Global and Country Specific CGE Models at the World Bank for Climate Change Analysis

1. Global and Country Specific CGE Models at the World Bank for Climate Change Analysis GovindaTimilsina The World Bank, Washington, DC Skopje, Macedonia March 01, 2011

2. Presentation Outline • Introduction • Global CGE Model • Data for Global CGE Model • Single Country CGE Model • Data for Single Country CGE Model

3. Introduction • Costs of climate change (impacts and mitigation) are carried out at activity or sector level and such analysis does not account the inter-sectoral linkages. Due to inter-linkages between productive sectors; between economic agents and international trade, an activity, if implemented at a large scale, could have economy wide effects; • The impacts or costs measured at the activity or project level could be significantly different from those measured at the economy-wide levels • A GHG mitigation technology, for example, attractive from activity or sectoral approach may not necessarily be attractive if its impacts to the overall economy are accounted for (or the rankings of GHG mitigation options could change)

4. Global CGE Model – Key Characteristics • Multi-sector, multi-region, global recursive dynamic CGE model • The model is flexible enough to accommodate new regions/countries or sectors and is calibrated with GTAP database • Nested CES and CET functional forms to represent production behavior and land supply, respectively • Nonhomothetic Constant Difference of Elasticities (CDE) function form for households • Detailed representation of land-use biofuel sectors • Representation of bilateral and international trade

5. Global CGE Model Structure – Production Sector Nested CES structure of the model for production sectors

6. CGE Model – Production Sector (Cont.) Cost minimization formulation • where VAE is the value added and energy bundle, ND is the non energy bundle. PVA and PND are the prices of VAE and ND, respectively. where X is gross output. VAE and ND correspond to the share parameters for VAE and ND, respectively, and VAEND is the elasticity of substitution between VAE and ND. VAE and ND are the productivity parameters that represent the state of the technology. The indices i, r, v and t correspond to sector, country/region, capital vintage and time, respectively.

7. CGE Model – Production Sector (Cont.) • Derivation of demand and price variables • In the similar manner, all demand and price variables were derived

8. Global CGE Model – Energy Sector Figure 1 (c): Nested CES structure of the model for energy demand

9. Global CGE Model – Land Use Figure 1 (b): Nested CET structure for land supply

10. Global CGE Model – Land Use (Cont.) • Land is split into 18 Agro-Ecological Zones (AEZs) *LGP stands for Length of growing period

11. Model Dynamics and Closure • Medium variant of UN population forecasts • Per capita GDP growth is exogenous (World Bank projections) • Resource prices (e.g., oil price forecasts) are exogenous • Annual sector specific productivity growth (2.1% for agriculture, 1% for service and 2% for manufacturing) • Autonomous energy efficiency improvement (1% ) • Long-term sustainability  Government deficit and capital account are fixed

12. Data & Parameters • Data are coming from the GTAP (Global Trade Analysis Project) database (Purdue University, Indiana) • The database provides SAMs and international trade (bilateral flows, trade barriers) • Database version 7.1 • Year 2004 • 112 countries/regions • 57 sectors

13. GTAP 7.1 – Geographic disaggregation Orange – individual countries; red- combined a regions

14. GTAP 7.1 – Sectoral Disaggregation Energy intensive Agriculture etc. Processed food Services Oth. Manufacturing

15. Regional and sector decomposition • Computational limitations require aggregation of countries/regions and sectors (GTAP: 112 regions & 57 sectors or 112* 57 = 6,384 equations for 1 variable only defined on 2 dimensions) • Focus on main countries/regions producer of biofuels • Keep as much detail as possible for agriculture (especially biofuelfeedstocks) and for energy sectors

16. Key Elasticity Parameters • Elasticity parameters other than related to biofuels and land-use are from Burniaux and Chateau (2010); van derWerf (2008); Timilsina and Shrestha (2006); Ma et al (2010); Jarrett and Torres (1987) and Narayanan and Walmsley (2008). • Elasticity of substitution between biofuels and fossil fuels • Existing studies (e.g., Birur et al. 2007) - 2.0 based on historical data • Increase the value from 1.2 (2004) to 3.0 (2020) to reflect expansion of flex-fuel vehicles • Elasticity parameters for land-use module: • A high value (18) between AEZ (based on literature) • CET elasticity values -- -0.2, -0.5 and -1.0, respectively for top, middle and bottom nests (Choi, 2004; Hertel et al. 2008)

17. Single Country Model: Key Features • Multisector, SAM based general equilibrium model for a country (Thailand, Brazil, Nigeria and Morocco); • It has two regions: the country and the rest of the world (but assumption small open economy) • Number of sectors are flexible based on policy questions to be analyzed (for example, in Thailand 187 sectors are aggregated to 21 sectors) • Deep nested structures for representing the behavior of production and household sectors;

18. Single Country Model: Difference from other models • Has detailed representation of the energy sectors and commodities (e.g., coal, crude oil, natural gas, fuel wood, petroleum refinery, gas processing and electricity generation); • The electricity sector is further divided into seven sub-sectors: hydro; coal-, oil- and gas- fired steam turbine; oil- and gas- fired combined cycle; and diesel fired internal combustion engine; • Refined petroleum products are divided into three category: gasoline, diesel and others • Land use and biofuels are explicitly represented to allows modeling of GHG mitigation options in the land use change and forestry sector

19. Single Country Model: Production Structure(Excluding transport, agriculture and forestry sectors)

20. Single Country Model: Production Structure(transport sector)

21. Single Country Model: Production Structure(Agriculture and forestry sectors)

22. Single Country Model: Land Supply

23. Single Country Model: Electricity Supply

24. Modeling Challenges • CGE models, normally do not have technology level details of production sectors, especially when a production sector is an aggregate of several sub-sectors, which in turn are aggregate of several technologies (e.g., food & beverage sector, chemical sector) • Since CGE models are based on database of a base year (SAM), modeling a technology which does not exist in the base year is difficult (although there might be some tricks) • Since MAC curve is a product of a separate models/modules outside the CGE model, there exits always a danger of inconsistencies on assumptions on the common economic variables (e.g., GDP growth, price assumptions, etc.) • Precise estimation cost of climate change impacts is difficult if not impossible.

25. THANK YOU Govinda R. Timilsina Sr. Research Economist (Climate Change & Clean Energy) Development Research Group The World Bank 1818 H Street, NW Washington, DC 20433, USA Room: MC3-451 Mail Drop: MC3-300 Tel: 1 202 473 2767 Fax: 1 202 522 1151 E-mail: gtimilsina@worldbank.org