GEM-CCGT

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The CCGT Project was financed by the European Commission under the Energy, Environment and Sustainable Development programme within the Fifth Framework Programme. The project aimed at providing quantitative insights into the impacts of two important international policy initiatives: (i) multilateral agreements on climate protection strategies, and (ii) trade agreements towards global trade liberalisation. The main part of the CCGT project consists of the development of an appropriate analytical framework and its parameterisation.

Starting from a multi-regional, multi-sectoral computable general equilibrium (CGE) model of the world economy and global energy use several extensions are introduced such as imperfect competition on commodity markets (including emission permit markets), scale economies, and risk and transaction costs associated with the use of flexible instruments in GHG abatement strategies.

By introducing increasing returns to scale on the plant or firm level, the GEM-CCGT(General Equilibrium Model-Climate Change Policy and Global Trade) model is able to capture pro-competitive industrial organisation effects of trade policy reforms (such as EU enlargement). Besides the model can analyse how EU emission abatement policies will change under efficiency and equity considerations in response to different developments of world trade.

Result

Typical Model Applications:

• Policy impact analysis of current and future trade treaties
• Policy impact analysis of GHG abatement strategies under the Kyoto Protocol
• Policy impact analysis of the interference of trade and environmental policies

Sectoral coverage:

All sectors covered by the GTAP-4 database (or GTAP-4E respectively):

Crude Oil, Refined Oil Products, Electricity, Energy-intensive Industries, Non-energy-intensive Industries

Consumption categories:

• Coal, Gas, Oil, Electricity, Agricultural Goods, Energy-intensive Goods, Other Goods

Behavioural assumptions:

• Households: In each region a representative household maximises utility subject to a budget constraint given by his income level. The latter consists of factor income, revenues from taxes and a baseline exogenous capital flow. Household preferences are specified by CES utility functions with a CES consumption composite of an aggregate of energy goods and a Cobb-Douglas aggregate of non-energy goods.
• Firms: Firms choose input quantities of primary factors (labour, capital, fossil fuels resources), intermediate inputs from other sectors and production levels in order to maximise profits. In sectors with imperfect competition firm-level product differentiation is assumed, i.e. each firm produces its own variety of the good. In addition, domestic and foreign varieties are incomplete substitutes (according to the Armington assumption). Imperfect competition is due to exogenous fixed costs at the firm level. Prices are a mark-up over marginal costs, where the mark-up reflects the number of firms and the elasticity of market demand. Price-cost mark-ups by sector and region are partly econometrically estimated using cross-country regressions. With free entry and exit combined with fixed costs, the number of firms changes in such way that the output price equals average cost. Producers compete based on a Cournot model with fixed conjectural variations. When markets are geographically segmented, the individual firm located in one region is able to choose the quantity supplied to each other region separately.

Energy-environment module:

GEM-CCGT considers only carbon emissions by introducing carbon coefficients for coal, gas and refined oil. Carbon emission constraints induce inter-fuel substitution, and/or fuel-/non-fuel substitution, and/or the reduction of intermediate or final consumption.

Government revenue:

• Output tax
• Tax on intermediate inputs
• Export and import tax
• Tax on final demand
• CO2 tax

Dynamic structure:

• Comparative static
• Time horizon: 2030

Linkage between regions and countries:

All commodities are traded in world markets. Crude oil and coal are imported and exported as homogeneous products with single world prices determined by global demand and supply, reflecting empirical evidence that these fossil fuel markets are fairly integrated due to cheap shipping possibilities. All other goods are characterised by product differentiation and imperfect substitutability between imports and domestically sold domestic output; thus the standard Armington assumption is adopted. Bilateral trade flows are subject to export taxes, tariffs and transportation costs.

To account for trade restrictions, tariff equivalents for cross-border services trade (Business Services and Construction Services) are estimated and introduced into GEM-CCGT as well as Post-Uruguay Round tariff rates.

Market Structure:

Product market:

• Imperfect (oligopolistic) competition
• Firms set prices (mark-ups over marginal costs)

Labour market:

• Perfect competition

Main model results:

Macro economic results: GDP, consumption, employment, investment, etc.

Sectoral economic results: Prices and quantities (production, factor demand, employment, exports/imports)

Environment-related results: Energy consumption, CO2 emissions

Required technical infrastructure:

The model is formulated and solved as mixed complementarity problem (MCP) using the Mathematical Programming Subsystem for General Equilibrium (MPSGE) within the GAMS mathematical modelling language.

The complementarity problem is solved in GAMS using PATH.

Structure of Input Data:

Exogenous variables and parameters:

• Variables that can be adjusted for the purpose of policy analysis (e.g. tax rate, emission reduction targets)
• Coefficients of the behavioural (utility and cost) functions, e.g. substitution elasticities in production function or Armington elasticities (taken from economic literature)

Base year data:

• Base year data: Country- or region-specific "Social Accounting Matrices" (SAM) including national accounts and input-output data, bilateral trade matrices (main data source: GTAP-4 and GTAP-4E, OECD/IEA energy statistics for 1995, information from WTO negotiations)

Calibration:

• The calibration method is used in order to determine level parameters that, in the base case, exactly reproduce the pre-determined data set
• The forward calibration of the benchmark economies to the target year is based on assumptions for GDP growth, energy demand and future energy prices, taken from International Energy Outlook (DOE/IEA)

Regional Scope:

All regions covered by the GTAP-4 database:

Japan, European Union, ASEAN, India, United States, Brazil, Central and South America, Africa, Rest of World, Central and East European Associates, Former Soviet Union, Sub-Saharan Africa

See also

• ZEW Mannheim
• More information

References

Böhringer, C., Löschel, A. (eds.) (2004), Climate Change Policy and Global Trade, ZEW Economic Studies 26, Physica, Heidelberg.