Computable General Equilibrium Analysis Research Articles

How may a carbon tax transform Australian electricity industry? A CGE analysis

The carbon tax policy proposed by Australian government has triggered deep concerns about the high electricity prices facing households and the sustainability of electricity industry. By employing a computable general equilibrium (CGE) model and an environmentally extended Social Accounting Matrix (SAM), this article simulates the effect of Australian carbon tax on the electricity industry. The modelling results show that the wholesale electricity prices indeed increase by about 90%, but the retailer prices only increase by 25%. The coal-fired electricity generators will reduce their output by 8% (for black-coal) to 18% (for brown-coal), but the profitability of the industry will drop dramatically. On the other hand, generators using oil, gas or renewable resources, will increase their output significantly and enjoy a handsome profit. Through the price, cost and profitability mechanisms, the carbon tax will transfer the Australian electricity generation to a low emission industry in the long term.

Taxing CO2 emissions and its ancillary health benefits: a computable general equilibrium analysis for Tunisia

Since the middle of the last century, Tunisia has embarked on an ambitious trade reform program aimed at improving its integration in the world economy, boosting growth through valorizing comparative advantages, and reducing unemployment among its population. However, and despite the positive role that trade may play in improving growth through better allocation of domestic resources and lower costs of imported equipments and raw materials, the risk is to amplify output in sectors intensive in energy in a country where energy is still subsidized. Introducing pollution abatement taxation has been suggested as a way to achieve ancillary benefits from reduced local air toxics. The highest level of local air pollution is found in heavily populated cities where labor is concentrated and where labor health is believed to have been significantly impacted. The objective of this paper is to address this important issue. It identifies the optimal and ‘no regrets’ pollution abatement tax on a net welfare function, which integrates both net health benefits and adjustment costs. The paper uses a Dynamic Computable General Equilibrium (CGE) model for the assessment that allows the health benefits to feed back into the economy. A health effects sub-model takes the local air emissions output from the CGE model and assesses the implications for ambient air concentration levels and health effects. The results suggest an ‘optimal’ abatement rate in 2020 of around 25% of CO2 reduction compared with the baseline 2020 emissions. However, the most significant impact concerns the relatively small aggregate cost of pollution abatement in terms of forgone real average growth rate of GDP between 2010 and 2020 for the trade scenario with ‘optimal’ climate policy. Finally, the major consequence of pollution abatement policies is the reduction of production generated by polluting activities against a higher production of less-polluting activities.

Computable general equilibrium analyses of global economic impacts and adaptation for climate change: the case of tropical cyclones

Computable general equilibrium models have been widely used for simulating global warming and evaluating economic damages caused by climate change. However, to date little research has focused on the economic consequences incurred across several industry sectors at a global level. This article uses the evaluation model for environmental damage and adaptation (EMEDA) to simulate direct economic damages caused by tropical cyclones and losses that are offset through growth in other sectors to measure the global economic impacts arising from climate change. Simulated results by EMEDA indicate that: 1) several regions experience economic growth, with four regions offsetting economic damages in the primary industry sector whilst the other regions increase their damages; 2) seven regions show economic growth whilst only North America neutralises damage in their secondary sectors, with the other regions revealing more severe losses; 3) several regions are able to offset their tertiary sector losses yet the other regions show an increase in damages; 4) the equivalent variation in all regions except East Asia decreases as temperature increases.

Environmental tax reforms in Switzerland a computable general Equilibrium impact analysis

Summary The Swiss energy strategy until 2050 envisages ambitious CO2 emission reduction targets along with substantial cutbacks in electricity consumption to establish a low-carbon economy without nuclear energy. Our computable general equilibrium analysis finds that compliance with stringent CO2 constraints requires high CO2 taxes on economic activities which are not eligible for international emissions trading; likewise, electricity consumers are burdened with substantial electricity taxes. Environmental tax reforms are not likely to generate welfare gains without accounting for the benefits of improved environmental quality. However, economic adjustment costs to a low carbon economy without nuclear energy remain modest and can be markedly reduced through revenue-neutral cuts of initial distortionary taxes. On the other hand, alternative recycling strategies pose a trade-off between efficiency and distributional justice which has to be resolved on normative grounds.

How FDI influences the triangular trade pattern among China, East Asia and the U.S.? A CGE analysis of the sector of Electronics in China

This paper uses a computable general equilibrium (CGE) model to simulate the FDI inflows in the Electronics sector in China. Our aim is to capture how the causation chain works through production networks and the triangular trade pattern. China is a production base and export center for Electronics, with a heavy dependence on East Asian Electronics supply. Meanwhile, the U.S. and the rest of the world (ROW) are important markets for Electronics exports. China collaborates with East Asia in the production networks but competes with East Asia for the exports to the U.S. and ROW. The shock of FDI reinforces the pivotal role of China and intensifies its exports without any remarkable change on the pattern of the geographical destination or origin of its Electronics exports and imports. The Chinese trade links and production division remain unchanged. However, China takes up more of the world market crowding out its competitors. In this sense, after the shock, the shares in imports of Electronics of rest of regions change noticeably, showing a remarkable increase in the weight of China. East Asia will increase its exports to China, providing more intermediates for further processing. However, it will be displaced by China in the rest of the markets, thus, reducing its overall exports.

Modeling Regional Transportation Demand in China and the Impacts of a National Carbon Policy

China's climate and energy policy commitments are stated at the national level, but they may have uneven impacts on the country's regionally heterogeneous transport system. This work quantifies the expected provincial-level response of freight transport to an economywide policy targeting reductions in carbon emissions intensity. The analysis applies the China Regional Energy Model, a multisector, static, global, computable general equilibrium (CGE) model representing 30 individual provinces with physical accounts of energy and greenhouse gas emissions. The structure of road and nonroad freight (and passenger) sectors, the preparation of transport activity data, and a policy similar to announced goals that specify a 17% reduction in the carbon dioxide emissions intensity of gross domestic product are described. In the national aggregate and in most provinces, the road freight sector is most affected by the emissions intensity cap. The road freight sector contributes 24%–-versus 18% from nonroad freight and 51% from nontransport sectors–-of a 5.1% reduction in national refined oil demand. Significant regional differences are found in the impacts of a national-level, economywide policy. Steep reductions in freight activity occur in some of the poorest provinces, partly because they offer low-cost abatement opportunities, and the resulting adjustments across the economy affect transport demand. This research contributes a new tool capable of capturing the transport impact of sector- and province-specific policies in detail and providing a rigorous foundation for future dynamic CGE analyses. Potential impacts of energy and climate policy on regional transport systems are important inputs to policy and infrastructure investment decisions at the central and local levels.

International price transmission in CGE models: How to reconcile econometric evidence and endogenous model response?

The importance of empirically analyzing the transmission of international prices to and their impacts on domestic markets is growing particularly since the 2006–2008 food price hikes. However, the field is dominated by econometric Price Transmission Analysis (PTA) but surprisingly disconnected from analyses based on simulation models such as Computable General Equilibrium (CGE) models. The missing reconciliation among these tools could be due to PTA often being concerned with high frequency data and short-term adjustment processes, which does not reconcile well with the annual data of CGE analyses; different research teams in econometric time series analysis and CGE modeling with typically little overlap; and the endogeneity of price transmission in CGE models. Due to this endogeneity, the calibration of CGE models to empirically observed price transmission is not straightforward, as an infinite combination of model parameters and specifications allows for reaching a certain level of price transmission. This paper aims at paving the way for the integrated use of PTA and CGE models by analyzing how a given degree of price transmission from the international to the domestic market, which may be determined empirically e.g. based on a vector error correction model, can be met in a single country CGE model. We examine and validate seven hypothetical determinants including structural characteristics of the model, the parameterization of behavioral functions and properties of the sectors concerned. The findings of this paper support controlling the pass-through of prices from the international to the domestic market in CGE models.

Switching to carbon-free production processes: Implications for carbon leakage and border carbon adjustment

Climate policy under partial global compliance raises concerns regarding carbon leakage. While border carbon adjustment (BCA) measures are a potential remedy, they have also been criticised on various grounds. This paper therefore investigates whether a policy fostering the switch to carbon-free technologies can substitute for BCAs. A reason for the effectiveness of a targeted technology policy is that major leakage prone sectors (such as iron and steel), have two main sources of carbon emissions, combustion of fossil fuels and industrial processes. While combustion emissions can be reduced relatively easy by increasing energy efficiency, reducing process emissions requires a switch to low-carbon production processes, e.g. in steel production by deploying electrolysis based on large-scale solar electricity. We show by means of a multi-regional computable general equilibrium analysis that such a switch in steel production technology can eliminate a significant fraction of carbon leakage and also increase sectoral output and welfare. Since the necessary technologies are not available at large scale yet (however, are likely to be by 2020), a transitional BCA scheme may be a crucial supportive instrument to foster such technology switches. Yet, in the long run BCA should be phased out to preserve the incentive for carbon-free innovation.

REDD+ and international leakage via food and timber markets: a CGE analysis

This paper studies the effect of international trade in food and timber on land use and potential carbon leakage in the context of actions to reduce emissions from deforestation and forest degradation (REDD+). First a simple analytical model of international leakage is presented that focuses on international competition between firms that produce food and timber. A formula for the leakage rate in the model is derived. The results of the analytical model are then tested with a large Computable General Equilibrium (CGE) model and it is verified that the qualitative results from the analytical model hold. Finally, a scenario of leakage rate trajectories is presented for a number of key tropical forest regions for the next two decades and a sensitivity analysis is performed on key parameters. Computed leakage rates range between 0.5 % for Brazil and 11.3 % for Malaysia and are fairly stable over the projection period. Leakage rates increase with a higher supply elasticity of land and a higher trade elasticity, they decrease with a higher elasticity of input substitution in production and appear to be independent of the rates of forest conservation and absolute prices of food and timber.

Non-grain fuel ethanol expansion and its effects on food security: A computable general equilibrium analysis for China

Concerning food security, China has launched non-grain fuel ethanol projects with potential land. However, there are concerns and facts, such as feedstock price rise, regarding its implications on quantity of food supply and food price. The study aims to better understand the impacts of expanding non-grain fuel ethanol on food price, supply and consumption using a CGE (computable general equilibrium) model. The investigation is divided into two scenarios, no supply of potential land and supply of potential land. The results show that: an increase in the fuel ethanol production raises food prices under both scenarios; and food supply and consumption can be ensured when there is a supply of potential land. Also, the simulated results predict adequate and quality potential land supply is one of the most important aspects to ensure food security in China. In addition, financial and trade policy implications are proposed.

Estimating a model of excess demand for public housing

The purpose of this paper is to develop and estimate a new equilibrium model of public housing that acknowledges the fact that the demand for public housing may exceed the available supply. We show that ignoring these supply side restric- tions leads to an inconsistent estimator of household preferences. We estimate the parameters of the model based on a unique panel data set of low-income households in Pittsburgh. We find that public housing is an attractive option for seniors and exceedingly poor households headed by single mothers. We also find that for each family that leaves public housing there are, on average, 3.8 families that would like to move into the vacated unit. Simple logit demand models that ignore supply side restrictions cannot generate reasonable wait times and wait lists. Demolitions of existing units increase the degree of rationing and potentially result in welfare losses. An unintended consequence of demolitions is that they increase racial segregation in low-income housing communities. Keywords. Excess demand, rationing, search, equilibrium analysis, welfare anal- ysis, enriched sampling, computational general equilibrium analysis. JEL classification. C33, C83, D45, D58, H72, R31.

Assessing the economic impact of North China’s water scarcity mitigation strategy: a multi-region, water-extended computable general equilibrium analysis

This paper describes a multi-region computable general equilibrium model for analyzing the effectiveness of measures and policies for mitigating North China’s water scarcity with respect to three different groups of scenarios. The findings suggest that a reduction in groundwater use would negatively affect economic growth and household incomes. A planned water-transfer project would improve economic development and reduce the over-exploitation of local water resources, while water demand management policies would improve water-use efficiency through reallocating water to those sectors having a higher marginal product value. Several important policy implications are drawn from these findings.

The Impact of a Multilateral Electricity Generation Tax on Competitiveness in Southern Africa: A Computable General Equilibrium Analysis Using the Global Trade Analysis Project

The South African Government announced, in the 2008 Budget Review, the intention to tax the generation of electricity from non-renewable sources with 2c/kWh. The intention of the tax is to serve a dual purpose of managing the potential electricity shortages in South Africa and to protect the environment. The primary objective of this paper is to evaluate the impact of an electricity generation tax on the international competitiveness of South Africa. Specifically, different scenarios are assessed to establish whether the loss of competitiveness can be negated through an international, multilateral electricity generation tax. The paper firstly considers the beneficial impact of environmental taxation on the competitiveness of a country. We subsequently apply the Global Trade Analysis Project (GTAP) model to evaluate the impact of an electricity generation tax on the competitiveness of South Africa, given multilateral taxes on SACU, SADC and European Union economies. It is shown that an electricity generation tax will indeed affect the competitiveness of South Africa in a negative way. Furthermore, SACU and SADC wide implementation will marginally reinforce these negative effects. However, a multilateral electricity generation tax across SACU or SADC countries will result in emission reductions, but lower than in the case of a unilateral electricity generation tax. In contrast, the cost to the South African economy could be limited, if the European Union would follow suit and implement an electricity generation tax. One could therefore argue in favour of global rules for environmental taxes, since this will ensure minimum negative competitiveness effects on participating countries.

Macroeconomic impact of a mild influenza pandemic and associated policies in Thailand, South Africa and Uganda: a computable general equilibrium analysis

Previous research has demonstrated the value of macroeconomic analysis of the impact of influenza pandemics. However, previous modelling applications focus on high-income countries and there is a lack of evidence concerning the potential impact of an influenza pandemic on lower- and middle-income countries. To estimate the macroeconomic impact of pandemic influenza in Thailand, South Africa and Uganda with particular reference to pandemic (H1N1) 2009. A single-country whole-economy computable general equilibrium (CGE) model was set up for each of the three countries in question and used to estimate the economic impact of declines in labour attributable to morbidity, mortality and school closure. Overall GDP impacts were less than 1% of GDP for all countries and scenarios. Uganda's losses were proportionally larger than those of Thailand and South Africa. Labour-intensive sectors suffer the largest losses. The economic cost of unavoidable absence in the event of an influenza pandemic could be proportionally larger for low-income countries. The cost of mild pandemics, such as pandemic (H1N1) 2009, appears to be small, but could increase for more severe pandemics and/or pandemics with greater behavioural change and avoidable absence.

Trade and Environment in India: A Computable General Equilibrium Analysis

This paper examines general equilibrium implications of international trade and globalization on social welfare and environmental emission. It applies Computable General Equilibrium (CGE) modelling as our relevant methodology following Shoven and Whalley (1984). Constructing Energy/Environmental Social Accounting Matrix (SAM) and CGE model, it attempts to purport the effects of liberalized trade over different macroeconomic aspects, energy consumption and Green House Gas (GHG) emission. With the help of an index known as Pollution Terms of Trade (PTOT), it finds that trade and globalization in most of the cases aggravated the problem of GHG emission and made India 'Pollution Haven'.

Evidence-based regional economic policy analysis: the role of CGE modelling

An important ingredient in meeting the challenges for regional policy is evidence-based analysis capable of revealing the full ramifications of economic policies and events across regions. This paper considers the capabilities of computable general equilibrium (CGE) modelling to provide such analysis. After summarising the main features of CGE models, we examine how they can be put to work to inform regional policymakers. We first consider historical CGE analysis designed to uncover the economic causes underlying relative regional performance. We then discuss CGE regional forecasting and policy modelling, highlighting the model’s analytical capabilities in revealing the regional consequences of a wide range of regional policy initiatives.

Assessing the economic costs of a foot and mouth disease outbreak on Brittany: A dynamic computable general equilibrium analysis

Outbreaks of animal diseases such as foot and mouth disease (FMD) are of great concern for agriculture. In this paper, we quantify the potential dynamic impacts of such a disease on Brittany, a French region with an important livestock sector. In order to do this, we develop a dynamic computable general equilibrium model that allows us to measure the impacts on the livestock sectors and downstream food industries. We study the impacts of a FMD outbreak including the culling infected animals, a temporary decline in demand, and restrictions on movements of live animals and meats during the FMD outbreak period.Our results show that economic losses following this disease are spread over many periods even with a one-time shock. We also find that the impacts on the various primary sectors and downstream food sectors are quite different, depending on their initial trade position. Our general equilibrium results show the great incidence of potential constraints affecting factor markets. Capital and wage constraints severely increase the aggregate costs of such disease. These results challenge the definition of a simple efficient management policy for this disease.

Transition towards a low carbon economy: A computable general equilibrium analysis for Poland

In the transition to sustainable economic structures the European Union assumes a leading role with its climate and energy package which sets ambitious greenhouse gas emission reduction targets by 2020. Among EU Member States, Poland with its heavy energy system reliance on coal is particularly worried on the pending trade-offs between emission regulation and economic growth. In our computable general equilibrium analysis of the EU climate and energy package we show that economic adjustment cost for Poland hinge crucially on restrictions to where-flexibility of emission abatement, revenue recycling, and technological options in the power system. We conclude that more comprehensive flexibility provisions at the EU level and a diligent policy implementation at the national level could achieve the transition towards a low carbon economy at little cost thereby broadening societal support.

Is there a role for biofuels in promoting energy self sufficiency and security? A CGE analysis of biofuel policy in Thailand

Given the rising price of crude oil, some developing countries including Thailand are looking towards developing their domestic renewable energy resources, in particular biofuels. However, there are concerns about the possible adverse effects such a policy strategy would have on key variables such as sectoral output, land allocation and the effects of prices, particularly food prices. This study develops a computable general equilibrium (CGE) model of the Thailand economy that features enhancements of the energy sector and uses it to analyze the government’s recent renewable energy development plan. This plan aims to increase domestic energy use from renewable sources to replace fossil fuel imports. The study simulated specific policies contained in the plan. Among other things, we found that promoting biofuel use causes a rapid increase in the price of biofuel and biofuel feedstock in the short-run, whereas these prices only increase slightly in the long-run due to more elastic supplies. The prices of food and other products marginally increase, implying that food security is not undermined by the policy. On the basis of the findings, the study recommends a review of some of the targets because they were found to be rather high, and a phasing in of others.

The EU Decarbonisation Roadmap 2050—What way to walk?

We carry out a detailed computable general equilibrium (CGE) analysis of the EU Decarbonisation Roadmap 2050 on a macroeconomic and on a sectoral level. Herein, we study a Reference scenario that implements existing EU policies as well as 3 unilateral and 3 global climate action scenarios. We identify global climate action with international emissions trading and the full equalisation of CO2 prices across all (EU) sectors as an economically reasonable policy option to avoid additional costs of the Decarbonisation Roadmap to a large extent. This policy option may include CDM (Clean Development Mechanism in the sense of ‘where’-flexibility) in an extended form if there are countries without emissions caps. Moreover, we identify diverse sectoral effects in terms of output, investment, emissions and international competitiveness. We conclude that the successful realisation of the EU Decarbonisation Roadmap probably requires a wise and joint consideration of technology, policy design and sectoral aspects.