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Macroeconomic Consistency issues in E3 Modeling: The Continued Fable of the Elephant and the Rabbit

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  • Frederic Ghersi and Jean-Charles Hourcade

Abstract

Starting from a short presentation of the limits of using conventional production functions to hybridize energy-economy relationships, this paper presents a methodology aiming at a better integration of bottom-up policy scenarios in a top-down static general equilibrium framework. Along the lines of AhmadÕs innovation possibility curve, the methodology consists in implementing top-down envelopes of production and demand functions, whose variable point elasticities of substitution provide a flexible interface for calibration on any bottom-up expertise. Numerical experiments assessing the impact of a rising carbon tax on the global 2030 economy compare the application of this methodology to that of two standard CES-based approaches. Results confirm that, in case of large departures from reference scenarios or of strong convexities in bottom-up results, the use of conventional CES production and utility functions may lead to a significant bias in cost assessment.

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  • Frederic Ghersi and Jean-Charles Hourcade, 2006. "Macroeconomic Consistency issues in E3 Modeling: The Continued Fable of the Elephant and the Rabbit," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 39-62.
    • Handle: RePEc:aen:journl:2006se_jaccard-a03
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