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Economics of Avoiding Climate Change

E3ME: a macroeconometric model of the global economy

 

Group Leader: J-F Mercure  
Group Members: Terry Barker,
                          Hector Pollitt (Cambridge Econometrics)
                          Unnada Chewpreecha (Cambridge Econometrics)
                          Pablo Salas

Economics research at 4CMR is done using a large-scale econometric model of the global economy in 53 countries or regions, E3ME, used and maintained in collaboration with Cambridge Econometrics. This model as 28 econometric equations evaluated on data back to 1971 for 21 regions of the world and used to project into the future. It has a high sectoral resolution: 43 sectors, 28 consumption categories, 22 fuel users, 12 types of fuels and 14 types of emissions. It is thus formed of thousands of equations evaluated at each time step. E3MG is a non-equilibrium model of the global economy.

These relationships are used to project into the future the complete set of variables of the model (in each sector, region, category etc, generating thousands of equations), which includes economic output, investment, prices, consumption, employment, disposable income, imports, exports and CO2 emissions that stem from fuel combustion. Meanwhile, sectors are connected to one another using input-output tables expressing intra-industry flows of goods and investments, resulting in typical Keynesian multiplier effects. The model does not assume optimal growth, economic equilibrium, full employment or use production functions. It is demand led and supply constrained.

For instance, energy demand is modelled using an econometric equation that incorporates induced technological change by incorporating accumulated investment and R&D expenditures, for fuel i and region j, of the form

E3MG_ED.jpg

where Xij is the fuel demand, Yij represents output, Pij relative prices and TPIij is the technological progress indicator. The introduction of endogenous accumulated investment and R&D makes this equation non-linear, path-dependent and hysteretic. For example increases in prices lead to enhanced energy-saving R&D that permanently reduces energy demand per unit of output, which would not have occurred without price changes. (See Barker & Scrieciu, Energy Journal, 2010)

 

Related Projects

FTT:Power: The FTT component for the electricity sector is now fully integrated within the FORTRAN code of E3MG. The two models thus now interact dynamically, and we call it FTT:Power-E3MG. It thus feature a combination of bottom-up innovation-diffusion modelling with top-down non-equilibrium econometrics.

Integrated Assessment: E3MG lies at the core of the Integrated Assessment model of 4CMR, driving energy demand, part of which is passed on to the FTT model in order to evaluate the technology mix and resulting emissions, the other emissions evaluated within E3MG itself. 

 

Publications

Barker, T. and Crawford-Brown, D., "Are estimated costs of stringent mitigation biased?", Climatic Change, DOI 10.1007/S-10584-013-0855-8, 2013.

Barker, T., "Climate Policy: Issues and Opportunities for Rapidly Industrializing Countries", Chapter 2, pp. 19-37 in H. Compston and I. Bailey (Eds), Feeling the Heat: the Politics of Climate Policy in Rapidly Developing Countries, Palgrave Macmillan, London, 2012.

Barker, T., Anger, A., Chewpreecha, U. and Pollitt, H., "A New Economics Approach to Modelling Policies to Achieve Global 2020 Targets for Climate Stabilisation", Special Issue on Economic Policies of the New Thinking in Economics, International Review of Applied Economics, Vol. 26, No. 2, pp. 205-211, 2012.

Dagoumas, A and T. Barker, “Pathways to a Low-carbon Economy for the UK with the Macro-econometric E3MG Model’, Energy Policy, 38, 2010.

Barker, T. and Scrieciu S., "Unilateral Climate Change Mitigation, Carbon Leakage and Competitiveness: An Application to the European Union", International Journal of Global Warming, 1(4): 405-417, 2009.

Barker, T., Ekins, P., Junankar, S., Pollitt, H. and Summerton, P., "The Competitiveness Effects of European Environmental Fiscal Reforms", European Review of Energy Markets, 3(1), 2009.

Barker, T., Dagoumas, A. and Rubin, J., "The Macroeconomic Rebound Effect and the World Economy". Energy Efficiency, 2(4): 411-427, 2009.

Barker, T., "Endogenous Money in 21 Century Keynesian Economics", in Arestis, P and Sawyer, M. (eds) 21st Century Keynesian Economics, Palgrave Macmillan, 2009. 

Barker, T., Junankar, S., Pollitt, H. and Summerton, P., "The Effects of Environmental Tax Reform on International Competitiveness in the European Union: Modelling with E3ME", in Andersen, M. S. and Ekins, P. (eds) Carbon-Energy Taxation: Lessons from Europe, Oxford University Press, 2009.

Barker, T., Junankar, S., Pollitt, H. and Summerton, P., "Carbon Leakage from Unilateral Environmental Tax Reforms in Europe, 1995-2005", in Andersen, M. S. and Ekins, P. (eds) Carbon-Energy Taxation: Lessons from Europe, Oxford University Press, 2009.

Barker, T., "Will the Reconstruction of the Global Economy be Positive for Mitigating Climate Change?", in Giddens, A., Latham, S. and Liddle, R. (eds) Building a low carbon future: the politics of climate change, 2009. 

Barker, T., Junankar, S., Pollitt, H. and Summerton, P., "The Macroeconomic Effects of Unilateral Environmental Tax Reforms in Europe, 1995-2012", in Innovation, Technology and Employment: Impacts of Environmental Fiscal Reforms and Other Market-Based Instruments, edited volume “Critical Issues in Environmental Taxation VOL VI”, Oxford University Press, 2009.

Huang, Y., "The Political Economy of Financial Reform: Are Abiad and Mody Right?", Journal of Applied Econometrics, 24(7), 2009.

Huang, Y., "Dynamic Panel Data Evidence on the Finance-Investment Link", Journal of Statistics: Advanced Theory and Applications, 2(2), 2009. 

Pollitt, H. and Barker, T., "Modelling the Financial Crisis with the Global E3MG Model", IUP Journal of Applied Economics, Volume-VIII, Issue Nos 5 & 6, Sep-Nov 2009, pp5-31., 2009.
 

Barker, T., Dagoumas, A. and Rubin, J., "The Macroeconomic Rebound Effect and the World Economy", Energy Efficiency, 411-427, 2009.

Barker, T., Ekins, P., Junankar, S., Pollitt, H. and Summerton, P., "The Competitiveness Effects of European Environmental Fiscal Reforms", European Review of Energy Markets, 3(1), 2009.

Barker, T. and Scrieciu, S.Ş., "Unilateral Climate Change Mitigation, Carbon Leakage and Competitiveness: An Application to the European Union", International Journal of Global Warming, 1(4): 405–417, 2009.

 

 

Briefing papers

Clean Development Mechanism

 

People specializing in this area

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