Dynamic CGE Model Research Articles

Climate change and agriculture in the Sudan: Impact pathways beyond changes in mean rainfall and temperature

Sudan is a country with a predominantly rainfed agriculture which is a major contributor to GDP, foreign exchange earnings, and livelihoods. However, with current and projected environmental changes on the horizon there is an urgent need to measure and analyze the impact of these changes. This study analyzes the economy-wide impacts of climate change and consults national policy plans, strategies, and environmental assessments to identify interventions for mitigating the effects. We feed climate forcing data, projected water demand, and macro-socioeconomic trends into a modeling suite, which includes models for global hydrology, river basin management, water stress, and crop growth. This modeling suite provides us with annual crop yields and global food prices under various climate change scenarios until 2050. The effects from climate change are assessed by using a single country dynamic CGE model for the Sudan. Additionally, we introduce yield variability into the CGE model based on stochastic shocks of crop yields until 2050. The results reveal that extreme negative variability could cost the Sudan cumulatively US$ 105.5 billion in GDP between 2018 and 2050 compared to a baseline scenario without climate change.

Does the different sectoral coverage matter? An analysis of China's carbon trading market

By the end of 2017, China formally established the national carbon trading market, however, only electricity industry was eligible to participate in the emission trading scheme (ETS). This paper aims to answer the question as to what should China do after the first step of establishing China's national ETS market using a dynamic recursive CGE model with six scenarios from different coverage according to relevant documents. The results show that when more industries are covered in ETS market it will lead to a higher GDP performance and less ETS price in general. Since the trading price is related to the marginal emission reduction cost of enterprises, the coverage of enterprises with low emission reduction cost can bring lower prices. However, there is no direct relationship between carbon price and emission reduction, as the coverage is different in different. There is no obvious relationship between the additional burden of enterprises and emission reduction, it is only related to carbon price and the coverage. Finally, we find that after covering the power generation industry, the carbon market should cover other primary energy production enterprises, which will bring much better emission reduction benefits than the original plan of the National Development and Reform Commission in China.

The macroeconomic consequences of quality improvement policies in advanced tourism-led economies

ABSTRACT Traditional sun-and-beach destinations in advanced economies are facing increased competition from cheaper destinations in emerging countries. In contrast to other capital-intensive sectors, tourism, as a service-based activity, cannot make significant productivity gains to improve its competitiveness. Moreover, tourism-led economies have an underdeveloped industrial sector that limits opportunities for economic diversification. In this context, this paper presents a three-country dynamic CGE model to analyze the role of tourism quality improvements to achieve sustainable long-term economic growth in mature destinations in a context of international capital movements. According to the results, tourism-led economies may converge in real salaries with wealthier economies when focusing on high-end visitors. On the other hand, cheaper destinations achieve better returns from tourism activity in diversified economies.

The Impacts of the Shrinkage in Goods Exports on Chinese Economy: A CGE Model-Based Scenario Analysis

Focusing on the shrinkage in goods exports, this paper quantitatively analyzes the impacts of Sino-US trade war on growth, trade, industrial production of China. The method used here is a dynamic simulation for the period from 2019 to 2030 based on a recursively dynamic CGE model of 18 industries. The impacts are analyzed and assessed by providing 5 alternative scenarios and by comparing their deviations from the baseline scenario. Three alternative scenarios are diffident forms of reduction in goods exports, and two alternative scenarios are diffident hedging measures to the impacts. A comparison of alternative scenarios reveals that the reduction in goods exports will significantly affect the nominal GDP but cause trouble for the real GDP of China. As the hedging measure, the currency depreciation ultimately only affects the price, and the effect on the real GDP is very limited. To increase the domestic real investment will result in the increase in imports and significantly hedge the loss of nominal GDP and cause a larger-scale trade deficit, and therefore need to be used with caution.

A dynamic CGE model for jointly accounting ageing population, automation and environmental tax reform. European Union as a case study

We develop a dynamic Computable General Equilibrium model based on the combination of different versions of GTAP utilities where alternative scenarios on ageing population trends are combined with projections on the incidence of automation into production processes and the adoption of unilateral decarbonisation policies. By simultaneously controlling for these different challenges that especially developed countries should face in the next decades, it is possible to disentangle non-linear mechanisms that will influence sustainability of public budget when the three issues are jointly combined. The European Union is taken as a case study. The first result is that ageing trends will impact fiscal sustainability reducing the EU capacity to respect the Stability and Growth Pact parameters. Second, when also considering technical change related to automation and robotics in the production process, fiscal sustainability will improve only in the case of input-neutral technological change. On the contrary, if biased technical change produces unemployment impact, negative impacts of ageing population are reinforced by automation. Third, the adoption of an environmental tax, here modelled in the form of a carbon price, leads to an improvement in environmental sustainability but has non-linear effects of fiscal sustainability.

Scenario analysis of ETS revenue allocation mechanism of China: based on a dynamic CGE model.

The successful establishment of China's emission trading scheme (ETS) could lead the next generation of global climate carbon markets in industrializing and developing countries. The allocation of ETS revenue from auctioning carbon emission allowance is important for the achievement of China's joint targets of economic growth, mitigation, and welfare improvement. This study develops a dynamic CGE model to evaluate the effects of different ETS revenue allocation mechanisms and identifies the proper mechanism for China's ETS design. Ten scenarios including business as usual (BAU), no ETS revenue allocation incentive (NA) and other eight ETS revenue allocation scenarios are designed. Simulation results indicate that the tradeoff between economic cost and environmental benefit exists under different ETS revenue allocation mechanisms. ETS revenue is suggested to allocate to household sector through reducing indirect tax and, after 2020, a certain proportion of ETS revenue could be allocated to production sector for improving energy-saving technology (i.e., STP mechanism). This study provides references for policymakers in China to design effective and realistic ETS-related policies. A similar study could be conducted to explore the proper ETS and the revenue allocation policies in other countries that have similar national conditions to China, such as other BRICS countries.

A recursive dynamic computable general equilibrium analysis of value-added tax policy options for Nigeria

The study investigates how government can implement an increase in the rate of value-added tax (VAT) to ensure that the final rate of 15% is achieved in a way that satisfies the public (households and business community) and also ensures maximum revenue generation for the government. The nation’s VAT rate is presently at 5%. A recursive dynamic CGE model is used to address the study’s objective, and the model is solved and simulated for 10 years. It is found that the best policy option is to increase the rate by 2.5% yearly for the next 4 years. The option delivers the best outcomes for real GDP (and its growth), investment, intermediate imports, government expenditure and household consumption when compared to alternative options that require 5% increase (implemented in the first and fourth years) and 10% increment (implemented in the first year). Government revenue (divided into VAT, tax and total revenue) registers the highest percentage changes under 2.5% VAT policy in the medium term (6–10 years).

A tourism growth model

Two processes can be used to summarize the productive-mix of a tourism-led economy: the lack of a significant secondary sector and strong tertiarization. Both developments have had significant consequences for productivity gains that, as shown by empirical research, are key to understanding economic progress. In fact, this productivity has been predominantly concentrated in the industrial sector while services have relied more on factor accumulation. However, this varying economic pattern has permitted long-lasting economic growth in current tourism-led economies. This article develops a theoretical dynamic economic model (a dynamic CGE model) to explain the beginning, development and long-term growth consequences of tourism-led economies.

SECTORAL TARGETS TO ADDRESS COMPETITIVENESS — A CGE ANALYSIS WITH FOCUS ON THE GLOBAL STEEL SECTOR

In the wake of the Paris Climate Agreement, countries may employ sectoral approaches. These allow for efficiency gains while at the same time addressing the concerns of competitiveness and carbon leakage. Applying a multi-country, multi-sector dynamic CGE model, this paper explores the role of sector emission targets for the steel sector in an international agreement, their interaction with emissions trading systems, and to which extent sector targets may address competitiveness concerns. To better reflect technological realities, the steel sector is disaggregated into its two main industries: primary fossil fuel-based steel production (BOF) and secondary scrap recycling steel production (EAF). The policy simulations suggest that sectoral targets may effectively counter the (negative) output and competitiveness effects of differences in the stringency of climate policy across countries. BOF steel contributes significantly more to emission reductions than EAF steel. Moreover, the output effects of BOF and EAF are of opposite signs.

Carbon taxes and the double dividend hypothesis in a recursive-dynamic CGE model for Spain

ABSTRACTA carbon tax is potentially a policy that can reduce CO2 emissions and mitigate climate risks, at lowest economy-wide costs. We develop a dynamic CGE model for Spain to assess the economic and environmental effects of a carbon tax, and test the double dividend (DD) hypothesis. We simulate the impact of three carbon taxes: €10, €20 and €30 per ton of CO2. For each tax, four ‘revenue recycling’ scenarios are examined: a reduction of taxes on capital, on labor, on value-added tax, and a scenario in which revenues are not recycled. We find a DD for taxes of €10/ton and lower, within five to seven years of implementation. We estimate an annual CO2 emissions reduction of around 10% with this tax. Under some circumstances, the DD can be achieved for a tax of €20/ton. In any case, recycling revenues to cut pre-existing taxes reduces costs of imposing carbon taxes.

Resource Allocation Across Industrial Sectors, Growth, Poverty, and Income Inequality in Ethiopia: A Macro-Micro Approach

Ethiopia has endorsed a Growth and Transformation Plan intended to transform the manufacturing sector through the construction of industrial parks that target priority industries such as textiles and garments, leather and leather products, sugar, cement, metals and engineering, chemicals, pharmaceuticals, and agro-processing. Using the 2010 Social Accounting Matrix (SAM), a dynamic CGE model, and data from the 2009-2010 survey of Household Income and Expenditure, we examined the effect on economic growth, poverty, and income inequality in Ethiopia when resources were allocated to selected industrial activities. We simulated the effect of financing industrial parks through borrowing and then repaying loans through a five-percent tax on non-priority industrial sectors. The results showed that Ethiopia’s Gross Domestic Product increased slightly across time. Both production and exports of priority industries operating inside the industrial parks and household income increased while production and exports in similar sectors outside the industrial park decreased. The production of non-priority industrial and service activities showed mixed results, and poverty and income inequality were reduced by a small amount. Transforming the manufacturing sector and stimulating both economic growth and poverty reduction requires attention to attracting direct foreign investment.

Commodity Booms, Human Capital, and Economic Growth: An Application to Colombia

The idea that a trade-off exists between current levels of consumption and future levels of human capital is modeled. As shocks in international commodity prices affect income and modify the optimal consumption basket, household members adjust their time preferences between school and work. As a result, the dynamics of human-capital accumulation may be affected and, in cases in which commodity production and trade play a significant role in the economy, such dynamics may also have an impact on economic growth and the composition of economic sectors. Using a dynamic CGE model and Colombian macroeconomic data, we showed how shocks in commodity prices determined households’ educational demands and, at the same time, the composition of the labor market.

The Impact of Energy De-Subsidization Policy in 2030: A Dynamic CGE Model in China

The Impact of Energy De-Subsidization Policy in 2030: A Dynamic CGE Model in China

Integrating Dynamic Material Flow Analysis and Computable General Equilibrium Models for Both Mass and Monetary Balances in Prospective Modeling: A Case for the Chinese Building Sector.

Integrated Assessment Models based on Computable General Equilibrium (IAM/CGE) and dynamic Material Flow Analysis (dynamic MFA) are two most widely used prospective model families to assess large-scale and long-term socioeconomic metabolism (SEM) and inform sustainable SEM transition. The latter approach could complement the former by a more explicit understanding of service provision, in-use stocks, and material cycles in a mass balanced framework. In this paper, we demonstrated this by integrating the dynamic MFA and CGE model approaches for the Chinese building sector from 2012 to 2030. Our results revealed the impacts of building stock dynamics on sectoral and economy-wide CO2 emissions: lower service saturation levels and later saturation time of building stock development could free up investment on buildings and accumulatively save up to 25.4 Gt in embodied CO2 emissions of the building construction sector, representing a 2.7-fold of 2012 countrywide CO2 emissions. However, the save-ups are partly compensated by an increase of embodied CO2 emissions in the other sectors due to economy-wide rebound effect (ca. 18.8 Gt or about 74%). The integrated model we developed could help ensure both mass and monetary balances, explore rebound effects in prospective modeling, and thus better understand the economy-wide consequences of infrastructure development.

Multiple impacts of environmental regulation on the steel industry in China: A recursive dynamic steel industry chain CGE analysis

With the increasing international attention paid to environmental issues, the ability to pursue continuous development while protecting the environment and thereby achieving a win-win situation has become a significant issue for developing countries such as China. In previous studies, environmental regulation has been proven to be an effective governance mechanism. However, few studies have attempted to analyse the comprehensive impacts and determine the optimal stringency of environmental regulation, especially for a specific industry, based on the actual situation in China. Therefore, this paper calculates the effects of the current and proposed environmental regulation of China's steel industry from 2006 to 2013 by adopting a pollution treatment approach, and based on this calculation, it constructs a recursive dynamic steel industry chain CGE model to investigate the macroeconomic, market and technology impacts from an industry chain perspective under 3 different levels of environmental regulation of the steel industry. The simulation results show that real GDP and the outputs of the downstream sectors of the steel industry will suffer slightly, while the outputs and exports of the steel industry itself will benefit from stringent environmental regulation over the long term. In addition, the material efficiency of steel use will be improved in the long term through the implementation of environmental regulation of the steel industry. Based on the results, it is recommended that a moderate level of environmental regulation should be adopted initially, which can then be smoothly transformed into more stringent regulation during a period of economic growth to avoid sudden and major shocks. In addition, this paper also provides a reference for other substantial industries in China when choosing the optimal pattern for the implementation of environmental regulations.

Impacts of the Clean Energy Subsidy Reform on Industry Development and Environment Pollution: An Analysis Based on a Dynamic CGE Model

Clean energy subsidies are important policy tools to promote the development of related industries and achieve resource and environmental goals in China. In view of a series of serious environmental pollution problems caused by fossil energy consumption, the call for increasing the clean energy use and improving the utilization of clean energy to improve and optimize the energy consumption structure has become more and more intense in recent years. However, previous studies have focused on the energy price reform and the impact of the subsidy scale on the social economy, focusing on the analysis of the process and effect of energy subsidy policies on macroeconomic operations while lacking quantitative research on the impact of relevant industries and environmental systems. In the clean energy subsidy program, different subsidy policy schemes are quite different. How much influence does the clean energy subsidy reform design have on different industry development and environmental pollution control? It is worth further research. The paper constructs a dynamic computable general equilibrium model （DCGE） to appraise the impact of clean energy subsidies on industry development and environmental governance based on a national + local” scenario from a long-term latitude. The results show that, overall speaking, clean energy subsidies are helpful to promote the energy price reform. Due to the price advantage brought by clean energy subsidy policies, elasticity of substitution between fossil energy and clean energy can be changed greatly, which will increase the total output of related industries, improve the energy consumption structure, and reduce the emission intensity of major pollutants. However, the impacts of different subsidy programs greatly differ from each other. National basic subsidy policies can improve the competitiveness of clean energy to some extent, and strong local subsidy policies can be more effective to promote the development of clean energy industries, improve energy consumption per unit GDP and per capita energy surplus, reduce the environmental damage, and optimize the energy consumption structure. Therefore, the use of the national + strong local” design is more conducive to clean energy industry development and environmental governance. The main contributions of this paper are to introduce factors such as clean energy industry and resource environment into the subsidy reform research, effectively assess the differences between different programs on industrial development and environmental systems, and study the subsidy intensity of different topics such as national and local governments in subsidy policies. The impact of alternative elasticity, industrial development and environmental pollution control makes clean energy subsidy policies more in line with the reality of social development. The results of this paper can improve the feasibility of the clean energy subsidy program, and provide reference for the formulation and sustainable development of clean energy subsidy policies related to the national economy and the people’s livelihood.

Impact and distribution of climatic damages: a methodological proposal with a dynamic CGE model applied to global climate negotiations

The UNFCCC Paris Agreement, entered into force on 4 November 2016, represents a step forward in involving all countries in mitigation actions, even though it is based on a voluntary approach and lacks the active participation of some major polluting countries. The underinvestment in mitigation actions depends on market and policy failures and the absence of price signals internalizing the economic losses due to climatic damage. This contributes to underestimating potential benefits from global action. In this paper we discuss how crucial is the assessment of the vulnerability of a country to climate change in defining the threat and action strategies. A dynamic climate-economy CGE model is developed that includes a monetary evaluation of regional damages associated with climate change. By considering alternative damage profiles, results show that internalizing climatic costs might change the bargaining position of countries in climate negotiations. Consequently, damage costs should be given greater importance when defining the implementation of a global climate agreement.

The impacts on CO2 emission reduction and haze by coal resource tax reform based on dynamic CGE model

The paper builds a dynamic computable general equilibrium model (Dynamic CGE Model) to evaluate the impact on carbon emissions reduction and haze with different scenarios of coal resource tax rate adjustment. The results shows that: Overall speaking, coal resource tax reform can be conducive to promote CO2 emission reduction and environmental benefits from a longer time rang, but the impacts are different with the three kinds of policy design which are 2%,5% and 10% respectively. Increased coal resources tax inhibits resources consumption, improves resource utilization efficiency, and reduces haze emission; meanwhile, the implementation of resource value compensation policy plays a more positive role in improving the environment quality. Compared with the impact by 2% and 10% tax rate, 5% Ad valorem tax should be a reasonable and effective choice for decreasing CO2 emission and PM2.5&PM10, and improving environment welfare. Therefore, some suggestions are given as following: 1) it is necessary to choose coal resource tax rate properly and scientifically. 2) Integrating the policy of resource compensation into the category of resource tax, and further clarify the form of resource compensation standards. 3) Paying more attention to the coordination of resources policy; 4) important mineral resources, forest resources should be incorporated into the resource tax policy.

Exploring Long Run Structural Change with a Dynamic General Equilibrium Model

In this paper we present a computable general equilibrium model (G-RDEM), specifically designed for the generation of long run scenarios of economic development, featuring a non-homothetic demand system, endogenous saving rates, differentiated industrial productivity growth, interest payments on foreign debt and time-varying input-output coefficients. To the best of our knowledge, this is the first model of this kind. We illustrate how parameters of the five modules of structural change have been estimated, and we test the model by comparing its results with those obtained by a more conventional recursive dynamic CGE model. Both models are driven by the same GDP and population data, exogenously provided by the IPCC Shared Socio-economic Pathway 3. GDP levels determine the endogenous productivity parameters. Population affects the definition of per capita income, which in turn affects the household demand system and the variation of input-output coefficients. Information on the demographic structure is also employed to modify the aggregate saving rate parameters. It is found that the two models do produce different findings, both globally and at the regional and industrial level. Understanding the origins of such differences sheds some light on how mechanisms of structural change operate in the long run.

Environmental Fiscal Reform and the Double Dividend: Evidence from a Dynamic General Equilibrium Model

An environmental fiscal reform (EFR) represents a transition of a taxation system toward one based in environmental taxation, rather than on taxation of capital, labor, or consumption. It differs from an environmental tax reform (ETR) in that an EFR also includes a reform of subsidies which counteract environmental policy. This research details different ways in which an EFR is not only possible but also a good option that provides economic and environmental benefits. We have developed a detailed dynamic CGE model examining 101 industries and commodities in Spain, with an energy and an environmental extension comprising 31 pollutant emissions, in order to simulate the economic and environmental effects of an EFR. The reform focuses on 39 industries related to the energy, water, transport and waste sectors. We simulate an increase in taxes and a reduction on subsidies for these industries and at the same time we use new revenues to reduce labor, capital and consumption taxes. All revenue recycling options provide both economic and environmental benefits, suggesting that the “double dividend” hypothesis can be achieved. After three to four years after implementing an EFR, GDP is higher than the base case, hydrocarbons consumption declines and all analyzed pollutants show a reduction.