A dynamic applied general equilibrium model with environmental feedbacks

The paper presents the general equilibrium model DREAM (Dynamic Resource/Environment Applied Model) of the Norwegian economy. DREAM is a dynamic model of a small open economy with sheltered and exposed industries. There are installation costs of investment. A representative consumer with infinite horizon decides on labour supply and savings. The particular feature of DREAM, however, is its twoway link between the environment and the economy. The economy produces emissions to air and other strains on the environment. The environment affects the economy in the areas of productivity, depreciation and household welfare. The paper discusses the nature of environmental feedbacks to include in an applied dynamic general equilibrium model, and explains a simplified Version of the model. An illustrative simulation is shown. A substantial appendix presents the equation system.