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Rob Dellink — Modelling the costs of environmental policy 1
Dynamic CGE Modelling
for Analyzing Environmental Policies
Ekko van Ierland and Rob Dellink
[email protected] [email protected]
or: www.enr.wur.nl/uk/staff/dellink/
Rob Dellink — Modelling the costs of environmental policy 2
Set-up of the presentation
Aim: assessing the costs of Dutch environmental policy by developing a dynamic AGE model with special attention to pollution and abatement (DEAN)
Introduction
Overview of the model
Data and policy scenarios
Main results
Concluding remarks
Rob Dellink — Modelling the costs of environmental policy 4
Overview of the DEAN model
Multi-sector dynamic Applied General Equilibrium model
– perfect-foresight behaviour: Ramsey-type model
Environmental module: pollution and abatement– pollution and abatement are present in the benchmark
No impact from environment to economy– no amenity value of environmental quality– no damages from environment on economy– no efficiency analysis, just cost-effectiveness
Model specified in GAMS / MPSGE & available on website
Rob Dellink — Modelling the costs of environmental policy 5
Specification of economic activity Multi-sector Applied General Equilibrium model
– description of the national economy– producers: profit maximisation under perfect competition– consumers: utility maximisation under budget balance & LES structure– equilibrium on all markets (Walras’ Law)– individual agents are price takers; no money illusion
International trade– small open economy– domestic and foreign goods are imperfect substitutes (Armington)– no international co-ordination of environmental policy
Rob Dellink — Modelling the costs of environmental policy 6
Specification of economic growth Dynamic model
– perfect-foresight behaviour: Ramsey-type model with finite horizon– exogenous increase in labour supply– endogenous accumulation of capital and greenhouse gasses
Comparison of dynamic behaviour in Chapter 3– comparative-static specification– recursive-dynamic specification– perfect-foresight speciciation– comparison uses small version of the model
Rob Dellink — Modelling the costs of environmental policy 7
Specification of pollution
Environmental themes– individual pollutants aggregated using ‘theme equivalents’– interactions within theme fully taken into account
Polluters need pollution (permits) for their activities– necessary input of production process / utility formation– tradable permit system implemented in the benchmark– autonomous pollution efficiency improvements
Government auctions pollution permits – environmental policy implemented as restriction of number
of permits– revenues are recycled lumpsum to private households
Rob Dellink — Modelling the costs of environmental policy 8
Specification of abatement
Using bottom-up technical abatement information– costs and effects of end-of-pipe and process-integrated options: discrete modelling of all available options is practically infeasible– measures ordered by increasing marginal abatement costs– technical potential: in the short run not all pollution can be abated– ‘spending effects’: inputs in Abatement production function
Endogenous choice between (i) paying for pollution permits or (ii) investing in abatement or (iii) reducing activity level
Estimation of “Pollution - Abatement Substitution” (PAS) curves: limited substitution between pollution and abatement
Rob Dellink — Modelling the costs of environmental policy 9
From MAC to PAS
0
20
40
60
80
100
120
0 20 40 60 80 100 120
Emissions (in % of current level)
Cu
mu
lati
ve a
bate
men
t costs
(in
% o
f m
axim
um
)
Data abatement costs
PAS curve
Technical potential
Current pollution level
Sustainabilityestimate
Short-termpolicy target
Rob Dellink — Modelling the costs of environmental policy 10
Abatement as an economic good Abatement modelled like ‘normal’ production
sector– abatement goods are demanded by all polluters (on a perfect market)– decisions on ratio between pollution and abatement are reversible
The ‘Abatement sector’ production function– nested CES production function– labour, capital and produced goods are inputs in abatement sector production function (the ‘spending effects’)– changes in input costs leads to changes in marginal abatement costs (mainly changes in labour productivity)
Autonomous pollution efficiency improvements
Rob Dellink — Modelling the costs of environmental policy 11
Structure of the production functionOutput
Environmental Services
0
Production
Intermediate deliveries
LabourCapital
KL
Y
ID
Pollution permits -unabatab
le part
Abatement
0
PAS
Pollution permits -abatable
part
Rob Dellink — Modelling the costs of environmental policy 13
Calibration of the model
Environmental themes– Climate change, Acidification, Eutrophication, Smog
formation, Dispersion of fine dust, Desiccation, Soil contamination
Benchmark projection– model calibrated to the Netherlands, accounting matrix
for 1990– balanced growth of 2% per year – theme-specific autonomous pollution efficiency
improvements– 27 production sectors– 1 representative consumer for all private households– 1 government sector: existing distortionary taxes
Rob Dellink — Modelling the costs of environmental policy 14
Data sources
Description of initial situation in 1990– Social Accounting Matrix: Statistics Netherlands (National
accounts)– emissions: Statistics Netherlands / RIVM– abatement cost curves: own compilation based on various
sources, including RIVM and ICARUS
Growth rates– own calculations based on data for 1995 and 2000
Parameters– elasticities: extended Keller model / SNI-AGE model– other parameters: existing literature
Rob Dellink — Modelling the costs of environmental policy 15
Policy scenarios
Policy scenario NEPP2030– emission targets for 2030 based on NEPP4 (+expert
judgements):Climate -50%; Acid. -85%; Eutroph. -75%; Smog -85%; PM10 -90%
– linear path to target from 2000 - 2030– stabilisation of emissions from 2030 onwards
Policy scenario Delay– targets for 2030 postponed to 2040
Policy scenario NEPP2010– additional targets for 2010 based on NEPP3 (+expert
judgements)
Rob Dellink — Modelling the costs of environmental policy 16
Policy impulse for Acidification
0
5
10
15
20
25
30
35
40
45
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
m.
aci
d e
qu
ivale
nts
Benchmark projection NEPP2030 Delay NEPP2010
0
5
10
15
20
25
30
35
40
45
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
m.
aci
d e
qu
ivale
nts
Benchmark projection NEPP2030 Delay NEPP2010
0
5
10
15
20
25
30
35
40
45
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
m.
aci
d e
qu
ivale
nts
Benchmark projection NEPP2030 Delay NEPP2010
0
5
10
15
20
25
30
35
40
45
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
m.
aci
d e
qu
ivale
nts
Benchmark projection NEPP2030 Delay NEPP2010
Rob Dellink — Modelling the costs of environmental policy 18
Impact on GDP
0
200
400
600
800
1000
1200
1400
1600
1800
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
bn
. eu
ros
without environmental policy
with environmental policy
0
200
400
600
800
1000
1200
1400
1600
1800
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
bn
. eu
ros
without environmental policy
with environmental policy
Rob Dellink — Modelling the costs of environmental policy 19
Impact on GDP
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
% c
han
ge c
om
pare
d t
o b
en
chm
ark
NEPP2030 Delay NEPP2010-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
% c
han
ge c
om
pare
d t
o b
en
chm
ark
NEPP2030 Delay NEPP2010
Rob Dellink — Modelling the costs of environmental policy 20
Sectoral results
Indirect effects are important– most dirty sectors not necessarily most heavily impacted
Impacts on production sectors very diverse– in long run large reductions in energy sectors and heavy industry– small reductions (or even small increases) in services sectors– combination of shift and shrink
Impacts on consumption more evenly spread– impacts depend crucially on environmental policy abroad– in short run increase in consumption
Rob Dellink — Modelling the costs of environmental policy 21
Grouped sectoral results
Sectoral effects of NEPP2030 policy
1990 2010 2030 2050
Private consumption Agriculture 0.44 -0.08 -6.88 -9.30
Private consumption Industry 0.89 0.91 -8.80 -12.05
Private consumption Services 1.06 1.34 -3.23 -8.57
Sectoral production Agriculture -1.09 -7.46 -32.64 -34.58
Sectoral production Industry -0.60 -3.25 -35.05 -30.64
Sectoral production Services 0.09 -0.64 0.49 -3.74
Sectoral production Abatement services-0.03 4.23 16.59 15.81
Rob Dellink — Modelling the costs of environmental policy 22
Emission reductions (year 2030)
0
20
40
60
80
100
120
Climate change Acidification Eutrophication Smog formation Fine dust
Emissions before policy Economic restructuring Technical measures
0
20
40
60
80
100
120
Climate change Acidification Eutrophication Smog formation Fine dust
Remaining emissions Technical measures Economic restructuring
0
20
40
60
80
100
120
Climate change Acidification Eutrophication Smog formation Fine dust
Emissions after policy Economic restructuring Technical measures
Rob Dellink — Modelling the costs of environmental policy 23
Technically abatable emissions
-100
-80
-60
-40
-20
0
20
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
% c
han
ge c
om
pare
d t
o b
en
chm
ark
Climate change Acidification Eutrophication Smog formation Fine dust
Rob Dellink — Modelling the costs of environmental policy 24
Gross environmental expenditures in the NEPP2030 scenario with the base specificationof DEAN (undiscounted values in billion Euro)
1990 2010 2030 2050
Climate change 0.55 1.64 2.52 6.07
Acidification 0.16 0.42 5.60 6.58
Eutrophication 0.11 0.23 0.36 0.54
Smog formation 0.07 0.25 100.96 107.54
Fine particles to air 0.01 0.02 0.65 0.82
Desiccation 0.25 0.37 0.37 0.64
Soil contamination 8.77 13.04 13.15 22.42
Total environmental expenditures 9.92 15.98 123.62 144.62
in percentage of GDP 4% 5% 26% 21%
Gross environmental expenditures
Rob Dellink — Modelling the costs of environmental policy 26
Sensitivity analysis
Specification of technical potential– results highly sensitive to technical potential Smog formation– higher technical potential means lower costs and more abatement
Specification of PAS-elasticity– small impact, as all VOC measures will be implemented anyway– higher elasticity means lower costs and less abatement expenditure
Specification of endogenous environmental innovation
– endogenous innovation (read: learning by doing) is likely to occur– any excessive economic costs of environmental policy can be prevented
Rob Dellink — Modelling the costs of environmental policy 27
Impact of model variants on welfare
Equivalent variationBase specification -5.8GHG emission policy -7.4Endogenous innovation -3.2Labour tax recycling -5.6Multilateral policy -11.7
High technical potential Smog formation -4.1
Rob Dellink — Modelling the costs of environmental policy 28
Future research / room for improvement Better modelling of energy carriers and fuel switch
options– linking emissions of GHGs to input of energy where appropriate– top-down modelling of fuel switch options– ay suggestions on modelling national climate policy?
Add more empirical details on abatement options– sectoral specification of potential options (if possible)– differentiate production function abatement sector– improve modelling of negative cost options
Add feedback effects from environment to economy (benefits)
Rob Dellink — Modelling the costs of environmental policy 29
Conclusions Major (bottom-up) characteristics of abatement
options can be integrated in a (top-down) CGE framework
Macro-economic impact ‘modest’ 10 percent / 5 years delay / 80 bn Euro net / 145 bn Euro gross
Environmental policy creates both threats and opportunities for production sectors
Technical measures and economic restructuring are both essential
Interactions between environmental problems have substantial influence on results