Dynamic (GTAP) model and baseline for energy and environment issues

Dynamic CGE models are widely used in research on long-term energy and climate policies. Whilst a range of models exist, their emphasis is clearly on energy products. For a more general evaluation of energy and climate related policies on e.g. evolution of production structures, in combination with changes in macroeconomic characteristics, like aging population and increased labour skill levels, the GTAP data and Dynamic Model provide an appealing tool. However, the latter does not take into account the special characteristics of the energy products and the policy instruments such as emission trade. This paper presents a modified version of the dynamic GTAP-model and a long-run baseline, constructed particularly for analysis of energy and environment issues. The model incorporates CO2 emissions accounting and trading, as well as substitution between alternative forms of energy following the principles introduced in the GTAP-E model. The baseline includes, apart from the standard macroeconomic projections, assessments of new technologies enhancing energy use and production. Some example simulations illustrating the effects of alternative growth assumptions using the model and baseline are also given. The additional model features are implemented in a manner that allows flexibility with regard to sector and region aggregation and the sets of energy commodities. Whilst the basic principle builds primarily on the solutions incorporated in the GTAP-E model, changes are made to the defining of additional sets and, more importantly, to the treatment of emissions trade participation. This is required to enable gradual extension of trading area and flexible simulation of alternative policy options. An attempt is also made to extend the energy commodities to alternative sources, especially biofuel, as GTAP data provides an excellent framework for analysing the topical issues related to energy and food supply. The macroeconomic variables for a long-run baseline, reaching up to year 2050, are compiled from various international sources and calibrated. These variables include projections for population, skilled and unskilled labour force, and total factor productivity. In addition, with help of energy technology systems models, estimates are produced for increase in energy efficiency and for technological change enhancing energy production.