WIOD in GEM-E3 E3M-Lab – ICCS Paroussos Leonidas, Karkatsoulis Panagiotis, Vrontisi Zoi, Capros Pantelis

Overview GEM-E3 in WIOD Use of the GEM-E3-WIOD model Description of the GEM-E3 model in connection with the WIOD database and comments on the WIOD data. Methods/sources for reconciliation of additional data required Use of the GEM-E3-WIOD model

GEM-E3 versions GEM-E3 is a recursive dynamic CGE model that currently has two versions: GEM-E3-EU: Covers all EU member states based on EUROSTAT data. GEM-E3-World: Covers the whole world linked with endogenous bilateral trade (based on GTAP data). New version: GEM-E3-WIOD (work in progress) Cover 40 regions and 35 sectors linked with bilateral trade matrices (use the highest detail of the database available) Baseline projections up to 2050 with a 5 year time step

GEM-E3 Model Identity GEM-E3 is a computable general equilibrium model with multiple sectors and multiple regions The model performs recursively dynamic simulations until 2030 and 2050 The model is suitable for impact assessment studies concerning structural change policies Conclusions are drawn by comparing scenarios Special focus on interactions between the economy, the energy system, the environment. Written as MCP problem in GAMS (solved with the PATH solver)

GEM-E3 Model Database Employment data Input-Output Tables Transfers between sectors Bilateral Trade Matrix Family Budget statistics Employment data Capital data by sector Emission statistics Investment Matrices Data available from WIOD

Economic circuit of GEM-E3-WIOD The model computes the price vector that simultaneously clears the product, capital and labor market.

Regional and sectoral coverage The regional detail (40 countries) of the WIOD database is sufficient to cover the GEM-E3 model main regional requirements. At the sectoral level the resolution provided by the database (35 industries) is detailed enough, apart from the representation of the energy sector. The energy sector is quite aggregated. In the current version of the database comprises of i) coke, refined petroleum and nuclear fuel and ii) electricity, gas and water supply. The minimum resolution required by the GEM-E3 model for the energy sector is i) coal ,ii) crude oil, iii) refineries iv) gas v) electricity supply.

Comments on regional and sectoral coverage Both the regional and sectoral classification of the database are adequate for modeling purposes. The following points should be taken into account: For the world version of GEM-E3 the database needs to be closed (by adding a RoW region) For the EU27 version where RoW is exogenously defined the WIOD database suffices The energy sector is aggregated hence limiting the potential of the model to be used for GHG mitigation policies.

Comments on WIOT (I) Handling of negative flows: For certain countries WIOT data include negative flows as regards to exports. Proposed solutions i) treat as imports (ZEW), ii) put them to zero and adjust production (CPB), iii) add to change in stocks (as long as the value is low),iv) aggregate. Negative flows registered in the operating surplus account (compensation of capital) are consistent with the valuation concepts since they represent losses of the particular industry for the particular year. Although this is consistent in valuation terms it is not consistent with the CGE model assumptions (i.e. that the structure of the economy at the base year is at long run equilibrium). The ZEWs approach in dynamic calibration may be adopted in order to compute the “equilibrium” production functions.

Comments on WIOT (II) Taxes less subsidies on products: Decomposition into indirect taxes, VAT and subsidies is desired (with an indication of the tax base for each country). Value Added: In the WIOT data value added is reported aggregated (i.e. the sum of compensation of capital and labor). Separate reporting for labor and capital exists in the YL files and supply and use tables. Inconsistency: Some of the value added reported in YL files does not sum up to the value added of the WIOT The compensation of employees transaction could be further disaggregated to its components, that is wages & salaries and employers social security contributions. Tariffs and International trade margins: A tariff and trade margin table following the bilateral flows is usefull. The implied tariff rates computed from the WIOD database are found to be reasonable.

Firms behavior - production Intermediate demand flows expressed at producer prices (product assumption) Value Added Total domestic supply Imports Total supply Taxes Model change based on the detailed WIOT trade data (the decision will be modeled at the final/intermediate demand level)

Bilateral trade The bilateral trade matrix in the WIOT covers the data requirements of the model and provides additional information that the model could utilize Improvement of the GEM-E3 model: The Armington assumption at the aggregate level can be relaxed and the decision among imported and domestically produced goods can be defined at the agents level. Specific comments to WIOD database: In the TR files bilateral imports are not yet mirrored. The provision of bilateral exports could be very useful in computing the bilateral margins. Imports as registered in the TR files are not consistent either with those in the supply and use tables SUT files or with the WIOT data.

Extention of composite good representation For firms the decision for the imported good will now take place at the level of intermediate input transaction (pxd,pimp: prices of domestically produced goods and imports, s: Armington elasticity, ) Similar representation holds for household decision

Institutional transactions Full Sequence of Accounts Households Firms Government RoW H F G R 217040 34590 2430 110 Transfers Table (e.g. taxes on income) The WIOD database covers all institutional sectors but it does not include the institutional accounts that cover all the transactions between them. For EU27 member states ICCS has computed these transactions using the full set of ESA95 tables for the full sequence of accounts of each institutional sector from the EUROSTAT database.

Investment This construction of the investment matrix requires three sets of information: Gross fixed capital formation by product (already identified by WIOD) Investment by firm (or time series of capital stock that can be used as proxy) Mapping table of 1 to 2 Currently in WIOD includes only fixed capital formation. A RAS method can be applied if 1 and 2 are available

Consumption Consumption matrices translate household consumption (as defined in COICOP classification) to demand for consumption products (see Figure 4). Currently in the WIOD database only the demand for consumption products is identified. Consumption matrix available for UK

Labour market The coverage of the WIOD database regarding the labor market is quite sufficient for the GEM-E3 model. Additional data requirements regarding the unemployment rates were extracted from the ILO database. Wage rates per industry and country were found to be at reasonable levels apart from very few cases. Great Britain, Japan and Belgium present considerably higher than the industry average hourly labor compensations. This is mainly the case for the energy sector (coke, refined petroleum and electricity), water and air transport, real estate and for private households with employed persons.

Euro/working hour GBR BEL GBR JPN BEL POL BEL JPN JPN GBR GBR

Application with the GEM-E3-WIOD model: Carbon Leakage Definition: A domestic GHG mitigation action may result in the increase of GHG emissions outside the country (carbon leakage). This leakage is assumed to take the form of industries re-location towards countries with no or mild GHG mitigation rules (competitiveness loss due to asymmetric climate policies) and the increase of fossil fuels consumption (triggered by lower prices following the slackened demand for fossil fuels, IPCC 2006).

Key modeling issues for carbon leakage (I) Highly aggregated sectors and products homogeneity: Most of the models used to asses the carbon leakage effects assume that each industry produces a unique homogeneous product. This industry aggregation may mask significant sub-sector differences (i.e. high quality/R&D energy intensive products whose production cannot be relocated due to infrastructure limitations of the hosting place (i.e. lack of skilled labor) cannot be identified). WIOD contribution: Labor skills distinction (high, medium, low) Distinction of capital compensation according to 9 types of capital. High sectoral detail

Key modeling issues for carbon leakage (II) Investment barriers: Risk premium on capital associated with relocating businesses abroad is usually not taken into account. Imperfect substitution between domestic and imported products: In CGE models the Armington elasticities define the degree of “competition” between domestic and imported products and hence the potential for carbon leakage, but this apply to the composite goods instead of industrial sectors. WIOD contribution: Detailed bilateral trade on intermediate consumption and final demand.

Thank you

GEM-E3 data requirements GEM-E3 is calibrated in a single year: selected year for current version 2006. Final demand: household consumption (including consumption of NPISHs), government consumption, gross fixed capital formation, change in inventories & valuables and exports. Intermediate consumption Government receipts/expenditures: intermediate taxes, value added type taxes, subsidies, duties, indirect taxes, personal income taxes, employers social security contributions etc.. Bilateral trade matrices. Investment matrices (i.e. matrices that translate investment by firm to demand for certain investment products). Consumption matrices (i.e. matrices that translate household consumption by product to consumption by purpose). Transfer payments among institutional sectors (households, firms, government and RoW) Interest rates. Inflation rates Labor market data: active population, unemployment rate, unemployment benefits, hours worked by sector. Emissions: All GHG emissions (and their associated marginal abatement cost curves) and main pollutants (NOX, SOX, NH3, NMVOC, CO, PM10).