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AMOS Energy CGE Modelling Karen Turner Department of Economics and Fraser of Allander Institute University of Strathclyde ESRC Grant Ref: RES-061-25-0010 FAI Brown Bag Seminar Overview • • • • • Policy issues Model requirements Computable general equilibrium modelling Development of the AMOSENVI framework Current and future research Policy issues • Impacts of changes in economic conditions and/or policy on environmental/sustainability indicators • Sustainability – global and local concerns • UK – regional and national focus • Supply-side issues • Energy and/or carbon taxation • Resource productivity, energy efficiency • Changes in technology • Demand-side issues • Nature and structure of energy demand and use • Elasticity of energy demand Requirements for energy-economyenvironment modelling • Multi-sectoral modelling • Different energy-use and pollution generation characteristics of different production and consumption activities • System-wide • Interaction between different production and consumption activities Input-output accounting and modelling • Input-output accounts • Snapshot of economic activity • Multi-sectoral, economy-wide • Single entry book-keeping • Regional and national accounts • Multiplier analysis • Input-output models • Assumptions • Simple, transparent form of general equilibrium modelling • Popular with policymakers • But restrictive – demand or supply, prices or quantities, universal Leontief technology Computable general equilibrium (CGE) modelling (1) • IO database • Extended to social accounting matrix (SAM) • Labour supply and demand, capital stocks, investment demands • Key: analytical work with IO/SAM – structural characteristics • Theoretical origins: Walrasian general equilibrium theory • In practice: wide variety of approaches, assumptions and focus Computable general equilibrium (CGE) modelling (2) • Common features: • Both supply and demand matter • Prices and quantities modelled simultaneously • Data inform about structure • Modelling based on theory and observation of behavioural relationships, market interactions • Involves making assumptions • Should be transparent and subject to sensitivity analysis Example - AMOS • Originally developed as A micro and macroeconomic Model Of Scotland • 3-sector, single region • Now N-sector, single and inter-regional • Particular focus on regional labour markets • Recent developments – energy-environment, linked demographic model AMOSENVI (1) • Environmental impact version of AMOS • N-sector – identify sectors with distinct energy supply/use and/or pollution generation characteristics • Initial version – emphasis on pollution generation – Leontief ouput-pollution coefficients – Captures changes in pollution due to scale and composition effects – But not due to input substitution and technology effects • ESRC funded project ‘Modelling the impacts of sustainability policies in Scotland’ – Link pollution generation to energy input use – Introduction KLEM production structure – substitution between energy and other inputs AMOSENVI (2) • 3 transactor groups – households, firms, government • 25 commodities and activities (5 energy supply) • Two exogenous external transactors (RUK and ROW) • Commodity markets taken to be competitive • Scotland modelled as a small open economy AMOSENVI (3) • Assume cost minimisation in production • Multi-level production functions • Four major components of final demand: • Government expenditure – exogenous or endogenous • Consumption a linear homogenous function of real disposable income • Exports (and imports) determined via an Armington link (relative price sensitive) • Investment AMOSENVI (4) Single Scottish labour market Perfect sectoral mobility Wages subject to a regional bargained real wage function Labour and capital stocks updated between periods Capital – investment equals depreciation plus fraction gap between desired and actual capital stocks Population updating via migration function AMOSENVI (5) • KLEM production structure • Input- and output-CO2 coefficients • Calibrated on 1999 Scottish SAM • Scottish IO tables with estimated electricity disaggregation • Pilot region-specific sectoral CO2 accounts Sectoral breakdown of the 1999 Scottish 25 sector extended (KLEM) AMOSENVI model IOC 1 AGRICULTURE 1 2 FORESTRY PLANTING AND LOGGING 3 FISHING 3.1 4 FISH FARMING 3.2 5 Other mining and quarrying 6,7 6 Oil and gas extraction 7 Mfr food, drink and tobacco 8 Mfr textiles and clothing 21 to 30 9 Mfr chemicals etc 36 to 45 10 Mfr metal and non-metal goods 46 to 61 11 Mfr transport and other machinery, electrical and inst eng 12 Other manufacturing 13 Water 87 14 Construction 88 15 Distribution 89 to 92 16 Transport 93 to 97 17 Communications, finance and business 18 R&D 19 Education 20 Public and other services 2.1, 2.2 5 8 to 20 62 to 80 31 to 34, 81 to 84 98 to 107, 109 to 114 108 116 115, 117 to 123 ENERGY 21 COAL (EXTRACTION) 22 OIL (REFINING & DISTR OIL AND NUCLEAR) 35 23 GAS 86 ELECTRICITY 85 24 Renewable (hydro and wind) 25 Non-renewable (coal, nuke and gas) 4 Figure1. Production structure of each sector i in the 25 sector/commodity AMOSENVI KLEM framework GROSS OUTPUT INTERMEDIATES ROW composite VALUE-ADDED UK composite RUK composite LABOUR CAPITAL LOCAL composite ENERGY composite NON-ENERGY composite Non-energy comm. j = 1……………………………….20 ELECTRICITY composite RENEWABLE (comm j=24) NON-ELECTRICITY composite NON-RENEWABLE (comm j=25) OIL (comm j=22) NON-OIL composite COAL (comm j=21) GAS (comm j=23) Application of AMOSENVI • Debate in literature: “rebound” and “backfire” effects • Policy concern – House of Lords (2005) report on energy efficiency • Khazzoom-Brookes Postulate (KBP) – Jevons (1865) – “confusion of ideas” regarding productive use of fuel and diminished consumption – increase utility, impact on implicit prices • Will an increase in efficiency of energy use lead to increased or reduced consumption of energy? E.g. increase energy efficiency by 5% • No rebound or backfire – reduce energy consumption by 5% • Rebound – reduce energy consumption by less than 5% • Backfire – increase energy consumption • Efficiency effects vs substitution, income and output effects • General equilibrium effects Case study: Scotland • Rebound and backfire effects • Difference in direction of effects over short- and long-run • Key parameters governing the extent of rebound and backfire: • Elasticities of substitution in production • Energy and non-energy intermediates • Value-added and intermediates • RUK Export demand elasticity • Target of shock • Implications of variations in sectoral energy supply and use characteristics Figure 4. Impact of a 5% increase in energy efficiency in all sectors on energy indicator variables 2.0 1.5 0.5 51 49 47 45 43 41 39 37 35 33 31 29 27 25 23 21 19 17 15 13 9 7 5 11 -0.5 3 0.0 1 % change from base 1.0 -1.0 -1.5 -2.0 -2.5 Period (year) Y/m (1) - GDP £/tonnes oil equiv non-elec Energy consumption (elec gigaw att hours) GDP Y/m (2) - GDP £/gigaw att hours elec Share of electricty generation from renew able sources Key results of sensitivity analysis (long run impacts) Central case Electricity rebound effect (%) Non-electricity energy rebound effect (%) 123.0 116.1 Elasticity of substitution Energy/Non-energy Value-added/intermediate Low 0.1 High 0.7 Low 0.1 High 0.7 109.5 150.3 120.2 128.5 106.7 135.1 113.8 120.7 Central case Electricity rebound effect (%) Non-electricity energy rebound effect (%) 123.0 116.1 Armington export Electricity (RUK) Low 2.0 87.0 84.5 Varying target of shock Energy supply Non-energy (ES) supply (NES) 209.2 57.6 179.9 72.6 Heavier users Heavier users Heavier users gas gas and oil gas and oil (ES) and oil (NES) 65.3 79.6 60.4 75.2 70.3 76.0 Case study - UK • Scottish results driven by fact Scotland is a net exporter in electricity to RUK • Also, nature of shock (somewhat blunt, and targeting Scotland only, in a single region model) • DEFRA project with UKENVI model (UK national economy) • No backfire • Elasticities of substitution dominate rather then export elasticities (particularly energy/non-energy) • Time pattern different – rebound bigger in short-run than in long-run Key conclusion • Extent of rebound and backfire effects is always and everywhere an empirical issue • A large number of parameters potentially important for influencing general equilibrium effects • Elasticities of substitution in production important • But other characteristics such as • Openness of the economy in question • Elasticity of supply of other inputs • Energy intensity of individual production sectors and final consumption activities • Elasticity of substitution between commodities in consumption • Income elasticities of demand for commodities Current and future research • EPSRC projects (ongoing) • Inter-regional CGE framework for UK • More sophisticated modelling of electricity production and markets • Extension of policy applications – e.g. changes in technology, carbon/energy taxation • ESRC 1st grant project (start October 07) • Analysis of factors governing energy rebound effects in the UK economy • Introduce different hierarchical production and consumption activities • Identification different household consumption groups and consumption activities • Focus on key production and consumption activities • Econometric estimation of key functions and parameters • Examination of a wider range of policy scenarios • Systematic programme of simulation, sensitivity and scenario analysis • Contribute to evidence base on extent to which economy-wide rebound effects are likely to occur in UK, and nature of effects • Development of energy-economy-environment CGE modelling framework for application to a wider range of regional and national economies, and policy issues