A Purpose-Based Energy Substitution Structure For CGE

Konstantins Benkovskis, Dzintars Jaunzems and Olegs Matvejevs
Additional contact information
Dzintars Jaunzems: Latvijas Banka
Olegs Matvejevs: Latvijas Banka

No 2023/07, Working Papers from Latvijas Banka

Abstract: We propose a novel method for modelling energy substitution in CGE models using energy processes defined according to the purposes of energy use. The purpose-based approach is superior for modelling the green transition because it closely mimics firms’ decisions regarding switching energy sources and is more parsimonious, relying on fewer industry-specific elasticities in the production structure. Latvia’s Computable General Equilibrium (CGE) model is an integral part of the joint CGE-EUROMOD modelling system used for policy simulations at Latvijas Banka. We improve this model by 1) incorporating endogenous substitution of energy resources by enterprises through the proposed purpose-based approach, 2) including the accounting of greenhouse gas (GHG) emissions generated by all public and private sector entities, and 3) introducing explicit modelling of expenses related to these emissions both due to state-level levies and participation in the EU Emissions Trading Scheme (EU ETS). To illustrate the advantages of the augmented model, we simulate a scenario in which Latvia follows a linear path to achieve GHG emissions reduction consistent with its European Green Deal objectives by 2030 achieved solely through carbon pricing. The analysis of this scenario suggests that over a three-year horizon ending in 2025, the resulting cumulative welfare losses would exceed 2% in the case of an uncompensated carbon tax (resulting in a budget balance improvement of 2.6% of GDP) or amount to 0.3% if government consumption is increased to keep the budget balance constant. If instead the size of the public sector is maintained and the higher carbon tax is compensated by a VAT rate cut, economic activity expands by 1% but GHG emissions fall by 40% less.

Keywords: CGE model; Latvia; GHG emissions; Emissions Trading Scheme; carbon tax; energy substitution; green transformation; energy transition; European Green Deal; EUROMOD (search for similar items in EconPapers)
JEL-codes: C68 Q41 Q48 Q54 Q58 (search for similar items in EconPapers)
Date: 2023-12-18
New Economics Papers: this item is included in nep-cmp, nep-eec, nep-ene, nep-env and nep-eur
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://datnes.latvijasbanka.lv/papers/WP_7-2023.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ltv:wpaper:202307

Access Statistics for this paper

More papers in Working Papers from Latvijas Banka Contact information at EDIRC.
Bibliographic data for series maintained by Konstantins Benkovskis ().