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Annex 5: Computable General Equilibrium Model

RELEASED UNDER THE OFFICIAL INFORMATION ACT

Outline of the Global Trade and Environment Model

ABARE has developed a computable general equilibrium model known as the Global Trade and Environment Model (GTEM) to specifically address policy issues with global dimensions. ABARE developed GTEM from the internationally respected Global Trade and Analysis Project (GTAP) model, developed at Purdue University (Indiana, USA), which is used worldwide for global trade analysis. GTEM simulates the impact of policy changes or specific events on a large number of economic variables of a particular national/regional economy, including GDP, consumption, production, trade, investment, greenhouse gas emissions and carbon prices.

Computable general equilibrium models such as GTEM are built up from microeconomic foundations and account for all transactions within an economy. Depending on the level of sophistication of the specific model, the model can represent a diverse range of economic agents, including households, industries, regions, government(s), investors and international trade.

The strength of computable general equilibrium models for climate change modelling lies in their detailed representation of industry, captured through the input-output tables. The input-output structure of the models traces resources and materials used in the economy, starting with the production of raw materials from agriculture and mining through to final products for consumption or trade. The accounting of emissions and prices from raw materials to final goods can easily be represented in this input-output structure, and shows how carbon is integrated into the production chain.

GTEM can represent up to 68 regional economies (corresponding to individual countries or country groups) that are linked through trade and investment flows, allowing for detailed analysis of the direct as well as flow-on impacts of policy and changes for individual economies - the model tracks intra-industry trade flows as well as bilateral trade flows, allowing for detailed trade policy analysis. The detailed international trade links are important, as these determine where production, particularly carbon-intensive production, will shift as international abatement costs increase.

GTEM is a dynamic model accounting for capital and debt accumulation and solving for population growth, which enables the model to account for transactions between sectors and trade flows between regions over time. As a dynamic model, it accounts for the impacts of changes in labour force and investment on a region's production capabilities.

GTEM has a comprehensive international greenhouse emissions database accounting for combustion and non-combustion carbon dioxide, methane and nitrous oxide emissions, which account for around 98% of global anthropogenic greenhouse gas emissions. Methane and nitrous emission from waste and agriculture residues, and synthetic and industrial-process emissions, are not covered in the emissions database.

GTEM has a detailed representation of international energy supply and demand. The database distinguishes a number of different fuels, including three types of coal (brown coal, or lignite; black coal, or steaming coal; and coking coal), natural gas and oil. Electricity may be generated through seven technology types, including brown coal, steaming coal, oil, natural gas, nuclear (New Zealand uses no nuclear energy by assumption), hydroelectricity and geothermal, and other renewables (eg, biomass and wind generation), and generation by technology substitutes with the relative cost of generation.

Other considerations

As with all models, GTEM has imperfections from a policy-analysis viewpoint.

GTEM is only able to estimate the economic costs associated with climate change abatement policies and cannot project the economic impact of climate change.

The technology response in GTEM to climate change policies is limited. Increasing the costs imposed on carbon-intensive industries will reduce emissions intensity through fuel switching (eg, natural gas for coal), substituting towards less carbon-intensive industries (eg, steel making in electronic arc furnaces from blast iron furnaces), and new proven technology may be introduced as it becomes economic. However, GTEM (as with most economic models) is unable to solve for endogenous technical change, such as new energy-saving technology, alternative fuels and research and development.

The most recent official input-output table for New Zealand from Statistics New Zealand represents 1995/96. Although the input-output table has subsequently been updated using synthetic methods, the method of updating does not guarantee the database represents the current structure of the New Zealand economy. Typically, computable general equilibrium model results have not been overly sensitive to updates in the official input-output tables.

GTEM does not include waste-sector emissions and policy options for abatement in the waste sector. Furthermore, forestry sinks and land-use and land-use-change emissions are not policy responsive in the model.