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EC 936 ECONOMIC POLICY MODELLING LECTURE 8: CGE MODELS OF CLIMATE CHANGE POLICY ISSUES • Environmental impact of economic growth • Environmental impact of liberalization policies • Global warming and the cost of greenhouse gas emissions control • Tradable permits for CO2 • Carbon tax policies • Deforestation and reforestation • Environmental standards legislation/regulation • Double dividends? SOCIAL ACCOUNTING APPROACH • SAMEA (SAM with Environmental Accounts) • Standard SAM (expressed in monetary units) linked to: • EA (expressed in physical units) – Additional rows displaying environmental inputs consumed as resources – Additional columns displaying discharge of emissions and pollutants to the environment COST-BENEFIT OF SAMEA • Diagnostic tool for evaluating impact of policies and growth patterns on environmental outcomes • Adaptable to different environmental contexts • Multiplier analysis the core mechanism of analysis • Multiplier decomposition a la Pyatt-Round • Fix price, fixed coefficients model; no substitution effects APPLICATION OF SAMEA MODEL TO SPAIN (MORILLA et al, 2007) WHY CGE MODELS? • General vs partial equilibrium analysis • Counterfactual modeling • Decomposition of complex array of simultaneous influences (exogenous as well as policy decisions) • Simulation exercises • Evaluation of key parameters ECONOMIC MODELS OF CLIMATE POLICIES • Early 70s: first models mainly build by natural scientists focusing on GHG • Late 70s: first economic models • Toronto Climate Conference in 1988 • Late 80s/early 90s first CGE models, analysis of CO2 taxes • CGE modeling of climate policies took off in the 90s – More powerful software to handle larger models – GTAP Energy – GAMS codes for standard models available (Rutherford) • The Kyoto Protocol JORGENSON & WILCOXEN, 1990 • For USA only; 35 industrial sectors, 672 household types, labor, capital, energy, materials • Parameters estimated for 1947-1987 data • Dynamic; until 2050 • Experiments: - Freeze emissions at 1990 or 2000 level - Cut emission in 2080 to 80% of 1990 level WHALLEY & WIGGLE, 1990 • 6 regions: EU, North America, Japan, other OECD, Oil exporters, ROW • 4 resources: carbon/non-carbon energy resources, sector-specific factors in energy intensive manufactures, other primary factors • 5 products: carbon/non-carbon energy, composite energy, energy intensive goods, other goods • Period 1990 - 2030 • Experiments: – reduce carbon emissions by 50 % rel. to benchmarks by producer, consumer or internationally levied tax MORE RECENT MODELS I (Peterson) MORE RECENT MODELS II (Peterson) CLIMATE CHANGE MODELS BASIC MAPPING OF CLIMATE CHANGE GTAP-E MODELS (Roson et al) • Use extended GTAP model incorporating greenhouse-gas emissions to evaluate probable path of greenhouse gases on: – Tourism (2006) – Coastal inundation/erosion (2007) – Human health (2006) • Constructs base snapshots for 2010, 2030, 2050 with and without climate change effects Source: Roson (2003) CGE MODEL OF SEA LEVEL RISE (Bosello, Roson and Tol, 2007) • Calibrates model to 2010, 2030, 2050 by setting population, capital, natural resources and productivity (endogenous→exogenous) • Shocks system by reducing stock of land according to predictions of Global Vulnerability Assessment database – Without any investment in protection against rising sea levels (reduction in land) – With capital investments in dikes and flood barriers (no reduction in land, but increase in investment expenditure) Source: Bosello, Roson & Tol (2007) ADDING A DYNAMIC COMPONENT (Eboli, Parrado, Roson, 2010) • ICES (Inter-temporal Computable Equilibrium System)— extension of GTAP-E which incorporates capital and international debt accumulation as endogenous factors to simulate growth in combination with exogenously determined growth in labour, land and natural resources. • Essentially an escalator model—calibrated to a new benchmark at annual intervals to establish a baseline global growth forecast • Model is then shocked with new exogenous variables, such as land loss due to sea level rise and a new series of benchmark equilibria are generated Source: Eboli, Parrado, Roson (2010)