GEM-E3, a macroeconomic general equilibrium model for studying Economy-Energy- Environment interactions

Transcription

1 GEM-E3, a macroeconomic general equilibrium model for studying Economy-Energy- Environment interactions Workshop on transition to a low carbon economy: status of the long run scientific modelling in Belgium Brussels, 22 March 2012

2 GEM-E3 Versions GEM-E3 Europe, covering the 27 EU countries (except Luxemburg, Malta and Cyprus) GEM-E3 World, covering the world economy (from 22 to 35 regions) GEM-E3 Belgium regionalised (three regions)

3 General characteristics of GEM-E3 follows the computable general equilibrium methodology demand and supply functions derived from microeconomic behaviour of economic agents (optimisation of their objective) markets clear through prices and prices are such that at equilibrium all agents optimise their behaviour covers the entire economic activity within a region simultaneously multinational and specific for each region, markets clear at country, regional or World level, where appropriate

4 General characteristics of GEM-E3 cnt d extensive environmental dimension, inclusive its transfrontier characteristics and possibility of feedback from the environment on the economy wide variety of policy instruments (standards, taxes, permits, at World and regional level, different allowance scheme) oriented towards medium & long term macroeconomic implications of policies (general, energy, environment) follows a time forward path (dynamic recursive over time) with myopic expectation

5 Market Equilibrium Market clearing condition (equilibrium between demand and supply) serves to compute the market price (explicitly computed) Goods markets: unit cost of production, under perfect competition assumption Labour market: wage rate through equilibrium (full flexibility) or wage rate rule (rigidity of wage and possibility for unemployment)

6 Market Equilibrium (cnt d) permit market through permit price (at sectoral, national, regional or World level) at equilibrium, prices such that all agents optimise their behaviour and fully use their budget their final economic balance may be in surplus or deficit model designed such that the sum of the agents surplus or deficit are zero.

7 Policy Appraisal Social Welfare Function W W R (1 ) where W i represents the Region i welfare derived from the consumer's utility function, which includes in a separable way the utility from the consumption of goods and leisure and the environmental utility/damage and represents the degree of inequality aversion Such a function can incorporate two limiting cases: the utilitarian approach and the Rawlsian or democratic approach, through i 1 i (1 )

8 Alternative versions Equilibrium mechanism for the labour market (through wage flexibility or market negotiation/rigid real wages) Depletable resource reduced form module (for oil and gas) Endogenous growth: modelling endogenously innovation and the impact of R&D expenditure Imperfect competition in goods and permit market, allowing for the impact of market power Modelling the impact of climate change on the economy

9 Dimensions of the model 22 World regions for the World model, one model per region, all linked through trade flows 5 countries for the EU model, one model per country, all linked through trade flows 4 economic agents: households, firms, government, rest of the world. 18 sectors: agriculture, 4 energy branches, 8 industrial branches, 2 transport sectors, 3 market and non market services 13 household expenditure categories: 11 non durable consumption categories, 2 durable consumption categories.

10 Dimension of the model (cnt d) 9 government revenue/expenditure categories: direct and indirect taxes, energy and environmental taxes, VAT, subsidies, import duties and foreign sector transfers, social security taxes and transfers, public consumption and government enterprises. 10 air pollutants: CO2 and 5 other GHG, SO2, NOx, VOC, PM and ozone, inclusive damage, abatement possibilities and transfrontier aspects 2 primary production factors: labour; capital. annual/5year time path: the model is solved annually/by period and follows a time-forward path; the model can run untill 2050 or even further.

11 Sources and Types of Data Calibration data EUROSTAT for the EU model and GTAP Data for the world version ExternE study/needs FP6 project for damage from pollution and its valuation Constructed: Investment matrix and Consumption matrix Elasticities from literature studies Exogenous data for simulations World growth and energy prices for EU model Technical progress on production factors Policy options for reference and scenarios

12 Strengths of GEM-E3 has a sound economic foundations ensures that in all scenarios the economic system is in general equilibrium, oriented towards medium to long term analysis: gives the impact of policy when all the adjustment have occurred insights in distributional effects between countries and in longer term structural mechanisms

13 Strengths of GEM-E3 (cnt d) macroeconomic, covers the different dimension of the economy in a consistent and rather detailed framework includes a great number of economy, energy and environmental policy instruments allows to compute the overall cost of a policy

14 Limits of GEM-E3 though rather detailed for a macroeconomic model, remains still at an aggregate level, no personal income distribution aspects simple behavioural and market clearing assumptions, no modelling of barriors or behavioural/organisational change no dynamic adjustment path, oriented towards the medium/long term

15 What questions can GEM-E3 answer? consistent general medium to long term economic projections, inclusive their sectoral disaggregation what are the overall implications of an energy/ environmental policy (on growth, employment, trade balance, on environment, etc), how are the cost distributed between EU countries integrated analysis of environmental and energy objectives on an European scale, e.g. energy security versus clean air

16 What questions can GEM-E3 answer? (cnt d) integrated analysis of different environmental problems: simultaneous analysis of global warming and acid rain policy. which policy instrument/tax recycling strategy to choose given an economy/ energy/environmental target and at which level (EU or country, sectoral)

17 Policy Studies with GEM-E3 Impact of EU climate policies: contribution of GEM-E3 to EU directives, to EU roadmaps, evaluation of country pledges, (by CES KUL, IPTS, NTUA) Impact of the CAFE proposal Macroeconomic impact in the EU of climate change (PESETA project) Generation of consistent projection of the macroeconomic inputs for TIMES and TIAM