AMOS Energy CGE Modelling

1. AMOS Energy CGE Modelling Karen Turner Department of Economics and Fraser of Allander Institute University of Strathclyde ESRC Grant Ref: RES-061-25-0010 FAI Brown Bag Seminar

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

3. 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

4. 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

5. 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

6. 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

7. 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

8. Example - AMOS • Originally developed as Amicro 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

9. 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

10. 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

11. 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

12. 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

13. AMOSENVI(5) • KLEM production structure • Input- and output-CO2 coefficients • Calibrated on 1999 Scottish SAM • Scottish IO tables with estimated electricity disaggregation • Pilot region-specific sectoral CO2 accounts

16. 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

17. 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

20. 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

21. 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

22. 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 1st 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