Introduction to GEM-E3 (with special emphasis on impacts assessments) (JRC PESETA II project)

1. Introduction to GEM-E3 (with special emphasis on impacts assessments)(JRC PESETA II project) • Juan-Carlos Ciscar * • Potsdam, September 18, 2013 * The views expressed are purely those of the authors and may not in any circumstances be regarded as stating an official position of the European Commission

2. Outline GEM-E3 Model JRC PESETA II, EU assessment Conclusions

3. The GEM-E3 Model:General Equilibrium Model for Energy-Economics-Environment interactionswww.GEM-E3.net

4. The GEM-E3Model:The Development The model is a result of a collaborative effort by a consortium involving: Core modelling team National Technical University of Athens (Coordinator) Catholic University of Leuven (Centre for Economic Studies) University of Mannheim and Centre of European Economic Research (ZEW) Contributors University of Toulouse (IDEI) University of Strathclyde Stockholm School of Economics Ecole Centrale de Paris (ERASME) Catholic University of Leuven (CORE) Middlesex University Partially funded by the European Commission, Programme JOULE, DG-XII/F1

5. The GEM-E3 Model: Overview (1/3) Computable General Equilibrium model representing multiple production sectors and countries integrating energy and environment in the economy to simulate the simultaneous competitive equilibrium of all markets: goods, labour, energy, pollution permits etc.; the endogeneous response of producers/consumers to environmental/energy policies (abatement, policy limits, taxes); to evaluate costs and benefits (including the environmental dimension) distributional effects of policy instruments (different taxes and subsidies, auctioning, permits, command-and-control)

6. The model simulates an economy with: multiple sectors, each producing a homogeneous commodity a single representative firm operates in each sector minimizing cost under CRTS technology deriving optimal demand for production factors (including all other commodities, labour and capital) a single representative household maximizing utility allocating revenues to consumption of commodities and savings determining labour supply and a Government ensuring transfer distribution and applying policy through taxes, consumption, investments etc. The GEM-E3 Model: Overview (2/3)

7. The economy is open to foreign competition Imported goods combine with domestic production to form supply Consumers (final, intermediate, government etc.) may substitute domestic and foreign commodities to form demand The stock of capital is fixed within the period (either sectorally or for the country or World wide) Constraining production possibilities in static terms while dynamically accumulating (through investments) Labour market includes unemployment The GEM-E3 Model: Overview (3/3)

8. The GEM-E3 model: Framework Data: Input/Output tables(GTAP-8) Bilateral Trade matrices (GTAP-8) Employment Environment Mixed Complementarily formulation using GAMS/PATH solver Templates for scenario building and result reporting Baseline scenario

9. The GEM-E3 model sectors 19 Sectors Agriculture Coal Refined Oil and coke Crude oil Gas Electricity transmission and distribution Ferrous & non-ferrous, ore, metals Chemical Products Other Energy-Intensive Industries Electrical Goods Transport Equipment Other Equipment Goods Industries Consumer Goods Industries Building And Construction Land Transport Air Transport Water Transport Other Market Services Non-Market Services

10. Power technologies 10 Power Technologies Coal Conventional thermal Oil Conventional thermal Gas Conventional thermal Nuclear Biomass Hydro Wind PV & Solar Coal CCS Gas CCS

11. The GEM-E3 regional detail • All EU27 member states individually represented • USA • Canada • Japan • Oceania • China • India • Russian Federation • Brazil • Rest of Annex I • RoW

12. The GEM-E3 variables and parameters Exogenous Endogenous (volumes values and deflators) • Population • Government consumption and investment • Government tax, subsidy and social benefit policies • Technical Progress • Total Factor Productivity • Technical Progress Embodied in Production Inputs • Elasticity Parameters • Technical coefficients in investment and consumption matrices • All the elements of the Social Accounting Matrix • Consumption by purpose • Investment and Capital • Bilateral Trade • Labour market participation employment and unemployment • Basic Interest Rate • Emissions and damages • Welfare and GDP Index

13. The GEM-E3 Model: Simulation

14. GEM-E3 SAM

15. Economic circuit The model computes the price vector that simultaneously clears the product, capital and labor markets

16. Advantages of CGE modelling Consistency Theory (microeconomics foundations, within a consistent macroeconomic framework) Data (National Accounts, SAM) Structural model (versus reduced-form models): explain behavior of agents in markets, taking into account institutions Takes fully into account the spill-over effects across sectors, consumers, government and other countries Transparency Systematic analysis; not mechanical Flexibility Can address a broad range of policy issues: climate and energy, taxation, trade, agriculture, etc.

17. Criticisms / disadvantages of CGE modelling Weak empirical validation (calibration versus econometric estimation) The critical role of functional forms Simplification of exogenous elements of the model Data requirements Heavy computational load

18. 2. JRC PESETA II project

19. EU Adaptation Strategy Following the Green Paper (2007) and White Paper (2009) on adaptation, the EU Strategy on Adaptation to Climate Change was adopted in April 2013 (European Commission Communication) The JRC PESETA II project provides background evidence on climate impacts in the Impact Assessment of the Communication.

20. Questions of interest What are the climate impacts (reference and 2ºC) What are the distributional implications of climate impacts? Fairness and equity issues How much adaptation can reduce climate impacts? Are spatial (cross-country) spillovers significant?

21. Integrated, granular modelling Multi-disciplinary impact assessment Soft-link of models High space-time resolution of climate data (T, P, other), common to all impacts (considers spatial correlation) Run detailed physical impact models for each impact category Integration of market impact results under a Computable General Equilibrium (CGE) model: overall economic effects, direct + indirect; trade effects

22. 3 stages in the integration

23. PESETA II Project strategy Building climate impact modeling capabilities at JRC Existing data and resources within JRC Operational and research models Learning-by-doing within JRC To support the EC services on adaptation policy EU adaptation strategy DG AGRI, CLIMA, ENER, ENV, MOVE, REGIO, Others

24. Climate models (A1B) • ensemble of 12 RCM/GCM combinations • spatial resolution of 25 km

25. Climate models (E1) • spatial resolution of 50 km • 3 runs with same RCM-GCM combination • different boundary conditions GCM • captures much less uncertainty in future climate for E1

26. Temperature change (°C) in climate runs for 2071-2100, compared to 1961-1990

27. PESETA II Impact categories Sectoral impact categories teams - Agriculture physical modelling (IES) - Agriculture economic modelling (IPTS) - Forest fires (IES) - Tree species habitat suitability (IES) - River flood (IES) - Tourism (IPTS) - Energy (IPTS) - Transport (IPTS) - Human health (IPTS) - Climate tipping points (IPTS) CGE modeling for the integration

28. Climate data input per impact category

29. Preliminary economic results(Impact Assessment of 2013 Adaptation Strategy)(based on JRC PESETA II, and FP7 ClimateCost results for Agriculture and Coasts)

30. Shock implementation into GEM-E3

31. Reference run, 2080s (Welfare change, million €) Source: JRC PESETA II, ClimateCost (agriculture, coasts)

32. Reference run, 2080s (Welfare change, % of GDP)

33. Regional welfare change (%GDP), Reference and 2ºC

34. Coastal impacts, 2080s, adaptation (Welfare change, million €)

35. Uncertainty: Range of impacts for River Floods (Welfare change, million €)

36. Transboundary effects (Welfare change, million €)

37. Conclusions • - JRC PESETA II as a pilot study: soft-linking of JRC models • - Fruitful cooperation within JRC • Contribution to IA of Adaptation Strategy • Next • Water, land use • Non-market impacts, extremes • Dynamic perspective: climate change and growth • Damage function derivation?

38. Thanks for your attention! juan-carlos.ciscar@ec.europa.eu http://peseta.jrc.ec.europa.eu/