CO 2, GDP and RET: An aggregate economic equilibrium analysis for Turkey

Abstract

There is a worldwide interest in renewable electricity technologies (RETs) due to growing concerns about global warming and climate change. As an EU candidate country whose energy demand increases exponentially, Turkey inevitably shares this common interest on RET. This study, using an aggregate economic equilibrium model, explores the economic costs of different policy measures to mitigate CO 2 emissions in Turkey. The model combines energy demands, capital requirements and labor inputs at a constant elasticity of substitution under an economy-wide nested production function. Growing energy demand, triggered by economic growth, is met by increased supply and initiates new capacity additions. Investment into RET is encouraged via the incorporation of (a) endogenous technological learning through which the RET cost declines as a function of cumulative capacity, and (b) a willingness to pay (WTP) function which imposes the WTP of consumers as a lower bound on RET installation. The WTP equation is obtained as a function of consumer income categories, based on data gathered from a pilot survey in which the contingent valuation methodology was employed. The impacts of various emission reduction scenarios on GDP growth and RET diffusion are explored. As expected, RET penetration is accelerated under faster technological learning and higher WTP conditions. It is found that stabilizing CO 2 emissions to year 2005 levels causes economic losses amounting to 17% and 23% of GDP in the years 2020 and 2030, respectively.