Modelling environmental adjustments of production technologies: A literature review: Externalities and environmental studies

This chapter theoretically discusses existing methodologies to model environmental adjustments of technologies. We elaborate on the limitations of treating pollution as an input or weakly disposable output, as commonly occurs in the literature. Moreover, we discuss the drawbacks of models that rely on the materials balance principle. We advocate the use of multi-equation modelling, which explicitly models the subprocesses of the production technology. Applied to the context of pollution, such an approach separately models the conventional technology, on the one hand, and the pollution-generating technology, on the other. Finally, we discuss abatement options as well as the possibility of adjusting for good environmental outputs (e.g. carbon sinks).