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The Olifants river basin, which is one of the nine river basins in South Africa ranks as the third most water-stressed basin as well as the most polluted due to pollution from mining activities, irrigation agriculture, and industrial waste disposal. As a result, the government has implemented a series of pollution control measures with the view to mitigating pollution and water shortage in the basin. In this paper, we analysed the regional economic and environmental impacts of a tax policy to reduce water pollution using a Computable General Equilibrium (CGE) model. Firstly, an extended Social Accounting Matrix (SAM) which includes water pollution related activities was constructed for the basin using the framework of environmentally extended SAM. Secondly, we simulate a reduction in current pollution load by increasing the pollution tax rate under alternative revenue recycling schemes. The analyses reveal that internalising the cost of pollution control will effectively reduce the pollution situation in the river basin with marginal negative impact on Real Regional Gross Domestic Product (RRGDP). However, revenue recycling through uniform lump-sum transfers may positively impact RRGDP. In addition, the policy will lead to a change in regional production structure from heavy polluting sectors to less pollution-intensive sectors with benefits to sustainable development and the aquatic ecosystem. JEL codes: C68, Q25, Q28 Keywords: water quality, Olifants River, computable general equilibrium model, South Africa, market-based incentives


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