MAPS Chile Macroeconomic Modelling Results: MEMO II Model November 5th, 2014 EconLab III, Cape Town

2 Framework

Macroeconomic Modelling: Objectives Macroeconomic model (DSGE) to asses the impact of 9 mitigation scenarios built by Institute for Structural Research (IBS, Poland): Aggregate emissions Macroeconomic indicators: ‐GDP growth rate ‐Sectorial GDP ‐Employment and unemployment ‐Consumption ‐Investment ‐Fiscal revenue and expenditure ‐Current account ‐Exchange rate ‐Wages

Macroeconomic Modelling: Framework Sectoral Baseline -CO2 emissions -Economic activity level -Electricity generation data -Forestry expansion plan Sectoral Baseline -CO2 emissions -Economic activity level -Electricity generation data -Forestry expansion plan DSGE Multisectoral Model DSGE Multisectoral Model Baseline MAPS 2013 GDP, Population, Labor Market, Exchange Rate, Fuel Prices Baseline MAPS 2013 GDP, Population, Labor Market, Exchange Rate, Fuel Prices Sectoral Models Sectoral Models Macoreconomic indicators CO2 emissions Model Input/output for the model Mitigation Scenarios -CO2 emissions -Expansion plan electricity sector -CAPEX-i, OPEX-i Mitigation Scenarios -CO2 emissions -Expansion plan electricity sector -CAPEX-i, OPEX-i DSGE calibration: -I/O Matrix 2003 OECD -National Accounts National Employment Survey -National Energy Balance -Fiscal Statistics DIPRES

Links: Sectoral Models and DSGE Model Electricity generation Mining and Industry Transport Agriculture Forestry CPR Waste Raw materials Public services Construction Transport Agriculture and Forestry Trade Financial Services Industry Services Electricity generation Households Sectoral ModelsDSGE Model Coal Oil Gas Copper Coal Crude petroleum Diesel Gasoline Other oil derivate Natural gas LPG and kerosene Copper Sectoral ModelsDSGE Model

6 Macroeconomic model: DSGE MEMO II

Characteristics of MEMO II Model Dynamic Stochastic General Equilibrium model (DSGE) Small open economy 10 productive sectors y 4 type of raw materials More than 4000 variables Calibrated with data for the Chilean economy

Structure of the Model: General Equilibrium

9 Mitigation Actions

How the mitigation scenarios are simulated in the model 96 mitigation actions with different level of intensity are used to built mitigation scenarios. 9 Mitigation Scenarios: Carbon tax, base, medium and high effort, Renewable Energies, NCRE, Energy Efficiency, 80/20. Cost (savings) for each scenario CAPEX (capital expenditure) OPEX (operational expenditure) Identification of the affected sectors CAPEX: imported machinery, construction sector, etc. OPEX: savings in energy consumption, maintenance spending, etc. These cost (savings) must be translated to shock into the model.

11 Information (w) Simulation results (deviations from baseline, %) Problems Simulation Strategy Data (w)

DSGE Model Results Mitigation Scenarios

DSGE Model Results Carbon Tax Scenarios

Modelling Carbon Tax Five different carbon tax level are simulated: US$5, US$10, US$20, US$40 and US$50 US$5/ton simulated by MAPS Chile is different than the carbon tax included in the tax reform recently approved in Chile. Assumptions MAPS Chile simulation: Carbon tax is imposed to all sources of emissions in the economy. Recycling Fiscal Revenue: Lump sum transfer to household

Carbon Tax Scenario: Aggregates results Change in CO 2 emissions (millions of tons) US$-3,61-5,17 20 US$-14,42-20,69 Change in CO 2 emissions: 20 US$ tax (million of tons) ModelElectric sectorDSGE ,07-14, ,55-20,69

Carbon Tax Scenario 20 US$: Sectoral results

Effects on Employment Effects on Employment and Unemployment rate (1) It Includes agriculture, hunting, forestry and fishing. (2) It Includes construction and real states. (3) It Includes electricity, gas and water. (4) It Includes services of finance intermediation. (5) It Includes manufacturing industry. (6) It Includes public administration, defense, social security, education, others. (7) It Includes domestic services and other services. (8) It transport, storage and telecommunication. (9) It Includes retail sales. (10) It Includes mining. (1) There is no direct relationship between unemployment and employment because the labor force is endogenous in the DSGE model. Carbon Tax Scenario 20 US$: Employment Sector Sector share in total employment (year 2012, %) Deviation from baseline year 2020 (%) Deviation from baseline year 2030 (%) Agriculture (1) 10,0%-1,8% Construction (2) 14,6%-2,0%-0,9% Electricity (3) 0,7%-1,5%-2,1% Financial services (4) 1,8%-1,9% Industry (5) 11,6%-2,5%-2,4% Public services (6) 20,8%-0,8%-1,5% Other services (7) 10,3%-1,3%-1,4% Transport (8) 7,3%-1,9%-1,8% Trade (9) 19,7%-1,6%-1,5% Raw material (10) 3,3%-3,0%-2,9% Total 100,0%-1,6% Year Natural unemployment rate (%) Unemployment rate 1 (%) Change in employment (number) 20208,0%8,3% ,0%8,2%

DSGE Model Results Base Scenario

Base Scenario: Aggregates results CAPEX y OPEX (% Baseline GDP) OPEX-0,1%-0,5%-1,2% CAPEX0,3%0,2%0,4% Change in CO 2 emissions (million of tons) Sectoral model-11,1-19,2 DSGE model-9,54-14,14 Difference1,585,06

Base Scenario: Sectoral results

Effects on Employment Effects on Employment and Unemployment rate (1) It Includes agriculture, hunting, forestry and fishing. (2) It Includes construction and real states. (3) It Includes electricity, gas and water. (4) It Includes services of finance intermediation. (5) It Includes manufacturing industry. (6) It Includes public administration, defense, social security, education, others. (7) It Includes domestic services and other services. (8) It transport, storage and telecommunication. (9) It Includes retail sales. (10) It Includes mining. (1) There is no direct relationship between unemployment and employment because the labor force is endogenous in the DSGE model. Base Scenario: Employment Sector Sector share in total employment (year 2012, %) Deviation from baseline year 2020 (%) Deviation from baseline year 2030 (%) Agriculture (1) 10.0%-0.8%2.4% Construction (2) 14.6%3.2%4.5% Electricity (3) 0.7%-9.8%-18.9% Financial services (4) 1.8%-0.3%3.6% Industry (5) 11.6%0.6%3.7% Public services (6) 20.8%-0.8%4.6% Other services (7) 10.3%-0.4%2.7% Transport (8) 7.3%-0.5%2.9% Trade (9) 19.7%-0.1%3.5% Raw material (10) 3.3%-0.3%3.3% Total 100.0%-0.1%3.5% Year Natural unemployment rate (%) Unemployment rate 1 (%) Change in employment (number) %7.9%-9, %7.2%320,925

DSGE Model Results High Effort Scenario

CAPEX y OPEX (% Baseline GDP) OPEX-0,1%-0,6%-2,1% CAPEX0,8%2,1%1,2% Change in CO 2 emissions (million of tons) Sectoral model-16,9-51,0 DSGE model-14,12-39,90 Difference2,7611,06 High Effort Scenario: Aggregates results

High Effort Scenario: Sectoral results

Effects on Employment Effects on Employment and Unemployment rate (1) It Includes agriculture, hunting, forestry and fishing. (2) It Includes construction and real states. (3) It Includes electricity, gas and water. (4) It Includes services of finance intermediation. (5) It Includes manufacturing industry. (6) It Includes public administration, defense, social security, education, others. (7) It Includes domestic services and other services. (8) It transport, storage and telecommunication. (9) It Includes retail sales. (10) It Includes mining. (1) There is no direct relationship between unemployment and employment because the labor force is endogenous in the DSGE model. High Effort Scenario: Employment Sector Sector share in total employment (year 2012, %) Deviation from baseline year 2020 (%) Deviation from baseline year 2030 (%) Agriculture (1) 10.0%0.0%5.2% Construction (2) 14.6%2.4%8.3% Electricity (3) 0.7%-26.0%-3.2% Financial services (4) 1.8%0.1%7.1% Industry (5) 11.6%1.2%8.2% Public services (6) 20.8%-0.7%7.6% Other services (7) 10.3%0.3%5.2% Transport (8) 7.3%-0.2%2.9% Trade (9) 19.7%0.2%6.6% Raw material (10) 3.3%-1.4%2.3% Total 100.0%-0.2%6.3% Year Natural unemployment rate (%) Unemployment rate 1 (%) Change in employment (number) 20208,0%7,8% ,0%6,2%

DSGE Model Results All Scenarios

All Scenarios: Aggregates results Scenario GDPEmploymentCO2 emissions Carbon tax (5 US$)*-0,2% -0,4% -3,1%-3,4% Carbon tax (20 US$)*-0,9%-0,8%-1,5%-1,6%-12,3%-13,5% Base effort0,1%4,1%-0,1%3,5%-8,2%-9,3% Middle effort-0,3%6,7%-0,7%5,5%-10,9%-23,4% High effort-0,1%7,4%-0,2%6,3%-12,2%-26,2% Energy efficiency-0,6%3,3%-0,8%2,6%-4,2%-6,2% NCRE0,0%0,6%0,3%-0,2%-3,8%-9,1% Renewables energies-0,1%0,7%0,3%-0,2%-4,1%-15,2% 80/200,2%1,2%-0,3%0,0%-9,9%-18,8%

Macroeconomic Modelling Results: MEMO II Model November 5th, 2014 EconLab III, Cape Town