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Rob Dellink — Modelling the costs of environmental policy
Dynamic CGE Modelling
for Analyzing Environmental Policies
Ekko van Ierland and Rob Dellink
[email protected]
[email protected]
or: www.enr.wur.nl/uk/staff/dellink/
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Rob Dellink — Modelling the costs of environmental policy
Set-up of the presentation
Aim: assessing the costs of Dutch environmental policy by
developing a dynamic AGE model with special
attention to pollution and abatement (DEAN)
 Introduction
 Overview of the model
 Data and policy scenarios
 Main results
 Concluding remarks
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Rob Dellink — Modelling the costs of environmental policy
Part I:
Model description
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Rob Dellink — Modelling the costs of environmental policy
Overview of the DEAN model
 Multi-sector dynamic Applied General Equilibrium model
– perfect-foresight behaviour: Ramsey-type model
 Environmental module: pollution and abatement
– pollution and abatement are present in the benchmark
 No impact from environment to economy
– no amenity value of environmental quality
– no damages from environment on economy
– no efficiency analysis, just cost-effectiveness
 Model specified in GAMS / MPSGE & available on
website
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Rob Dellink — Modelling the costs of environmental policy
Specification of economic activity
 Multi-sector Applied General Equilibrium model
– description of the national economy
– producers: profit maximisation under perfect competition
– consumers: utility maximisation under budget balance & LES
structure
– equilibrium on all markets (Walras’ Law)
– individual agents are price takers; no money illusion
 International trade
– small open economy
– domestic and foreign goods are imperfect substitutes (Armington)
– no international co-ordination of environmental policy
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Rob Dellink — Modelling the costs of environmental policy
Specification of economic growth
 Dynamic model
– perfect-foresight behaviour: Ramsey-type model with finite horizon
– exogenous increase in labour supply
– endogenous accumulation of capital and greenhouse gasses
 Comparison of dynamic behaviour in Chapter 3
– comparative-static specification
– recursive-dynamic specification
– perfect-foresight speciciation
– comparison uses small version of the model
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Rob Dellink — Modelling the costs of environmental policy
Specification of pollution
 Environmental themes
– individual pollutants aggregated using ‘theme equivalents’
– interactions within theme fully taken into account
 Polluters need pollution (permits) for their activities
– necessary input of production process / utility formation
– tradable permit system implemented in the benchmark
– autonomous pollution efficiency improvements
 Government auctions pollution permits
– environmental policy implemented as restriction of number of
permits
– revenues are recycled lumpsum to private households
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Rob Dellink — Modelling the costs of environmental policy
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Specification of abatement
 Using bottom-up technical abatement information
– costs and effects of end-of-pipe and process-integrated options:
discrete modelling of all available options is practically infeasible
– measures ordered by increasing marginal abatement costs
– technical potential: in the short run not all pollution can be abated
– ‘spending effects’: inputs in Abatement production function
 Endogenous choice between (i) paying for pollution permits
or (ii) investing in abatement or (iii) reducing activity level
 Estimation of “Pollution - Abatement Substitution” (PAS)
curves: limited substitution between pollution and
abatement
Rob Dellink — Modelling the costs of environmental policy
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From MAC to PAS
Cumulative abatement costs
(in % of maximum)
120
Sustainability
estimate
100
Short-term
policy target
Technical
potential
Current
pollution level
80
60
40
Data abatement costs
PAS curve
20
0
0
20
40
60
80
Emissions (in % of current level)
100
120
Rob Dellink — Modelling the costs of environmental policy
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Abatement as an economic good
 Abatement modelled like ‘normal’ production sector
– abatement goods are demanded by all polluters (on a perfect
market)
– decisions on ratio between pollution and abatement are reversible
 The ‘Abatement sector’ production function
– nested CES production function
– labour, capital and produced goods are inputs in abatement sector
production function (the ‘spending effects’)
– changes in input costs leads to changes in marginal abatement
costs
(mainly changes in labour productivity)
 Autonomous pollution efficiency improvements
Rob Dellink — Modelling the costs of environmental policy
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Structure of the production function
Output
0
Environmental
Services
Production
Y
0
ID
K
L
Intermediate Labour Capital
deliveries
PAS
Pollution Pollution Abatement
permits - permits unabatabl abatable
e part
part
Rob Dellink — Modelling the costs of environmental policy
Part II:
Calibration
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Rob Dellink — Modelling the costs of environmental policy
Calibration of the model
 Environmental themes
– Climate change, Acidification, Eutrophication, Smog formation,
Dispersion of fine dust, Desiccation, Soil contamination
 Benchmark projection
–
–
–
–
–
–
model calibrated to the Netherlands, accounting matrix for 1990
balanced growth of 2% per year
theme-specific autonomous pollution efficiency improvements
27 production sectors
1 representative consumer for all private households
1 government sector: existing distortionary taxes
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Rob Dellink — Modelling the costs of environmental policy
Data sources
 Description of initial situation in 1990
– Social Accounting Matrix: Statistics Netherlands (National
accounts)
– emissions: Statistics Netherlands / RIVM
– abatement cost curves: own compilation based on various
sources, including RIVM and ICARUS
 Growth rates
– own calculations based on data for 1995 and 2000
 Parameters
– elasticities: extended Keller model / SNI-AGE model
– other parameters: existing literature
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Rob Dellink — Modelling the costs of environmental policy
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Policy scenarios
 Policy scenario NEPP2030
– emission targets for 2030 based on NEPP4 (+expert judgements):
Climate -50%; Acid. -85%; Eutroph. -75%; Smog -85%; PM10 90%
– linear path to target from 2000 - 2030
– stabilisation of emissions from 2030 onwards
 Policy scenario Delay
– targets for 2030 postponed to 2040
 Policy scenario NEPP2010
– additional targets for 2010 based on NEPP3 (+expert judgements)
Rob Dellink — Modelling the costs of environmental policy
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Policy impulse for Acidification
45
35
30
25
20
15
10
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Benchmark project ion
NEPP2030
Delay
NEPP2010
2090
2080
2070
2060
2050
2040
2030
2020
2010
2000
0
1990
m. acid equivalents
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Rob Dellink — Modelling the costs of environmental policy
Part III:
Main results
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Rob Dellink — Modelling the costs of environmental policy
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Impact on GDP
1800
1600
14 00
1000
800
600
4 00
wit hout environment al policy
200
wit h environment al policy
2090
2080
2070
2060
2050
2040
2030
2020
2010
2000
0
1990
bn. euros
1200
Rob Dellink — Modelling the costs of environmental policy
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changecompared
comparedtotobenchmark
benchmark
%%change
0.0
-2.0
-4 .0
-6.0
-8.0
-10.0
-12.0
NEPP2030
Delay
NEPP2010
2090
2080
2070
2060
2050
2040
2030
2020
2010
2000
1990
Impact on GDP
Rob Dellink — Modelling the costs of environmental policy
Sectoral results
 Indirect effects are important
– most dirty sectors not necessarily most heavily impacted
 Impacts on production sectors very diverse
– in long run large reductions in energy sectors and heavy industry
– small reductions (or even small increases) in services sectors
– combination of shift and shrink
 Impacts on consumption more evenly spread
– impacts depend crucially on environmental policy abroad
– in short run increase in consumption
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Rob Dellink — Modelling the costs of environmental policy
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Grouped sectoral results
Sectoral effects of NEPP2030 policy
1990
2010
2030
2050
Private consumption Agriculture
0.44
-0.08
-6.88
-9.30
Private consumption Industry
0.89
0.91
-8.80
-12.05
Private consumption Services
1.06
1.34
-3.23
-8.57
Sectoral production Agriculture
-1.09
-7.46
-32.64
-34.58
Sectoral production Industry
-0.60
-3.25
-35.05
-30.64
Sectoral production Services
0.09
-0.64
0.49
-3.74
Sectoral production Abatement services -0.03
4.23
16.59
15.81
Rob Dellink — Modelling the costs of environmental policy
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Emission reductions (year 2030)
120
100
80
60
40
20
0
Climate change
Acidification
Emissions
Remaining before
after
emissions
policy
policy
Eutrophication Smog formation
Technical
Economic
Economic
measures
restructuring
restructuring
Fine dust
Economic
Technical
Technical
restructuring
measures
measures
Rob Dellink — Modelling the costs of environmental policy
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2090
2080
2070
2060
2050
2040
2030
2020
2010
2000
1990
Technically abatable emissions
% change compared to benchmark
20
0
-20
-4 0
-60
-80
-100
Climat e change
Acidif icat ion
Eut rophicat ion
Smog f ormat ion
Fine dust
Rob Dellink — Modelling the costs of environmental policy
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Gross environmental expenditures
Gross environmental expenditures in the NEPP2030 scenario with the base specification
of DEAN (undiscounted values in billion Euro)
1990
2010
2030
2050
Climate change
0.55
1.64
2.52
6.07
Acidification
0.16
0.42
5.60
6.58
Eutrophication
0.11
0.23
0.36
0.54
Smog formation
0.07
0.25
100.96
107.54
Fine particles to air
0.01
0.02
0.65
0.82
Desiccation
0.25
0.37
0.37
0.64
Soil contamination
8.77
13.04
13.15
22.42
Total environmental expenditures
9.92
15.98
123.62
144.62
4%
5%
26%
21%
in percentage of GDP
Rob Dellink — Modelling the costs of environmental policy
Part IV:
Final remarks
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Rob Dellink — Modelling the costs of environmental policy
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Sensitivity analysis
 Specification of technical potential
– results highly sensitive to technical potential Smog formation
– higher technical potential means lower costs and more abatement
 Specification of PAS-elasticity
– small impact, as all VOC measures will be implemented anyway
– higher elasticity means lower costs and less abatement expenditure
 Specification of endogenous environmental innovation
– endogenous innovation (read: learning by doing) is likely to occur
– any excessive economic costs of environmental policy can be
prevented
Rob Dellink — Modelling the costs of environmental policy
Impact of model variants on welfare
Equivalent variation
Base specification
-5.8
GHG emission policy
-7.4
Endogenous innovation
-3.2
Labour tax recycling
-5.6
Multilateral policy
-11.7
High technical potential Smog formation -4.1
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Rob Dellink — Modelling the costs of environmental policy
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Future research / room for improvement
 Better modelling of energy carriers and fuel switch options
– linking emissions of GHGs to input of energy where appropriate
– top-down modelling of fuel switch options
– ay suggestions on modelling national climate policy?
 Add more empirical details on abatement options
– sectoral specification of potential options (if possible)
– differentiate production function abatement sector
– improve modelling of negative cost options
 Add feedback effects from environment to economy
(benefits)
Rob Dellink — Modelling the costs of environmental policy
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Conclusions
 Major (bottom-up) characteristics of abatement options can
be integrated in a (top-down) CGE framework
 Macro-economic impact ‘modest’
 10 percent / 5 years delay / 80 bn Euro net / 145 bn Euro gross
 Environmental policy creates both threats and opportunities
for production sectors
 Technical measures and economic restructuring are both
essential
 Interactions between environmental problems have
substantial influence on results