Introducing the Water-Energy link in a General Equilibrium Model: ICES-WN

The Water-Energy-Food Nexus is a theme increasingly under the spotlight of both the academic and the policy making community. Its relevance derives from the fact that all the elements of the Nexus are subject to the risks of exhaustion and overexploitation and are fundamental for the construction of human wellbeing and sustainable development paths. Despite its importance to fully understand the economic consequences of policies and macroeconomic shocks, the explicit representation of all its elements in General Equilibrium Models is still significantly underdeveloped. The aim of this paper is therefore to modify a GTAP-based Computable General Equilibrium Model (ICES) to improve the representation of the Nexus in the model and to develop ICES Water Nexus (ICES-WN). The improvements in ICES-WN respect to the original version are mainly two: 1) the implementation of a wider database that includes a water value added for the energy sector and 2) the modification of the original production function, in accordance to the guidelines of the most recent literature. The different versions of the model are then tested with systematic shocks on the water endowment supply in order to simulate water scarcity scenarios and evaluate their behavioural and economic coherency. The paper specifically address the impacts of different water scarcity scenarios on the global GDP, as well as the regional trends for sectoral outputs, prices, and imports in the different specifications. Moreover, it analyse the implications in terms of water use shares and water competition in the final version. The conclusions underline the importance of the introduction in the production structure of all the links of the Nexus, as well as the importance of having a realistic function, since different constructions can significantly affect the simulation’s results.