Global General Equilibrium Model Research Articles

Global climate policy with differentiated carbon price floors

ABSTRACT We use a state-of-the-art global general equilibrium model to quantify the effects of an International Carbon Price Floor (ICPF) proposal for the coordination of global climate policy. With the ICPF proposal, countries would implement a carbon price floor that is differentiated according to their level of development. The price floor could be implemented by an actual carbon price or other policies with equivalent stringency. Implementing such a joint effort would be a big step towards aligning global emissions with the Paris Agreement. The study highlights three main findings. First, the ICPF is progressive in terms of emission reductions and demands considerably more effort from high-income countries (HICs). Unlike proposals based on equity principles, however, it requires neither extremely high emission reductions from HICs nor massive financial transfers. Second, the differentiated carbon prices cost only an additional 0.3 percent of global GDP compared to a global uniform carbon price. Third, the ICPF can be as effective as border carbon adjustment (BCA) mechanisms at preserving competitiveness of HICs despite the differentiation in carbon price floors. This means, there would be no need for BCA with an ICPF. Compared to a BCA, HICs can avoid the administrative burden and low-income countries (LICs) will not face the cost of BCA. As a first step to global climate policy, a sectoral ICPF for the EITE sector could be introduced. It would address competitiveness concerns almost as well as the full ICPF. Key policy highlights An International Carbon Price Floor (ICPF), with carbon price floors differentiated by development level, would incur only small economic costs compared to baseline economic growth. The ICPF would allow for international burden sharing, with HICs incurring higher cost than middle – and low-income countries. The ICPF reduces distortions to competitiveness as much as BCA, so that no BCA would be necessary. A ‘sectoral ICPF’ in energy-intensive and trade-exposed sectors would be effective against leakage and loss in competitiveness and would thus be an attractive alternative to border carbon adjustment.

Promoting sustainable investment through financial architecture reform

Abstract The global financial architecture is struggling to facilitate the sustainable investment needed to address climate change. Some argue that if the Basel III global capital rules treated environmentally friendly assets as being safer forms of capital, banks would be incentivized to hold more of these assets on their balance sheets and extend more green debt, promoting sustainable investment. This paper explores the possible impacts of this reform by combining firm-level environmental, social, and governance (ESG) data with a global general equilibrium model. It finds that the reform would result in a significant reallocation of capital, goods, and services across sectors and economies. It finds that while the reform could significantly increase investment, the investment is not necessarily sustainable and not all countries benefit from cooperation. The paper identifies a range of challenges that need to be overcome for these results to hold, including the reliability of ESG data, inconsistencies in taxonomies and methodologies, and further analysis confirming whether green firms are indeed safer borrowers. The paper argues that the G20 is well placed to address these challenges and outlines an agenda to achieve it.

AN ECONOMY-WIDE FRAMEWORK FOR ASSESSING THE STRANDED ASSETS OF ENERGY PRODUCTION SECTOR UNDER CLIMATE POLICIES

Climate change mitigation efforts, which require the transition away from carbon-intensive activities, can pose financial risks for owners of fossil fuel assets and investors that the finance companies are engaged in greenhouse gas-emitting activities. For instance, fossil fuel extraction may be significantly scaled-back, and coal-power plants may be idled or even phased out prematurely, thus becoming stranded assets for the shareholders. Using a global general equilibrium model with detailed energy sector and capital stock structures, we estimate the corresponding stranded assets under various emissions mitigation scenarios. Our findings reveal that, depending on the policy scenario, the global net present value of unrealized fossil fuel output through 2050 relative to a “no policy” scenario is between 21.5 and 30.6 trillion USD, and that of stranded assets in coal power generation is between 1.3 and 2.3 trillion USD. The analytical framework presented in our study complements existing research, in which macroeconomic variables required for estimating the stranded assets are often derived from models with more simplified assumptions. Therefore, individual firms and financial institutions can combine our economy-wide analysis with details on their own investment portfolios to determine their climate-related transition risk exposure.

Fiscal consolidation during the pandemic

In connection with the increase in public debt induced by the growth of government expenditures aimed at reducing negative effects of the global pandemic, the analysis of such policy measures as fiscal consolidation is an urgent issue. In this paper, we analyze gains and losses of fiscal consolidation aimed at gradually reducing government debt to pre-pandemic levels by raising taxes. Within the framework of the global multi-regional general equilibrium model with overlapping generations (CGE-OLG), we consider scenarios of local (single region) and global consolidation. As a result, we have found that local consolidation leads to insignificant losses in terms of output in the Russian economy in the short term and to more significant losses in developed countries, whose budgetary expenditures were significantly higher during the pandemic. In the long run, there is a positive effect on the level of output in all economies. Another important result is the additional positive effect of global consolidation giving higher output values compared to local consolidation.

Impacts of import restrictions on poultry producers in Ghana

Abstract This paper investigates the potential effects of trade restrictions and alternative tariff policies, including a tariff wedge between feed and final products on the Ghanaian poultry producers. We apply a hybrid approach that uses qualitative results of a Delphi study to define scenarios for a modified global general equilibrium model. The projected production changes are then used as inputs into a typical farm analysis that disentangles the effects for broiler farm types in Ghana. The effect of expanding a tariff wedge between final and feed products by 5 per cent, either through increasing the tariff rates of the final product or through abolishing the tariffs on feed products, is small in our case. However, increasing the tariff rate of the final product to the maximum level of bound tariff (i.e. 99 per cent) or a complete ban has a larger effect on domestic production. It increases the production by 104 per cent and up to 254 per cent, respectively. The typical farm analysis reveals that large-scale farms are better positioned to increase production than small and medium farm types.

National and Sectoral Effects of a Decline in the Desirability of Investing in Australia

AbstractAustralia has a long‐standing dependence on foreign investment to make up the difference between domestic saving and investment opportunities. There is, nevertheless, an ongoing debate about the merits or otherwise of inward foreign investment. There has also been a recent tightening of criteria governing foreign investment. The OECD assesses Australia's foreign direct investment regime to be one of the most restrictive in the OECD area, while broader discussions have considered the potential for a decline in Australia's credit rating. This paper uses a dynamic global general equilibrium model—GDyn‐FS—to report on the national and sectoral effects of a decline in the desirability of investing in Australia, relative to other countries.

Exploring linkage opportunities for China's emissions trading system under the Paris targets——EU-China and Japan-Korea-China cases

Linking emissions trading systems (ETSs) in developing and developed countries is expected to serve as an important cooperative approach for achieving the Paris Agreement targets. As one of the first developing countries leveraging ETS to achieve domestic climate targets, China's involvement will significantly impact the market-based cooperation landscape. This study investigates two prospective linkage options for China's ETS, including the linkage with the EU ETS and the linkage with Japan's and Korea's ETSs under three different emission reduction targets, and analyzes the emissions, energy and economic impacts of both full linkage and limited linkage on China and its linkage partners using a global general equilibrium model. We find that full linkage could bring the largest welfare gains for each participant, but it also causes a loss in international competitiveness of China's domestic sectors and impedes the deployment of renewable energy in China's linkage partners. With the strengthening of emission constrains, the adverse impacts of full linkage intensify. If a limit is set on the volume of permits trading, carbon price changes are more moderate in each participant and the adverse impacts on international competitiveness of China and on renewables development of its linkage partners are lessened, at the expense of reduced welfare gains. Therefore, national policy-makers have to strike a balance between welfare gains and other policy objectives when considering linking their emissions trading systems. A limited linkage is more politically feasible and can be established initially and the restrictions on partner's permits may be loosened over time as the balance between different policy objectives is achieved.

COVID-19 and trade: Simulated asymmetric loss

This paper uses 2018 data as a benchmark to build a numerical 26-country global general equilibrium model with trade cost and an endogenous trade imbalance structure. We assume that COVID-19 will increase the trade cost between countries and decrease labor supply in production. We use China’s trade data from January to April in 2020 to calibrate the influence level parameters and then simulate the trade effects of COVID-19 in China, the EU, the US, and the world. Our simulation results find that all countries’ trade and exports will be significantly hurt by the pandemic. Due to the trade diversion effect and the price growth effect, some countries will see an increase in import trade. Comparatively, the pandemic has the most negative impact on global trade, followed by the EU, the US, and China. As the pandemic deepens, the negative impact on trade will increase. The worldwide pandemic has the most significant impact on US trade, with an effect about 1.5 times that of the average world effect.

Impacts of COVID-19 on global poverty, food security, and diets: Insights from global model scenario analysis.

This study assesses the impact of coronavirus disease 2019 (COVID‐19) on poverty, food insecurity, and diets, accounting for the complex links between the crisis and the incomes and living costs of vulnerable households. Key elements are impacts on labor supply, effects of social distancing, shifts in demand from services involving close contact, increases in the cost of logistics in food and other supply chains, and reductions in savings and investment. These are examined using IFPRI's global general equilibrium model linked to epidemiological and household models. The simulations suggest that the global recession caused by COVID‐19 will be much deeper than that of the 2008–2009 financial crisis. The increases in poverty are concentrated in South Asia and sub‐Saharan Africa with impacts harder in urban areas than in rural. The COVID‐19‐related lockdown measures explain most of the fall in output, whereas declines in savings soften the adverse impacts on food consumption. Almost 150 million people are projected to fall into extreme poverty and food insecurity. Decomposition of the results shows that approaches assuming uniform income shocks would underestimate the impact by as much as one‐third, emphasizing the need for the more refined approach of this study.

Nitrogen Tax and Set-Aside as Greenhouse Gas Abatement Policies Under Global Change Scenarios: A Case Study for Germany

The ambitious climate policy objectives of the COP21 agreement require the design and the implementation of effective and efficient policy instruments. The effectiveness and efficiency of agricultural abatement options depend on regional climate and natural conditions, changes in the global economy, global agricultural markets and regional agricultural production. Thus, the assessment of abatement options requires consideration of the global scale, the market scale and the regional producer scale. We investigate two abatement options discussed controversially in literature. Both have been partially applied to reduce environmental pollution from agriculture: a tax on nitrogen and the obligatory set-aside of agricultural land. Our study provides an assessment of the ecological effectiveness and the economic efficiency of both abatement options under different global scenarios. In our policy analysis we combine three applied policy simulation models to develop an integrated economic model framework. This model framework considers the global, the national and the regional scale and consists of the global general equilibrium model DART-BIO, the partial-equilibrium model CAPRI and the regional supply model RAUMIS. In the different global scenarios, the results show that both abatement options create relatively high marginal abatement costs and that the maximally reached abated greenhouse gas emissions represent only 15% of the quantity required to fulfill the policy targets. Compared to the obligatory set-aside option, the nitrogen tax is in both scenarios the more efficient policy. With respect to impacts on production and environment, a nitrogen tax is less forecastable than the obligatory set-aside option. Our study illustrates the relevance of considering global economic and market change in the assessment of producer-targeting environmental policies.

Trade protectionism and US manufacturing employment

This paper builds a numerical global general equilibrium model to simulate the effects of US-initiated trade protection measures on manufacturing employment. The simulation results show that US trade protection measures reduce manufacturing employment in the US, and these losses will further increase if trade partners take retaliation measures. Although trade protection measures can increase demand for US domestic manufactured goods because of decreased foreign demand, increased consumption prices of manufactured goods will move the demand to services. Trade partners’ retaliation measures will further decrease the demand for US manufactured goods. The whole effect is that the US loses on domestic manufacturing demand and then loses manufacturing employment.

The GTAP Data Base: Version 10

This paper highlights the numerous improvements to the Global Trade, Assistance, and Production (GTAP) Data Base, version 10 (also referred to as GTAP 10). The Data Base describes the world economy for 4 reference years (2004, 2007, 2011, and 2014) and distinguishes 65 sectors, up from 57 in the previous release, in each of the 141 countries/regions. The 121 countries in the Data Base account for 98% of world GDP and 92% of world population. For each country/region, the Data Base reports production, intermediate and final uses, international trade and transport margins, and taxes/subsidies. This Data Base underlies most, if not all, applied global general equilibrium models. We use the time series GTAP 10 Data Base to examine the evolution of carbon dioxide emissions embodied in bilateral merchandise and services trade over the 2004-2014 period.

International remittances, migration and primary commodities

AbstractThis paper documents the global crude oil market as a key driver of international migration and remittances. Structural estimation documents that crude oil supply and demand shocks induce sizeable remittances flows. The sign and magnitude of remitter outflows differ across countries and structural shocks. A multilateral global general equilibrium model is used to show how oil‐exporting remitters generate international remittance and migration spillovers from crude oil price movements. Remittees’ economic outcomes from remittances and migration channels are found to be dominated by terms of trade channels for shocks to the global market for crude oil. Due to this, studies of remittance flows need to account for the source of the commodity price movement if using the correlation between remittee real GDP and remittance inflows.

Economic Impacts of the Possible China–US Trade War

ABSTRACTThis article uses a multi-country global general equilibrium (GE) model to numerically simulate the effects of possible China–US trade wars. We introduce an endogenous trade imbalance structure with trade cost into the model which helps to explore both tariff and non-tariff trade war effects. Our simulation results show that China will be significantly hurt by the China–US trade war, but negative impacts are affordable. The US can gain under unilateral sanction measures to China, but will lose if China takes retaliation measures. Comparing the effects under mutual trade war, China will lose more than the US. Introducing non-tariff barrier trade wars will intensify the negative effects, and comparatively negative effects to China are larger than to the US. Mexico’s involvement in trade war with the US will strengthen the negative effects and comparatively hurt the US more. Under non-cooperative and cooperative Nash bargaining equilibrium, the US can gain more than China in trade war negotiation, which means the US has stronger bargaining power than China. Additionally, trade wars between China and the US will hurt most countries and the world especially in GDP and manufacturing employment, but benefit their welfare and trade.

(The Construction of a Global General Equilibrium Model for the Russian Economy Based on International Experience)

Russian Abstract: Мультирегиональные вычисляемые модели общего равновесия широко применяются в международной практике анализа последствий экономической политики в глобальном контексте. В зависимости от целей экономической реформы структура моделей может существенно различаться. В данной работе проводится сравнение различных типов глобальных вычисляемых моделей общего равновесия. На основе сделанных выводов предлагается модель для российской экономики, позволяющая анализировать такие реформы, как налоговой маневр и модернизация пенсионной системы. English Abstract: Multiregional computable general equilibrium models are employed extensively in international practice of examining the consequences of various measures of economic policy in the global context. Depending on the goals of the considered economic policy, the optimal model structure may vary. This study offers a comparison of a range of global CGE models, which results into constructing a global CGE model focused on current issues of Russian economic policy, such as the tax maneuver and the pension reform.

International Remittances, Migration, and Primary Commodities in FSGM

This paper adds international migration and remittances into the IMF’s Flexible System of Global Models (FSGM). FSGM is a global general equilibrium model with endogenous primary commodity markets. A method to estimate the structural dynamics of major remitter regions is proposed. The dynamics of remittances and migration in FSGM are calibrated to be consistent with the main stylized facts of the empirical estimates. Structural disturbances pertinent to current global remittance flows are examined. These disturbances include disruptions to oil supply, output variation in Europe and the United States, labor nationalization policies in Saudi Arabia, and a global reduction in the cost to remit. The multilateral framework illustrates how remittance inflows need not originate from the region with the underlying economic disturbance but can arise from third party remitter regions affected by global commodity markets. The results also illustrate that the correlation of remittance inflows and the real GDP of labor-exporting economies can be either positively or negatively correlated. The evidence suggests that the behavioral incentive to migrate and remit cannot be deduced from correlations of real GDP and remittance inflows.

International Remittances, Migration, and Primary Commodities in FSGM

This paper adds international migration and remittances into the IMF's Flexible System of Global Models (FSGM). FSGM is a global general equilibrium model with endogenous primary commodity markets. A method to estimate the structural dynamics of major remitter regions is proposed. The dynamics of remittances and migration in FSGM are calibrated to be consistent with the main stylized facts of the empirical estimates. Structural disturbances pertinent to current global remittance flows are examined. These disturbances include disruptions to oil supply, output variation in Europe and the United States, labor nationalization policies in Saudi Arabia, and a global reduction in the cost to remit. The multilateral framework illustrates how remittance inflows need not originate from the region with the underlying economic disturbance but can arise from third party remitter regions affected by global commodity markets. The results also illustrate that the correlation of remittance inflows and the real GDP of labor-exporting economies can be either positively or negatively correlated. The evidence suggests that the behavioral incentive to migrate and remit cannot be deduced from correlations of real GDP and remittance inflows.

How close is Asia already to being a trade bloc?

FTA bilateral and regional negotiations in Asia have developed quickly in the past decade moving Asia ever closer to an economic union. This paper uses a fifteen-country global general equilibrium model with trade costs to numerically calculate Debreu distance measures between the present situation and potential full Asia integration in the form of a trade bloc. Our results reveal that these large Asia economies can be close to full integration if they act timely in agreements through negotiation. All Asia countries will gain from Asia trade bloc arrangements except when the Asia FTA can only eliminate tariffs. These countries’ gain will increase as bilateral non-tariff elimination deepens. Larger countries will gain more than small countries. Asia FTA, Asia Union and RCEP will benefit member countries more than ASEAN+3. Global free trade will benefit all countries the most.

How Would Bilateral Trade Retaliation Affect China?

China is a large trade surplus country and could potentially become involved in bilateral trade retaliation. This paper uses a numerical simulation method to empirically explore how Chinese involvement in bilateral trade retaliation could affect both China and other countries. We analyze four different country groupings using scenario solutions of numerical global general equilibrium models to simulate trade retaliation equilibria and calculate their impacts. Our simulation results suggest that China will be hurt by trade retaliation sequences with other countries, but impacts depend on who is involved. Trade retaliation with large countries and major trade partners will hurt China more.

Impact Assessment Model of International Transportation Infrastructure Development: Focusing on Trade and Freight Traffic in Central Asia

This paper analyzes the expected impacts of improved border-crossing services on international freight transportation in Central Asia (CA). It develops a freight traffic network-assignment model based on the user equilibrium principle, and the developed model is combined with a global general equilibrium model to analyze the impacts of infrastructure development on regional economy and trade. Three cases are simulated to assess the improved border-crossing services. The results show that improvements in border-crossing service provision significantly decrease international transportation costs and boost trade flows in and out of CA in the short run. However, further growth of regional trade causes traffic congestion, which leads to an increase in international transportation costs, potentially reducing long-run trade volumes to and from CA. The analysis thus suggests that further improvement of CA transportation services is a prerequisite for the sustainable growth of regional trade.