Modelling Structural Reforms in the EU. Juha Honkatukia. VATT - The Government Institute for Economic Research

Transcription

1 Modelling Structural Reforms in the EU Juha Honkatukia VATT - The Government Institute for Economic Research

2 AGE/CGE Models Numerical/applied equilibriummodels suited for both micro and macroeconomic analysis Basis in microeconomic theory Structural issues Economic measures, institutions, public expenditure Real changes and responses Labour, capital and material inputs, tax revenues, welfare Policy usually modelled as exogenous Changes in taxes and public spending Public sector usually not explicitly modelled All variables must be explained by behavioural equations or explicit restrictions The models can be used to study the effects of ecopnomic policy on production, employment, economic growth and the public sector itself The Governemnt Institute for Economic Research (VATT) uses several AGEmodels the EV-model (GAMS), VATTAGE-, VATTREG-, and VATT- TERM (GEMPACK), and various versions of the GTAP-model

3 The VATTAGE-model VATT has developed the model with the needs of several policy applications in mind The model is intended a long term tool for policy analysis Effort to develop routines for updating the data Baseline scenarios for several policy needs Fairly detailed description of the public sector VATT-AGE is based on the ORANI and MONASH models widely in use e.g. by USTC, COPS, Danish MTI, several Asian and African countries, Polish MoF Advantages of MONASH - global support, CoPS-training, links to GTAP-models and training User-friendly for non-expert clients simplified Windows applications for limited client applications

4 The VATTAGE-model Core: traditional comparative-static AGE (ORANI-like) Leontieff- and CES aggregators, Armington exports etc. Use and make-matrices from IO tables Price signals drive adjustment to policy changes or changes in technologies and tastes Macroeconomic constraints for employment, capacity, external balance Multi-industry, multi-commodity (51 X 43, can easily go to 100 X 100, with more effort to even more detailed) Public sector does not directly contribute to welfare

5 Dynamics Modular - can be turned on or off Consists of consecutive solutions Periods linked by the accumulation of capital and financial assets and capital and labour market dynamics Sector specific capital logistic investment function Sluggish wage adjustment convergence to forecast Both public and private assets need to be defined Public debt home and abroad, external balance Different budgetary rules can be studied Balanced/unbalanced budget policies Gradual balancing of public budgets A baseline view helpful e.g. AWG forecasts

6 Expectations Calibrated expectations The model can be calibrated to different baselines and history - by adjusting expectations and shifts in exogenous variables While not forecasting, at least ensuring compatibility with someone else s forecast (e.g., the commission s) useful for focusing your argument! Current ROR and investment costs determine investment Epxected and realised returns converge Rational expectations Iterative Fair-Taylor algorythm Solution based on an intitial solution for expectations. Investments iterated until expected and realised returns converge.

7 Data requirements Input-output tables From 2000 on, yearly updated Sectoral investment data Consumption and production taxes Margins Taxes and transfers between households and govt, between municipal sector and govt Household budget constraints Budget constraints for public sectors (govt, municipal sector and social insurance) Behavioural parameters

8 Data for dynamics Public sector assets and liabilities Foreign assets and liabilities in Finland Finnish assets and liabilities abroad Capital stock and investment by industry Labour force and population forecasts Price history (to calibrate expectations) Labour market story

9 ORANI/MONASH-like database Absorptiomatriisi Varastojen Tuottajat Investoinnit Kotitalous muu- Vienti Julkinen sektori tos Koko I I 1 D 1 1 Vaihdanta perushintaan CxS V1BAS V2BAS V3BAS V4BAS V5BAS V6BAS Jakelu- CxSxM V1MAR V2MAR V3MAR V4MAR V5MAR n/a marginaa- lit Hyödykeverot CxS V1TAX V2TAX V3TAX V4TAX V5TAX n/a Työ O V1LAB Pääoma 1 V1CAP Maa 1 V1LND C =Hyödykkeiden lukumäärä I =Toimialojen lukumäärä S = Tarjonnan lähteet (kotimainen ja tuonti alueittain), lkm O = Tyovoimatyypit, lkm M = Palveluiden lukumäärä jotka mukana jakelumarginaaleissa D =Vientikohteiden lukumäärä Tuotannon verot 1 V1PTX Tuotannon tuet 1 V1OCT

10 Public sector in VATTAGE Expenditure Public consumption Public investments Transfers Unemployment benefits (CPI/W-indexed) Old-age pensions Child care benefits Student benefitsi Other personal benefits Other transfers Servicing of ppublic sector debt Subsidies Other Income Indirect taxes VAT Taxes on goods Other taxes Direct taxes Business taxes Taxes on capital incomes pääomatuloverot Income taxes Social security contributions Other

11 VATTAGE - applications Instrument design and evaluation Ex ante analysis of changes in tax structure Ex ante effects as changes from forecast baseline (POLICY) Ex post effects that are due to changes in taxes (HISTORICAL) Scenarios Effects of changes in policies Effects of changes in population, technology etc. Extensions»Regional ageing scenarios»regional productivity scenarios Links to other models GTAP-VATTAGE EU-TEN- VATTAGE

12 Application: The Bird flu. Employment falls % VATT PANDEMIA20 PANDEMIA35 PAN20EMP PAN35EMP PAN3520 Cumulative change from year 2000, per cent

13 Bird flu: Employment: permanent effect % Cumulative change in employment Per cent from baseline PANDEMIA20 PANDEMIA35 PAN20EMP PAN35EMP PAN

14 Bird flu: Permanent GDP effect -1,3 - -0,2% PANDEMIA20 PANDEMIA35 PAN20EMP PAN35EMP PAN Cumulative change from baseline, per cent

15 Bird flu: Public sector deficit grows Public sector deficit compared to baseline, MEURO MEURO PANDEMIA20 PANDEMIA35 PAN20EMP PAN35EMP PAN

16 Application: regional growth and policy scenarios Here: sectoral differences in regional production drive employment growth Other applications: regional differences in ageing drive public expenditure growth Työllisyys: kumulatiivinen muutos peruslaskelmassa Uusimaa Pohjanmaa koko maa

17 Application: energy taxes

18 Application: bioenergy targets Table 1. Estimated potential for increasing the use of bioenergy until 2015 by sector Sector, TWh Heating Combined heat and power generation in communities Combined heat and power generation in industries - of which small-chp Current support: price of fossil fuels and emission permits, 20 EUR/tonne Enhanced measures and/or higher energy prices Separate power generation - separate condensing plant condensing plants of CHP-units 2.0 Biocarburants in transport 2.5 Total increase 22.7 Note: Biocarburants in transport do not incluce the share of fodder, heat or other side products

19 Table 2. Estimated potential for increasing the use of bioenergy until 2015 by fuel type Fuel type, TWh Current support: price of fossil fuels and emission permits, 20 EUR/tonne Enhanced measures and/or higher energy prices Wood residue from forestry - from stumpage -fromthinning Wood used for heating of houses -wood pellets and chips Recycled fuels Biomass from fields -straw, crop residue, manure -ruokohelpi, new energy crops -crops and other biomass cultivated for producing fuel for transport Wood residues from industry -increase of energy content through drying /condensing Peat Total increase

20 Application: bioenergy targets + fuel taxes

21 11th GTAP conference 11th Annual Conference on Global Economic Analysis - Future of Global Economy" June 12 June 14, 2008 in Helsinki Arranged by the Government Institute for Economic Research and the Wider Institute (UNU)

22 Themes Globalisation and economies in transition Development, poverty and vulnerability Energy and environment Wealth, aging and income distribution

23 Evaluation with EV-model Implementing climate policies involves both technological and economic measures Apparent dichotomy between CGE and bottom-up: Technology effects often not covered in detail, or: Only technology effects covered Two approaches often create confusion and unnecessary debate but: The conflict stems from a misperception Technology models usually partial equilibrium Economical models usually general equilibrium Top-down: choice of technology exogenous and emissions endogenous Bottom-up: demand for energy services exogenous and technology choice endogenous Approaches can be combined to answer more questions Can answer specific technology questions Can introduce economic measures Can handle broad cost concepts

24 Costs of ET in Finland Model takes into account Power production technologies (18 in all) Process technologies (forest, chemical and metal industries) Scarcity rents (a la Böhringer 1998) Most fuels motor gasolines,,diesel fuels light fuel oil, heavy fuel oil LPG coal peat natural gas wood Energy taxes Labour markets Capital markets Energy efficiency scenarios

25 7,000 6,000 D e m a n d 5,000 Supply Marginal cost/price 4,000 3,000 P * R e n t 2,000 1,000 C o s t Q * 0,000 0,000 0,500 1,000 1,500 2,000 2,500 3,000 C apacity

26 The inversely logistic investment function EEQROR 0.4 K_GR_MIN K_GR_MAX 0.3 D' S 0.2 D RORN 0.1 D' D K_GR_TREND K_GR -0.1 S -0.2

27 Flexible mechanisms and climate policies EU climate and energy targets: 20 to 30 per cent cuts by with the help of flexible mechanisms 20 target for renewable energy What role flexibility? Flexible mechanisms can increase cost efficiency in EU project mechanisms introduce flexibility to the non-ets sector Flexibility and technology policy too much flexibility slows down innovation restrictions on flexibility force more domestic innovation at the cost of efficiency Restrictions can lead to multiple markets and multiple prices Direct technology policy measures may be a better solution

28 Flexible mechanims in EU ETS The extent of govt participation = amounts committed to in NAP The amounts purchased have impolications to how much quotas are allocated to ETS sectors in the NAP Passive: No govt purchases, NAP requires more reductions from ETS sectors Uniform: govt purchases to the extent that equal reductions for ETS and non-ets sectors (on the basis of estimated 2010 emissions) In effect, govt purchases alleviate the reduction in non- ETS sectors Active: Half of anticipated reductions Flexible mechanisms in 2025 EU ETS Tightening reduction targets Kyoto 10 to 30% Flexibility: govt either remains passive or active

29 Effects of flexibility in 2010 Simulations based on the Finnish WM-scenario Required reductions for Finland about 15 per cent from BAU Climate policies: EU ETS Current taxes in ETS sectors, rising CO2 taxes in non-ets sectros Purchases of ERUs financed by raising non-ets sector electricity taxes Prices for ERUs and permits /tco2 Climate policies cause GDP to fall by 0,5-0,9 in 2010 With active govt participation, GDP loss slightly lower Industry level differences between active and passive policies not large

30 Macroeconomic effects GDP Consumption Investm ent Employment. Active: 20 Active: 10 Active: 5 Uniform: 20 Uniform: 10 Uniform: 5 Passive: 20 Passive: 10 Passive: 5 % from baseline in 2010

31 Effects of flexibility in 2025 Baseline National climate change adaptation strategy baseline GDP growth 2+ % on average between Population growth forecast from Statistics Finland Industries s GDP share is falling Energy intensive sector grow slower than industry on the average Energy efficiency improves as on trend Export growth follows IPCC, EU scenarios

32 Climate policy in 2025 Reductions based on Kyoto targets Kyoto also in 2025 (for Finland, %) -10%, -20%, -30% from Kyoto levels EU ETS, Current taxes in ETS sectors, rising CO2 taxes in non- ETS sectros, Purchases of ERUs financed by raising non-ets sector electricity taxes, Prices for ERUs and permits /tco2 GDP losses 0,4-1,2 in 2025 GDP losses clearly smaller with active policies GDP losses large with more stringent targets Flexible mechanims facilitate more efficient targets between ET and non-et sectors If NON-ETS sectors get baseline emissions by govt intervention, effects smaller If non-ets emissions cut in same proportion as ETS emissions, costs can be large

33 1 0-1 Effects at industry level in Minerals Forest Chem ical Metal Other Services Energy sectors. Kyoto-30%: 20, Passive Kyoto-20%: 15, Passive Kyoto-10%: 10, Passive Kyoto: 5, Passive Kyoto-30%: 20, Active Kyoto-20%: 15, Active Kyoto-10%: 10, Active Kyoto: 5, Active

34 11th GTAP conference 11th Annual Conference on Global Economic Analysis - Future of Global Economy" June 12 June 14, 2008 in Helsinki Arranged by the Government Institute for Economic Research and the Wider Institute (UNU)

35 See you in Helsinki!