Recursive Dynamic Computable General Equilibrium Research Articles

Impact of Subsidy and Taxation Related to Biofuels Policies on the Economy of Thailand: A Dynamic CGE Modelling Approach

Thailand is the leader in biofuel, biodiesel and bioethanol production in South East Asia, using cassava, sugar cane and palm oil as feedstock. This study used econometric estimation to feed into a recursive dynamic computable general equilibrium model to analyze the impacts of biofuel policies on the economy of Thailand. We carried out several simulations on two set of issues (a) policy of increasing excise tax that consists of 12 scenarios such as increasing excise tax on oil products at a higher rate than biofuel products. The excise tax varies from 10 to 40% and (b) policy of increasing subsidy on biofuel consisting of four scenarios by subsidizing at 10–40% rate. The simulations indicate that increasing excise tax on oil products and biofuel products would increase Thailand’s gross domestic product, social welfare and total energy consumption. For subsidy on biofuel, increasing subsidy would not lead to significant increase in GDP, social welfare and energy factors. These results imply that government should carefully decide on a balance of excise tax and subsidy, but ensure that price of biofuel products cheaper than other oil products to attractive the biofuel consumption.

Climate policy vs. agricultural productivity shocks in a dynamic computable general equilibrium (CGE) modeling framework: The case of a developing economy

The main objective of this paper is to compare the cost of climate policy consistent with the 2 °C global warming target (Paris Agreement target) with the cost of climate change induced agricultural productivity shocks, using a recursive dynamic CGE model for India. The social cost of carbon, in terms of loss in agriculture sector, is estimated to be about 2 percent of GDP, at zero rate of discount, under conservative forecasts of fall in agricultural productivity. In comparison, the cost of climate policy consistent with the Paris Agreement target of 2 °C is about 1 percent of GDP. Thus, there is a strong case for the adoption of ambitious climate policy in India, provided other countries also adhere to the same. Besides, revenues generated from the carbon tax and emission allowance could be a means to support the development and adoption of new energy and agricultural technologies, to increase social sector expenditure and to reduce abatement costs.

Dampak Kenaikan Tarif Dasar Listrik Terhadap Kinerja Sektor Pertanian di Indonesia dalam Jangka Pendek dan Panjang

Increasing on electricity price by Indonesian Government in 2001 by 17.47% and 2002 by 24% not only has negative impact on industry sectors but also on agricultural sectors. This paper aims to analysis impact on agricultural sectors performance with using a Recursive Dynamic Computable General Equilibrium (CGE) Model, namely “INDOF model”. The simulation indicates both in the short run and long run increasing on electricity price will reduce industry output, household consumption and employment in agricultural sectors. Besides that the policy will increase price of agricultural product. The negative impacts except household consumption are higher in the long run than that in the short run.

How do learning externalities influence the evaluation of Ontario's renewables support policies?

Support programs for renewable electricity generation in Ontario have been in place since 2005, including feed-in-tariffs and a competitive procurement process. These programs have been criticized on a number of fronts. In particular, critics claim the level of support was excessive and creating surplus supply. However, prior studies have ignored one potential benefit of renewable energy support—that it can help to promote cost reductions in new technologies through learning-by-doing.This paper uses a recursive-dynamic computable general equilibrium (CGE) model featuring learning-by-doing effects to assess the renewable support programs provided in Ontario. Our results, in line with previous studies, do not justify the high support rates paid in Ontario given our core range of assumptions. But our modeling approach allows us to identify the combination of key parameter values relating to learning effects and environmental damages that justify the observed rates. These parameters are hard to measure empirically, and our modeling approach introduces a new tool for examining the impact of variations in these parameters on policy analysis.

G-RDEM: A GTAP-Based Recursive Dynamic CGE Model for Long-Term Baseline Generation and Analysis

We motivate and detail the newly developed G-RDEM recursive-dynamic Computable General Equilibrium model as a tool for long-term counterfactual analysis and baseline generation from given GDP and population projections. It encompasses an AIDADS demand system with non-linear Engel curves, debt accumulation from foreign saving and introduces sector specific productivity changes, endogenous aggregate saving rates, as well as time-varying input-output coefficients. Parameters for these relationships are econometrically estimated or taken from published work. The core of the model is derived from the GTAP standard model and seamlessly incorporated into the modular and flexible CGEBox modelling platform. Accordingly, it can be applied with various other extensions such as GTAP-AEZ, GTAP-Water or a regional breakdown for Europe to 280 NUTS2 regions. G-RDEM maintains the flexible aggregation from the GTAP data base. It is open source, encoded in GAMS and can be steered by a Graphical User Interface, which also encompasses a tool to analyse results with tables, graphs and maps. Existing GDP and population projections for the Socio-Economic Pathways 1-5 can be directly incorporated for baseline construction. A comparison of the generated long-term structural composition of the economy against a simple recursive-dynamic variant, using the basic CDE demand system of the standard GTAP model, uniform productivity growth, fixed saving rates and technology parameters, and no debt accumulation shows that G-RDEM brings about much more plausible results, as well as a more realistic, internally consistent representation of the economic structure in a hypothetical future.

R&D in a post centrally-planned economy: The macroeconomic effects in Poland

Half a century of centrally planned policy in the Central and Eastern European countries resulted in outdated technologies, inefficient allocation of resources and low productivity. Following the end of communism there was a fifteen year process of transition which ended in 2004 with eight post-communist countries joining the European Union (EU) of which Poland was the largest. As part of the EU these countries now face the challenge of the common EU strategy Europe 2020, which has set the target of achieving R&D expenditure to GDP ratio (called the R&D intensity) of 3% by 2020 for the Union as a whole in an effort to increase the competitiveness of the region. Poland, like the other post-communist countries, faces a lower target of R&D intensity, set at 1.7%. Nevertheless, the challenge is immense, since the country is still at only half that level and has little experience in developing policies to help achieve it. In this paper we tested two possible policy options to achieve the target: (1) to increase government expenditures on R&D and; (2) to provide tax relief on R&D to businesses. The method applied to assess the options is a recursive dynamic computable general equilibrium (CGE) model for Poland with an explicit link between productivity and R&D stock. The results show that achieving the R&D intensity target via the use of tax relief is 2.5 times more costly to the government budget, but it has a greater impact on the economy in terms of a higher GDP growth. Tax relief proved efficient in the short run while in the long run the government expenditure policy provides better value for money.

The impact of Emission Trading Scheme (ETS) and the choice of coverage industry in ETS: A case study in China

Emission Trading Scheme (ETS) is one of the most effective measures of emission reduction. However, few literatures have focused on the impact of the industry coverage in ETS. This paper constructs a recursive dynamic Computable General Equilibrium (CGE) model to simulate the choice of the coverage industries in China’s national ETS in 2017, and explore the impacts of ETS and the most suitable coverage industry for China. The results show that CO2 emission will reach its peak and stabilize by 2030 to meet the goal of “Enhanced Actions on Climate Change: China's Intended Nationally Determined Contributions”. The cumulative CO2 emission will reduce to 12.05 Bt-CO2 in ETS market during 2017–2030. Moreover, commodity prices will increase from 0.12 to 1.64% in different coverage scenarios. Carbon price can be guaranteed within a reasonable range if the rational choice of the Carbon Rights (CR) suppliers and demanders in ETS market is made by the government. This paper suggests that the industry covered in China’s ETS could imitate the patterns of EU Emissions Trading System (period I and period II) and Midwest Greenhouse Gas Reduction Accord in the U.S., or seek another option to balance the demand and supply of CR in ETS market.

Energy efficiency and economic growth: A retrospective CGE analysis for Canada from 2002 to 2012

The efficiency with which energy is used by firms and households has widespread impacts on economic activity, which in turn has implications for environmental quality and energy security. Using a novel method that could be used for other jurisdictions, we estimate the impact of energy efficiency improvements on Canadian GDP, employment, economic structure, and welfare from 2002 to 2012. We use a counterfactual back-casting method with a sectorally and regionally disaggregated dynamic recursive computable general equilibrium model, in effect “reverse calibrating” the model from observed data to isolate the effects of energy efficiency. We estimate that total energy efficiency improvements in Canada during this period increased GDP by 2.0% (0.19%/yr), employment by 2.5% (0.24%/yr) and household welfare by about 1.5% (0.15%/yr). Additionally, energy efficiency improvements reoriented economic structure from capital intense energy supply sectors to relatively labour intense manufacturing and services. We find evidence of widespread “rebound” on an energy expenditure basis across most sectors, and “backfire” (where energy efficiency leads to absolute energy use increases) in oil sands in situ extraction, bitumen upgrading, shale gas extraction, lime production, pulp & paper, and metal smelting, but overall energy use is reduced by energy efficiency improvements over this period.

The Ex-Ante Evaluation of Achieving Sustainable Development Goals

This paper describes the methodology and main results from an overall assessment on future achievement of sustainable development goals. The proposed approach consists of a model-based, looking forward composite sustainable development index—FEEM sustainability index—projected to the future. It represents a first experiment to reproduce the future dynamics of sustainable development indicators over time and worldwide and to assess future sustainability under different scenarios. The assessment presented here is relevant under different viewpoints. First, it has a very broad nature in terms of both geographical coverage and meaningfulness: it considers the multi-dimensional structure of sustainable development by combining relevant indicators belonging to economic, social and environmental pillars for the whole world. Second, the modelling framework to compute future trends of indicators relies upon a recursive-dynamic computable general equilibrium model. This is an ideal tool to look simultaneously at the development of many indicators, their potential interactions and trade-offs, and more in general to the consequences of economic development and/or policies aiming to increase performance in one or more indicators; it allows measuring the overall sustainability under alternative scenarios, across countries and over time. Finally, regarding the construction of the composite indicator, the application of fuzzy measures and Choquet integral increases substantially the model capability allowing taking into account the interactions that exist among the three main pillars of sustainability and the considered indicators.

Potential socio-economic implications of future climate change and variability for Nigerien agriculture: A countrywide dynamic CGE-Microsimulation analysis

This study explores the potential economic and social effects induced by a possible future deterioration of weather conditions on Niger's agriculture. Our scenarios over a 25 year period rely on both long term climate change deterministic features and climate variability stochastic features which take into account a higher than normal frequency of severe droughts. Using a microsimulated Dynamic Recursive Computable General Equilibrium model, we show how a long run mean decrease in main crop yields could adversely affect growth, poverty and food security in the country and how more severe drought would worsen these negative effects. However, we also show that there would appear to be some room for manœuvre for coping strategies for Niger such as improving the rural road network, adopting modern crop varieties or, to a lesser extent, extending irrigation capacity.

Will China's demographic transition exacerbate its income inequality?–CGE modeling with top-down microsimulation

ABSTRACTDemographic transition due to population aging is an emerging trend throughout the developing world, and it is especially acute in China, which has undergone demographic transition more rapidly than have most industrial economies. This paper quantifies the distributional effects in the context of demographic transition using an integrated recursive dynamic computable general equilibrium model with top-down behavioral microsimulation. The results of the poverty and inequality index indicate that population aging has a negative impact on the reduction of poverty while its impact is positive with regard to equality. In addition, elderly rural households are experiencing the most serious poverty, and their inequality problems compared with other household groups and within-group inequality worsen with demographic transition. These findings not only advance the previous literature but also deserve particular attention from Chinese policy-makers.

The impact of electric vehicles and CCS in the context of emission trading scheme in China: A CGE-based analysis

Global warming and harsh environment make China have to accelerate the pace of low-carbon economy. Promoting Electric Vehicles (EVs) and Carbon Capture and Storage (CCS) may be the significant ways to reduce CO2 emissions. A recursive dynamic computable general equilibrium (CGE) model will be constructed to explore respectively the impacts of EVs and CCS on China's macroeconomics, environmental quality and energy demand, under 6 simulation scenarios. The simulation results show that the promotion policy at a basic-level with CCS can effectively reduce CO2 emission and alleviate economic loss. Promoting the process of electric vehicles will lead to an economic loss, although it will make carbon emission peak occur in 2030. The basic-level promotion will have a better performance than the higher in carbon intensity: 0.073 and 0.079 kg-CO2/RMB in 2050. Moreover, CCS technology with EVs promotion plays an important role in protecting energy transformation sectors, reducing the loss of gross domestic product (GDP) and reducing emission but oil dependence. We highly recommend that promoting EVs with CCS is a reliable strategy to energy-savings and CO2 reduction. From 2015 to 2050, by applying this strategy, China will contribute to CO2 reduction by 24.97 Bt-CO2 or 74.35% of 2010 world total emission.

A computable general equilibrium assessment of Japan’s nuclear energy policy and implications for renewable energy

This study assesses the economic and environmental impacts of Japan’s nuclear power scenarios and examines the implications for renewable energy. To assess nuclear power scenarios, we use the following three scenarios: “new policy scenario” of the International Energy Agency as a reference; a 40-year operational time limit of nuclear power plants; and no restart of nuclear power plants. For all scenarios, renewable energy with feed-in tariffs is considered. In addition, to assess the impact on the international competitiveness of Japanese industry, we construct a multi-regional, recursive dynamic computable general equilibrium model based on version 8.1 of the Global Trade Analysis Project database. Compared to the reference scenario, the other two scenarios increase CO2 emissions through an increase in fossil fuel electricity generation and decreases Japan’s real gross domestic product, although renewable energy supply also increases. In particular, a nuclear power phase-out negatively impacts Japan’s energy-intensive and trade-exposed sectors. However, our model does not consider externalities from fossil fuel usage and nuclear risk. The results of this simulation study represent the first step in answering important questions on energy policy but further research on externalities of fossil fuel and nuclear power usage should be conducted.

In search of structural change surplus and perpetual growth in Ethiopia

Purpose – The Ethiopian economy is characterized by erratic and poor performance with negative growth rates, seven times over the period 1981-2010. This trapped per capita income at 358 USD in 2010 staying far away from middle-income country status. A lot of unsolved debates regarding perpetual growth, structural change and sectoral allocation of resource emerged overtime. The purpose of this paper is to examine the alternative effects of induced sectoral total factor productivity and makes comparisons of various sectoral growth options. Design/methodology/approach – This study uses a recursive dynamic computable general equilibrium model based on neoclassical-structuralist thought. It also calibrates coefficients that capture the impacts of openness, imported capital and liberalization on sectoral total factor productivity growth using a model of vector auto-regressive with exogenous variables. Findings – Future economic growth rate is expected to grow at a declining trend and to be dominated by the service sector. If it keeps growing on the current path it will expose the economy to a severe structural change burden problem. Openness induced agricultural total factor productivity highly improves the welfare of households while imported capital goods induced industrial total factor productivity is also better in fostering structural change of the economy. The broad-based growth option that combines the induced total factor productivity of all sectors also enables the economy to achieve more sustainable growth, rapid structural change and welfare gain at the same time. Originality/value – There are intensive and charged debates regarding alternative sectoral growth options. However, the debate does not derive from a rigorous analysis and holistic economy-wide approach. It is rather affiliated with politics. Therefore, the paper is original and investigates these issues meticulously.

Can climate policy enhance sustainability?

Implementing an effective climate policy is one of the main challenges for the future. Curbing greenhouse gas emissions can prevent future irreversible impacts of climate change. Climate policy is therefore crucial for present and future generations. Nonetheless, one may wonder whether future economic and social development could be harmed by climate policy. This paper addresses this question by examining recent developments in international climate policy and considering different levels of cooperation that may arise in light of the outcomes of the Conference of the Parties held in Doha. The paper analyses how various climate policy scenarios would enhance sustainability and whether there is a trade-off between climate policy and economic development and social cohesion. This is done by using a new comprehensive indicator, the FEEM Sustainability Index (FEEM SI), which aggregates several economic, social, and environmental indicators. The FEEM SI is built into a recursive-dynamic computable general equilibrium model of the world economy, thus offering the possibility of projecting all indicators into the future and of delivering a perspective assessment of sustainability under different future climate policy scenarios. We find that the environmental component of sustainability improves at the regional and world level thanks to the implementation of climate policies. Overall sustainability increases in all scenarios since the economic and social components are affected negatively yet marginally. This analysis does not include explicitly climate change damages and this may lead to underestimating the benefits of policy actions. If the USA, Canada, Japan and Russia did not contribute to mitigating emissions, sustainability in these countries would decrease and the overall effectiveness of climate policy in enhancing global sustainability would be offset.

Out-of-pocket health payments: a catalyst for agricultural productivity growth, but with potentially impoverishing effects in Senegal

This paper analyzes the relationship between health expenditures and productivity in Senegal by using a dynamic recursive computable general equilibrium (CGE) model that has been run from 2011 to 2020. This model links the growth rate of agricultural productivity to household investment in health goods taking into account catastrophic health payments considered as barriers to achieve maximal productivity gains. In fact, despite being a potential catalyst for productivity, out-of-pocket health expenditures can be a burden after a critical threshold has been crossed and might potentially decrease household resources and place constraints on the productivity-generating process. Results show a positive impact on poverty reduction when the Government reduces the burden on households by financing catastrophic payment overshoots. Lower health costs also appear to improve households’ well-being, especially in the case of agricultural households. These results suggest the need for policies which will reduce the health system’s reliance on out-of-pocket payments and demonstrate that health programs should reach the most vulnerable households. The effectiveness of poverty-orientated interventions can be increased by targeting households incurring catastrophic health expenditures.

The role of Japanese FDI in China

We quantify the impacts of a sharp fall of Japanese foreign direct investment (FDI) to China that occurred after the worldwide financial crisis in 2009 using a three-region (Japan, China, and the rest of the world) recursive dynamic computable general equilibrium model with multinational enterprises (MNEs). The FDI fall would reduce exports and production of Japanese MNE affiliates in China and depreciate the Renminbi. This latter effect would favor Chinese manufacturing, but China, would not be a gainer, because it would experience a contraction in its service sector, which would exceed the gains in manufacturing.

Assessing SDGs: A New Methodology to Measure Sustainability

The FEEM project APPS – Assessment, Projections and Policy of Sustainable Development Goals – focuses on the quantitative assessment of the seventeen Sustainable Development Goals (SDGs), adopted by the United Nations at the end of September 2015. The project consists of two phases. The first, retrospective, computes indicators for all SDGs in 139 countries and then derives a composite multi-dimensional index and a worldwide ranking of current sustainability. This allows informing on strengths and weaknesses of today socio-economic development, as well as environmental criticalities, all around the world. The second phase, prospective, aims at evaluating the future trends of sustainability in the world by 2030. The assessment of the SDGs is carried out by means of an extended version of the recursive-dynamic computable general equilibrium ICES macro-economic model that includes social and environmental indicators. The final goal is to highlight future challenges left unsolved in next 15 years of socio-economic development and analyze costs and benefits of specific policies to support the achievement of proposed targets. This paper presents the methodology and the results of the retrospective assessment. Five main steps are described: i) screening of indicators eligible to address the UN SDGs; ii) data collection from relevant sources; iii) organization in the three pillars of sustainability (economy, society, environment); iv) normalization to a common metrics; v) aggregation of the 25 indicators in composite indices by pillars as well as in the multi-dimensional index. The final ranking summarizes countries’ sustainability performance. As expected, Middle-North European countries are at top of the ranking (Sweden, Norway and Switzerland the first three), with the most industrialized European countries such as Germany and UK, however, penalized by insufficient environmental performance. Other highly developed countries are between 24th (Canada) and 52nd place (United States). The emerging nations are scattered in our sustainability ranking. Brazil (43rd) and Russia (45th) precede China (80th) and India (102nd), the latter two especially penalized because of their social complexity. The worst performances, in terms of overall sustainability, are in Sub-Saharan Africa (Comoros, the Central African Republic and Chad occupy the last places in the ranking).

A CGE Analysis of the Implications of Technological Change in Indian Agriculture

A recursive dynamic computable general equilibrium (CGE) model is used to conduct an ex- ante analysis of the economy-wide impacts of new agricultural technologies in India. Differential impacts of changes in productivity of new promising cultivars for irrigated and rainfed maize and wheat are incorporated in the model. Technological change in these crops results in higher future economic growth as well as food security, both in food consumption and availability. While there is considerable scope for increasing the production of both crops through the introduction of new technologies, maize (both irrigated and rainfed) with promising cultivars for higher yield gain generates significant growth in output. The projected gains for wheat are primarily in the rainfed wheat output as this is where the yield gaps are highest from the promising technologies. Lower prices, particularly for maize and wheat, stimulate higher consumption of these cereals and other food commodities. Rural households benefit more than their urban counterparts in food consumption. Although maize’s contribution to the national economy is less than wheat, given the relatively higher estimated yield gains from promising maize technologies, the positive impacts of maize technologies on food security and national income are higher than the impacts of wheat. In view of the land and water constraints in Indian agriculture, maize which is predominantly rainfed and widely adapted could be a viable alternative for the future. However, a joint improvement of maize and wheat productivity would further enhance economic conditions and food security in India.

Dutch Disease, Informality and Employment Intensity in Colombia

From the first half of the 2000s until 2014 the Colombian economy was under the influence of an oil and mining production and export boom that triggered the potential for Dutch Disease effects. As the boom has the potential to induce shifts in the sectorial composition of the economy, it may have significant effects on employment dynamics and on the evolution of employment intensity, especially when the informal sector is sizable. We study the potential effects of this boom, had it extended as forecasted by 2011. For this, we use a recursive dynamic computable general equilibrium model, calibrated to a 2011 Social Accounting Matrix of the Colombian economy, in which activities are differentiated in terms of their formal and informal components, and suitable details are included to account for the stream of income the government receives from the booming activities. We find that the resource shift and spending effects from the boom are sizeable, leading to a relative drop in exports in non-boom sectors and to shrinking output for most sectors of the economy, while employment in the formal sector and for skilled workers is favored. Furthermore, we find that the policy package designed by the Colombian government to face potential Dutch Disease effects on the economy has a limited impact on improving the resource shift and spending effects.