1. Dr. Athanasios Dagoumas & Dr. Terry Barker
Implementing the G8 80% target with the macro-econometric E3MG model: The case of the UK
Dr. Athanasios Dagoumas & Dr. Terry Barker
Hellenic Transmission System Operator S.A.
Cambridge Centre for Climate Change Mitigation Research (4CMR)

2. Outline E3MG model Theory and structure
Energy system modelling within the E3MG
Implementing the G8 80% reduction target
Results presented for the UK
Conclusions

3. Introduction
E3MG is an integrated Economy-Energy-Environment (E3) model
E3MG is one of a suite of E3 models:
MDM-E3: Multisectoral Dynamic Model of the UK Economy, including energy-environment-economy (E3) interactions
E3ME: E3 Model of Europe
E3MG: E3 Model at the Global level
All follow the same overall principles in their economics, construction and operation (Econometric, dynamic, structural, post-Keynesian, hybrid)

4. “New economics” modelling approach
Simulation, econometric, dynamic, structural, “new economics”
Structural: 20 regions, 42 industries, 19 energy users, 12 energy carriers
Organized around a Social Accounting Matrix e.g. System of National Accounts
Dynamic (behavioural equations with effects from previous outcomes: i.e. history matters)
Estimated on cross-section & time-series data
Forward-looking (projections annually or in 5 or 10 year steps)
Social institutional groups (heterogeneous not representative agents)
Hybrid (incorporates submodels e.g. Energy Technology Model)
Demand driven, treatment of uncertainty
Endogenous technological change, learning-by-doing and learning-by-researching
Structured into regions of political importance
Stochastic parameters are location and time specific
Comprehensive (whole E3 system, all sectors, many policy instruments)
Open as regards economic policy, i.e. no assumptions of full employment, budget balance, or balance of payments equilibrium

5. Engineering-Energy-Environment-Economy Interactions
as in national
accounts
TECHNOLOGY
specifications &
costs
ENVIRONMENTAL
EMISSIONS
as in environmental
statistics
ENERGY
as in energy
damage to health and buildings
e.g. industrial emissions of SF6
funding R&D
prices
and
activity
low-carbon
processes &
products
feedback
energy-saving
equipment etc
fuel use
pollution-
abatement
equipment

6. Energy system modelling within the E3MG

7. Energy system modelling
The main energy submodel
Determines aggregate and disaggregate energy demand by fuel user and prices of fuel use
Provides feedback to main economic framework
In E3MG this 'top-down' approach is supplemented by a set of 'bottom-up' engineering submodels
the Energy Technology Model (ETM)
provides fuel use for power generation that replaces the econometric estimates.
the Transport submodel
Provides fuel use for electric vehicles

8. Energy demand modelling
No explicit production function
2-level hierarchy: aggregate energy demand equations and fuel share equations
Aggregate demand affected by:
industrial output of user industry, household spending in total, relative prices, temperature, technical progress indicator
Augmented by time trends and/or accumulated investment to represent energy efficiency improvements
Some users’ aggregate demands are affected by upward movements in relative prices only (ratchet or asymmetrical price effects)
Fuel share (disaggregate energy demand) equations depend upon:
activity, technology, relative price effects and temperature
Error Correction Model (ECM) - in the econometric equations- distinguishes between long-term and adjustment parameters

9. The ETM submodel of the E3MG
A simulation not optimization model where:
Dispatch of electricity generation units is based on history besides economic, technical and environmental issues
Electric system expansion considers
Investment in new technologies from relative costs
Learning curves from cumulated global investment

10. Market share & Frequency distribution of relative prices
the smaller the standard deviation, the larger the α)
Elasticity of substitution α
(the narrower the distribution –
Market share (1 means 100%)
Relative price of marker to technology i
(1 means the cost the same)

11. Implementing the G8 80% reduction target
with the E3MG:
The case of the UK

12. Policies
Emission reduction and stabilization targets are considered as part of an international effort and are achieved through a portfolio of policies:
Carbon pricing (Carbon trading for ETS sectors / Carbon Tax for rest of the economy).
Revenue recycling (e.g. through auctioning carbon permits) to:
Incentives for electricity technologies.
Accelerated diffusion of electric plug-in vehicles through technological agreements and behavioural shift in transport.
Incentives to energy-intensive industries to low-carbon production methods.
Incentives for investments in energy efficiency in households, (by improving the energy efficiency of domestic dwellings and appliances and for introducing new ones such as low-emission dwellings and solar appliances).
Accelerated carbon price increase at an earlier year e.g. 2030

13. Energy Efficiency Policies
Considered no-regret options (low or negative cost):
Investments are offset from gains due to reduced energy consumption
Source: IEA/ETP2008

14. Primary Energy Demand for the UK for the period 2005-2050
Reference Scenario G8 80% reduction Scenario
Final and Primary energy demand is decreased significantly, by about 65%, for the G8 80% reduction scenario compared to the reference scenario. This comes from both efficiency improvements and from behavioural changes (which offset the rebound effect).

15. Final Energy Demand by fuel for the UK for the period 2005-2050
Reference Scenario G8 80% reduction Scenario
Electricity demand is increased during the electrification of transport
Gas and oil demand is decreased

16. Final Energy Demand by sector for the UK for the period 2005-2050
Reference Scenario G8 80% reduction Scenario
Transport demand is decreased more compared to other sectors. This is attributed to shift to electric vehicles, which are more efficient to conventional fuel vehicles (and behavioural changes).

17. Installed Capacity for the UK for the period 2005-2050
Reference Scenario G8 80% reduction Scenario
Renewables, CCS and Nuclear penetrate significantly.
Plug-in vehicles work in favour of renewables (wind)

18. Sectoral Emissions for the UK for the period 2005-2050
Reference Scenario G8 80% reduction Scenario
Power sector is almost decarbonised, affecting also transport emissions

19. Carbon Price for the UK for the period 2005-2050
Reference Scenario G8 80% reduction Scenario
A very high carbon price is needed to boost green investments
The carbon price is a price signal of the value needed (e.g. a guaranteed price) to address economic and climate uncertainty
An alternative of the high carbon price is regulation (not modeled here)

20. Investments per sector for the UK for the period 2005-2050
Reference Scenario G8 80% reduction Scenario
Investments are increased for the services, residential and transport sectors where the energy efficiency improvements are higher compared to other sectors e.g. industry and power sector. There already exist energy inefficiencies in the system (e.g. no regret options)

21. GDP, Investments and Consumers Spending for the UK
Reference Scenario G8 80% reduction Scenario
GDP is slightly increased for the 80% reduction scenario compared to the reference scenario.
Revenue recycling helps economy to grow

22. Conclusions
Emission reduction targets are implemented through a portfolio of policies.
Carbon pricing should be accompanied with other policies (e.g. auctioning, revenue recycling, incentives, regulation, behavioural shift).
Critical issues for meeting deep reduction targets are:
“Decarbonisation” of power sector,
Renewables, Nuclear and CCS can penetrate significantly.
Electrification of transportation
Help the penetration of renewables (wind) through tariff systems
Energy demand reduction through
price response, regulation, improved efficiency and behavioural shift.
Inclusion of induced technological change
significantly reduces the costs of stabilisation
in a demand-led model, it generally leads to higher growth

23. Conclusions High carbon price signal
If policies are successful in raising real carbon prices, the extra investment leads to higher global growth & welfare
if inflation is unaffected and governmental fiscal rules are followed
but uncertainties to be investigated
Does not view higher carbon prices as necessarily a constraint on economic growth
Pathways exist for meeting deep reduction targets and also boosting the economy.