Global Computable General Equilibrium Model Research Articles

Could the EU carbon border adjustment mechanism promote climate mitigation? An economy-wide analysis

Due to concerns about carbon leakage and sectoral competitiveness, the European Union (EU) proposed implementing the carbon border adjustment mechanism (CBAM). The effectiveness and potential negative consequences of CBAM have aroused extensive discussion. From the perspective of the economy-wide analysis, this study uses a global computable general equilibrium model to explore the rationality of CBAM from the aspects of socioeconomic impact and the effects of promoting climate mitigation. Furthermore, the potential alternative mechanism of CBAM is proposed. The results show that CBAM can reduce the EU's gross domestic product (GDP) loss; however, the GDP loss in all other regions increases. Moreover, CBAM raises household welfare losses in most regions, including the EU. Second, although CBAM can reduce the marginal abatement cost in eight regions, it comes at the cost of greater economic losses. Furthermore, the economic and household welfare cost of raising emissions reduction targets in regions like the USA and Japan is substantially higher than the impact of passively accepting the CBAM; therefore, CBAM's ability to drive ambitious emission reduction initiatives may be limited. Finally, for the potential alternative mechanism, from the perspective of reducing economic cost and household welfare losses, the EU could implement domestic tax cuts in the short-term and promote global unified carbon pricing in the long-term.

Peatland restoration in Germany: A dynamic general equilibrium analysis

Drained peatland currently contributes 7.5% of Germany's total national greenhouse gas emissions. The National Peatland Protection Strategy adopted by the German government in 2022 recognizes that these emissions need to be reduced significantly to meet the country's climate change mitigation commitments. The present study employs a global dynamic computable general equilibrium model to assess the economic and greenhouse gas emission impacts of alternative agriculture-focused peatland rewetting scenarios for Germany up to 2030. In contrast to partial-analytic approaches, the global general equilibrium approach allows to take consistent account of economic ripple-on effects and carbon leakage effects triggered by peatland rewetting. The results suggest that in the medium term towards 2030 a reduction in annual emissions from agricultural peatland use by up to 45% are attainable at marginal private abatement costs between 27 and 61 Euro/tCO2e. Carbon leakage effects due to induced indirect land use change in Germany and the rest of the European Union reduce the global net emission reduction impact by 0.7 to 1.0% of the direct emission reduction. The effects on food prices remain small in all scenarios. In conclusion, a sizable reduction of Germany's land-use-related emissions is achievable at a low macroeconomic cost by moving beyond the moderate ambitions of the National Peatland Restoration Strategy.

Azerbaijan: pathways for decarbonization in a global context

ABSTRACT As economies around the world are increasing their mitigation ambitions, Azerbaijan’s lingering dependency on fossil fuel exports threatens its medium – and long-term economic development prospects. Global decarbonization is expected to directly impact the country’s resource rents through lower fossil fuel demand and prices. In this regard, it is crucial to understand the potential implications of the global mitigation efforts on the economy of Azerbaijan and evaluate the domestic mitigation policies. To address this gap in the literature, we use a global dynamic computable general equilibrium model and explore a set of forward-looking climate policy scenarios till 2060. Our results suggest that while being adversely impacted by decarbonization efforts in countries around the world, it is in Azerbaijan’s self-interest to implement domestic mitigation policies. With proper sequencing and design of such policies, including a combination of fossil-fuel subsidies reform, the introduction of carbon prices post-2030 and recycling of the additionally collected revenue via reduced factor taxes, the country could achieve NDC targets, boost economic growth and increase economic diversification. More ambitious mitigation efforts, consistent with reaching net-zero emissions by 2060 would result in substantial health co-benefits from improved air quality, which could almost fully outweigh the direct economic costs of such mitigation.

Impacts of Global Warming on Regional Energy and Economy: Uneven consequences arising from global warming-induced heating and cooling demand of households

The impacts of global warming vary across regions. This paper studies the distributional implications of global warming impacts on household energy use for heating and cooling and the induced macroeconomic responses under different scenarios. Our research updates the direct impact of global warming on household energy demand in 140 regions worldwide by utilizing existing estimations of damage functions related to temperature changes. Subsequently, the updated direct impact is used in a global static computable general equilibrium (CGE) model to evaluate the macroeconomic responses. We find that at the global level, the market effects cause a reduction in the direct impact on the demand for oil and gas, while that for electricity displays a positive but moderate growth. Whereas the regional effects vary across countries and lead to changes in both directions, in which the autonomous adaptation embodied in the global market plays a vital role. Furthermore, we find strong inequality in the socioeconomic responses to global warming across regions. Notably, low-income countries are most strongly affected by increased primary energy use and decreased gross domestic product (GDP). Disparities in the impacts on carbon-based energy sources yield a near-perfect inequality as per the adjusted Gini index for CO2 emission changes, which potentially intensify the distributional consequences of global climate change.

Building a baseline to better integrate air passenger and air freight transport into a global Computable General Equilibrium (CGE) model

The Covid-19 pandemic has had opposite effects on demand for air passenger and air cargo transport and on the way these two sectors interact with other sectors of the economy. However, macroeconomic models generally represent aviation as a single sector, limiting the ability to assess those interactions. In this study, we split the air transport sector into two sectors (passenger and freight) in GTAP’s Multiregional Input–Output table. We assess the sectors’ response to a carbon tax by performing a sensitivity analysis. Our results highlight the environmental benefits from the Covid-19 pandemic will only be transitory unless policies and consumer demand rein in traffic growth in the aviation industry. Particular attention should be paid on leisure travel, due to its large share in the aviation industry and the potential steep rise in demand (87%) in the EU27 projected between 2015 and 2030.

The distributional effects of CO[formula omitted] pricing at home and at the border on German income groups

While climate policy studies are widespread, fully fledged computable general equilibrium (CGE) model analyses of distributional policy effects are challenging because the required data and approaches are not directly available. To ease such distributional analyses, we provide a step-by-step “recipe” for disaggregating a country-specific representative consumer of a CGE model. Using this “recipe”, we implement German household survey data in a global CGE model by distinguishing three income groups of the German representative consumer. We find that the negative consumption effect of CO2 pricing is highest for the low-income group, whereas the negative income effect is highest for the high-income group and exceeds the consumption effect. The low-income group benefits most from (per capita-based redistribution of) carbon pricing revenues and receives social transfers such that poor households can be better off with such climate policies than without them. CO2 pricing of imports at the (EU) border slightly strengthens these distributional effects and is mainly beneficial for the low-income group. The geographic extension of emissions trading within a “climate club” leads to substantial efficiency gains that are beneficial for Germany and the EU.

Synergies of CGE and IAM modelling for climate change implications on WEFE nexus in the Mediterranean

The Mediterranean Sea Basin (MSB) is experiencing increasing pressure on its natural resources due to climate change (CC) and demographic growth, posing challenges to water and food sustainability. In line with the United Nations Sustainable Development Goals and the Water-Energy-Food-Ecosystems (WEFE) nexus, this study projects shifts in welfare and food security under various climatic conditions. Agriculture, a sector that is highly vulnerable to climate variability, depends predominantly on rainfed croplands, which constitute 70-100% of agricultural land in most MSB countries. The remaining areas are irrigated by climate-dependent water bodies such as rivers and aquifers.A comprehensive analysis of the WEFE nexus is essential for a coherent examination of climate policy and future pathways for the economy and the natural environment. Using a dual-modeling approach, this research assesses the impacts of alternative water sources and irrigated agriculture within the MSB amidst uncertainties of CC-driven extreme events. A global computable general equilibrium (CGE) model, based on the GTAP framework, was used to examine inter-sectoral and inter-regional impacts. In tandem, the Integrated Assessment Model (IAM) based on the RICE-99 framework quantifies the uncertainties related to future extreme climatic events. This synergistic approach provides a comprehensive assessment of CC impacts, integrating adaptation strategies for alternative water sources and irrigated agriculture, as well as mitigation strategies to reduce greenhouse gas emissions from energy production.The focus on cross-sectoral and multi-scale management of water, ecosystems, and food in the MSB was embedded into the economic models - CGE GTAP-AW and IAM RICE-MED, to analyze the impacts of CC adaptation and mitigation strategies on the WEFE nexus. The results indicate a reduced impact of CC on food production, and provide a comprehensive overview of potential adaptation and mitigation measures to reduce food security risks in the MSB. These findings are crucial for policymakers to promote sustainable water and agricultural practices in the face of a changing climate.

Land for fish: Quantifying the connection between the aquaculture sector and agricultural markets

This study employs a global Computable General Equilibrium (CGE) model to quantify the effects of aquaculture production on agricultural markets, food prices and land use. We conduct a scenario analysis simulating, first, the fish sector developments expected by FAO; second, a rebuilding of sustainable wild fish stocks to achieve SDG 14; and third, a stronger expansion in aquaculture production with varying fishmeal supply. The results show direct effects of aquaculture production and limited fishmeal supply on agricultural production, land use, and food prices. Substituting fishmeal with plant-based feed when rebuilding sustainable fish stocks has lower effects on agricultural markets than growth in aquaculture production comparable to the first decade of this century. In addition, expanding aquaculture production increases prices for capture fish via fishmeal demand, instead of reducing capture fish prices by substituting consumer demand. Finally, rebuilding sustainable fish stocks has significant adverse effects on food prices in marine fish dependent regions in the southern hemisphere, and these regions need support in the transition period until sustainable fish stocks are achieved. The results of this study illustrate the interconnectedness of SDG 14 (life below water), SDG 15 (life on land) and SDG 2 (zero hunger).

Growth and structural transformation – Options for Pakistan

Structural transformation, which signifies a shift towards high value-added production and an elevated standard of living, is a vital ingredient for inclusive growth. Pakistan’s pace of structural transformation has been amongst the slowest and lowest compared to other countries in Asia. Against this backdrop, the purpose of this paper is to quantify the economic benefits of accelerating the rate of transformation (trade and productivity-oriented) in Pakistan. This research explores this relationship using an Input-Output (IO) framework in conjunction with a global Computable General Equilibrium (CGE) model. This allows for the evaluation of the economy-wide impact of exogenous changes in the trade and productivity of critical sectors. The IO framework helps in identifying these key Pakistani sectors by providing backward, forward, and inter-sectoral linkages for each sector. The results of the IO framework show that the sectors with strong backward linkages in Pakistan are “Food, Beverages and Tobacco”, “Textiles and Textile Products”, “Leather and Footwear”, and “Construction”. Whereas “Agriculture”, “Mining and Quarrying”, and “Wholesale and Commission Trade” are the sectors with strong forward linkages. The estimated results from a global CGE Model demonstrate that structural transformation towards promising sectors (manufacturing and services) has a positive impact on the macro-economic variables as well as at the household level in Pakistan.

Economic Costs of Work Stoppages Caused by the COVID-19 Outbreak

AbstractThis study explores the economic costs of work stoppages resulting from the COVID-19 pandemic. It utilizes a global multiregional dynamic computable general equilibrium model and finds that the higher the proportion of labor compensation in the initial factor distribution, the greater the economic damage. Macroeconomic loss was characterized by a monotonically increasing function, with developed countries potentially incurring greater losses than developing countries. The COVID-19 pandemic had significant negative impacts on the global labor market, with a decline in labor productivity; the cumulative global economic loss in 2020–2022 surpassed $10.4 trillion, of which the EU, the USA, and China contributed 30.44%, 18.74%, and 15.44%, respectively. Countries’ anti-epidemic responses showed great heterogeneity, with South Korea and China’s actions showing the dual advantages of protecting the economy and lives, whereas the EU failed to protect either lives or the economy. This article argues that it was necessary to adopt strict quarantine measures to control the spread of the virus in the early stages of the epidemic, but with a drop in the case fatality rate and the introduction of vaccinations, strict control measures had to be removed to protect the economy.

Carbon pricing, carbon equity, and the RCEP framework

Trade liberalization in the Regional Comprehensive Economic Partnership (RCEP) not only contributes to regional economic growth but also leads to an increase in energy consumption and carbon emissions, which may exacerbate climate change risks. This study aims to explore the carbon pricing issue in the context of the RCEP framework. Additionally, for the sake of carbon equity, we introduce a differentiated carbon pricing scheme based on the cost fairness principle (CPCF), and the unified carbon pricing was used for a cost effectiveness analysis. The empirical analysis was conducted with a global multi-regional computable general equilibrium model. The results show that with the help of trade liberalization, the RCEP's GDP, energy consumption, and carbon emissions may increase by 0.639%, 1.962%, and 1.897%, respectively. The CPCF scheme, wherein developed countries assume the primary abatement burden, can be used to offset the increase in carbon emissions from trade liberalization while RCEP members maintain positive economic growth. The total abatement cost of the CPCF for carbon offsets in the RCEP can be reduced via unified carbon pricing, and the cost-saving effect approaches 24.24%. Unified carbon pricing may result in a carbon price of US $5.83 within the RCEP. As such, this study explores carbon pricing in the context of trade liberalization, and its findings will be valuable for the RCEP to achieve a win-win situation in terms of economic growth and climate change.

Cost reduction in low-carbon hydrogen: effective but insufficient to mitigate carbon emissions

Many countries have announced hydrogen promotion strategies to achieve net zero CO2 emissions around 2050. The cost of producing low-carbon (green and blue) hydrogen has been projected to fall considerably as production is scaled up, although more so for green hydrogen than for blue hydrogen. This article uses a global computable general equilibrium (CGE) model to explore whether the cost reduction of green and blue hydrogen production can mitigate the use of fossil fuels and related carbon emissions. The results show that cost reduction can raise low-carbon hydrogen consumption markedly in relative terms but marginally in absolute terms, resulting in a modest decrease in fossil fuel use and related carbon emissions. The cost reduction of low-carbon hydrogen slightly lowers the use of coal and gas but marginally increases the use of oil. If regional CO2 taxes are introduced the increase in green hydrogen production is considerably larger than in the case of low-carbon hydrogen cost reduction alone. However, if cost reduction in low-carbon hydrogen is introduced in addition to the CO2 tax the emissions from fossil fuels are only marginally reduced. Hence, synergy effects between the two measures on emissions are practically absent. A low-carbon hydrogen cost reduction alone is effective but insufficient to have a substantial climate impact. This study also calls for modeling development to capture special user preferences for low-carbon hydrogen related to climate mitigation when phasing in new energy carriers like hydrogen.

How Do Productivity Benefits Spill Over Across Firms? Explorations in a Heterogeneous Firm Applied General Equilibrium Trade Model

Considerable diffusion of technology occurs via global trade and foreign direct investment (FDI) while firm heterogeneities cause considerable production heterogeneities. Hi-tech products and investment goods of differentiated varieties from emerging and developed economies are vehicles of superior technology. Given this stylized evidence, we analyse factors facilitating (or inhibiting) technological spillover to domestic firms in the host nations in a counterfactual scenario of a Trans-Pacific-Partnership (TPP) deal. By using a mixture interface of global computable general equi-librium (CGE) models of FDI (GTAP-FDI) and firm heterogeneity model of Global Trade Analysis Project, GTAP Heterogeneous (GTAP-HET), we calibrate impacts of trade and FDI spillovers on: (i) global production, (ii) trade patterns, (iii) welfare and (iv) regional productivity gains. Importance of regional trade agreements and policy for productivity spillovers is highlighted.

Carbon emissions and economic impacts of an EU embargo on Russian fossil fuels

The Russia–Ukraine conflict lays bare the dependence of the European Union (EU) on fossil fuel imports from Russia. Here, we use a global computable general equilibrium model, C3IAM/GEEPA, to estimate CO2 emission and gross domestic product (GDP) impact of embargoing fossil fuels from Russia. We find that embargoes induce more than 10% reduction of CO2 emissions in the EU and slight increases of emissions in Russia, while both regions experience GDP losses (around 2% for the EU and about 5% for Russia, ignoring the relative impact of other sanctions). Reacting to increasing energy prices with demand-side response inside the EU would increase CO2 emission savings, while turning GDP losses into gains. Implementing a partial embargo with tariffs largely compensates for lost government revenue. An EU embargo on Russian fossil fuels would lead to a rapid decrease in fossil fuel combustion, GHG emissions reductions and potential economic losses. This analysis quantifies such effects, while also demonstrating how demand-side responses could offset the negative shock.

The Effects of China’s Participation in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP): A Quantitative Assessment

This paper aims to quantify the effects of China’s participation in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), in particular by focusing on the possible productivity effects through the endogenous assignment of skills to technologies. In this paper, we develop a large-scale global computable general equilibrium (CGE) model in which firms are heterogeneous in technologies and workers are heterogeneous in individual skill levels so that equilibrium skill–technology assignments are endogenously determined. This study contributes to the literature with the new CGE modeling and application to the recent important issue in international trade. By calibrating the model to 23 countries and regions, we quantify the effects of China’s participation in the CPTPP. Due to the positive real productivity effects and the reallocation of workers, the results show that China’s participation in the CPTPP may generate significantly higher productivity, GDP, and welfare effects compared to previous conventional CGE models based on simplistic representative agent frameworks at a given productivity. Globally, on average, the real productivity of the manufacturing sector, the number of exporting firms, real GDP, and welfare increase by 0.52%, 19.62%, 1.36%, and USD 3.41 billion, respectively.

Labour productivity and economic impacts of carbon mitigation: a modelling study and benefit–cost analysis

Despite the emerging carbon neutrality pledges from different countries, it is still unclear how much these pledges would cost and how the costs would compare with the economic benefits. Comparisons at the country level are important for tightening country-specific emissions trajectories to keep the temperature limit targets outlined in the Paris Agreement within reach. We aimed to systematically estimate avoided heat-related labour productivity losses against the costs of climate change mitigation at country and regional levels. In this modelling study, to address the above-mentioned research gaps, we first selected two representative climate change scenarios (Representative Concentration Pathway 6.0 [RCP6.0] scenario, a higher warming scenario representing limited mitigation pledges before the Paris Agreement with around 3°C warming by the end of this century; and RCP2.6 scenario, a lower warming scenario assuming global temperature rise is limited to 2°C) and estimated heat-related labour productivity loss using the exposure-response function at country and regional levels. By representing the direct heat-related labour productivity losses in a multiregional global computable general equilibrium model, we then did a benefit-cost analysis to quantify the economic benefits of avoided heat-related labour productivity losses as well as the estimated reduction in gross domestic product (GDP) related to carbon reduction. By 2100, the overall economic losses due to heat-related labour productivity loss could range from about 1·5% of global GDP under the RCP6.0 scenario to about 0·1% of global GDP under the RCP2.6 scenario. The productivity losses will be highly concentrated in low-latitude regions, especially in southeast Asia, India, and the Middle East, implying the necessity of additional adaptation measures. By 2100, about 51·8% of global climate change mitigation costs could be offset by economic benefits from reduced labour productivity losses. Cumulatively, about 17·0% of climate change mitigation costs could be offset by the economic benefits between 2020 and 2100, when using a 2% social discounting rate. The costs and benefits of climate change mitigation will be distributed highly unevenly across regions due to their varying climate zones and economic structures. Regions with benefits from reduced productivity losses higher than mitigation costs are mainly low-latitude and tropical regions with lower income and lower emissions, such as southeast Asia, Brazil, and Mexico. More than half the climate change mitigation costs could be offset by the economic benefits by 2100 for the world's largest emitters, including the USA, China, the EU, and India. Low benefit-cost ratios are expected in economies that rely on fossil fuels, such as Canada, Russia, and the Middle East. Although pledging carbon neutrality implies radical changes to most economies, substantial health and economic gains can be achieved by reduced heat-related labour productivity loss, even without accounting for other benefits. The benefit-cost analysis in this study shows the potential for choosing more stringent climate change mitigation pathways in some regions. Regions with low benefit-cost ratios need to restructure their economies to reduce mitigation costs as well as losses from declined fossil fuel exports. National Natural Science Foundation of China, Tsinghua-Toyota Joint Research Fund, the Wellcome Trust, Tsinghua University-China Three Gorges Corporation Joint Research Center for Climate Governance Mechanism and Green Low-carbon Transformation Strategy, the National Research Foundation, Prime Minister's Office, Singapore (Campus for Research Excellence and Technological Enterprise [CREATE] programme), and the Global Energy Interconnection Development and Coorperation Organization.

European Economic impacts of cutting energy imports from Russia: A computable general equilibrium analysis

The recent economic sanctions against Russia can jeopardise the sustainability of the European Union’s (EU) energy supply. Despite the EU’s strong commitment to stringent abatement targets, fossil fuels still play a significant role in the EU energy policy. Furthermore, high dependency on Russian energy supplies underlines the vulnerability of the EU energy security. Using a global computable general equilibrium model, we prove that the current EU embargo on coal and oil imported from Russia will have adverse supply effects, substantially increasing energy prices and welfare costs for the EU resident. Although it reduces emissions, extending the embargo to include natural gas doubles this welfare cost. The use of coal is likely to increase, especially with respect to EU electricity generation, given the current constraints of additional import capacities from non-Russian producers. The impact on Russia once the EU extends the sanctions to natural gas is less substantial than on the EU. Russian welfare cost will increase less than 50%, indicating that extending the current restriction to boycott Russian gas is a costly policy option.

Economic integration and food security – The case of the AfCFTA

The study assesses potential effects of the African Continental Free Trade Area (AfCFTA) on agri-food sectors and food security in Africa. It employs the global Computable General Equilibrium model MAGNET in an ex ante analysis. The analysis has high regional and sectoral detail, representing the wide variety of African economies and trade policy strategies.The AfCFTA lifts 1.0 million people from risk of hunger while increasing national incomes. The rise in food prices offsets the increase in household income in a few regions. Food production increases in total, but several regions reduce production while increasing imports. Non-tariff measure reductions have higher impact than tariff cuts. A group of countries could experience adverse food security effects due to the AfCFTA.

Economy-wide impacts of road transport electrification in the EU

While electrification of road transport is a key component of decarbonisation, the implications for the broader economy and related jobs remain underexplored. We quantify these impacts in the EU in a global Computable General Equilibrium (CGE) model, combining techno-economic assumptions about electric vehicles with deployment scenarios derived by energy models. We augment input-output tables underlying the JRC-GEM-E3 model with an explicit representation of vehicle manufacturing and upgrade the modelling of vehicle purchase and operation. Our findings illustrate that greater road transport electrification reduces the overall costs of climate mitigation, primarily driven by lower fuel costs for electric vehicles and a faster decline of battery costs. Transport electrification alters supply-chains and leads to structural shifts in employment from traditional vehicle manufacturing towards battery production, electricity supply and related investments. Finally, we expand the set of labour market indicators to cover skills and occupations, to refine the socio-economic assessments of climate policy.

The Impact of Trade Barrier Reductions on Global Value Chains for Agricultural Products in China and Countries along the ‘Belt and Road’

AbstractThe Belt and Road Initiative (BRI) may potentially reduce trade barriers between China and countries along the Belt and Road (BR) route, affecting the positions in Global Value Chains (GVCs) of agricultural products of these countries. This study explores the BRI influence on the GVC positions using a global computable general equilibrium (CGE) model and focusing on China and the BR countries. The study finds that the reduction of tariff barriers and non-tariff barriers between countries along ‘the Belt and Road’ results in increased producer prices and volumes of almost all agricultural products exported from China, which improves the position of China in the GVCs of these agricultural products in our best estimate scenario. Countries along the BR route also benefit from the reduction in trade barriers, with improved positions in the GVCs of agricultural products in the best estimate scenario, especially those products that have comparative advantages in GVCs.