AMOS Energy CGE Modelling Karen Turner Department of Economics and Fraser of Allander Institute University of Strathclyde ESRC Grant Ref: RES FAI Brown Bag Seminar

Overview Policy issues Model requirements Computable general equilibrium modelling Development of the AMOSENVI framework Current and future research

Policy issues Impacts of changes in economic conditions and/or policy on environmental/sustainability indicators Sustainability – global and local concerns UK – regional and national focus Supply-side issues Energy and/or carbon taxation Resource productivity, energy efficiency Changes in technology Demand-side issues Nature and structure of energy demand and use Elasticity of energy demand

Requirements for energy-economy- environment modelling Multi-sectoral modelling Different energy-use and pollution generation characteristics of different production and consumption activities System-wide Interaction between different production and consumption activities

Input-output accounting and modelling Input-output accounts Snapshot of economic activity Multi-sectoral, economy-wide Single entry book-keeping Regional and national accounts Multiplier analysis Input-output models Assumptions Simple, transparent form of general equilibrium modelling Popular with policymakers But restrictive – demand or supply, prices or quantities, universal Leontief technology

Computable general equilibrium (CGE) modelling (1) IO database Extended to social accounting matrix (SAM) Labour supply and demand, capital stocks, investment demands Key: analytical work with IO/SAM – structural characteristics Theoretical origins: Walrasian general equilibrium theory In practice: wide variety of approaches, assumptions and focus

Computable general equilibrium (CGE) modelling (2) Common features: Both supply and demand matter Prices and quantities modelled simultaneously Data inform about structure Modelling based on theory and observation of behavioural relationships, market interactions Involves making assumptions Should be transparent and subject to sensitivity analysis

Example - AMOS Originally developed as A micro and macroeconomic Model Of Scotland 3-sector, single region Now N-sector, single and inter-regional Particular focus on regional labour markets Recent developments – energy-environment, linked demographic model

AMOSENVI (1) Environmental impact version of AMOS N-sector – identify sectors with distinct energy supply/use and/or pollution generation characteristics Initial version – emphasis on pollution generation – Leontief ouput-pollution coefficients –Captures changes in pollution due to scale and composition effects –But not due to input substitution and technology effects ESRC funded project ‘Modelling the impacts of sustainability policies in Scotland’ –Link pollution generation to energy input use –Introduction KLEM production structure – substitution between energy and other inputs

AMOSENVI (2) 3 transactor groups – households, firms, government 25 commodities and activities (5 energy supply) Two exogenous external transactors (RUK and ROW) Commodity markets taken to be competitive Scotland modelled as a small open economy

AMOSENVI(3) AMOSENVI (3) Assume cost minimisation in production Multi-level production functions Four major components of final demand: Government expenditure – exogenous or endogenous Consumption a linear homogenous function of real disposable income Exports (and imports) determined via an Armington link (relative price sensitive) Investment

AMOSENVI(4) AMOSENVI (4) Single Scottish labour market Perfect sectoral mobility Wages subject to a regional bargained real wage function Labour and capital stocks updated between periods Capital – investment equals depreciation plus fraction gap between desired and actual capital stocks Population updating via migration function

AMOSENVI(5) AMOSENVI (5) KLEM production structure Input- and output-CO 2 coefficients Calibrated on 1999 Scottish SAM Scottish IO tables with estimated electricity disaggregation Pilot region-specific sectoral CO 2 accounts

Application of AMOSENVI Debate in literature: “rebound” and “backfire” effects Policy concern – House of Lords (2005) report on energy efficiency Khazzoom-Brookes Postulate (KBP) –Jevons (1865) – “confusion of ideas” regarding productive use of fuel and diminished consumption – increase utility, impact on implicit prices Will an increase in efficiency of energy use lead to increased or reduced consumption of energy? E.g. increase energy efficiency by 5% No rebound or backfire – reduce energy consumption by 5% Rebound – reduce energy consumption by less than 5% Backfire – increase energy consumption Efficiency effects vs substitution, income and output effects General equilibrium effects

Case study: Scotland Rebound and backfire effects Difference in direction of effects over short- and long-run Key parameters governing the extent of rebound and backfire: Elasticities of substitution in production Energy and non-energy intermediates Value-added and intermediates RUK Export demand elasticity Target of shock Implications of variations in sectoral energy supply and use characteristics

Case study - UK Scottish results driven by fact Scotland is a net exporter in electricity to RUK Also, nature of shock (somewhat blunt, and targeting Scotland only, in a single region model) DEFRA project with UKENVI model (UK national economy) No backfire Elasticities of substitution dominate rather then export elasticities (particularly energy/non-energy) Time pattern different – rebound bigger in short-run than in long-run

Key conclusion Extent of rebound and backfire effects is always and everywhere an empirical issue A large number of parameters potentially important for influencing general equilibrium effects Elasticities of substitution in production important But other characteristics such as Openness of the economy in question Elasticity of supply of other inputs Energy intensity of individual production sectors and final consumption activities Elasticity of substitution between commodities in consumption Income elasticities of demand for commodities

Current and future research EPSRC projects (ongoing) Inter-regional CGE framework for UK More sophisticated modelling of electricity production and markets Extension of policy applications – e.g. changes in technology, carbon/energy taxation ESRC 1 st grant project (start October 07) Analysis of factors governing energy rebound effects in the UK economy Introduce different hierarchical production and consumption activities Identification different household consumption groups and consumption activities Focus on key production and consumption activities Econometric estimation of key functions and parameters Examination of a wider range of policy scenarios Systematic programme of simulation, sensitivity and scenario analysis Contribute to evidence base on extent to which economy-wide rebound effects are likely to occur in UK, and nature of effects Development of energy-economy-environment CGE modelling framework for application to a wider range of regional and national economies, and policy issues