In the determination of the overall economic impact of taxes and regulations in the environmental area, use is often made of a general equilibrium model that reflects relationships in the economy and between the economy and the environment.
EMEC has 26 business sectors and one general government sector. Firms and households demand a mix of 33 goods and services as manufacturing inputs, for investment and for household consumption. The total supply of labour is determined exogenously, and capital is offered according to an exogenously determined rate of interest. All production factors are freely mobile between sectors.
Free competition prevails on all markets, and there are no economies of scale in production. It is assumed in the model that firms and households fully adjust to price changes.
Household consumption and the activities of the business sector give rise to environmental pollution. Combustion is the primary source of carbon dioxide, sulphur dioxide and nitrogen oxides. Energy and environmental taxes are imposed on the use of energy by households and firms. Existing exceptions in the taxation of manufacturing firms are considered in the tax rates used.
The principal limitations on economic growth are the availability of production factors and the state of technological development.