Macroeconomic Consistency Issues in E3 Modeling: The Continued Fable of the Elephant and the Rabbit

Frédéric Ghersi and Jean-Charles Hourcade

The Energy Journal, 2006, vol. 27, issue 2_suppl, 39-61

Abstract: Starting from a short presentation of the limits of using conventional production functions to hybridize energy-economy relationships, this paper presents a methodology aiming at a better integration of bottom-up policy scenarios in a top-down static general equilibrium framework. Along the lines of Ahmad’s innovation possibility curve, the methodology consists in implementing top-down envelopes of production and demand functions, whose variable point elasticities of substitution provide a flexible interface for calibration on any bottom-up expertise. Numerical experiments assessing the impact of a rising carbon tax on the global 2030 economy compare the application of this methodology to that of two standard CES-based approaches. Results confirm that, in case of large departures from reference scenarios or of strong convexities in bottom-up results, the use of conventional CESproduction and utility functions may lead to a significant bias in cost assessment.

Keywords: E3 modeling; Energy economy models; Hybrid modeling; Bottom up; Top down (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:sae:enejou:v:27:y:2006:i:2_suppl:p:39-61

DOI: 10.5547/ISSN0195-6574-EJ-VolSI2006-NoSI2-3

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