is a pollution generation ^ elimination model that is widely known as the
augmented Leontief model. Leontief introduces extra rows to the input ^ output table
that can illustrate the flow of pollutants from the economy to the environment, and
extra columns to illustrate the antipollution sectors which, with given quantities of
inputs from economic sectors, can remove a technologically determined level of pollu-
tion. The model, expanded in this manner, can be used to determine the level of
production activity of each sector in the economy that can meet the requirement
of the final demand. The basic principle followed in these models is that economic
activities create pollution as a by-product and the level of this pollution may be
reduced, at some cost, through payments to a pollution abatement sector. Because
such a structure considers the pollution problem as a process of generation and
elimination in rows and columns separately it cannot permit industries to internalize
the cost of pollution abatement (Johnson and Bennett, 1981), and also cannot effec-
tively reflect pollution abatement processes in terms of internality. However, this
framework thinks of the pollution abatement process as the activity of industries;
it provides a suitable idea for the economic ^ environmental input ^ output model
developed here.
The second category of models is the economic ^ ecological model which represents
an ambitious attempt to integrate an analysis of the input ^ output flows within and
between the economic system and the ecological system. In this structure, the total
system is divided into its human and nonhuman sectors. Therefore, a nonhuman sector
is added into the input ^ output table in rows and columns, respectively. The compre-
hensiveness of this idea lies in the fact that flows of material resources from the
environment to the economy make possible the production of goods, and the flows
582 X Li, S Ikeda

of pollutants from the economy to the environment affect the environment's ability
to regenerate those environmental resources which were initially withdrawn to the
economy (Isard, 1968). However, this category of models includes too many ecological
factors associated with the complex web involved in the ecological system. Because of
lack of data for the ecological process, this category of models was gradually adapted
to form the third category of models called the `commodity-by-industry' model.
The commodity-by-industry model adopts some of the conventions established
by Isard (1968), but greatly reduces model complexity and data requirements. The
model includes both economic and ecological commodities. The ecological com-
modities are those things that are inputted from, or outputted into, the environment
by economic sectors. The economic commodities are those things exchanged between
economic sectors or consumers (Victor, 1972). By recognizing the data problem
inherent in the ecological interaction matrix of Isard's model mentioned above, Victor
eliminated this matrix and focused on the linkage between economy and environment.
Although Victor's approach allows the extension of the basic input ^ output table to the
ecological sector, it is still an extensive analysis of the standard input ^ output model,
and it is also difficult to analyze effectively the pollution abatement activities in terms
of internality.
In this paper, following the augmented Leontief (1970) model, we consider that
pollution abatement activities are performed by environmental industries which have
the same production characteristics as the conventional economic sectors producing
abated pollutants as their goods. Such environmental industries are added into the
traditional input ^ output table. Then, setting up a balance relation between two types
of industries, not only in terms of volume but also in terms of unit value, we can
develop an economic ^ environmental input ^ output (EEIO) model. In this way, the
`externalities' of environmental problems can be incorporated into the conventional
input ^ output picture in terms of `internalities', and the complicated interactions
among economic industries and environmental industries can be analyzed effectively.
In the second section of this paper we will introduce our framework for the EEIO
table, and discuss a balance relation for such an input ^ output table. The policy
parameter involved in the framework and related sensitivity analysis is discussed in
section 3 and section 4. In section 5, this framework for the EEIO model is applied to
regional environmental protection analysis by taking a typical area in the northeast
part of China. Observations and conclusions will follow.

2 The economic ^ environment input ^ output model

2.1 A framework for economic ^ environmental input ^ output tables
Suppose that there are n economic industries and m environmental industries. Follow-
ing Johnson and Bennett (1981), we assume that each economic industry produces a
single economic commodity. Thus, the economic component of our model is designed
along the lines of a traditional input ^ output model, including a direct input coefficient
matrix A1 , total product vector X1 , and final demand vector Y1 :
A1 ˆ fa1ij ji ˆ 1, 2, .::, n; j ˆ 1, 2, .::, ng ;
0
X ˆ fx1j j j ˆ 1, 2, .::, ng ;
1

Y10 ˆ fy1j j j ˆ 1, 2, .::, ng ;

where a1ij represents the amount of product input from economic industry i to eco-
nomic industry j when j produces a unit product; x1j represents the total product of
economic industry j ; and y1j represents the final demand to economic industry j.
An economic ^ environmental input ^ output model 583

In addition, we introduce value-related technical coefficients in economic industries:

a vector of depreciation of fixed assets D1 ; a vector of labour compensation W1 ;
and a profit vector V1 :
D10 ˆ fd1j j j ˆ 1, 2, .::, ng ;
W10 ˆ fw1j j j ˆ 1, 2, .::, ng ;
V10 ˆ fv1j j j ˆ 1, 2, .::, ng ;
where d1j denotes the fixed asset depreciation for a unit product in economic indus-
try j ; w1j denotes the labour payment for a unit product in economic industry j ; and
v1j denotes the profit for a unit product in economic industry j.
Following Leontief (1970), environmental industries are added into the traditional
input ^ output table, and their product is defined as the amount of pollutants abated by
these industries. Each environmental industry is arranged to process only one kind of
pollutant, such as SO2, COD, or TSP. Hence, the total product vector X2 and final
demand vector Y2 are defined as follows:
X20 ˆ fx2j j j ˆ 1, 2, .::, mg ;
Y20 ˆ fy2j j j ˆ 1, 2, .::, mg ;
where x2j expresses the total product of environmental industry j (total pollutants
eliminated by environmental industry j ); and y2j expresses the final demand to envi-
ronmental industry j (pollutants eliminated for final consumption by environmental
industry j ).
Then, the traditional input ^ output table can be expanded by introducing a tech-
nical coefficients matrix A2 , and policy coefficients matrices B1 and B2 . In order to
develop policy analysis, we also add pollutants corresponding to the environmental
industries to the traditional input ^ output table by using technical coefficients matrices
G1 , G2 , and G3 . The definition of these coefficient matrices is as follows:
A2 ˆ fa2ij ji ˆ 1, 2, .::, n; j ˆ 1, 2, .::, mg ;
B1 ˆ fb1ij ji ˆ 1, 2, .::, m; j ˆ 1, 2, .::, ng ;
B2 ˆ fb2ij ji ˆ 1, 2, .::, m; j ˆ 1, 2, .::, mg ;
G1 ˆ fg1ij ji ˆ 1, 2, .::, m; j ˆ 1, 2, .::, ng ;
G2 ˆ fg2ij ji ˆ 1, 2, .::, m; j ˆ 1, 2, .::, mg ;
0
G ˆ fg3j j j ˆ 1, 2, .::, mg ;
3

where a2ij represents the product input from economic industry i to environmental
industry j when j is eliminating unit pollutants; b1ij represents the product input from
environmental industry i to economic industry j when j is producing a unit product
(pollutants eliminated by environmental industry i for economic industry j when j is
producing a unit product); b2ij represents the product input from environmental
industry i to environmental industry j when j is eliminating unit pollutants (pollutants
eliminated by environmental industry i for environmental industry j when j is eliminat-
ing unit pollutants); g1ij represents pollutant i generated by economic industry j when j
is producing a unit product; g2ij represents pollutant i generated by environmental
industry j when j is eliminating a unit pollutants; and g3j represents pollutant j
generated by the final unit demand.
584 X Li, S Ikeda

As for the economic sectors, we also define the other vectors associated with the
product value of environmental sectors: a vector of depreciation of fixed assets D2 ,
a vector of labor compensation W2 , and a profit vector V2 :
D20 ˆ fd 2j j j ˆ 1, 2, .::, mg ;
W20 ˆ fw2j j j ˆ 1, 2, .::, mg ;
V20 ˆ fv2j j j ˆ 1, 2, .::, mg ;
where d2j represents fixed asset depreciation for a unit product in environmental
industry j ; w2j represents the labour payment for a unit product in environ-
mental industry j ; and v2j represents profit for a unit product in environmental
industry j.
By considering the economic products recycled in the process of pollution elimi-
nation, we introduce a technical coefficient matrix
R ˆ frij ji ˆ 1, 2, .::, n; j ˆ 1, 2, .::, mg ,
where rij specifies the product of economic industry i recovered by environmental
industry j when j eliminates a unit pollutant.
The relation between all of these coefficient matrices and vectors is shown in table 1.
Clearly, the products needed by the environmental industries during the process of
pollution elimination depend on the technology of this process. Therefore, A2 ÿ R is the
technical coefficient matrix. Pollutants generated from economic and environmental
industries depend on the technology being used by them, in other words, they depend
on their fixed assets, so G1 and G2 are also technical coefficient matrices. Pollutants
generated from the final consumption depend on both the production structure and the
consumption style of the nation. Hence, G3 possesses sociocultural characteristics and is
also defined as a technical coefficient vector. Pollutants eliminated, however, depend on
the regulation of environmental policy, so we call B1 and B2 policy coefficient matrices.
In table 1, there are two critical differences from other environmental input ^ output
tables. First, pollution elimination is defined as the activity of environmental industries
that possess the same production characteristics as economic industries. This not only
makes the required data for the environmental sector tangible and collectable, but
also makes the value analysis of pollution elimination conceivable. Second, environ-
mental policy parameters can be effectively introduced into the input ^ output table,
which makes policy and policy sensitivity analysis possible.
Table 1. A framework of economic ^ environmental input ^ output tables.

Compensation Rise in value Total Pollution

products generated
economic environ- depreciation labour profit 1, .::, m
industries mental of fixed compen-
1, .::, n industries assets sation
1, .::, m

Economic A1 B1 D1 W1 V1 X1 G1
industries,
1, .::, n
Environmental A2 ÿ R B2 D2 W2 V2 X2 G2
industries,
1, .::, m
Final demand Y1 Y2 G3
Total products X1 X2
An economic ^ environmental input ^ output model 585

2.2 Balance relations in economic ^ environmental input ^ output tables

A series of balance equations including both volume and value relations are discussed
here. The volume relations can be set up by row equilibria and the value relations
can be set up by column equilibria in the input ^ output table.
According to the usual principle of input ^ output analysis, the volume balance can
be constructed, based on the defined notations, as follows:
A1 X1 ‡ A2 X2 ‡ Y1 ÿ RX2 ˆ X1 , (1)
B1 X1 ‡ B2 X2 ‡ Y2 ˆ X2 . (2)
Equations (1) and (2) expresses a balance in volume of the products of each industry.
For each of the n economic industries, intermediate output to economic sectors
and to environmental sectors plus final demand less that recovered just equals its
total output. For each of the m environmental industries, pollutants eliminated
for production industry plus pollutants eliminated for environmental industry plus
pollutants eliminated for final consumption just equal the total pollutants eliminated
by it.
Alternatively, equations (1) and (2) may be expressed as a function of final demand:
    ÿ1  
X1 A1 A2 ÿ R Y1
ˆ Iÿ . (3)
X2 B1 B2 Y2
In any industry, for producing a unit product, the sum of the value input from other
industries, the value of depreciation of fixed assets, the compensation of labour, and
the profit just equals the value of unit output from this industry. This is called the
column equilibrium of input ^ output tables.
Let P10 ˆ f p1j j j ˆ 1, 2, .::, ng and P20 ˆ f p2j j j ˆ 1, 2, .::, mg refer to the price
vectors of the products of the economic industry and the environmental industry,
respectively. Based on the principle of column equilibria, value interrelations among
the m ‡ n industries may be formulated by equations (4) and (5), below. Alterna-
tively, the product price of each of the m ‡ n industries can be finally expressed by
equation (6):
A10 P1 ‡ B10 P2 ‡ D1 ‡ W1 ‡ V1 ˆ P1 , (4)
0 0 0
…A ÿ R †P1 ‡ B P2 ‡ D2 ‡ W2 ‡ V2 ˆ P2 ,
2 2 (5)
    ÿ1  
P1 A10 B10 D1 ‡ W1 ‡ V1
ˆ Iÿ 0 . (6)
P2 A ÿ R0
2 B20 D2 ‡ W2 ‡ V2
The input ^ output tables are usually set up in two different forms. One is the physical
unit form and the other is the value unit form. In table 1, B1 , B2 , and R are
always defined as a physical form. Therefore, in equations (4), (5), and (6), when
the basic input ^ output table takes a physical unit form, P1 represents the price
of the product of economic industries; and when the basic input ^ output table takes
a value unit form,
  
Dp1i
P1 ˆ 1 ‡
p1i
represents the unit value (price) change vector of economic industries. P2 always represents
the product price of the environmental industries.
586 X Li, S Ikeda

2.3 Some definitions associated with pollution generation and elimination

Pollutants are generated in the process of economic production, pollution elimination,
and final consumption. Therefore, the total volume of pollution generated is defined as
follows:
X n
G ˆ G1 X1 ‡ G2 X2 ‡ G3 y1i . (7)
i ˆ1

Since pollutants generated minus pollutants eliminated equals pollutants discharged,

we have:
H ˆ G ÿ X2 . (8)
The cost of pollution elimination can be calculated by the amount of pollutants
eliminated and the price of pollution elimination. This can be expressed as:
C ˆ P20 X2 . (9)

3 Policy parameters and environmental policy analysis

In the market economy, economic industries are not willing to eliminate pollutants by
themselves for the extra cost unless there is a regulatory policy to force them to do so.
In order to examine the effect of pollution elimination in the input ^ output model
developed here, we introduce a pollution elimination ratio matrix b into our model as
follows:
b ˆ f bij jbij ˆ bij =gij ; i ˆ 1, 2, .::, m; j ˆ 1, 2, .::, ng …0 4 bij 4 1† .
Then, b is a policy parameter matrix. Now, let us consider this problem in the simplest
case by assuming that there is only one economic industry, one environmental industry,
and no pollution is generated in the environmental industry. In this condition, there
is only one element in each matrix or vector defined above, so we use the lower case
of the matrices or vectors to represent the element in them. By doing so, according
to equation (6), the price of the product of environmental industry can be simply
expressed as:
a2 …d1 ‡ w1 ‡ v1 † ‡ …1 ÿ a1 †…d2 ‡ w2 ‡ v2 †
p2 ˆ . (10)(1)
1 ÿ a1 ÿ a2 bg1
Parameters a1 , a2 , g1 , d1 , w1 , v1 , d2 , w2 , and v2 are all constant coefficients of the
input ^ output table. Hence, pollution elimination price p2 is increasing with pollution
elimination ratio b. If the pollution discharge tax rate is set to Tr , then the behavior
of the economic industry to eliminate pollution will change with Tr . This is illustrated
in figure 1.
In figure 1, b  corresponds to the intersection point of Tr and p2 . When
b ˆ b1 ( b1 < b  ), the pollution discharge tax rate is greater than the pollution
elimination price, Tr > p21 , and so economic industry will choose the behavior of
pollution elimination, paying the environmental industry for eliminating the pollutant,
to increase b until b ˆ b  ( p2 ˆ Tr ). And when b ˆ b2 ( b2 > b  ), the pollution
elimination price is greater than the pollution discharge tax rate, p22 > Tr , economic
industry will choose the behavior of paying tax with discharging pollutant, to decrease
b until b ˆ b  ( p2 ˆ Tr ). Therefore, b  is the optimal pollution elimination ratio of
economic industry related to pollution discharge tax rate Tr . If the pollution discharge

(1)According to equation (6) the price of the product of economic industry and environmental
industry may be formulated as a1 p1 ‡ b g1 p2 ‡ d1 ‡ w1 ‡ v1 ˆ p1 ; and a2 p1 ‡ d2 ‡ w2 ‡ v2 ˆ p2 .
Therefore, equation (10) may be deduced.
An economic ^ environmental input ^ output model 587

p2

p22
p2 , Tr

Tr
p21

Tr

0 b  b1 b b2 1
b

Figure 1. Pollution discharge behavior of industry.

tax rate decreases from Tr to Tr , then the optimal pollution elimination ratio will also
decrease from b  to b .
When there are a number of economic industries and a couple of pollutants
involved, the conclusion that the price of pollution elimination is increasing with
bij (8i, j ) can also be deduced, and the same result as above can be obtained. Therefore,
the pollution elimination ratio b can be considered as a regulatory policy parameter
related to pollution discharge tax. In this way, we can analyze volume and the cost of
pollution elimination at various policy levels.

4 Sensitivity analysis related to the pollution elimination ratio

Based on equations (1) ^ (9), a sensitivity analysis with respect to the pollution elimi-
nation ratio b can be constructed. In order to simplify the expressions, let:
           
X1 Y1 P1 D1 W1 V1
X ˆ ,Y ˆ ,P ˆ ,D ˆ ,W ˆ ,V ˆ .
X2 Y2 P2 D2 W2 V2
When b changes from b0 to b1 , the following sensitivity analyses are to be explored:
(1) Change in the product price of each industry:
DP ˆ Pb ÿ Pb .
1 0
(11)
(2) Change in the total output of each industry:
DX ˆ Xb ÿ Xb .
1 0
(12)
(3) Change in GDP:
DT ˆ DP 0 Y . (13)
(4) Change in the labor employment. The change of total employment is expressed in
terms of a percentage as follows:
W 0 …Xb ÿ Xb †
DL ˆ 1
 100% . 0
(14)
W 0 Xb 0

(5) Change in the using level of fixed asset. The change of total fixed assets used is also
given in terms of a percentage:
D 0 …Xb ÿ Xb †
DF ˆ 1
 100% . 0
(15)
D 0 Xb 0

(6) Change in profits. Profit change may be discussed according to three situations as
follows:
588 X Li, S Ikeda

(a) Profit of per unit product does not change and is fixed as b ˆ b0 . In this
condition, the change in the total profit can be formulated as:
DSv ˆ V 0 …Xb ÿ Xb † .
1 0
(16)
In this case, the price of products will rise, and the expense of pollution elimination
will be fully borne by the household sector, in other words, borne by the consumers.
(b) The price of product in any industry (including both economic and environ-
mental industries) does not change and is fixed as b ˆ b0 . When b changes from b0 to b1 ,
the technical coefficient matrices or vectors A1 , A2 , D1 , D2 , W1 , W2 , G1 , and G2 will
be kept constant, and only the policy coefficient matrices B1 and B2 may change from
(B1 )b , (B2 )b to (B1 )b , (B2 )b . In this situation, the unit profit change and the total
0 0 1 1

profit change need to be discussed. If DV expresses the unit change when b moves from
b0 to b1 , the sensitivity of unit profit and total profit may be represented as follows,
respectively:
  0 
A10 …B10 †b
DV ˆ ÿ I ÿ DP , 1
(17)(2)
A20 ÿ R 0 …B2 †b 1

DSp ˆ V 0 DX ‡ DV 0 Xb . 1
(18)
In this case, the price of products will not change, and the expense of pollution
elimination would be fully borne by the economic production sector, in other words,
borne by economic industries.
(c) Both the unit profit and the price of products may change. In other words, the
price of products will rise, but less than in situation (a), and the unit profit will
decrease, but not as much as in situation (b). If the unit profit of industry i (including
both economic and environmental industries) is expressed as
 
Dvi
^
vi ˆ ai vi , 1 ‡ 4 ai 4 1 ,
vi
where vi is the unit profit when b ˆ b0 , Dvi is the change of unit profit in situation (b),
then profit analysis can be undertaken by using equations (6), (11), (17), and (18).
When ai ˆ 1, 8i, it becomes situation (a), and when ai ˆ 1 ‡ Dvi =vi , 8i, it becomes
situation (b).

5 Application of the economic ^ environmental input ^ output model to regional

economic ^ environmental impact analysis
5.1 Overview of application problem
The EEIO model will be applied to Heilongjiang province located in the northeast of
China for a regional economic ^ environmental impact analysis. In order to show the
applicability of our model, we take a simple case by aggregating the economic system
into three major sectors and taking two major pollution-processing industries into
account. They are:
(2) According to equation (6), a new value balance equation related to this process may be set up as

follows:
 0 
A10 …B1 †b
Pb ‡ D ‡ W ‡ …V ‡ DV † ˆ Pb .
1

A20 ÿ R 0 …B2 †b 1
0 0

In addition,
 0 
A10 …B1 †b
Pb ˆ Pb ÿ DP , and 0
1
Pb ‡ D ‡ W ‡ V ˆ Pb .
0 1
A ÿ R0
2 …B2 †b 1
1 1

Therefore, equation (17) can be deduced.

An economic ^ environmental input ^ output model 589

(a) agriculture sector, which includes farming, forestry, animal husbandry, and fishery;
(b) industry sector, which includes mining and quarrying, manufacturing, and electricity,
gas, and water production and supply;
(c) others, which include construction, transportation, postal and telecommunication
services, trade, catering, and other service sectors;
(d) COD (chemical oxygen demand, an indicator of water pollution) processing industry;
(e) SO2 (sulfur dioxide, an indicator of air pollution) processing industry.
The economic sectors generate COD and SO2 in the production process with a certain
generation rate G1 , and the environmental sectors will eliminate COD and SO2 according
to the pollution elimination ratio, b. The impact of pollution elimination on the economic
system seems to be very complicated. Traditional economic or system analysis methods to
solve this type of problem could not address these complicated interactions compre-
hensively. The EEIO model will provide a feasible approach for analyzing such problems.
5.2 Assumptions on input data
Data for the conventional elements of the input ^ output table were collected from
several sources. A1 , D1 , W1 , V1 , and Y1 were drawn from a six-sector input ^ output
table in the Compilation of Statistical Material of Heilongjiang (1952 ^ 1996); B1 and
G1 were from the Environmental Yearbook of China (1997), Heilongjiang Statistical
Yearbook (1997), and other environmental statistical references from Heilongjiang
province. As discussed in section 2, A2 and R are technical coefficient matrices related
to pollution elimination technology. These data could be provided by industrial tech-
nology process analysis or the associated experimental investigations. However,
because of the unavailability of such expert data, we assume a zero recycle rate, in
other words, R ˆ 0, whereas A2 was estimated based on the Economic and Technical
Handbook of Wastewater Processing in China (Wang et al, 1992) and experimental
studies in Heilongjiang province. Since there have been no statistical investigations
about pollution generated and eliminated in the agriculture sector or the process of
pollution elimination, there is assumed to be no generation and no elimination. In this
way, the conventional input ^ output table and pollution generation and elimination
relations are set up as in table 2.
Table 2. Conventional input ^ output table with pollution elimination relations.

Agriculture Industry Others COD SO2 Final

processing processing

Agriculture 0.10828 0.07388 0.00544 0 0 425

Industry 0.24585 0.38184 0.35244 0.00470 0.00610 755
Others 0.05991 0.10246 0.16008 0.00210 0.00260 835
COD processing industry 0 0.17874 0.01321 0 0 0
SO2 processing 0 0.00556 2:04  10ÿ6 0 0 0
Fixed asset depreciation 0.01695 0.07243 0.07895
Labor compensation 0.48550 0.13440 0.26167
Profit 0.08352 0.23498 0.14143
COD generated 0 0.27106 0.02114 0 0
SO2 generated 0 0.15306 0.00890 0 0
COD, chemical oxygen demand; SO2, sulfur dioxide.
Units: 108 RMB (Ren Min Bi, the monetary unit of China) for the economic sectors; 106 kg
for COD and SO2.
590 X Li, S Ikeda

5.3 Deduction of EEIO table

In the study area, pollution elimination activity is not as presented in the model
specification (performed as an independent industry) but is performed in the process
of economic production. Hence, the input ^ output relations A1 , D1 , W1 , and V1
collected in table 2 include the part that is used by pollution elimination. Therefore,
the items of the EEIO table related to A1 , D1 , W1 , and V1 may be deduced based on
table 2.
First, the intermediate input of the EEIO table can be calculated as:
^ ˆ A ÿA B .
A (19)
1 1 2 1

Here, the subsequent variables with ^denote those to be estimated for the EEIO table.
^1 , D
Second, the depreciation of fixed assets (D ^2 ), compensation of labour (W^1, W
^ 2 ),
^ ^
and profit (V1 , V2 ) of the EEIO table can be estimated based on the equilibrium of the
input ^ output table. Generally speaking, this is a difficult accounting issue of common
cost distribution. In this model, it is assumed that the depreciation of fixed assets,
compensation of labor, and profit of each industry is directly proportionate to its
total output. Therefore, the corresponding items distributed to the environmental
industries should also be proportionate to the amount of products produced (pollutants
eliminated) by them. This may be expressed as follows:
 Xm 
d^
1j ˆ 1 ÿ lj b1ij p 2i d1j … j ˆ 1, 2, .::, n† ;
i ˆ1
X
n
p 2i lj b1ij X1j d1j
d^
j ˆ1
2i ˆ …i ˆ 1, 2, .::, m† ;
X 2i
 X
m 
w^
1j ˆ 1 ÿ lj b1ij p 2i w1j … j ˆ 1, 2, .::, n† ;
i ˆ1
X
n
p 2i l j b1ij X1j w1j
w^
j ˆ1
2i ˆ …i ˆ 1, 2, .::, m† ;
X 2i
 X
m 
v^
1j ˆ 1 ÿ lj b1ij p 2i v1j … j ˆ 1, 2, .::, n† ;
i ˆ1
X
n
p 2i l j b1ij X1j v1j
v^
j ˆ1
2i ˆ …i ˆ 1, 2, .::, m† ;
X 2i
where lj is a coefficient of proportion associated with economic industry j, and p 2i is
the price of environmental industry i. They are determined by the value equilibrium
equations as:
Xn X
m
a^
1ij p1i ‡ b1ij p^ 2i ‡ d ^
1j ‡ w^
1j ‡ v^
1j ˆ p1j … j ˆ 1, 2, .::, n† , (20)
i ˆ1 i ˆ1

Xn
a 2ij p1i ‡ d ^
2j ‡ w^
2j ‡ v^
2j ˆ p^
2j … j ˆ 1, 2, .::, m† . (21)
i ˆ1

According to the principle of value equilibrium, P1 does not change after the distri-
bution, since the original input ^ output table is given in value unit, p1i ˆ 1, 8i.
An economic ^ environmental input ^ output model 591

Table 3. Economic ^ environmental input ^ output table.

Agriculture Industry Others COD SO2 Final

processing processing

Agriculture 0.10828 0.07388 0.00544 0 0 425

Industry 0.24585 0.38097 0.35238 0.00470 0.00610 755
Others 0.05991 0.10207 0.16005 0.00210 0.00260 835
COD processing industry 0 0.17874 0.01321 0 0 0
SO2 processing industry 0 0.00556 2.04610ÿ6 0 0 0
Fixed asset depreciation 0.01695 0.07231 0.07894 0.00063 0.00080
Labour compensation 0.48550 0.13419 0.26164 0.00120 0.00149
Profit 0.08352 0.23460 0.14141 0.00200 0.00260
COD generated 0 0.27106 0.02114 0 0
SO2 generated 0 0.15306 0.00890 0 0
Note: for factors see table 2.

Consequently, lj ( j ˆ 1, 2, .::, n) and p 2i (i ˆ 1, 2, .::, m) can be completely determined

by equations (20) and (21).(3) In addition, A2 , B1 , B2 , G1 , and G2 can be directly moved to
the EEIO table. Thus, the EEIO table can be deduced as table 3.(4)
5.4 Observation
For the condition of final demand
Y1 ˆ …425, 755, 835† ,
Y2 ˆ …0, 0† ,
present pollution elimination ratio
 
0 0:6594 0:6250
b0 ˆ ,
0 0:0363 2:29  10ÿ4
when the pollution elimination ratio increases by 20%, in other words:
 
0 0:7913 0:7500
b1 ˆ 1:2 b0 ˆ ÿ4 ,
0 0:0436 2:75  10
the calculated results of the EEIO model are as shown in sections 5.4.1 ^ 5.4.3.
5.4.1 Volume of pollutants and their change
The level of pollutants generated, eliminated, and discharged and how these levels
change with b are shown in table 4 (see over).
Specifically, table 4 shows that: when b increases by 20%, COD generated will
increase by 0.04% (from 634.30 to 634.54), and SO2 also increases by 0.04% (from
354.18 to 354.32). On the other hand, COD discharged will decrease by 38.44%
(from 217.00 to 133.59), and SO2 discharged also decreases by 0.69% (from 341.74 to
339.38). Clearly, the levels of pollutants generated, eliminated, and discharged do not

(3) There are n ‡ m solutions for equations (20) and (21), theoretically. By considering envi-

ronmental technology conditions and the actual situation of the area studied, we take a
lower environmental facility-using scheme as l1 ˆ 1:00000, l2 ˆ 0:81467, l3 ˆ 0:74667,
p 21 ˆ 0:01062, and p 22 ˆ 0:01359 to estimate the EEIO table.
(4) Since the original statistical data about pollution generation and elimination coefficients of

`Others' are very low compared with that of `Industry', the change between table 2 and table 3 is
also very small, and hence the numbers in these tables are given to five decimal places.
592 X Li, S Ikeda

Table 4. Pollutants generated, eliminated, and discharged and their change.

Pollutants generated Pollutants eliminated Pollutants discharged

COD SO2 COD SO2 COD SO2

b ˆ b0 634.30 354.18 417.30 12.44 217.00 341.74

b ˆ b1 634.54 354.32 500.95 14.94 133.59 339.38
b1 ÿ b0 0.24 0.14 83.65 2.49 ÿ83.41 ÿ2.36
[( b1 ÿ b0 )=b0 ]100% 0.04 0.04 20.05 20.05 ÿ38.44 ÿ0.69
COD, chemical oxygen demand; SO2, sulfur dioxide. Units: 103 tons.

linearly correspond with the pollution elimination ratio b because an expansion of

production scale is required to deal with increased pollutants.
5.4.2 Production scale and price level and their change
The production scale, price level, and their change with b are shown in table 5, which
indicates that, when b increases by 20%, the total products of each industry will
increase: agriculture by 0.01%, industry by 0.04%, others by 0.02%, and the COD
elimination industry and SO2 elimination industry both by 20.05%. At the same time,
the product price of each industry will also increase: agriculture by 0.02%, industry by
0.07%, others by 0.03%, both COD elimination industry and SO2 elimination industry
by 0.04%. Because the activities of the environmental industries relate strongly to
`industry', they make a great impact on industry. The environmental industries
also make an impact on agriculture, although there are no direct relations between
agriculture and environmental industries.
Table 5. Production scale, price level, and their change.

Economic industrya Environmental industryb

agriculture industry others COD SO2

Production scale
b ˆ b0 670.01 2237.52 1314.89 417.30 12.44
b ˆ b1 670.09 2238.40 1315.22 500.95 14.94
b1 ÿ b0 0.07 0.88 0.33 83.65 2.49
[( b1 ÿ b0 )=b0 ]100% 0.01 0.04 0.02 20.05 20.05
Price level
b ˆ b0 1.000 1.0000 1.0000 1062.38 1359.22
b ˆ b1 1.0002 1.0007 1.0003 1062.79 1359.75
b1 ÿ b0 0.0002 0.0007 0.0003 0.41 0.53
[( b1 ÿ b0 )=b0 ]100% 0.02 0.07 0.03 0.04 0.04
a 108 RMB, unit value change.
b 103 ton, RMB/ton.

5.4.3 Pollution abatement cost, regional GDP, employment, fixed asset using level, and
profit
Tables 6 and 7 show the level and their change of listed items. Here, we would like to
emphasize that the unit profit of each industry, when the pollution elimination ratio
increases by 20% and product price is fixed as b ˆ b0 , decreases to different degrees:
in the lead is `industry' decreasing by 0.17%; second is `others' decreasing by 0.02%;
whereas for `agriculture' and the environmental industries the change is almost zero.
This indicates that the cost of pollution elimination will be borne totally by its
generator if the product price of each industry does not change.
An economic ^ environmental input ^ output model 593

Table 6. Pollution abatement cost, regional GDP, and their change.

b ˆ b0 b ˆ b1 b1 ÿ b0 [( b1 ÿ b0 )=b0 ]6100

Pollution abatement cost (105 RMB) 4602.45 5527.20 924.70 20.09

Regional GDP (108 RMB) 2015.00 2015.92 0.92 0.05

Table 7. Change of employment scale, fixed asset using level, and profit level.
Change in value Change in ratio
(105 RMB) (%)
Employment scale 344.04 0.0355
Fixed asset using level 145.03 0.0523
Total profit when unit profit is fixed as b ˆ b0 431.77 0.0562
Total profit when product price is fixed as b ˆ b0 ÿ489.42 ÿ0.0638
Unit profit when product price is fixed as b ˆ b0
industry ÿ3:94  10ÿ4 ÿ0.17
others ÿ2:81  10ÿ5 ÿ0.02
agriculture and environmental industries 0 0

The calculated results of the EEIO model show that the level of environmental
protection will have an impact on economic production in a complicated way. However, it
does not seem very substantial in this case study. This is in part because the aggregated
statistical data are deficient and because the lower environmental facility-using scheme
was adopted when the EEIO table was estimated. Anyway, the case study shows that
coordinating environmental protection and economic development is still an important
problem in developing countries.

6 Conclusion
We have presented a new framework of economic ^ environmental impact analysis
based on an input ^ output model. The specific characteristics involved in our proposed
model can be summarized as follows:
(1) By introducing the concept of environmental industry, whose products are elimi-
nated pollutants, it is possible to analyze both the volume and the value of pollution
elimination.
(2) General balance equations in the EEIO model are set up in terms of both volume
and value related to production and pollution elimination.
(3) Policy parameters of environmental regulation are introduced into the model, and a
preliminary discussion of the impact of environmental policy on the behavior of
economic industries to deal with pollution is undertaken.
The case study shows that our EEIO model was able to provide an acceptable
method for which to deal with the complicated interactions and impacts between
economic production and environmental protection. However, there are many remain-
ing research issues which need to be taken into account in the framework of our
proposed EEIO model, such as the interactions between policy parameters and tech-
nological innovation, between policy parameters and the capacity of fixed assets,
between economic development and environment protection, and so on.
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