Description of different models

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The IEA model is an econometric energy sector model constructed till the year 2005. The macroeconomic indicators are exogenously determined, and most of the parameters are estimated econometrically over the period 1965-89. Adjustment factors for technology, saturation of markets and resources complement these economic forecasts. The strengths of the model include the detailed modelling of end-use consumer energy prices and their link to primary prices, and the incorporation of the rigidities of the current energy systems of OECD regions. The latter, however, limits its use for very long term policy analyses (100+ years). The IEA model does not account for feedbacks from the energy sector into the rest of the economy, therefore cost results can only be given in terms of the size of carbon tax needed to reach a specific target, and not in terms of GDP loss.

MR model (Global 2100)

Global 2100 is a dynamic GE optimisation model developed by Manne and Richels (MR) as an analytical framework for estimating the costs of carbon emission limits. The MR model combines a detailed energy sector process model with a macroeconomic production function model; this maximises the discounted value of consumption utility over time, subject to specified carbon constraints. The focus of the model is GNP loss under different assumptions of emission constraints, costs and availabilities of energy supply technologies, inter-factor substitution, exogenous energy efficiency improvements and price induced substitution. The model applies a nested production function approach, which combines two composite intermediate goods consisting of Cobb—Douglas functions of labour/capital and electric/non-electric energy, inside a CES function with a non-unitary elasticity.

The model is solved as an inter-temporal system over eleven ten-year intervals (benchmarked against the base year 1990), assuming that producers and consumers have rational expectations about all future scarcities of energy and environmental restrictions. Factor supply and demand is equilibrated within each time period, but there are features that allow for interactions between periods, particularly for the depletion of exhaustible resources and for the accumulation of capital over time. Each of the regions faces an exogenously determined carbon emissions quota and an international crude oil price; a limitation of the model is that it neglects the possibility of trade in carbon emission rights. Later versions of the model (for example, Rutherford 1992) include such trade.

The Edmonds and Reilly model (ERM) has been described by Cline (1992) as an energy-carbon accounting framework, which calculates carbon emissions, by major world regions, at twenty-five-year intervals, from 1975 to 2100. The focus of this model is on estimating energy-related carbon emissions, and it has limited strengths in explaining the energy system's impact on the economy. ERM has nine energy types: conventional oil, conventional gas, unconventional (synthetic) oil, unconventional gas, coal, biomass, solar electricity, nuclear electricity and hydroelectricity. The model applies iterative price adjustments to achieve equilibrium between supply and demand for each fuel in each region.

Nordhaus: DICE

Nordhaus (1991a) presents a very simple general equilibrium model that links the economy, emissions and climate change; the model is aggregated at the global level. He also summarises empirical evidence on the costs of GHG abatement, and the damages from greenhouse warming for the year 2050. The model accounts for all GHGs by transforming each of the greenhouse gases considered into its CO2 equivalent using its total warming potential. A simplified model is used for the change in atmospheric concentration of CO2 equivalent GHGs and the associated change in temperature.

It is assumed that the economy has reached a resource steady state, and balanced resource augmenting technological change enables the economy to grow at a constant rate. The objective is to maximise the social welfare function; that is, the discounted sum of per capita consumption utility. Consumption is defined as the product of output with no emission reductions and no climate damage, and the difference in the steady state cost function and steady state damages from climate change. This framework is very aggregate, but its strengths are the more complete coverage by including all greenhouse gases, and the inclusion of the costs as well as the benefits side of the greenhouse effect and abatement measures.

GREEN

This applied general equilibrium model was developed by the OECD to study the economic impacts of CO2 abatement policies (Burniaux et al. 1991a). The GeneRal Equilibrium ENvironmental (GREEN) model focuses on the energy sector, and uses government excise taxes or a carbon tax as a policy instrument to reduce CO2 emissions. The model highlights the relationship between depletion of fossil fuels, energy production, energy use and CO2 emissions.

The time horizon for the model is 1985-2020 and it is simulated for five-year intervals. The recursive structure of the model describes the economy as a sequence of single period static temporary equilibria. In each sector output is produced using the five energy inputs (coal, natural gas, crude oil, refined petroleum and electricity) which can be domestically supplied or imported, fixed factors (which are predetermined), capital, labour and intermediate goods and services (domestic or imported). The individual energy sectors produce a composite energy good through a CES production function. The model version reviewed here had no potential for backstop technologies, though these are included in a later version. Capital and sector specific factors combine to produce a capital—energy composite. This merges with labour (CES) to form a composite input which produces output subject to a (Leontief) input-output structure. The model assumes constant returns to scale, and a common production structure based on cost minimisation given the sectoral demand and relative after-tax prices.

Whalley and Wigle (WW; 1991) use a global static general equilibrium model, which incorporates trade, production and consumption of energy (carbon based and non-carbon based) and non-energy products (energy intensive manufacture and other goods) in a number of countries/ regions.

WW addresses the issue of how different countries might fare under a carbon tax adopted to limit the build-up of CO2 and other greenhouse gases. Effects of the tax would depend upon a number of factors. Firstly, the burden would depend on whether the tax were imposed on consumers or on producers. Elasticity of supply would determine the burden sharing between producers and consumers—a low elasticity of supply favouring consumers. Other factors determining the effects of taxation would be the disbursement of tax revenues and trade in energy intensive manufactures. The model is capable of looking at alternative forms of taxation as well as international trade effects and generates results for the period 1990-2030. As the model is static it does not have a time path.

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