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Water Economic Modeling for Policy Analysis:A CGE approach to estimate the direct and indirect economic costs of water quality improvements in the WFD
Institute for Environmental Studies (IVM)
Presentation for the International Workshop on User-Producer Conference: Water
Accounting for Integrated Water Resource Management, Voorburg, May 23, 2006
Vincent LINDERHOF (Institute for Environmental Studies, Vrije Universiteit)
2
Outline
Introduction WEMPA AGE Model
Economy Environment Linkage
Data Results (preliminary) Potential and issues of the model
3
Introduction WEMPA
• The ‘Directorate-General Water’ of the Ministry of Transport, Public Works and Water Management would like to have insight in direct and indirect economic costs of WFD measures.
• Donors: – ‘Directorate-General Water’ and – Leven met Water (Living with water)
• Participating organizations:– Institute for Environmental Studies (IVM), Vrije
Universiteit– Agricultural Economic Research Institute (LEI)– Statistics Netherlands (CBS)– RIZA– WL Hydraulics
4
WEMPA Approach
Modular approachTop-down modeling starting with economic
model
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WEMPA Modular approach
GeneralEquilibrium
model
Economic sector models
Up/down scaling model
Water quality and ecological
models
Emissionmodels
Input loadmodels
River basins
WFD (programs of
measures)
Rhine Meuse Scheldt Ems
Economic instruments
6
WEMPA Approach
Modular approachTop-down modeling starting with economic
modelUse of existing knowledge
– Models (AGE-SNI, DEAN from IVM, Substance flow model from RIZA/WL)
– Data (NAMWA and National Accounts from CBS, abatement technologies from experts)
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Model
• Integrated assessment model of IVM including the economy and physical flows.
• Static Applied General Equilibrium (AGE) Model for the Dutch economy– Measures instant costs and losses in Net
National Income – No technological changes over time
• Objective: maximization of Net National Income subjected to environmental constraints
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Model: economy
• Static AGE model with 27 production sectors (38 or even 58)
• Production structure: nested Constant Elasticity of Transformation/Substitution (CET/CES)
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Model: Nested CES structure
Output
Unabatable Emissions
Abatable Emissions
Abatement Measures
Intermediates Capital Labour
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Model: economy
• Static AGE model with 27 production sectors• Production structure: nested Constant
Elasticity of Transformation/Substitution (CET/CES)
• Three consumers: private households (luxury and subsistent consumption), government, the Rest of the World
• Consumption structure: price and income elasticities given
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Model: economy
• Environmental sectors– Abatement sector: demand and supply of
abatement technologies– Emissions and abatement enter production
functions as inputs– Emission permits: demand and supply of
emission permits given the total amount of emission permits based on the emission norms
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Model: Dutch economy in an AGE model
GovernmentEndowments
Consumption Emissions
Consumption OutputConsumers Producers
Endowments Input
Gross Investm. Depreciation
Capital UseInvestor Capital Sector Capital Goods
Net investments
Tax
Tax and Rent
Subsidies
Net Savings
Market for Goods and Factors
Market for Emission Units
Budget Surplus
Budget Surplus
Tax
Subsidies TaxRents
TaxTax
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Model: environment
• NAMWA data from Statistic Netherlands • Two physical flows (environmental themes)
– Eutrophication (NAMWA)• 10 kg N = 1 kg P = 1 Phosphor eq.
– Dispersion of toxic substances to water (NAMWA)• 1 Aquatic Eco-Toxicity Potentials (aetp equivalents)
equals – 6.3 kg Arsenic – 217.4 kg Chromium – 3.4 kg Cadmium– 3.2 kg Cupper– 3.6 kg Mercury– 0.3 kg Nickel– 666.7 kg Lead– 55.6 kg Zink
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Model: environment
• Input in model (NAMWA)– Emission intensity (per sector); – Abatement technologies (costs and reduction
potential from experts); – Emission standards (will be derived from water
quality standards)
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Example of abatement cost curves
Enhanced greenhouse effect, 2000
0
2000
4000
6000
8000
10000
12000
14000
16000
0 50 100 150 200 250 300
Trillion CO 2 equivalents
Mil
lio
n E
UR
Os
16
Model: environment
• Input in model (NAMWA)– Emission intensity (per sector); – Abatement technologies (costs and reduction
potential from experts); • List of measures off which some are policy
scenario based
– Emission standards (will be derived from water quality standards)
• All environmental themes are equal to or are less than the emission norm imposed
• Interactions between environmental themes
17
Model: environment
• Trade-off for meeting emission standards: – Investment in abatement technologies or– Costs of emission permits– If marginal costs > Marginal investment, then reduce
economic activities and consequently reduce emissionsRemark 1: if economic volume declines, the reduction
potential of abatement technologies declines as well!Remark 2: high intensity sectors are likely to invest first,
but this depends largely on the economic structure
• Emission permits scheme– Amount of permits are determined by the emission
norms– Revenues are recycled into the economy
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Example of Abatement technologies
Enhanced greenhouse effect, 2000
0
30
60
90
0 50 100 150 200 250
Trillion CO2 equivalents
Bil
lion
eu
ros
Sustainabilitystandard
SNI 2
Enhanced greenhouse effect, 2000
0
2000
4000
6000
8000
10000
12000
14000
16000
0 50 100 150 200 250 300
Trillion CO 2 equivalents
Mil
lio
n E
UR
Os
19
Results (1)
• Three scenarios: 10%, 20% and 50% reduction of emissions: the exact emission norms derived from WFD are yet unknown
• Two variants– Variant I: No changes in relative world market
prices– Variant II: Changes in relative world market
prices
• Results are very preliminary
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Results (2)
Reduction of Net National Income (NNI)due to emission norms derived form WFD
0
10
20
30
40
50
60
70
80
10% 20% 50%
Bil
lion
eur
os
No changes of world market prices Changes of world market prices
21
Results (3) two scenarios for Variant II
Relative reduction in value added of industries: scenarios comparison
0.0 10.0 20.0 30.0 40.0 50.0 60.0
Transport by land
Elektrotechnical industry
Non-commercial services
Textiles, clothing and leather industry
Transport equipment industry
Paper and -board industry
Transport by water
Rubber- en plastics industry
Chemical industry
Basic metal industry
10% scenario
50% scenario
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Results (4) direct vs. indirect costs (preliminary)
• “Direct costs” = Investments in abatement technologies
• “Indirect costs” = Loss in Net National Income minus investments
10% 20% 50% 10% 20% 50% 10% 20% 50%Variant I 2,32 2,36 2,41 3,24 6,07 23,44 42% 28% 9%Variant II 2,33 2,36 2,33 3,23 6,07 77,1 42% 28% 3%
Direct costs (billion €) Indirect costs (billion €) Share of direct costs
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Results (5) Regional impact (NAMWARiB)
Rhine-West 51%
Rhine-Centre 8%
Rhine-East 11%
Rhine-North 5%
Scheldt 2%
Meuse 20%
Ems 3%
Example of the distribution of direct and indirect costs across river basins for a 50% emission reduction scenario
24
Future improvements
• Dynamic model (DEAN)• Substances instead of environmental themes• Sector-specific but generic abatement
technologies• Regional distinctions but production sectors
(growth expectations)• Extension of priority substances, such as
POP’s, PCB’s and dioxines• No physical water flows
25
Thank you!
• More information on our project Water economic mosdeling for Policy Analysis (WEMPA):
• http://www.ivm.falw.vu.nl/watereconomicsThank you!
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