Introduction to EME

7.2.1.1 BACKGROUND

E3ME (Energy-Environment-Economy Model for Europe) is a general model for Europe designed to address issues that link developments and policies in the areas of energy, the environment, and the economy (see Cambridge Econometrics, 2005). The European economy is becoming more and more integrated; at the same time, the relationship between economic activity, energy use, and the environment is of pressing concern for European policy and political debate. The guiding principles of the model are such that it is:

• elaborated at a European, rather than at a national, level, with the national economies being treated as regions of Europe;

• dealing with energy, the environment, population, and the economy in one modelling framework and allowing short-term deviations to occur while convergence to a long-run outcome takes place;

• designed from the outset to address issues of central importance for economic, energy, and environmental policy at the European level;

• capable of providing highly disaggregated short- and long-term economic and industrial forecasts for business and government;

• capable of analysing long-term structural change in energy demand and supply and in the economy;

• focused on the contribution of research and development, and associated technological innovation, on the dynamics of growth and change.

7.2.1.2 ANTECEDENTS

E3ME is a multisectoral dynamic regional econometric model capable of providing a long-term equilibrium solution. The model uses input-output tables, but combines them with the time-series analysis used in macroeconometric models. It has been developed following the structure of a regionalized E3 model of the UK economy (Barker and Peterson, 1987) which has been used to analyse in detail the effect of the EC carbon/energy tax on the UK economy. Models in the same tradition for national economies have been developed by the INFORUM group of modellers (see Almon, 1991).

EU Inside Region

EU Transportation & Distribution

Other Regions' Output

EU Inside Region

EU Inside Region

EU Transportation & Distribution

Total Demand

Other Regions' Output

Consumers' Expenditure

Investment & Inputs to Production (input-output)

Employment

Exports

Imports

Output

Incomes

Figure 7.1. E3ME41 as a regional econometric input-output model

7.2.1.3 THE E3ME MODEL

E3ME version 4.1 is comprehensively described in the model manual (<http://www.camecon-e3memanual.com/>), which includes a full set of results from the estimated equations.

Figure 7.1 shows how E3ME can be represented as a regional, econometric input-output model. Most of the economic variables shown are at a 42-industry level (NACE two-digit with expanded fuel and power sectors, including 16 services sectors) and cover the time period 19702002. The whole system is solved simultaneously across all industries and countries (the EU25 in 2006 plus Norway and Switzerland). More information on the E3ME model can be found at the main model website, <http://www.e3me.com/>.

7.2.1.4 E3 MODELLING IN E3ME

Figure 7.2 shows how the three components of the model—energy, environment, and economy—fit together. Each component is shown in its own box and utilizes its own units of account and sources of data. Each data set has been constructed by statistical offices to conform to accounting conventions. Exogenous factors coming from outside the modelling framework are shown as inputs into each component on the outside edge of the chart. For the EU economy, these factors are economic policy economic policy

Figure 7.2. E3ME as an E3 model

economic activity and prices in non-EU world areas and economic policy (including tax rates, growth in government expenditures, interest rates, and exchange rates). For the energy system, the outside factors are the world oil prices and energy policy (including regulation of energy industries). For the environment component, exogenous factors include policies such as reduction in SO2 emissions from large combustion plants. The linkages between the components of the model are shown explicitly with arrows showing which values are transmitted between components.

The energy price data in E3ME come from the International Energy Agency (IEA) and do not include sector-specific pricing (i.e. all industry groups are assumed to pay the same price for their various fuel inputs). Although sector-specific prices are available for some countries, they are not available on a consistent basis across Europe. However, this is a key assumption, because the expected sectoral effects of ETR will be directly related to the fuel prices paid by that sector—for example, a tax of 10C/toe will have a much larger relative effect when the fuel price excluding taxes is 50C/toe than when the fuel price is 100C/toe. This assumption means that results for sectors made up of large firms that can purchase fuels at lower prices (such as paper and pulp) are probably being understated, and those with many small firms may be being overstated.

E3ME's historical database is constructed using data from Eurostat, DG ECFIN (AMECO), and the OECD secretariat's STAN database. These sources have the advantage of covering the whole of the EU on a consistent basis (as far as possible), but the data are usually published later than the corresponding data from national sources. These data have been supplemented by standardized data from other sources when required, to form completed time series. For more information about the coverage of the data, the reader should refer to the model manual.

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